SEC Files Another In A Series of Actions Tied to Secret Commissions

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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