A former Cantor Fitzgerald Co. trader was charged with defrauding customers by lying about prices of mortgage-backed securities, becoming the latest target of a U.S. crackdown on deceptive practices in the bond market.
David Demos, 35, of Westport, Connecticut, is accused of falsifying prices at which his firm bought residential mortgage-backed bonds to get customers to pay more, and misrepresenting transaction prices to induce clients to sell the bonds for less, prosecutors said.
The case is at least the sixth in three years in which bond traders faced criminal charges over sales practices. The crackdown, which has led to the departure of more than 20 traders from banks, began with the arrest of former Jefferies Co. managing director Jesse Litvak in January 2013. Litvak, who argued his misrepresentations weren’t material to customers because they believed the bond prices were fair, was found guilty of fraud in March 2014. His conviction was thrown out on appeal and his retrial is scheduled to start next month.
Demos, who faces as long as 20 years in prison if convicted, worked as a trader and managing director at Cantor Fitzgerald from November 2011 until he was fired in February 2013. On Friday he pleaded not guilty to charges during an appearance in federal court in New Haven, Connecticut. He was released on a $250,000 bond and is set to return to court on Feb. 9, according to Thomas Carson, a spokesman for Connecticut U.S. Attorney Deirdre Daly.
“Mr. Demos denies the charges made against him, including the allegations that his communications and negotiations with counterparties were ‘material,'” his attorneys, Peter Chavkin and Stanley Twardy Jr., said in a statement. “He intends to vigorously defend himself.”
Karen Laureano-Rikardsen, a spokeswoman for Cantor Fitzgerald, said the firm had no comment on the charges.
Demos worked for broker EDF Man Capital Markets Inc. in New York until January, according to records maintained by Financial Industry Regulatory Authority. Demos is no longer registered with the Wall Street-backed regulator.
Emma Kane, a spokeswoman for EDF Man, declined to comment on Demos.
The charges against Demos signal the probe is continuing as President-elect Donald Trump prepares to take office. Daly, who brought all of the bond-trading cases except for Litvak after assuming her post in May 2013, will likely be replaced under the new administration, along with most other U.S. attorneys.
Some of Demos’s victims were affiliated with or units of recipients of funds from the U.S. Troubled Asset Relief Program, the government bailout plan created in 2009 in response to the financial crisis.
Demos allegedly defrauded customers buying residential mortgage-backed securities in trades in which they agreed to purchase bonds at the price Cantor paid, in addition to a commission. Demos inflated how much the firm had paid in order to get a higher commission, according to the indictment.
Demos, for instance, defrauded an unnamed Connecticut firm in September 2012 by lying about Cantor’s profit on a deal — telling him the firm had made a profit of $4,600 when it had actually earned about $79,000, according to the indictment.
Prosecutors say Demos also defrauded customers who were selling mortgage-backed securities, understating what buyers would be willing to pay in order to get the seller to lower their price.
Demos also lied to the unnamed asset-management firm in New York in May 2012, telling them a buyer had agreed to pay a price that was lower than it actually was in order to increase the firm’s $630,000 profit on the deal, prosecutors said.
Demos this year co-founded Jeremy Point Management LLC, a privately held investment adviser in Westport, Connecticut, focused on residential mortgage-backed securities and other asset-backed securities, according to its website.
The firm shut down after EDF Man, which had supplied as much as $60 million in seed funding, pulled out after determining the mortgage-bond market didn’t offer enough opportunity for profit, the newsletter Hedge Fund Alert reported last month.
Jeremy Point’s telephone lines were busy on Friday afternoon and an e-mail seeking comment wasn’t immediately returned.
Three former Nomura Holdings Inc. traders, Ross Shapiro, Michael Gramins and Tyler Peters, are set to go to trial in Connecticut in February on similar charges. They deny wrongdoing. Two former Royal Bank of Scotland Group Plc traders, Matthew Katke and Adam Siegel, have pleaded guilty similar charges too.
The case is U.S. v. Demos, 16-cr-00220, U.S. District Court, District of Connecticut (New Haven.)