by T. GormanPosted on Posted in SECActions

The Commission brought another in a series of actions centered on ConvergEx Execution Solutions LLC and its affiliates. As with the prior actions, this one centered on secretly adding substantial commissions to transactions which were far higher than the normal one which was also charged. SEC v. Bassily, Civil Action No. 16-cv-2733 (S.D.N.Y. Filed April 12, 2016).

Defendant Khaled Bassily was the head of the Global Transition Management or GTM business group of ConvergEx Executions Solutions LLC or CES. He was also a director of CES which is a registered broker-dealer and investment adviser. From 2006 –2011 he served as a registered representative at CES. ConvergEx Global Markets Limited or CGM is a Bermuda based wholly-owned subsidiary of CES.

From 2006 through 2011 Mr. Bassily was in charge of GTM, an unincorporated division of CES that offered global transition management services. Those services were used by customers seeking to change fund managers or investment strategies. The services are intended to minimize risks and preserve the value of the portfolio while in transaction. The transactions costs are thus important. GTM provided these services to U.S. and international institutional customers.

Orders at the firm were entered into an order management system which permitted them to be them to be routed offshore to the firm’s affiliate CGM. Mr. Bassily, and others at GTM unnecessarily routed the orders to CGM in Bermuda in order to add a hidden commission typically called TP on to the trades.

To add TP to a customer order, CGM acted in a riskless principal capacity. Generally once a customer order had been received CGM bought or sold the securities in that order for its own account through a local broker. Mr. Bassily and others at GTM then advised the CGM traders whether, and to what extent, they could add a mark-up or mark-down to the price received by the local broker without detection by the customer. Once the security was either marked up or down it was delivered for execution back to GTM which confirmed the trade to the customer at the marked-up or down price. Customers were told the price of the security after the adjustment and the commission.

The arrangement was covered by the transition management agreements. Typically those agreements permitted GTM to effect transactions through affiliates and take the spread. Those agreements did not indicate that the transactions occurred routinely. Exhibit A to the agreements disclosed the commissions but not the additional mark-up or down which often far exceeded the agreed upon commission.

Mr. Bassily, along with others, took steps to conceal the TP scheme. For example, he helped draft and approved the use of certain misrepresentations and material omissions to customers who asked how ConvergEx was compensation for transaction services after TP had been taken. He also generally assessed the sensitivity of customers to determine if they were price sensitive. When the customer was viewed as price sensitive less TP was taken. In some cases a technology tool was used to help conceal the practice. That tool helped hide broker identification for trades executed in a transparent foreign market in order to minimize the risk that TP would be detected.

Steps were also taken to conceal the fact that the trade was routed through Bermuda. If discovered the customer might ask questions, truthful responses to which could uncover the scheme. Thus the head of trading at CGM was furnished with false business cards that did not reveal he was in Bermuda. A cover story was put together for instances when the customer looked up the trader and discovered his location.

The TP charges were very profitable for the firm and often far in excess of the actual commissions. For example, on one trade where the disclosed commission was $93,000 the TP was $543,000. On another the disclosed commission was about $33,000. The TP was $283,000. The TP was important to the profitability of GTM as a business unit and in setting employee compensation. Mr. Bassily’s annual bonuses was several times his base salary and totaled over $7 million during the period here, late 2006 through the end of 2011.

The Orders allege violations of Exchange Act Sections 10(b) and 15(c)(1) and Securities Act Sections 17(a)(1) and (3). The case is pending. See Lit. Rel. No. 23516 (April 12, 2016).

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by T. GormanPosted on Posted in SECActions

A former Texas Attorney General and state representative combined with others at a computer firm to promote the shares of the company which claimed to compete with Dell, Apple and others. About $26 million in stock was sold through private placements. The firm’s product and competitors were not, however, as advertised. SEC v. Mapp, Civil Action No. 4:16-cv-00246 (E.D. Tx. Filed April 11, 2016).

Defendant Servergy, Inc. is a Texas based company. The computer hardware firm had one product, the CTS-1000. Since the events here the firm has rebranded itself, focusing on cloud-based data storage services. It has also reconstituted its board of directors.

During the period of this action William Mapp, III, a co-founder of the firm, and a defendant, served as CEO and President. Defendant Warren Paxton, at one time the Texas Attorney General and also a state senator was paid 1,000 shares of firm stock to solicit investors. He is also an investment adviser who was indicted on state securities fraud charges. Defendant Caleb White was a purported independent director who owns an insurance sales firm. He was paid commissions to solicit investors from the company.

Servergy funded its operations from late 2009 through early fall 2013 by raising $26 million from the sale of its unregistered shares. Mr. Mapp was the primary fund raiser for the company. He identified prospective investors through referrals and offered a 10% commission for the introduction of new investors to the company. Once a potential investor was identified, Mr. Mapp followed-up with presentations. In those presentations he claimed that the CTS-1000 was more energy efficient than a Dell server while asserting that the products were comparable. The claims were false.

In 2013 broker-dealer WFG Investments raised an additional $20 million for the company, offering 10 million shares at $2. Mr. Mapp assisted with creating a PPM and materials for investor presentations. Those materials contained material omissions and misrepresentations. For example, they asserted that there were pre-orders for the CTS-1000. Those orders supposedly included one from Amazon. There were no such orders. The PPM also falsely stated that the CTS-1000 was a revolutionary new server that could replace “power-hungry” servers found in top data centers and that it was an enterprise grade general purpose server that would compete with IBM, Dell, and Hewlett Packard. In fact the CTS-1000 was a 32 bit processor, not 64 like the others. The materials also misrepresented the power consumption of the machine.

Over a two year period beginning in early 2012 Mr. White raised about $1.4 million from over 150 individuals. He was paid $66,000 in commissions. The solicitations were made through three joint ventures he formed and managed. In his solicitations he made misrepresentations. He also failed to disclose that he was being paid commissions. Mr. White was not a registered broker. After joining the board of directors Mr. White continued to recruit investors.

Finally, in July 2011 Mr. Paxton raised about $840,000 for Servergy. He promoted the company and recruited investors in exchange for an undisclosed payment of 100,000 shares of common stock. He failed to disclose that fact to the investors he solicited. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a) and 17(b) and Exchange Act Sections 10(b) and 15(a).

Servergy and Mr. White settled with the Commission. The firm was permanently enjoined from future violations of Securities Act Section 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). It will also pay a penalty of $200,000. Mr. White was permanently enjoined from future violations of the Sections cited in the complaint. In addition, he was directed to pay $66,000 in disgorgement to the SEC and 20,000 shares of stock to the company. See Lit. Rel. No. 23515 (April 11, 2016).

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