Pictured: Joseph Velli
In a deal which underscores the problem investors have in assessing the true costs of investment implementation, ConvergEx, the US-based global brokerage and trading services firm, has agreed to pay US$150 million to settle fraud charges brought by the Securities and Exchange Commission and criminal charges brought by the US Department of Justice.
ConvergEx, formed in 2006 through the outsourcing of Bank of New York’s securities arm to Eze Castle Software, has more than 3,000 institutional clients including sophisticated investors such as endowments, sovereign wealth funds, pension funds and money managers. According to an SEC statement, up to 5 per cent of the clients, representing 1 per cent of the trading activity, were impacted by the fraud.
The settlement, announced just prior to Christmas, followed a two-year investigation. The SEC said selected clients were paying more than double what they thought they were paying to execute trades.
The SEC statement said: “According to the SEC’s order instituting settled administrative proceedings, 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 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.
“ConvergEx brokerages sent customer trades on an unnecessary journey through its offshore affiliate so they could take extra fees behind customers’ backs,’ said Stephen L Cohen, associate director of the SEC’s Division of Enforcement. ‘Brokers who seek to enhance their bottom lines through deception about their compensation are violating the law and the trust of their customers.”
“According to the SEC’s order, the ConvergEx brokerages involved in the scheme were G-Trade Services LLC, ConvergEx Global Markets Ltd, and ConvergEx Execution Solutions LLC. Their customers included funds managed on behalf of charities, religious organizations, retirement plans, universities, and governments. The ConvergEx brokerages believed they would lose business if customers became aware of their mark-ups and mark-downs, so they engaged in specific acts to hide the scheme. Typically, they only took mark-ups and mark-downs on top of the disclosed commissions in situations where they believed that the risk of detection was low. They also made false and misleading statements to customers who inquired about their overall compensation, even providing certain customers with falsified trading data to cover up the fact that the offshore affiliate had taken mark-ups or mark-downs on their orders. The practice of executing orders through the offshore affiliate was not adequately disclosed to customers and was inconsistent with ConvergEx’s advertised conflict-free agency model. Using this practice, the ConvergEx brokers failed to seek best execution for their customers’ orders…”
The ConvergEx subsidiaries agreed to pay US$107 million to settle the SEC charges and US$43.8 million in criminal penalties and restitution for the Department of Justice charges. The SEC said that the company and two former employees, Jonathan Daspin and Thomas Lekargeren, who were also charged, co-operated with the investigation. Daspin paid US$1.1 million in “disgorgement and pre-judgement interest” to the authorities and Lekargeren US$117,000.
Joseph Velli, the chairman and chief executive, who headed up BNY Securities prior to the formation of ConvergEx, 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.
“Looking to the future, ConvergEx is financially sound with no debt, and the net capital levels of our broker-dealers will not be affected by payment of the resolution. With more than 600 dedicated employees and a diverse mix of best-in-class products and services, ConvergEx is well-positioned to move past these legacy matters, grow its business and expand its position as a market leader.”
ConvergEx is now owned by private equity firm CVC Capital. It has a Sydney sales office overseeing the Asia Pacific region.