It has not been a good week in court for the federal government and its pursuit of fraud charges against mortgage bond traders.
On Thursday, the Court of Appeals for the Second Circuit tossed the fraud conviction of former Jefferies managing director and mortgage-backed securities trader Jesse Litvak, marking the second time the government has failed in its five-year pursuit of Litvak.
But that wasn’t the only defeat the government took in court on Thursday.
That same day, a former mortgage bond trader at Cantor Fitzgerald, who stood accused of committing securities fraud by allegedly overcharging customers for residential mortgage-backed securities, was found not guilty of those charges.
Back in December 2016, 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., accused 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 was also accused of fraudulently deflating the price that Cantor Fitzgerald could sell a RMBS bond to “induce their victim-customers to sell bonds at cheaper prices.”
The conduct Demos allegedly engaged in was similar to what the government accused Litvak of doing.
For those unfamiliar with RMBS trading, 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 claimed that Demos abused his privilege as a broker-dealer and enabled both he and Cantor Fitzgerald to profit illegally.
Demos was a trader and managing director at Cantor Fitzgerald from November 2011 until he was terminated in February 2013. The government claimed that Cantor Fitzgerald and Demos caused their victims to sustain millions of dollars of losses.
But a jury disagreed and found Demos not guilty.
“Today’s verdict by the jury is a complete vindication of everything I’ve fought for, my family has fought for and my lawyers have fought for, for the past three years,” Demos said after the jury’s decision was announced (quote courtesy of Bloomberg). “Bluffing or lying or puffing about your cost in a negotiation was never a crime, is not a crime and should never be a crime.”