We are used to hearing big numbers thrown around in securities fraud cases, like the purported $64 billion in losses from the Ponzi scheme perpetrated by Bernard L. Madoff or $7 billion by R. Allen Stanford. What sometimes gets overlooked is how conduct involving relatively small amounts can add up to millions of dollars if allowed to go on long enough.
Charges filed by the Justice Department last week accuse two former brokers at the New York office of Linkbrokers Derivatives, Marek Leszczynski and Benjamin Chouchane, of securities fraud and conspiracy for secretly adding a few pennies to the cost of securities trades processed by the firm to generate $18.7 million in gains.
A sales trader and middle-office assistant at the firm, Henry A. Condron, entered a guilty plea and is cooperating in the government's case. The Securities and Exchange Commission also filed civil charges against the three men, and added another broker as a defendant who was not named in t he criminal case.
Linkbrokers, which was not named in the suit, executed high-volume trades on behalf of institutional customers, including hedge funds. The key is getting the best price for clients while quickly executing their orders.
Criminal complaints filed in Federal District Court in Manhattan accuse Mr. Leszczynski and Mr. Chouchane of charging a slightly higher price for a trade, or lowering the sale price, and then hiding the actual cost from the clients. According to the S.E.C., more than 36,000 trades from 2006 to 2010 involved pricing issues, with the amounts ranging from a few dollars to as much as $228,000 in one instance.
The tinkering came on days of higher volatility in the market because of greater price fluctuations. Institutional investors carefully scrutinize order executions and trading costs, so volatility helped provide cover for any mispricing.
“These brokers stole millions of dollars by overcharging customers for trades in volving stocks with high trading volumes and price volatility, which are characteristics they wrongly thought would conceal their illicit pricing scheme,†Robert Khuzami, the head of the S.E.C.'s enforcement division said in a statement.
Mr. Leszczynski's lawyer stated that his client was “astonished and shocked he was charged with a crime. He still doesn't know why.â€
While the trading gains went to Linkbrokers, the defendants were accused of benefiting through higher bonuses based on the profits they generated. According to the criminal complaints, Mr. Chouchane received bonuses ranging from $1.2 million to $2 million from 2007 to 2009, while Mr. Leszczynski's bonuses ranged from $600,000 and $2.4 million during that period.
The transactions outlined in the criminal complaints generated modest profits. Mr. Leszczyncki is accused in one trade of marking up the purchase price of 20,000 shares by 1.2 cents a share, generating a profit of $240. A trans action involving Mr. Chouchane had a mark-up of 1.24 cents on an order for 43,000 shares that resulted in a profit of $533.20.
The S.E.C. complaint also indicates they took a slice of profitable trades. According to the agency, a client would submit a limit order, which specified the price at which the securities would be bought. If the price moved higher after the trade, they then sold off some of the shares at a profit and informed the client that the order could not be completely filled.
Proving the case will not be an easy task. With over 36,000 trades potentially at issue, the government will have to introduce records from all of them to establish the pattern showing a fraudulent scheme. Imagine trying to put together a puzzle with that many pieces.
Mr. Condron, who pleaded guilty to securities fraud and conspiracy, was in charge of entering the prices into the trading records, playing a crucial role by controlling the flow of information. His cooperat ion will be important since he was, in effect, the bookkeeper of the operation. He could give perspective to the mass of paper by explaining how trades were executed and how the system could be gamed.
To bolster their case, prosecutors tried to use Mr. Condron, while wearing a recording device, to entice Mr. Chouchane into making incriminating statements. According to the complaint, a few weeks ago Mr. Condron met with Mr. Chouchane and asked if his current employer engaged in marking up trades. Mr. Couchane replied, “No, you know, they used to do it when it was good, like us … Now you can have an investigation from the S.E.C., from the bank, from the hedge fund … I don't think it's worth taking the risk. You know, to be honest, it's annoying for me.â€
Those comments are far from the kind of incriminating evidence presented at the recent insider trading trials, when jurors heard confidential information being passed from sources to traders. Trying to pull an admission out of someone two years after the fact is not easy. But having Mr. Condron wear a wire shows how much prosecutors now value recorded evidence in building a securities fraud case because it can show knowledge far better than a mass of trading records.
The prosecution of Mr. Leszczynski and Mr. Chouchane involves an area of the market largely hidden from public view. Like so much else on Wall Street, conduct involving even fractions of a penny can be significant if it is done often enough.
