Transaction brokerage ConvergEx has agreed to pay $150 million to settle charges that it deceived institutional clients into paying substantially higher amounts than disclosed for the execution of trading orders
Three subsidiaries of ConvergEx Group - G-Trade Services LLC, ConvergEx Global Markets Limited, and ConvergEx Execution Solutions LLC - agreed to pay more than $107 million and admit wrongdoing to settle the SEC's charges.
In a parallel action, the Department of Justice announced criminal charges against ConvergEx Group, a brokerage subsidiary, and two former employees, Jonathan Daspin and Thomas Lekargeren. To resolve those charges, ConvergEx Group has agreed to pay $43.8 million in criminal penalties and restitution.
According to the SEC, ConvergEx brokerage firms routinely routed orders, including orders for US 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, says the SEC.
"ConvergEx brokerages sent customer trades on an unnecessary journey through its offshore affiliate so they could take extra fees behind customers' backs," says Stephen 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."
Acting Assistant Attorney General Mythili Raman, says: "Although the theft of money from ConvergEx's clients was large in scale, the fraud scheme was committed in the most basic of ways: ConvergEx and its traders, plain and simple, lied to their clients to hide that they were stealing their money. This coordinated bilking of clients by a broker-dealer - accomplished through intentional and repeated misrepresentations - not only inflicted real financial losses on investors, but also undermines investors' confidence in the integrity and reliability of the financial markets."
ConvergEx says it has shut down the Bermuda trading desk identified in the settlement and substantially tightened its policies and controls to prevent a recurrence of the wrong-doings.