(December 19, 2013) — Three subsidiaries of transactions services provider ConvergEx have been hit with fines totalling more than $150 million, while the group and two specific employees face criminal proceedings, the Securities and Exchange Commission (SEC) and Department of Justice (DoJ) have announced.
The companies have been severely reprimanded for their brokerage practices, which included transition management, the agencies said. ConvergEx has agreed to pay $107 million in charges to the SEC, admit wrongdoing, and give a further $43.8 million in criminal penalties and restitution ordered by the DoJ.
The SEC said: “The ConvergEx brokerage firms represented to customers that they charge explicit commissions to execute equity trading orders. However, they 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 SEC said. “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.”
In February, 2012, aiCIO reported that through a complicated structure that seemingly fractured its business units into different legal entities, ConvergEx as a whole was charging both a commission and a spread on transitions, among other transactions, when dealing with pension plans.
“These legacy matters center on certain high-touch global program trading and global transition management orders routed through the former Bermuda trading desk of CGM, a ConvergEx subsidiary, which was effectively shut down in late 2011,” the firm’s statement sent to aiCIO on October 16, 2013 said, adding that the company discontinued this activity almost two years ago.
Despite these protestations, the DoJ still decided to press criminal charges against both the group and two specific employees: Jonathan Daspin and Thomas Lekargeren. All parties have pleaded guilty to the charges.
“Customers have a right to expect honesty from their brokers and accurate information in response to their inquiries,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement. “These ConvergEx brokers misled their customers and failed to provide complete information about the costs they were charging.”
Acting Assistant Attorney General Mythili Raman said: “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.”
There may be more prosecutions on the way. In its statement on the matter, the DoJ said: “ConvergEx employees assisted an unaffiliated provider of transition services in concealing that it was receiving a 50% to 60% share of the trading profits CGM Limited was taking on the unaffiliated company’s clients, in violation of the unaffiliated company’s client agreements. The unaffiliated company sent invoices addressed to ConvergEx Group that falsely stated that they were for trading cost analysis, when in fact the invoices were sent to cover up that the payments were in fact for the unaffiliated company’s share of the spread taken by CGM Limited on its clients.”
The department did not name the “unaffiliated company”.
Yesterday, ConvergEx Group Chairman and Chief Executive Officer Joseph Velli said: “The credibility of our company and the trust our clients place in us have always been our most sacred assets. By resolving these matters, we have accepted responsibility and deeply apologize to those customers who were adversely affected.”
aiCIO reported in July that the firm had closed its non-US transition management business. This came after JPMorgan began “winding down” its division in June, a spokesperson confirmed at the time. Likewise, Credit Suisse stopped bidding on American transitions in May in order to shutter its US operations.
The case was investigated by the FBI’s Washington Field Office and the Washington, DC, and New York offices of the US Postal Inspection Service.
Related content: Reluctant Voices & Slow Progress in Transition Management