The U.S. Securities and Exchange Commission (SEC) Friday charged four brokers who traded U.S. and Canadian stocks on the cash desk of an interdealer broker in New York with illegally overcharging clients US$18.7 million with hidden trading markups.
The SEC alleges that the brokers purported to charge very low commission fees, but they were actually reporting false prices when executing the orders. In fact, it says, they surreptitiously embedded markups and markdowns ranged from a few dollars to US$228,000, which involved more than 36,000 transactions over a four-year period. These markups and markdowns were difficult to detect, it says, because they were charged during times of market volatility in order to conceal the fraudulent nature of the prices they were reporting to their customers, which were primarily large foreign institutions and banks.
The regulator also alleges that the extra profits they generated for the firm with their deceptive trading activity, in turn, generated millions in illicit performance bonuses for the brokers. It reports that they received performance bonuses totaling more than US$15.6 million based, in part, on the fraudulent earnings.
The allegations have not been proven.
In a parallel action, the U.S. attorney’s Office for the Southern District of New York also announced criminal charges against two of the brokers, who were both charged with one count of securities fraud and one count of conspiracy to commit securities fraud and wire fraud. A third man pled guilty to one count of securities fraud and two counts of conspiracy to commit securities fraud. He faces a maximum penalty of 20 years in prison on the securities fraud charge and a maximum penalty of five years in prison on each of the conspiracy charges, along with fines and disgorgement.
The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and a permanent injunction against the brokers.
“These brokers stole millions of dollars by overcharging customers for trades involving stocks with high trading volumes and price volatility, which are characteristics they wrongly thought would conceal their illicit pricing scheme,” said Robert Khuzami, director of the SEC’s Division of Enforcement.