SEC Files Another Excessive Fee Case

The Commission brought another in a series of civil and criminal actions centered on charging excessive, undisclosed fees to clients transitioning their portfolios. SEC v. Place, Civil Action No. 2:16-c-4291 (E.D.Pa. Filed Aug. 8, 2016) is an action which names as defendants John Place, Paul Kirk, John Kirk, Global Transition Solutions, Inc. and Global Transition Solutions, LLC. Global Inc. is a now defunct broker-dealer; Global LLC has never been registered with the Commission but acted in tandem with Global Inc. John Place was the CEO of Global LLC and a registered representative of Global Inc.; Paul Kirk was the general counsel and COO of Global LLC and a registered principal of Global Inc.; and John Kirk was the President and a member of Global LLC and a registered representative of Global LLC.

The scheme alleged in this action is similar to those detailed in earlier cases, listed below. Global offers transition management for institutional investors who may, for example, be switching advisers or altering a portfolio. If the large blocks of securities typically involved were put into the market they could impact the prices. Firms such as Global help manage the transaction to avoid that possibility. They place the orders through select brokers called the routing broker. Here one of those was Bermuda based ConvergEx (see below).

A key consideration for the clients was the cost. Typically an arrangement was negotiated upfront which specified the fees. Defendants here repeatedly emphasized to prospective clients the supposedly transparent fee structure. The fees were to be limited. The board of directors of customer pension funds, for example, frequently considered Global’s fees when selecting a transition manager.

Most of the securities traded were domestic. The routing brokers engaged in riskless principal transactions, imposing mark-ups on the trades. Global shared in the mark-ups, although it told customers that its compensation came solely from the fully disclosed commissions.

Defendants Kirk, Place and Kirk orchestrated the scheme, according to the complaint, by approving and communicating false and misleading statements to Global customers regarding the firm’s revenue and business model. Mr. Place worked directly with the third party routing brokers to impose the hidden mark-ups. Those were taken opportunistically, depending on the sophistication and price sensitivity of the client.

The mark-ups inflated the cost of the transactions for customers. Defendants mislead their clients about the fees while claiming they were complying with their fiduciary obligations. Clients were induced to enter into the transactions with Global through misrepresentations regarding the fee structure. Additional misrepresentations were made in the pre-trade reports furnished to customers which projected the total cost of a potential transaction. The misrepresentations continued after the transaction. The post transactions reports did not disclose the revenue paid to Global through the mark-up. The complaint alleges violations of Exchange Act Sections 10(b), 15(c)(1), 20(A) and 20(E). The case is pending. See Lit. Rel. No. 23613 (August 8, 2016).

Other related cases include:

· Undisclosed commissions: 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 to 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. Orders at the firm were entered into an order management system which permitted 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. Mr. Bassily, along with others, took steps to conceal the TP scheme. The TP charges were very profitable for the firm and often far in excess of the actual commissions. The TP was also important to the profitability of GTM as a business unit and in setting employee compensation. The Order 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).

· 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 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 which was not disclosed. A series of steps were taken to conceal the added profit. 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 in which they were named 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 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.

· Parallel 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 and the remedial efforts of the company. The individuals also cooperated.

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