(Bloomberg) -- A portfolio manager for an investment firm allegedly defrauded by a former Cantor Fitzgerald LP managing director said he might still work with a trader who lied to him -- depending on the circumstances.
Eric Marks, of Ellington Financial LLC, took the stand for the government Thursday in the trial of David Demos, who is accused of ripping off Ellington and other firms by misrepresenting the prices of mortgage-backed bonds during negotiations. Demos is charged with defrauding investors in five trades between May 2012 and January 2013, including two with Ellington.
The first is a September 2012 transaction when Cantor bought two bonds from an investment manager and sold them to Ellington. Prosecutors allege Demos lied to Ellington about the price Cantor paid for the bonds, yielding a profit of more than $74,000. He’s also accused of misrepresenting the price at which Cantor bought a bond that it sold to Ellington in January 2013, netting Cantor more than $133,000.
During several hours of testimony over two days, Marks said he wanted to buy bonds as "cheaply as possible," and that he would have liked to have known Cantor’s true purchase prices before buying the securities. Still, he said, he might continue to do business with him.
"If he had a good opportunity, I would trade with him," Marks said. "If my firm was comfortable with that, I would be willing to do so."
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Marks testified for prosecutors last year against three former Nomura Holdings Inc. traders who were charged with similar conduct. Jurors cleared them of the vast majority of the 27 charges, fully acquitting one, convicting one of conspiracy and failing to reach a verdict on a few other counts. A retrial is scheduled for next month.
Marks said he’d probably change his negotiating tactics if he knew a trader had lied.
"I might have to be more guarded about the information I share," Marks testified. "I would be more wary of statements made to me."
Demos’s lawyers have said their client dealt with sophisticated investors who rely on complicated analytical models to decide whether to buy or sell bonds and discount statements made in trade talks as puffery. Under cross examination from defense attorney Alex Spiro, Marks said he was trained to be careful of statements made in negotiations.
"When my boss trained me, he told me to always watch out for what people tell you because you have to assume they’re lying to you," Marks said.
Marks also acknowledged he had negotiating tactics of his own, including embellishment.
"I would say, ‘My boss doesn’t really like it here, but I can pay you X,’" Marks said.
"And your boss might love it there, right?" Spiro asked.
"It’s possible, yes," Marks said.
"And you haven’t been arrested for that, right?" Spiro asked.
"No," Marks replied.
Under follow-up questioning from prosecutors Friday, Marks said "there would be a lot to think about" before he dealt with Demos again.
“After getting a speeding ticket, you might be less likely to speed," Marks said. "I might have to be more cautious."
Marks said traders are more cautious and watch what they say since the 2013 arrest of Jefferies LLC’s trader Jesse Litvak for lying to customers. Litvak was convicted and sentenced to prison.
"If they make misstatements there will be trouble for it,” he said.
Demos faces five counts of securities fraud. His federal trial in Hartford, Connecticut, is scheduled to run through next week.
The case is U.S. v. Demos, 16-cr-00220, U.S. District Court, District of Connecticut (New Haven).
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