Ex-bond trader's jury to decide between fraudster, 'guinea pig'

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A federal jury is poised to determine whether a former Cantor Fitzgerald managing director's tactics in trading mortgage-backed securities constitute securities fraud.

David Demos "lied to his customers about important things to steal their money, and when he lied, he knew it was wrong," Assistant U.S. Attorney Heather Cherry said Tuesday in Hartford, Conn. "That is securities fraud."

Jose Baez, an attorney for Demos, appealed to jurors to acquit his client, who he called a "guinea pig" for an "experimental prosecution." Baez said that until the arrest of former Jefferies & Co. trader Jesse Litvak in 2013, nobody had been charged with securities fraud for making misrepresentations during negotiations in the market for residential mortgage-backed securities since they were created more than 30 years ago.

"All of these transactions happened before anyone was ever arrested for negotiating in the RMBS market," Baez said during his closing statement. "There needs to be a bright line to tell you when you’re crossing it."

Demos is one of more than a half-dozen traders who were charged with fraud in a federal crackdown on questionable practices used in bond negotiations that began with the arrest of Litvak. Demos is charged with five counts of securities fraud, each of which carries a maximum sentence of 20 years in prison.

Cherry urged jurors to convict Demos during her closing statement, walking them through the details of the trades and pointing out where he lied during negotiations and how those lies affected the investment decisions his clients made. Demos is accused of lying to customers about bond prices in five trades, earning extra profits of more than $1.1 million for Cantor.

Demos' lawyers have argued that the misrepresentations weren't material to Cantor's clients, or important enough to affect their investment decisions. Baez said sales chatter happens in the market "every single day," and that all the participants knew how it worked.

"It's clear that this is how the game works," Baez said. "This is how dealers negotiate."

Baez said the alleged victims made millions on the same bond trades where Demos is accused of defrauding them and didn't care about the size of the commissions.

"When you're getting a steal, you don't bicker over nickels and dimes," he said. "They can't even park their yachts at their hedge funds for that kind of money."

But Cherry said Demos knew what he was doing was wrong, regardless of whether he intended to violate any specific law.

"He knew it's wrong to lie to take other people's money," Cherry said. "A child knows that. And he is not a child."

Jurors are expected to begin deliberations in the afternoon on May 1.

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

Bloomberg News
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