The US Securities and Exchange Commission has charged the former chief executive officer of a broker-dealer subsidiary of ConvergEx Group LLC for deceiving brokerage customers with hidden fees to buy and sell securities, showing clearly that the North American authorities are in favor of making individuals personally liable for fraudulent action as well as for abusing their position when holding a senior role within firms.
The SEC’s complaint alleges that the former CEO, Anthony G. Blumberg, engaged in a scheme that entailed concealing the practice of routing orders to an offshore affiliate in Bermuda to add mark-ups or mark-downs. The hidden fees known as “trading profits” or “TP” were in addition to and often much higher than the commissions paid by customers to have their orders executed.
The charges against Mr. Blumberg follow those announced in December by the SEC against three ConvergEx subsidiaries that agreed to pay more than $107 million and admit wrongdoing to settle the matter. Two former employees also settled charges with the SEC.
According to the SEC’s complaint filed against Mr. Blumberg in federal court in Newark, New Jersey, one university customer paid approximately $93,000 in disclosed commissions and about $543,000 in undisclosed TP. In another case, $1.6 million in fees allegedly went undetected. The SEC alleges that Blumberg engaged in deceptive practices to conceal the additional fees, and he encouraged traders under his management to do the same.
“We will continue to hold individuals accountable, including senior officials at broker-dealers, when they engage in fraudulent schemes to mislead customers,” said Andrew Ceresney, director of the SEC’s Division of Enforcement.
The U.S. Department of Justice announced parallel criminal charges against Mr. Blumberg. In the prior parallel criminal proceeding announced in December, ConvergEx Group and its Bermuda broker-dealer agreed to pay $43.8 million, and the two former employees named in the SEC case pleaded guilty in the criminal case.
ConvergEx has since shut down trading operations at the Bermuda broker-dealer subsidiary ConvergEx Global Markets Limited. Mr. Blumberg was CEO of ConvergEx Global Markets Limited and ConvergEx Global Markets, which included a unit of U.S. broker G-Trade Services LLC.
The SEC’s complaint alleges that Mr. Blumberg directed employees to suspend the taking of “take profit” (TP) when customers were monitoring execution prices. Mr. Blumberg made false and misleading statements to a brokerage customer and authorized employees to falsify trading data for customers who inquired about the details of their securities transactions.
“During his tenure, Blumberg directed a culture of deception and greed that systematically harmed investors,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement. “He had the power to put an end to this fraud, but instead used his power to encourage and perpetuate it.”
The SEC’s complaint alleges that Blumberg violated the antifraud provisions of the federal securities laws and an SEC antifraud rule. The complaint further alleges liability as a control person and aiding and abetting violations by certain ConvergEx subsidiaries and former employees. The SEC is seeking disgorgement of any ill-gotten gains with interest, a financial penalty, and permanent injunctive relief.
The SEC’s investigation, which is continuing, has been conducted by Sarah L. Allgeier, Richard E. Johnston, and Thomas D. Manganello under the supervision of Jennifer S. Leete. The litigation will be led by Cheryl L. Crumpton and Kyle M. DeYoung. The SEC appreciates the assistance of the Fraud Section of the U.S. Department of Justice’s Criminal Division, the Federal Bureau of Investigation, and the U.S. Postal Inspection Service.