Execution broker ConvergEx engaged in fraudulent order routing practices, including executing at inflated prices through an offshore affiliate and providing clients with falsified trade data, the Securities and Exchange Commission (SEC) has found, and faces fines totaling over US$150 million.
According to the SEC, ConvergEx and three of its brokerage subsidiaries, routed orders to a Bermuda-based affiliate that executed them on a riskless basis to boost profits by adding a mark-up or mark-down on the price of the securities, which included US equities.
The Commission found the offshore affiliate consulted with the client-facing brokers to assess the risk of customer detection before taking the extra money on top of the disclosed commissions, which resulted in some clients paying more than double what they should for execution.
As a result, ConvergEx will pay US$107 million to the SEC to settle fraud charges and US$43.8 million to the Department of Justice in a parallel action to settle criminal charges. Two former ConvergEx employees, which the SEC found central to the scheme will also pay a combined $1.2 million to the Commission.
In a statement, the SEC said it considered ConvergEx’s substantial cooperation and remedial action – including shutting down the Bermuda affiliate and discharging key management personnel – when setting the fine.
It said the firm’s clients received false or misleading statements regarding fees and the practice of executing offshore was not adequately disclosed to customers, who believed they were trading through a conflict-free agency model.
“ConvergEx brokerages sent customer trades on an unnecessary journey through its offshore affiliate so they could take extra fees behind customers’ backs,” said Stephen 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.”
Rebuilding client trust will be a major priority for newly appointed president and CEO of ConvergEx, Eric Noll, former head of transaction services for market operator Nasdaq OMX.
Noll will formally commence duties as CEO in January, but was made president of the company upon announcement of his move from Nasdaq late last month. He will be responsible for all strategy, business lines and day-to-day operations and will report to the board and serve as a director.
At Nasdaq, Noll was responsible for the firm’s US and UK equity, options and futures exchanges and helped manage relationships with key buy- and sell-side firms.