SEC Cites “Lax” Oversight in Illegal “Trading Profits” Case
Investors should always be on the lookout for brokers who add charges to their stated commissions. Securities fraud does not always involve Ponzi schemes or people selling fictitious investments. Many times, there is fraud in routine, everyday transactions where a seemingly legitimate broker takes markups on trades without telling the investor.
SEC v. Lax
Recently the U.S. Securities and Exchange Commission caught one such broker. On February 10, the SEC announced New Jersey broker Craig S. Lax, the CEO of brokerages in the U.S. and Bermuda, agreed to settle federal civil charges that his firms overcharged investors by assessing hidden fees known in the industry as “trading profits.” Lax will pay the SEC more than $730,000. His firms previously admitted to SEC charges and paid fines in excess of $100 million.
Lax, a licensed broker, oversaw G-Trade, a New York-based brokerage, as well as CGM, an affiliated business unit. CGM also had an affiliated brokerage in Bermuda, known as CGM Limited. As the SEC discovered, CGM was routing customer trades in the U.S. through CGM Limited in Bermuda. “Routinely,” the SEC said in its complaint against Lax, “if CGM Limited employees believed they could add a mark-up or mark-down without detection by the customer, they added one to the price received from the local broker and kept the difference for CGM as [trading profits].” In other words, customers were actually paying twice for the trades: first the agreed-upon commission, and then the “trading profits,” which the customer was never made aware of.
Indeed, the SEC found Lax not only knew his brokers were ripping off customers; he was helping them cover up their illegal activities. According to the SEC, Lax “authorized the temporary suspension of taking TP on trades if a customer, prior to trading, requested a time and sales report.” He also instructed a subordinate to use a “proprietary trading algorithm” to prevent a sophisticated customer following the market in real-time from discovering the existence of trading profits. Lax even told employees of CGM Limited to alter their business cards so customers would not learn CGM had an affiliated offshore brokerage in Bermuda, which could lead to discovery of the trading profits scheme.
As the “controlling person” for CGM and G-Trade, the SEC found Lax personally liable for federal securities law violations above and beyond the prior admissions of his companies. As a consequence, in addition to paying a fine, the SEC has barred Lax from working in the securities industry for the next five years.
Fighting Back Against Corrupt Stock Brokers
Brokers have a legal and ethical duty to be transparent with their customers. It is unacceptable for any broker to secretly overcharge clients for trades and then cover up such activities. Likewise, CEOs and other senior managers are responsible for ensuring all brokers under their employment follow the law. If you have been the victim of a stock broker’s excessive or illegal commissions and require legal advice on how to proceed, contact Florida securities fraud attorney Gregory Tendrich, P.A., today.