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US stock market daily report (December 19, 2013, Thursday)
Securities and Exchange Commission announced fraud charges against subsidiaries of ConvergEx Group as well as former employees, Jonathan Daspin and Thomas Lekargeren who agreed to admit and settle charges against them. ConvergEx Group is a global trading services provider that caused many institutional clients to pay substantially higher amounts than disclosed for the execution of trading orders. Subsidiaries of ConvergEx Group agreed to pay more than $107 million and admit wrongdoing to settle the SEC’s charges.
U.S. Department of Justice also announced criminal charges against ConvergEx Group, a brokerage subsidiary as well as Daspin and Lekargeren. ConvergEx has agreed to pay $43.8 million in criminal penalties and restitution to resolve the charges.
Daspin and Lekargeren are cooperating with the investigation by the SEC and admitted to taking steps to conceal the practice of taking trading profits from customers. The SEC considered the pairs cooperation in determining the appropriate terms of settlement with Daspin agreeing 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.
Andrew Ceresney, co-director of the SEC’s Division of Enforcement said, “Customers have a right to expect honesty from their brokers and accurate information in response to their inquiries. 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, ConvergEx brokerage firms represented to clients that they charge explicit commissions to execute equity trading orders. Including orders for U.S. equities, ConvergEx routinely routed orders to an offshore affiliate in Bermuda, to be executed on a riskless basis then, opportunistically boosted the firms profits by adding a mark-up or mark-down on the price of a security. To assess the risk of customer detection before taking the extra money on top of the disclosed commissions, the offshore affiliate frequently consulted with the client-facing brokers. As a result, many customers unknowingly paid double what they understood they were paying to have their orders executed, due to the mark-ups and mark-downs by ConvergEx.
Stephen L. Cohen, associate director of the SEC’s Division of Enforcement said, “ConvergEx brokerages sent customer trades on an unnecessary journey through its offshore affiliate so they could take extra fees behind customers’ backs. Brokers who seek to enhance their bottom lines through deception about their compensation are violating the law and the trust of their customers.”
ConvergEx brokerages involved in the scheme per the SEC order include G-Trade Services LLC, ConvergEx Global Markets Limited, and ConvergEx Execution Solutions LLC. The firms customers included funds managed on behalf of charities, religious organizations, retirement plans, universities, and governments. Of course ConvergEx brokerages would lose business if customers became aware of their mark-ups and mark-downs, so they engaged in specific acts to hide the scheme. Their hide tactics for the scheme included only tacking on mark-ups and mark-downs on top of the disclosed commissions in situations where they believed the risk of detection was the lowest.
ConvergEx group made false and misleading statements to customers who inquired about their overall compensation. Additionally the group provided 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. Executing orders through the offshore affiliate was not adequately disclosed to customers and was inconsistent with ConvergEx’s advertised conflict-free agency model. The fraudulent activity by ConvergEx brokers included their failure 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. ConvergEx brokerages admitted to the facts underlying the SEC’s charges and acknowledged that their conduct violated federal securities laws and agreed to pay disgorgement and prejudgment interest totaling $87,424,429 plus a penalty of $20 million. The SEC considered the firms significant remedial measures, including closure of the Bermuda affiliate and the discharge of a number of employees in management as well as other positions, as it ended the practice of routing U.S. securities offshore for order handling.
The SEC plans to return the money collected in the settlements to harmed customers through a Fair Fund distribution.
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