A former mortgage bond trader at Cantor Fitzgerald stands accused of committing securities fraud by allegedly overcharging customers for residential mortgage-backed securities, a collection of federal agencies announced Friday.
According to the Special Inspector General for the Troubled Asset Relief Program, the United States Attorney for the District of Connecticut, the Federal Bureau of Investigation, the Inspector General for the Federal Housing Finance Agency, and the Inspector General for the Federal Deposit Insurance Corp., David Demos, a former RMBS trader at Cantor Fitzgerald, is facing six counts of securities fraud.
The government is accusing Demos of defrauding customers by “fraudulently inflating the purchase price at which Cantor Fitzgerald could buy a RMBS bond to induce their victim-customers to pay a higher price for the bond.”
Demos also allegedly fraudulently deflated the price at which Cantor Fitzgerald could sell a RMBS bond to “induce their victim-customers to sell bonds at cheaper prices.”
For the uninitiated, mortgage bonds are not publicly traded on an exchange and pricing information for the bonds is not publicly available. Therefore, buyers and sellers of RMBS use broker-dealers to execute individually negotiated transactions.
The government contends that Demos abused that privilege and profited illegally, as did Cantor Fitzgerald.
According to the government, Demos was a trader and managing director at Cantor Fitzgerald from November 2011 until he was terminated in February 2013.
Before his termination, the government alleges that Cantor Fitzgerald and Demos caused their victims to sustain millions of dollars of losses.
Among the victims of this alleged scheme are asset managers and firms affiliated with or subsidiaries of recipients of funds from the Troubled Asset Relief Program, the government said.
According to SIGTARP’s Christy Goldsmith Romero, one of Demos’ alleged victims was an investment firm that managed TARP funds.
“Former Cantor Fitzgerald & Co. bond trader David Demos allegedly conspired to overcharge customers trading residential backed mortgage securities, including an investment firm that managed TARP’s Public-Private Investment Program funds,” Goldsmith Romero said. “In other words, victims of this alleged scheme – which involved the same type of securities that were at the heart of the financial crisis – include the manager of a taxpayer provided-bailout fund that was created to unlock frozen credit markets during that same crisis.”
According to the government, Demos faces a maximum term of imprisonment of 20 years on each count if he is convicted.