Bond fraud trial turns testy when defense takes on victim

The trial of a former Cantor Fitzgerald mortgage-backed securities trader charged with lying to his clients turned contentious as his lawyer aggressively questioned one of his alleged victims about methods his firm uses to invest.

In an effort to show that a customer wasn't swayed by David Demos's representations, defense attorney Jose Baez peppered Marathon Asset Management principal Ed Cong on April 25 with questions about his trades with Demos and the models his firm uses to make investment decisions.

During a cross-examination continually interrupted with objections from prosecutors, Cong acknowledged that his firm's model puts out a profile of a bond's cash flow that is then compared with prices to get a range where the firm would consider investing. While he said the model itself doesn't determine that range, he admitted the firm wouldn't go above a certain level.

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"If a bond's price costs too much you won't buy it, right?" Baez asked.

"Right, there's a threshold above where we don't buy," Cong said.

Demos is on trial in federal court in Hartford, Conn., accused of lying to clients such as Marathon about the prices at which he could buy or sell mortgage-backed securities in order to boost his firm's commissions and increase his own compensation. The defense says his customers were sophisticated investors who use detailed models to decide whether to buy or sell bonds and discount any statements made by traders during negotiations.

Demos is one of more than a half-dozen traders charged with deceiving customers as part of a federal crackdown on questionable tactics used in bond negotiations that began with the arrest of former Jefferies Group LLC managing director Jesse Litvak in January 2013. Litvak was convicted last year of securities fraud and is serving a two-year sentence.

Prosecutors say Demos misled Marathon in multiple transactions, including one when Cantor bought a bond from another bank and lied about the acquisition price, allegedly increasing the amount his firm would make by more than $50,000. Under questioning from prosecutors earlier this week, Cong said he wouldn't have sought out Demos's advice and services if he knew that he lied.

Confronted by Baez, Cong admitted that his firm made millions of dollars on that particular transaction.

"In this bond, you made millions of dollars, didn't you?" Baez asked.

"We did," Cong said.

Cong’s testimony was followed by that of another Marathon employee, former managing director Stuart Goldberg, who is set to return to the stand when the trial resumes.

The case is U.S. v. Demos, 16-cr-00220, U.S. District Court, District of Connecticut (New Haven).