The Securities and Exchange Commission today announced that the former CEO of a global investment services firm’s brokerage subsidiary agreed to pay more than $783,000 and admit wrongdoing to settle a case involving employees under his control misleading customers.
The SEC previously charged ConvergEx Group subsidiaries, which paid $107 million and admitted wrongdoing to settle the charges. The SEC also charged two former employees in that enforcement action, and later separately filed a case against a different former ConvergEx subsidiary CEO that is pending in federal court.
According to the SEC’s complaint against Craig S. Lax filed today in federal court in Newark, N.J., the ConvergEx subsidiaries under his control engaged in a scheme that caused customers to pay substantially higher amounts than the disclosed commissions for buying and selling securities. The scheme involved concealing the practice of routing trading orders to an offshore affiliate in order to take hidden mark-ups and mark-downs commonly referred to as “trading profits” or “TP.” Lax authorized employees to temporarily suspend taking TP when a customer asked for a certain report that could reveal the hidden charges. Lax also authorized the use of a proprietary trading algorithm to hide the charges from a customer in an otherwise transparent market. To avoid potential questions from customers about why one particular trader was located offshore, Lax requested new business cards falsely indicating the trader was located in New York.
In settling the SEC’s charges, Lax additionally agreed to be barred from the securities industry for at least five years.
“Senior executives cannot permit deceptive practices by their subordinates,” said Stephen L. Cohen, an Associate Director in the SEC’s Division of Enforcement. “Lax not only condoned such conduct, but he specifically authorized practices that kept customers in the dark.”
Lax consented to the entry of a judgment, subject to court approval, permanently enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Lax has entered into an agreement to cooperate in the SEC’s ongoing investigation and pending litigation. The amount of any financial penalty to be imposed against Lax in addition to the $783,297 in disgorgement and prejudgment interest will be determined at a later date.
The SEC’s investigation is being conducted by Sarah L. Allgeier, Richard E. Johnston, and Thomas D. Manganello and supervised by Jennifer S. Leete. Litigation is being led by Cheryl L. Crumpton and Kyle M. DeYoung. The SEC appreciates the assistance of the Fraud Section of the U.S. Department of Justice’s Criminal Division, the Federal Bureau of Investigation, and the U.S. Postal Inspection Service.