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November 19, 2014

ConvergEx Group Subsidiary Sentenced for Securities Fraud Scheme

WASHINGTON—A brokerage subsidiary of ConvergEx Group LLC was sentenced and ordered to pay a criminal penalty and restitution of $26 million for wire fraud and conspiracy to commit securities and wire fraud in connection with a scheme to charge clients millions of dollars in unwarranted and hidden fees.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, Assistant Director in Charge Andrew G. McCabe of the FBI’s Washington Field Office and Inspector in Charge Philip R. Bartlett of the U.S. Postal Inspection Service (USPIS) made the announcement.

“CGM Limited, a subsidiary of the global brokerage and trading firm ConvergEx, and certain executives and traders defrauded their clients by brazenly and repeatedly lying to them and then siphoning off millions of dollars through hidden fees,” said Assistant Attorney General Caldwell. “But they didn’t get away with it. Today’s sentence shows that the Justice Department will require financial companies to answer for taking advantage of their clients’ trust and violating the laws that protect investors in financial markets.”

“Today’s sentencing demonstrates that companies who hide earnings, fabricate transaction reports and provide clients with false details regarding their orders for the purpose of increasing their own bottom line will ultimately pay the price for their schemes,” said Assistant Director in Charge McCabe. “The FBI will continue to work with our partners to investigate complex international financial crimes and send a message that complete transparency is a requirement in the global trading market.”

“Today’s sentencing is an example of the dedicated work of law enforcement to stop fraud wherever it may be, safeguarding the investments of consumers and protecting the integrity of the financial markets,” said Inspector in Charge Bartlett.

ConvergEx Global Markets Limited (CGM Limited), a former broker-dealer registered in Bermuda, pleaded guilty on Dec. 18, 2013. Together with its parent company, ConvergEx Group, which entered into a deferred prosecution agreement on Dec. 18, 2013, CGM Limited will pay a criminal penalty of approximately $18.0 million, forfeit approximately $12.8 million, and will pay defrauded customers approximately $12.8 million in restitution. In total, CGM Limited and ConvergEx Group are paying $43.8 million in criminal penalties and restitution. U.S. District Judge Jose L. Linares in the District of New Jersey imposed the sentence.

As CGM Limited admitted when it pleaded guilty, certain ConvergEx Group broker-dealers that provided commission-based brokerage services regularly routed securities trading orders to CGM Limited in Bermuda so that it could take a mark-up (an additional amount paid for the purchase of a security) or mark-down (a reduction of the amount received for the sale of a security) when executing the orders. ConvergEx employees referred to such mark-ups and mark-downs as “spread,” “trading profits,” or “TP.”

To hide the increased fees, traders at CGM Limited and sales traders at ConvergEx Group subsidiaries sent false transaction reports to clients with fabricated details, including the number of shares involved in a trade, the time at which a trade was executed, and the price at which shares were purchased or sold. In total, CGM Limited took approximately $12.8 million in trading profits from these clients after it had sent the false statements to them.

CGM Limited admitted that its employees engaged in other fraudulent activities involving “spread.” As one example, CGM Limited traders violated a client’s trading instructions to allow them to take spread on the client’s trades, and then an employee of another ConvergEx Group subsidiary offered the client false explanations for the trading activity.

On Dec. 18, 2013, Jonathan Daspin, the head trader at CGM Limited, and Thomas Lekargeren, a sales trader at a different ConvergEx Group subsidiary, each pleaded guilty to conspiracy to commit securities and wire fraud.

On Aug. 6, 2014, Anthony Blumberg, the former CEO of CGM Limited, and Craig Marshall, a former trader at CGM Limited, were charged with wire fraud and conspiracy to commit securities and wire fraud. Blumberg was also charged with securities fraud. The charges in the indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty

As part of the deferred prosecution agreement with ConvergEx Group, the department highlighted ConvergEx Group’s extensive cooperation, including its robust internal investigation, and as well as its extensive remediation and enhanced compliance program and internal controls.

The case was investigated by the FBI’s Washington Field Office and the Washington, D.C. and New York offices of the USPIS. The case is being prosecuted by Trial Attorneys Justin Goodyear, Jason Linder and Patrick Pericak of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Leslie Schwartz of the District of New Jersey. Fraud Section Assistant Chief Robert Zink also assisted with the investigation.

The SEC referred the matter to the Justice Department for investigation, and the department expresses its appreciation for the substantial assistance provided by the SEC.

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