ConvergEx Traders Admit to Criminal Charges for Hiding Markups

Dec 19, 2013 12:00 am ET

Dec. 19 (Bloomberg) -- ConvergEx Group LLC and two former employees admitted to defrauding customers of millions of dollars by concealing markups on stock trades, resolving civil and criminal claims by U.S. authorities.

ConvergEx, which executes trades for hedge funds and endowments, agreed to pay more than $150 million, the Securities and Exchange Commission said yesterday in a statement. Traders Jonathan Daspin and Thomas Lekargeren pleaded guilty to conspiracy to commit securities and wire fraud in federal court in New Jersey, the Justice Department said in a separate statement.

The brokerage, whose biggest investors include Chicago- based private-equity firm GTCR Golder Rauner LLC and Bank of New York Mellon Corp., bilked institutional clients from 2006 to 2011, telling them it would trade stock for them at market rates and then sending the orders to a subsidiary that inflated prices, the SEC said. Daspin and Lekargeren covered up the scheme by faking trade records, the agency said.

“ConvergEx and its traders, plain and simple, lied to their clients to hide that they were stealing their money,” Mythili Raman, acting assistant attorney general, said in a statement.

ConvergEx’s customers included funds managed on behalf of charities, religious groups, retirement plans, universities and governments, according to the SEC.

‘Deeply Apologize’

“We have accepted responsibility and deeply apologize to those customers who were adversely affected,” ConvergEx Chairman and Chief Executive Officer Joseph Velli said in a statement.

ConvergEx also entered into a deferred-prosecution agreement with the Justice Department, and its Bermuda subsidiary pleaded guilty to wire fraud and conspiracy charges.

The U.S. probes, which started at least two years ago, scuttled a takeover bid by London-based buyout firm CVC Capital Partners Ltd. in December 2011. The purchase may have been valued at $1.9 billion, people with knowledge of the talks said at the time. ConvergEx withdrew plans for an initial public offering in June.

Daspin could be sentenced to a maximum of 30 years in prison, while Lekargeren could face as many as five years, Raman said during a conference call to discuss the case. The two men, who no longer work for ConvergEx, declined to comment.

The scheme was “brazen,” Raman said in a statement. ConvergEx would receive orders to trade stocks on U.S. exchanges and unnecessarily route them to the Bermuda unit, which used another company to execute them and add a markup, the SEC said. The brokerage often tacked on the fees when time-zone differences meant customers were sleeping, the agency said.

Taking the markups got harder as technical advances led clients to ask for real-time data on the trades, the SEC said. Daspin, global head of trading for the Bermuda unit, disabled the reporting system for one client from time to time so that he could continue to gouge them, according to the agency.

Bloomberg LP, the parent of Bloomberg News, competes with ConvergEx in providing trading services and technology.

--Editors: David Scheer, Joshua Gallu

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