The SEC and the U.S. Attorney’s Office in Manhattan continue to work closely together, policing the markets. While typically that partnership spawns insider trading cases, this time it resulted in a civil enforcement action against four brokers and criminal charges against three. At the center of the charges is a years long scheme in which the brokers defrauded customers in over 36,000 transactions that yielded them and their firm millions of dollars. U.S. v. Condon (S.D.N.Y. Unsealed Oct. 5, 2012); SEC v. Leszczynski (S.D.N.Y. Filed Oct. 5, 2012).

Marek Leszczynski, Benjamin Chouchane, Gregory Reyftmann and Henry Condon were employed in the New York office of a London based broker. The firm acted as an interdealer broker predominately for institutional clients. It charged clients fixed fees on a per share basis. Messrs. Reyftmann, Chouchane and Leszczynski were sales brokers on the cash desk which was responsible for developing customers and taking orders. Mr. Reyftmann, who is not named in the criminal proceedings, supervised the desk. Mr. Condon and another executed the trades.

The scheme had two facets. Under the first the defendants manipulated the mark up or mark down of the securities purchased for a client to effectively multiply the commission paid to the firm. This was done by altering the execution price of the stock and taking the difference for the firm in addition to charging the standard per share commission. For example, in one trade, the firm sold 90,0000 shares of Citigroup, Inc. for an average price of $19.1311 per share. Yet the trade was confirmed to the client at $17.7500 per share. The remaining $124,299 went to the broker along with the standard commission. More than 3,300 transactions like this involved mark ups or downs of more than 1,000% of the disclosed commissions. The defendants were careful to make these mark ups and mark downs on high volume and volatile days so that the market activity would effectively shroud their actions.

The second facet of the scheme involved misappropriating portions of trades. When a customer placed a limit order and there was a favorable intraday price movement for the stock the defendants would at times simply steal a portion of the trade. For example, in one transaction a customer directed the sale of 22,576 shares of Qualcomm, Inc. The shares were sold during the day using a limit order at an average price of $45.7500. Subsequently, the firm bought back 3,000 shares at an average price of $45.3500. Those shares should have been allocated to the customer. The client was told the order could not be filled.

Later that same day the firm allocated sell executions for only 19,576 shares to the customer for a gross execution price of $45.7500. The broker recognized an additional undisclosed profit of about $1,200 on the purchase of the 3,000 shares. This gave the broker a profit of approximately $1,335 of which only $135.97 was disclosed as commission. Overall the scheme resulted in customer overcharges of about $18.7 million. At the same time it earned the defendants millions of dollars in bonuses.

In the criminal case Messrs. Leszczynski and Chouchane have each been charged with one count of securities fraud and one count of conspiracy to commit securities and wire fraud. Mr. Condron pleaded guilty to one count of securities fraud and two counts of conspiracy to commit securities fraud. He also agreed to forfeit all proceeds traceable to the commission of the felonies.

The SEC’s complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The case is pending.