UPDATE 1-ConvergEx to pay more than $150 mln to settle U.S. charges

12/18/2013

By Sarah N. Lynch

WASHINGTON, Dec 18 (Reuters) - Brokerage company ConvergEx Group LLC will pay more than $150 million to resolve criminal and civil charges that some of its subsidiaries and two former employees secretly overcharged clients by millions of dollars and lied about the extra fees, U.S. authorities said Wednesday.

As part of an agreement with the U.S. Justice Department, a now-defunct ConvergEx unit that was registered in Bermuda and the two former company employees pleaded guilty to criminal conduct.

The Justice Department filed charges against ConvergEx itself but agreed to defer and drop them if the company abides by the terms of the deal, which includes paying $43.8 million in penalties and restitution.

In addition, three of ConvergEx's subsidiaries, including the shuttered Bermuda unit, will pay more than $107 million to settle parallel civil charges filed on Wednesday by the U.S. Securities and Exchange Commission.

In the SEC's case, those entities also admitted to violating securities laws and agreed to the set of facts laid out in the SEC's complaint.

This settlement marks the third time that the SEC has extracted admissions of wrongdoing from defendants, as part of a policy instituted by SEC Chair Mary Jo White earlier this year.

ConvergEx "engaged in a concerted and coordinated effort to fleece its clients by charging them millions of dollars in unwarranted fees ... and then concealing those charges from its clients through a pattern of deception," Acting Assistant Attorney General Mythili Raman said on Wednesday.

The company is a large brokerage that provides trade execution services to major institutional clients. Its two largest shareholders are private equity firm GTCR and Bank of New York Mellon.

ConvergEx had planned to go public in a $400 million initial public offering but withdrew the IPO in June. It recently hired Nasdaq OMX's second in command, Eric Noll, to be its president and chief executive.

According to the SEC's complaint, the brokerage often charged large institutional clients more than double what they thought they were paying.

ConvergEx was able to charge the extra fees by routing its customers' orders to the offshore unit in Bermuda.

This allowed ConvergEx to charge "undisclosed mark-ups and mark-downs" in addition to the commissions the customers expected to pay, the SEC said.

In a statement, ConvergEx said that the overwhelming majority of its equity execution business clients and customer orders were not affected by the scheme.

"The employees who engaged in this misconduct are no longer at the company, the Bermuda trading desk ... was shut down by ConvergEx, and the activity associated with these investigations was discontinued two years ago," the company said.

The Justice Department said that Jonathan Daspin, the former head trader of ConvergEx's broker-dealer that was registered in Bermuda, and Thomas Lekargeren, a sales trader at another one of the firm's subsidiaries, each pleaded guilty to conspiring to commit securities and wire fraud.

Both were accused of playing various roles that helped conceal the mark-ups from clients.

The Justice Department said Daspin was involved in creating false transaction reports with fabricated details about order executions. He also came up with a plan to avoid providing real-time data to its clients, the Justice Department said.

Later, when some clients complained, the Justice Department said, Lekargeren blamed the failure to deliver real-time data on information technology issues.

In a call with reporters on Wednesday, Raman said both men are cooperating with the government and the investigation is ongoing.

The government said the scheme, which occurred over a period of several years, victimized funds managed by charities, religious organizations, universities and governments.

Andrew Ceresney, co-director of the SEC's enforcement division, said that the ConvergEx was careful about which customers it overcharged and tried to pick clients that might not be paying close attention.

"Based upon the sensitivity of the customers and the likelihood that they were paying attention to execution quality, the firm then determined how much trading profit to take on particular transactions," he said.

An attorney for Daspin declined to comment, and an attorney for Lekargeren could not be immediately reached for comment.

In addition to pleading guilty to criminal charges, both former traders settled civil charges with the SEC.

Daspin agreed to pay roughly $1.1 million in disgorgement and prejudgment interest, and Lekargeren agreed to pay about $117,000 in disgorgement and prejudgment interest.



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