SEC, DOJ Charge Brokers With Defrauding Clients
The Commission brought charges against three subsidiaries of ConvergEx Group, LLC, and two employees of subsidiaries, based on a scheme to defraud brokerage customers by charging excessive fees. In the Matter of G-Trade Services LLC, Admin. Proc. File No. 3-15654 (Dec. 18, 2013); In the Matter of Thomas Lekargeren, Adm. Proc. File No. 3-15653 (Dec. 18, 2013); In the Matter of Jonathan Samuel Daspin, Adm. Proc. File No. 3-15652 (Dec. 18, 2013). The Department of Justice brought parallel criminal actions.
The proceeding against G-Trade names as Respondents, the firm, a registered broker dealer with a division known as the CGM Division; ConvergEx Global Markets Limited or CGM, a Bermuda broker dealer; and ConvergEx Execution Solutions or CES, a New York registered broker dealer. Mr. Lekargeren was a registered representative with G-Trade. Mr. Daspin, based in New Jersey, was the global head of trading of CGM. Each entity is a subsidiary of ConvergEx Group, LLC.
From 2006 through 2011 Respondents executed equity orders for institutional customers. The CGM Division of G-Trade handled large non-electronic orders around the world for firm customers. GTM handled global transition management services involving large orders of stock for customers who were changing fund managers or investment strategies. GTM and the CGM Division acted as agents on behalf of customers. They charged disclosed commissions for their services.
When GTM or the CGM Division received an order it was routed to CGM in Bermuda. That firm then acted in a riskless principal capacity and executed the order for its account through a local broker deal in the relevant market. If the CGM employee believed a mark-up could be added without the knowledge of the customer, it was included in the price. This created additional trading profit for the firm.
The confirmation disclosed the commission. The price reported to the customer included the additional profit. It did not inform the customer that additional profit had been added. Yet that amount was frequently more than the amount of the commission.
Since the additional profit was an important source of revenue for CGM and GTM, steps were taken to conceal the practice. Those included:
Select transactions: The additional profit was only added if it was believed the customer would not detect it.
Delay: Real time trade reporting was intentionally delayed.
Software: Software was employed to quickly fabricate false execution prices.
False statements: False and misleading statements were made to customers who inquired about Respondents’ overall compensation.
The Orders allege violations of Exchange Act Sections 10(b) and 15(c)(1).
To resolve the proceedings G-Trade and CES agreed to a series of undertakings. In addition, the Respondents in each proceeding admitted to the facts alleged in the Order which named them as a Respondent and to violating the federal securities laws. Each Respondent also consented to the entry of a cease and desist order based on the Sections cited in the Orders. The entity defendants also agreed to a censure.
In the G-Trade proceeding the Respondents will pay disgorgement of $79,802,448, prejudgment interest and a penalty of $20 million, jointly and severally. Messrs. Daspin and Lekargeren agreed to the entry of orders barring them from the securities business or from participating in any penny stock offering with any reapplication being subject to certain condition. In addition, Mr. Daspin agreed to pay disgorgement of $1 million, prejudgment interest and a penalty of $111,550. Mr. Lekargeren agreed to pay disgorgement of $110,089 and prejudgment interest.
The criminal charges were also resolved. Messrs. Daspin and Lekargeren pleaded guilty to conspiracy to commit securities and wire fraud. CGM agreed to plead guilty. ConvergEx Group entered into a deferred prosecution agreement where the underlying information charges one count of conspiracy to commit securities fraud and wire fraud and one count of wire fraud. To resolve the charges ConvergEx Group and CGM agreed to pay a criminal penalty of $18 million and to forfeit about $12.8 million. They also agreed to pay restitution of about $12.8 million.
Both the Commission and the DOJ acknowledged the extensive cooperation of ConvergEx after the investigation commenced. The company also took significant remedial measures, including the closure of the Bermuda affiliate and the discharge of a number of employees. Each individual named in the proceedings cooperated.