Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Monday, October 8, 2012

SEC Charges Four Brokers with Overcharging Customers $18.7 Million

Last Friday the SEC charged four brokers who formerly worked on the cash desk at an interdealer broker firm  with illegally overcharging customers $18.7 million by using hidden markups and markdowns and secretly keeping portions of profitable customer trades.  The brokers are Marek Leszczynski, Benjamin Chouchane, Gregory Reyftmann, and Henry Condron. Interdealer brokers typically operate only as agents and execute large volumes of securities trades on behalf of customers for low commissions. The cash desk where these brokers worked executed trades in U.S. and Canadian stocks, and customers were primarily large foreign institutions and foreign banks. The firm’s internal records show that customers were to be charged flat commission rates between $0.005 and $0.02 per share.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Leszczynski and Chouchane. Condron has pled guilty to criminal charges.

The SEC alleges that the brokers purported to charge customers very low commission fees that were typically pennies or fractions of pennies per transaction, but in reality they were reporting false prices when executing the orders to purchase and sell securities on behalf of their customers. The brokers made their scheme especially difficult to detect because they deceptively charged the markups and markdowns during times of market volatility in order to conceal the fraudulent nature of the prices they were reporting to their customers. The surreptitiously embedded markups and markdowns ranged from a few dollars to $228,000 and involved more than 36,000 transactions during a four-year period. Some fees were altered by more than 1000 percent of what was being told to customers.

The SEC further alleges that when a customer placed a limit order seeking to purchase shares at a specified maximum price, the brokers filled the order at the customer’s limit price but used opportune times to sell a portion of that order back to the market to obtain a secret profit for the firm. They falsely reported back to the customer that they could not fill the order at the limit price. Meanwhile, the brokers made millions of dollars in illicit performance bonuses based on the fraudulent earnings they were generating on the cash desk.

The SEC’s complaint alleges that the scheme spanned from 2005 to 2009. Reyftmann, Chouchane, and Leszczynski were sales brokers on the cash desk who were responsible for finding customers, developing relationships, and taking orders from customers. Reyftmann supervised the cash desk. Condron was a sales trader and middle-office assistant on the cash desk who entered orders received from the sales brokers and ensured the orders were executed.

The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and a permanent injunction against the brokers.

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