Retirement Funds Among Targets of Securities Fraud

Brokers serving retirement plans and other institutional investors were accused of routing orders for equities to an offshore affiliate in Bermuda that “executed them on a riskless basis and opportunistically boosted profits by adding a mark-up or mark-down on the price of a security.”

The former head of ConvergEx Group’s transition management business has agreed to be barred from the securities industry and has consented to a judgment ordering him to pay more than $975,000 to settle fraud charges the Securities and Exchange Commission (SEC) filed in 2016.

The SEC’s complaint alleged that Khaled Bassily “participated in a fraudulent scheme to hide from charities, religious organizations, and retirement funds that they paid substantially higher amounts than disclosed for the execution of trading orders.”

Without admitting or denying the SEC’s allegations, Bassily has consented to the entry of a final judgment that ordered him to pay a total of $988,414 in disgorgement, prejudgment interest and a civil penalty. The order also permanently enjoined him from violating Sections 10(b) and 15(c)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. Bassily further consented to the entry of an SEC order that barred him from the securities industry. Final judgment was entered on December 21, 2017, and the industry bar was imposed January 3, 2018.

The SEC’s successful charges here follow those announced in August 2014 against Anthony G. Blumberg, a former executive of a ConvergEx Group subsidiary, who remains involved in a federal action currently pending in Newark, New Jersey, and charges announced in December 2013 against three ConvergEx Group subsidiaries that agreed to pay more than $107 million and admitted wrongdoing to settle related charges. The SEC’s complaint filed against Blumberg says one university customer paid about $93,000 in disclosed commissions and about $543,000 in undisclosed trading profits. In another case, $1.6 million in fees allegedly went undetected. 

According to the SEC’s order instituting settled administrative proceedings, the ConvergEx brokerage firms represented to customers that they charged explicit commissions to execute equity trading orders. “However, they routinely routed orders, including orders for U.S. equities, to an offshore affiliate in Bermuda that executed them on a riskless basis and opportunistically boosted their profits by adding a mark-up or mark-down on the price of a security,” SEC charged. “The offshore affiliate often consulted with the client-facing brokers to assess the risk of customer detection before taking the extra money on top of the disclosed commissions. The mark-ups and mark-downs caused many customers to unknowingly pay more than double what they understood they were paying to have their orders executed.”

According to the SEC, customers affected by the wrongdoing included funds managed on behalf of charities, religious organizations, retirement plans, universities, and governments.

“The ConvergEx brokerages believed they would lose business if customers became aware of their mark-ups and mark-downs, so they engaged in specific acts to hide the scheme,” SEC reported. “Typically, they only took mark-ups and mark-downs on top of the disclosed commissions in situations where they believed that the risk of detection was low. They also made false and misleading statements to customers who inquired about their overall compensation, even providing certain customers with falsified trading data to cover up the fact that the offshore affiliate had taken mark-ups or mark-downs on their orders.  The practice of executing orders through the offshore affiliate was not adequately disclosed to customers and was inconsistent with ConvergEx’s advertised conflict-free agency model.  Using this practice, the ConvergEx brokers failed to seek best execution for their customers’ orders.”

In the end, according to the SEC, the subsidiary firms agreed to pay disgorgement and prejudgment interest totaling $87,424,429 and a penalty of $20 million. In determining the penalty amount, the SEC considered ConvergEx’s “substantial cooperation after the agency commenced its investigation.” The SEC also considered the company’s significant remedial measures, including the closure of the Bermuda affiliate and the discharge of a number of employees in management and other positions as it ended the practice of routing U.S. securities offshore for order handling.