On December 7, 2016, former Cantor Fitzgerald & Co. bond trader and managing director David Demos was charged in the District of Connecticut with six counts of securities fraud in connection with Residential Mortgage-Backed Security (“RMBS”) transactions. RMBS are collections of mortgages and home equity loans, which are grouped together and sold as packages. RMBS investors receive monthly payments, based on the extent to which homeowners repay the underlying mortgage and home equity loans. Because RMBS are not publicly traded on exchanges, pricing information is not publicly available, and buyers and sellers use broker-dealers such as Cantor Fitzgerald to execute transactions. According to the indictment, Demos defrauded customers by fraudulently inflating the prices at which Cantor Fitzgerald could buy RMBS bonds in order to induce customers to pay higher prices for the bonds. Demos also defrauded customers by fraudulently deflating the prices at which Cantor Fitzgerald could sell RMBS bonds in order to induce customers to sell bonds at lower prices. The indictment alleges that the victims of this scheme included asset managers and firms connected to recipients of funds from the U.S. Government’s Troubled Asset Relief Program (“TARP”). A similar case, United States v. Litvak, is set for retrial in Connecticut after the conviction was vacated by the Second Circuit based on the improper exclusion of expert testimony at the initial trial. United States v. Demos (D. Ct.). DOJ Press Release
