The SEC charged four brokers who formerly worked on the cash desk at a New York-based broker-dealer with illegally overcharging customers $18.7 million by using hidden markups and markdowns and secretly keeping portions of profitable customer trades.
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.
“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 the Director of the SEC’s Division of Enforcement. “They underestimated the SEC’s ability and resolve to pursue such illegal schemes.”
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges based on the same claims.
The attorneys at Beam & Astarita, LLC have been representing brokers and financial professionals for three decades in all types of SEC and FINRA investigations. If you have questions or concerns regarding any type of enforcement proceedings, give us a call at 212-509-6544 or by email at firstname.lastname@example.org.
The SEC's press release has more details.