More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
The Securities and Exchange Commission said Thursday that it has charged New York-based brokerage firm Linkbrokers Derivatives LLC for unlawfully taking secret profits of more than $18 million from customers by adding hidden markups and markdowns to their trades.
According to the SEC’s order instituting administrative proceedings, certain representatives on Linkbrokers’ cash equity desk defrauded customers by purporting to charge them very low commission fees, but in reality extracting fees that in some cases were more than 1,000% greater than represented.
“These brokers hid the true size of the fees they were collecting by misrepresenting the price at which they had bought or sold securities on behalf of their customers,” the SEC said. “The scheme was difficult for customers to detect because the brokers charged the markups and markdowns during times of market volatility in order to conceal the false prices they were reporting to customers.”
Linkbrokers consented to the SEC findings without admitting or denying them and agreed to pay $14 million to settle the SEC’s charges.
The SEC previously charged four former brokers on the cash equities desk at Linkbrokers, and three of them later agreed to settle those charges by consenting to judgments ordering more than $4 million in disgorgement plus interest.
The former brokers who previously agreed to settle the SEC’s charges are Benjamin Chouchane, Marek Leszczynski and Henry Condron, who each also have pleaded guilty to criminal charges.
The SEC’s litigation continues against the fourth former broker, Gregory Reyftmann. The SEC’s investigation is continuing.
“Linkbrokers employees engaged in a devious and abusive trading scheme orchestrated to steal from the firm’s unsuspecting customers,” said Daniel Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit, in a statement. “This settlement strips Linkbrokers of its remaining assets and allows those funds to be returned to harmed customers.”
According to the SEC’s order instituting a settled administrative proceeding against Linkbrokers, the scheme occurred from at least 2005 to February 2009 and involved more than 36,000 transactions.
The surreptitiously embedded markups and markdowns ranged from a few dollars to $228,000. Linkbrokers secured additional illicit profits by stealing a portion of customers’ trades.
“When customers placed limit orders seeking to purchase or sell shares at a specified maximum or minimum price, the brokers filled the orders at the customers’ limit price but withheld that information from the customers,” the SEC states. “Instead, they monitored the movement in the price of the securities and purchased or sold portions of these positions back to the market, keeping the profit for the firm.The brokers then falsely reported to the customers that they could not fill the order at the limit price.”
The SEC’s order finds that the firm violated Section 15(c)(1) of the Securities Exchange Act of 1934 and requires Linkbrokers to pay $14 million in disgorgement.
Linkbrokers ceased acting as a broker-dealer in April 2013 and will withdraw its registration.
Check out Advisor Misled Clients Into Moving Accounts: Mass. Court on ThinkAdvisor.