South Florida Transaction Markup, Markdown and Other Cost Fraud, Misrepresentation, Nondisclosure, Breach of Fiduciary Duty and False Disclosure FINRA Arbitration and Litigation Attorney:
The Securities and Exchange Commission recently announced fraud charges against three brokerage subsidiaries and two former employees of a global trading services provider that caused many institutional clients to pay substantially higher amounts than disclosed for the execution of trading orders.
These subsidiaries of ConvergEx Group agreed to pay more than $107 million and admit wrongdoing to settle the SEC’s charges. The former employees, Jonathan Daspin and Thomas Lekargeren, also agreed to admit and settle the charges against them.
In a parallel action, the Department of Justice announced criminal charges against ConvergEx Group, a brokerage subsidiary, and the two former employees. To resolve those charges, ConvergEx Group has agreed to pay $43.8 million in criminal penalties and restitution.
Customers with large orders typically rely on their brokers to execute orders on their behalf at the most favorable terms reasonably available. Monitoring the execution quality and costs of these orders can be difficult even for the most sophisticated investors given the complex nature of the markets where brokers must choose from a variety of order types, routing strategies, and trading venues.
“Customers have a right to expect honesty from their brokers and accurate information in response to their inquiries,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement. “These ConvergEx brokers misled their customers and failed to provide complete information about the costs they were charging.”
According to the SEC’s order instituting settled administrative proceedings, the ConvergEx brokerage firms represented to customers that they charge explicit commissions to execute equity trading orders. However, they routinely routed orders, including orders for U.S. equities, to an offshore affiliate in Bermuda that executed them on a riskless basis and opportunistically boosted their profits by adding a mark-up or mark-down on the price of a security. The offshore affiliate often consulted with the client-facing brokers to assess the risk of customer detection before taking the extra money on top of the disclosed commissions. The mark-ups and mark-downs caused many customers to unknowingly pay more than double what they understood they were paying to have their orders executed.
“ConvergEx brokerages sent customer trades on an unnecessary journey through its offshore affiliate so they could take extra fees behind customers’ backs,” said Stephen L. Cohen, associate director of the SEC’s Division of Enforcement. “Brokers who seek to enhance their bottom lines through deception about their compensation are violating the law and the trust of their customers.”
According to the SEC’s order, the ConvergEx brokerages involved in the scheme were G-Trade Services LLC, ConvergEx Global Markets Limited, and ConvergEx Execution Solutions LLC. Their customers included funds managed on behalf of charities, religious organizations, retirement plans, universities, and governments. The ConvergEx brokerages believed they would lose business if customers became aware of their mark-ups and mark-downs, so they engaged in specific acts to hide the scheme. Typically, they only took mark-ups and mark-downs on top of the disclosed commissions in situations where they believed that the risk of detection was low. They also made false and misleading statements to customers who inquired about their overall compensation, even providing certain customers with falsified trading data to cover up the fact that the offshore affiliate had taken mark-ups or mark-downs on their orders. The practice of executing orders through the offshore affiliate was not adequately disclosed to customers and was inconsistent with ConvergEx’s advertised conflict-free agency model. Using this practice, the ConvergEx brokers failed to seek best execution for their customers’ orders.
The SEC’s order finds that the ConvergEx brokerages violated Sections 10(b) and 15(c) of the Securities Exchange Act of 1934. The ConvergEx brokerages admitted to the facts underlying the SEC’s charges and acknowledged that their conduct violated the federal securities laws. The firms agreed to pay disgorgement and prejudgment interest totaling $87,424,429 and a penalty of $20 million. In determining the penalty amount, the SEC considered ConvergEx’s substantial cooperation after the agency commenced its investigation. The SEC also considered the company’s significant remedial measures, including the closure of the Bermuda affiliate and the discharge of a number of employees in management and other positions as it ended the practice of routing U.S. securities offshore for order handling.
Daspin and Lekargeren, who are providing cooperation in the SEC’s investigation, admitted to taking steps to conceal the practice of taking trading profits from customers. Daspin agreed to pay a total of $1,111,550 in disgorgement and prejudgment interest, and Lekargeren agreed to pay a total of $117,042 in disgorgement and prejudgment interest. The SEC considered their cooperation in determining the appropriate terms of settlement.
The SEC seeks to return the money collected in these settlements to harmed customers through a Fair Fund distribution.
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