[ by Howard Haykin ]

A Well-Drilled Team, They Took What Markets Allowed - in Markups, Markdowns, Trading Profits.

The SEC on Friday charged 4 brokers who formerly worked on the cash desk at a New York-based broker-dealer with illegally overcharging customers nearly $19 million by using hidden markups and markdowns and secretly keeping portions of profitable customer trades.  All four joined Linkbrokers Derivatives Corporation at various times in 2005 and all left the firm within a 6-month span - July 2010 to January 2011.

Profiles of Defendants. The brokers charged in the SEC’s complaint are Marek Leszczynski, Benjamin Chouchane, Gregory Reyftmann, and Henry Condron.  Here are their professional careers, as documented in the CRD:

1.  MAREK A. LESZCZYNSKI.    Currently employed by and registered with the Miami, FL office of Madison Capital Markets, Inc. (4/21/11-present).  Prior to that he was with:

• NY-based Linkbrokers Derivatives Corporation (10/2005 - 12/2010)

2.  BENJAMIN CHOUCHANE. Currently employed by and registered with the NY office of Louis Capital Markets, LP (4/5/11-present).  Prior to that he was with:

• NY-based Linkbrokers Derivatives Corporation (2/2005 - 1/2011)
• NY-based Refco Securities, LLC. (12/2002 - 02/2005)
• NY-based Louis Capital Markets, LP (10/2002-12/2002)

3.  GREGORY REYFTMANN.  Currently, not registered with FINRA.   Previously registered with: 

• NY-based Linkbrokers Derivatives Corporation  (2/2005 - 7/2010)
• NY-based Refco Securities, LLC  (5/2003 - 2/2005)

4.  HENRY CONDRON.  Currently employed by and registered with the NY office of Madison Capital Markets, Inc.  (4/4/11-present).  Prior to that he was with:

• NY-based Linkbrokers Derivatives Corporation  (3/2005 - 11/2010)
• NY-based Refco Securities, LLC  (7/2003 - 2/2005)
• NY-based Louis Capital Markets, LP (3/2002-12/2002)

Condron also was charged with Petit Larceny in 1998 - stealing from a store.

SEC Findings and Allegations. The case arises from a fraudulent scheme perpetrated at NY-based interdealer broker, Linkbrokers Derivatives Corp., to unlawfully take secret profits of at least $18.7 million at the expense of Interdealer Broker’s customers.  From at least 2005 through at least February 2009, Marek Leszczynski, Benjamin Chouchane, Gregory Reyftmann, and Henry Condron perpetrated the scheme by falsifying execution prices and embedding hidden markups or markdowns on over 36,000 customer transactions.

Working on Linkbrokers' “Cash Desk,” the 4 executed orders to purchase and sell securities on behalf of their customers, typically institutions, and purportedly charging small commissions - typically pennies or fractions of pennies per share.  Reyftmann, Chouchane, and Leszczynski were sales brokers on the cash desk who were responsible for finding customers, developing relationships, and taking orders from customers. Reyftmann supervised the cash desk. Condron was a sales trader and middle-office assistant on the cash desk who entered orders received from the sales brokers and ensured the orders were executed.

The scheme was devious and difficult to detect because Defendants selectively engaged in it when the volatility in the market was sufficient to conceal the fraud.  The SEC alleges that the fraudulent scheme worked as follows:

• Leszczynski, Chouchane, or Reyftmann received a customer order by phone, IM, or email and gave the order to Condron, who executed the trade.
• Condron recorded the actual execution price on the trade blotter and informed the sales brokers of the execution.
• Shortly after the trade was executed, Leszczynski, Chouchane, or Reyftmann examined other market executions around the time of the actual execution to determine whether the stock price fluctuated.
• If the stock price’s fluctuation was favorable to the firm and sufficient to conceal the fraud from customers, the sales brokers instructed Condron to record a false execution price in the gross price field on their internal trade blotter.
• Leszczynski, Chouchane, Reyftmann, or Condron then reported the false execution price and the commission to the customers.

In other instances, Defendants allegedly took advantage of a customer’s limit order and a move in the price of the security to steal a piece of a profitable customer trade for Linkbrokers.  They would fill a customer's limit order, say to buy shares, at a specified maximum price but then used opportune times to sell a portion of that order back to the market to obtain a secret profit for the firm. They falsely reported back to the customer that they could not fill the order at the limit price. Meanwhile, the brokers made millions of dollars in illicit performance bonuses based on the fraudulent earnings they were generating on the cash desk.  All told, the SEC estimates that the 4 brokers received substantial performance bonuses totaling more than $15.6 million based, in part, on the fraudulent earnings generated by the cash desk.

e.g. - on 4/26/07, Linkbrokers executed an order to sell shares of Qualcomm at a limit price of $45.7500. Linkbrokers sold 22,576 shares on the customer’s behalf, but then bought back 3,000 shares when the price decreased to $45.3500 per share. Interdealer Broker kept the $1,200 profit on the 3,000 shares for itself. Interdealer Broker passed along the execution of only 19,576 shares to the customer and falsely reported that it was unable to sell any more shares at the limit price.

Robert Khuzami, Director of the SEC’s Division of Enforcement, had this to say:  “These brokers stole millions of dollars by overcharging customers for trades involving stocks with high trading volumes and price volatility, which are characteristics they wrongly thought would conceal their illicit pricing scheme. They underestimated the SEC’s ability and resolve to pursue such illegal schemes.”

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Leszczynski and Chouchane. Condron has pled guilty to criminal charges.

SEC Objectives in this Case.   The SEC alleges that Leszczynski, Chouchane, Reyftmann, and Condron violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  The SEC seeks disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and a permanent injunction against the brokers.

SEC Staff Credits.   Investigation, which is continuing, by:  Mary Hansen (Ass't Director in Market Abuse Unit - Phila Regional Office), Kristina Littman (Senior Counsel in Phila. office), Darren Boerner (Specialist in Market Abuse Unit in Chicago Regional Office).  Jeffrey Boujoukos (Regional Trial Counsel), John Donnelly (Senior Trial Counsel) in Philadelphia office are handling the litigation.

For further details, go to:   [SEC PR 12-207, 10/5/12]   and    [ SEC Complaint ].