ConvergEx Group Subsidiary and Two Employees Plead Guilty to Securities and Wire Fraud Charges
|U.S. Department of Justice December 18, 2013|
WASHINGTON—A brokerage subsidiary of ConvergEx Group LLC agreed to plead guilty today to charges of wire fraud and conspiracy to commit securities fraud and wire fraud. ConvergEx Group has also agreed to pay $43.8 million in criminal penalties and restitution as part of a deferred prosecution agreement with the Department of Justice. In addition, Jonathan Daspin, the head trader at the brokerage subsidiary, and Thomas Lekargeren, a sales trader at a different ConvergEx subsidiary, both pleaded guilty today to conspiracy to commit securities and wire fraud before U.S. District Judge Jose Linares in the District of New Jersey.
Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division; Assistant Director in Charge Valerie Parlave of the FBI’s Washington Field Office; and Inspector in Charge Phillip Bartlett from the U.S. Postal Inspection Service (USPIS) made the announcement.
ConvergEx Global Markets Limited (CGM Limited), a former broker-dealer registered in Bermuda, has also agreed to plead guilty today. The department also filed today a criminal information in connection with a deferred prosecution agreement charging ConvergEx Group with one count of conspiracy to commit securities fraud and wire fraud and one count of wire fraud. To resolve the charges, ConvergEx Group and CGM Limited have agreed to pay in total a criminal penalty of approximately $18.0 million and forfeit approximately $12.8 million, for a total penalty of $30.8 million, and additionally to pay restitution of approximately $12.8 million to defrauded customers.
In a parallel action, the U.S. Securities and Exchange Commission also reached a resolution today with three ConvergEx Group subsidiaries, Daspin, and Lekargaren.
“As described in the guilty plea agreements and charging documents announced today, ConvergEx—which was a broker for some of the most sophisticated institutional investors in the world—along with several of its employees, engaged in a concerted and coordinated effort to fleece its clients by charging them millions of dollars in unwarranted fees—which ConvergEx called 'trading profits,' or 'spread'—and then concealing those charges from its clients through a pattern of deception,” said Acting Assistant Attorney General Mythili Raman. “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. As the guilty pleas and resolutions announced today show, we will not tolerate this type of criminal conduct, and we will hold both institutions and individuals to account.”
“With today’s guilty pleas, ConvergEx and two of its employees admitted their roles in a scheme in which they committed securities fraud,” said Assistant Director in Charge Parlave. “By doing so, they hid the fact that they were secretly earning millions of dollars by deliberately fabricating transaction reports which were provided to clients with false details regarding their orders. The FBI will continue to investigate allegations of securities fraud and abuse to ensure those who participate in the global trading market are doing so fairly.”
“This is yet another example of the significant results that can be achieved when law enforcement agencies partner, share information, and collaborate,” said USPIS Inspector Bartlett. “The Inspection Service values its partnership with the FBI and SEC in this case.”
According to court documents, certain ConvergEx Group broker-dealers that provided agency brokerage services and disclosed to clients that they would charge commissions for their services regularly routed securities 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 fact that spread had been taken on trades, traders at CGM Limited and sales traders at a ConvergEx Group subsidiary in New York sent false transaction reports to clients with fabricated details regarding the execution orders, including the number of shares involved in a trade, the time at which a trade was executed and the price at which shares were either purchased or sold. CGM Limited traders, including Daspin, created these false reports using exchange data from transactions entered into by others on the same trade date as the trades that had been executed by CGM Limited on behalf of its clients. Daspin instructed a sales trader while creating a false report to “Please put all Prints in one spreadsheet in the least Friendly Format....If possible take this out of spreadsheet Format and make a PDF—Or put this in picture file or something tricky to manipulate.” In another instance, Daspin notified an executive that “[w]e need to be creative putting something together as did not have time and sales for the price given. Fyi.” In total, CGM Limited took approximately $12.8 million in trading profits from these clients after it had sent the false statements to them.
Daspin and others also came up with a plan to continue taking spread on a client by violating the client’s instructions to provide “real-time” transactional data, i.e., an immediate data feed of the details of trades that CGM Limited executed for the client in offshore markets through foreign brokers. If the client’s instructions had been followed, CGM Limited’s traders would not have been able to take spread on the client’s trades. Daspin and other CGM Limited traders “turned off” real-time for certain portions of the client’s orders and took spread while real-time was turned off. On several occasions, when the client asked why it was not receiving real-time data, Lekargeren falsely blamed it on various IT issues.
Certain employees of CGM Limited and the broker-dealers offering agency brokerage services also took other steps designed to conceal the fact that CGM Limited was taking spread and the fact that spread was included in the trade prices reported to clients, including taking smaller amounts of spread on certain price-sensitive clients; taking larger amounts of spread when it was less likely to be discovered; insuring that the marked-up price they charged to clients was within the high or low price at which the security traded that day; and using multiple local brokers during the course of a trade so that a client would not be able to track the execution of the client’s order through publicly available resources.
The head of the division offering transition management services—which provided clients in the process of changing fund managers or investment strategies the ability to execute large orders to buy and sell securities—provided several clients with false information to hide trading profits. In July 2010, for example, this executive caused a client to be told that “no principal trading has been carried out in any transition” for that client, when this executive knew CGM Limited had traded in a principal capacity and had taken approximately $1.75 million of trading profits on the client’s trades a month earlier. After that false response was sent to the client, CGM Limited’s traders took approximately $4.5 million of additional trading profits on that client’s trades.
In addition, ConvergEx employees assisted an unaffiliated provider of transition services in concealing that it was receiving a 50 to 60 percent 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.
As part of the deferred prosecution agreement with ConvergEx Group, the department highlighted the internal investigation conducted by the company; its extraordinary and ongoing cooperation; its extensive remediation, including terminating officers and employees, ceasing all trading activities at CGM Limited, and voluntarily relinquishing the subsidiary’s Bermudan securities license; enhancing its compliance program and internal controls; and the guilty plea by CGM Limited and its agreement to pay restitution and the significant sanctions imposed by the SEC.
The case was investigated by the FBI’s Washington Field Office and the Washington, D.C. and New York Offices of the U.S. Postal Inspection Service. The case is being prosecuted by Trial Attorneys Justin Goodyear, Jason Linder, and Patrick Pericak of the Criminal Division’s Fraud Section.
The SEC referred the matter to the Justice Department for investigation, and the department expresses its appreciation for the significant assistance provided by the SEC.
The department also recognizes the assistance of the Criminal Division’s Office of International Affairs, the Financial Industry Regulatory Authority, and the United States Attorney’s Office for the District of New Jersey.