Two former Linkbrokers Derivatives brokers have been arrested on criminal charges of securities fraud, wire fraud, and conspiracy to commit securities fraud. Benjamin Chouchane and Marek Leszczynski, along with others, are accused of taking part in a securities scam that cost customers $18.7 million. It involved the brokers secretly raising the price of trades, in some instances by just pennies, or lowering them, and then concealing the actual cost from clients. The Securities and Exchange Commission, which is also filing civil charges against the two men, as well as against brokers Henry Condron and Gregory Reyftmann, says that they executed over 36,000 trades with these types of price discrepancies between 2005 and 2009. Condron has already pleaded guilty to criminal charges of conspiracy and securities fraud.
The alleged manipulations usually occurred when the market was more volatile and the prices were more likely to fluctuate, which made it easier for the mispricings to go undetected. While profits may have been minimal-for example, in one trade Leszczynski allegedly marked up 20,000 shares’ buying price by 1.2 cents/share, resulting in a $240 profit-pennies do add up. As SEC Division of Enforcement Director Robert Khuzami noted, by overcharging clients for stock trades, the brokers ultimately bilked customers of millions of dollars.
Linkbrokers executes high-volume trades for institutional clients. It is an interdealer broker firm that usually executes these large trades for low commissions. However, institutional investors are not the only ones to be impacted by such scams.
“While these may be institutional investors, many are mutual funds and pension funds which invest for small investors,” said Shepherd Smith Edwards and Kantas founder and securities fraud lawyer William Shepherd. “Many do not understand the enormity of this fraud. Through buying and selling, this can add up to perhaps 1% per year. If one works and saves for 40 years, that person can be cheated out of a large portion of his or her retirement assets.”
Linkbrokers’s records show that customers were charged flat commission rates ranging from $0.005 and $0.02/share. Although the brokerage firm received the trading gains made in the securities scam, the brokers also benefited. Per prosecutors, from 2007 to 2009, Leszczynski’s bonuses ranged from $600,000 to $2.4 million while Chouchane’s bonuses were from $1.2 million to $2 million. The brokers also allegedly shaved off money from some of the profitable trades. For example the SEC contends that when a client turned in a limit order that specified at what price to buy the securities, if the price were to go up following trading, the brokers would allegedly sell some of the shares and make a profit while telling the customer that the order wasn’t completely filed.
Also, when a client would issue a sell order, Leszczynski and Chouchane allegedly would give the customer a price that was “marked down” from the actual sales price.
“Investors are cheated out of millions of dollars through fractional pennies per share on billions of shares over time,” said Stockbroker Fraud Attorney Shepherd.
The Financial Fraud Enforcement Task Force, which was set up by President Barack Obama, cooperated in the criminal probe of this case.
Manhattan U.S. Attorney and FBI Acting Assistant Director in Charge Announce Arrests of Two Sales Brokers in Broker-Dealer Mark-Up Scheme, FBI, October 5, 2012
SEC Charges Four Brokers With Defrauding Customers in $18.7 Million Scheme, SEC, October 5, 2012
DealBook: How Pennies Add Up in a Securities Fraud Case, The New York Times, October 8, 2012
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New York’s Attorney General Sues JP Morgan Chase & Co. Over Alleged MBS Financial Fraud by Its Bear Stearns Unit, Stockbroker Fraud Blog, October 4, 2012
US Supreme Court Considers Hearing Stanford Ponzi Lawsuit, Stockbroker Fraud Blog, October 3, 2012
Wells Fargo and Wachovia Sued by LBBW Luxemburg Over Alleged $1.5B Securities Fraud, Institutional Investor Securities Blog, October 6, 2012