SEC charges brokers with defrauding clients

Four brokers who formerly worked on the cash desk of a New York-based broker-dealer were charged by the SEC with overcharging customers $18.7 million by using hidden markups and markdowns and secretly keeping portions of profitable trades.

The Commission alleges the brokers claimed to charge customers low commission fees that were typically pennies or fractions of pennies per transaction, but in reality they were reporting false prices when executing the orders to purchase and sell securities on behalf of the customers.

The scheme was especially difficult to detect because they deceptively charged the markups and markdowns during times of market volatility in order to conceal the fraudulent nature of the prices they were reporting.

The surreptitiously embedded markups and markdowns ranged from a few dollars to $228,000 and involved more than 36,000 transactions during a four-year period. Some fees were altered by more than 1000% of what was being told to clients.

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Further, the SEC alleges, when a customer placed a limit order seeking to purchase shares at a specified maximum price, the brokers filled the order at the customer’s limit price but used opportune times to sell a portion of that order back to the market to obtain a secret profit for the firm. They falsely reported back to the customer that they could not fill the order at the limit price. Meanwhile, the brokers made millions of dollars in illicit performance bonuses based on the fraudulent earnings they were generating on the cash desk.

The brokers charged in the SEC’s complaint are Marek Leszczynski, Benjamin Chouchane, Gregory Reyftmann, and Henry Condron. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Leszczynski and Chouchane. Condron has pled guilty to criminal charges.

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According to the SEC’s complaint filed in federal court in Manhattan, the brokers were employed at an interdealer broker firm. The cash desk where these brokers worked executed trades in U.S. and Canadian stocks, and customers were primarily large foreign institutions and foreign banks. The firm’s internal records show that customers were to be charged flat commission rates between $0.005 and $0.02 per share.

SEC’s complaint alleges the scheme operated from 2005 to 2009. Reyftmann, Chouchane, and Leszczynski were sales brokers on the cash desk who were responsible for finding customers, developing relationships, and taking orders from customers. Reyftmann supervised the cash desk. Condron was a sales trader and middle-office assistant on the cash desk who entered orders received from the sales brokers and ensured the orders were executed.

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The SEC alleges that the fraudulent scheme worked as follows:

• Leszczynski, Chouchane, or Reyftmann received a customer order by phone, instant message, or e-mail and gave the order to Condron, who executed the trade.
• Condron recorded the actual execution price on the trade blotter and informed the sales brokers of the execution.
• Shortly after the trade was executed, Leszczynski, Chouchane, or Reyftmann examined other market executions around the time of the actual execution to determine whether the stock price fluctuated.
• If the stock price’s fluctuation was favorable to the firm and sufficient to conceal the fraud from customers, the sales brokers instructed Condron to record a false execution price in the gross price field on their internal trade blotter.
• Leszczynski, Chouchane, Reyftmann, or Condron then reported the false execution price and the commission to the customers.

The SEC alleges the brokers further defrauded customers by stealing portions of their profitable trades and keeping them for the firm:

• After receiving and executing a customer’s limit order to buy shares, Reyftmann, Chouchane, or Leszczynski looked for an opportunity to sell that same stock at a higher price than the price at which the customer’s trade was executed.
• Leszczynski, Chouchane, or Reyftmann then instructed Condron to sell a portion of that customer execution back at the higher price.
• Rather than properly recording the actual price and quantity of the order fill, Condron entered a partial fill into the trade blotter, keeping the secret profits for the firm.
• Leszczynski, Chouchane, Reyftmann, or Condron then reported a partial fill to the customer, falsely stating they were unable to fully execute the customer’s limit order.

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The SEC alleges the brokers’ scheme enriched not only the firm but themselves as well. The four brokers received substantial performance bonuses totaling more than $15.6 million based, in part, on fraudulent earnings generated by the cash desk.

The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and a permanent injunction against the brokers. It’s investigation is continuing.