The notion that the complexity of securities law makes white collar cases difficult for prosecutors to win is pretty broadly accepted these day—indeed, to the extent that the jury that acquitted former Citigroup executive Brian Stoker of civil charges this summer urged the Securities and Exchange Commission not to be discouraged by the verdict.
Well, there’s moral complexity (who’s ultimately responsible?), there’s procedural complexity (how do you explain financial concepts to a jury?) and then there’s the somnial complexity, the daunting task of keeping a jury awake.
It’s that latter that’s may pose the biggest challenge in the government’s case against two former brokers at LinkBrokers Derivatives. As Peter Henning points out in today’s Times, defendants Marek Lezczynski and Benjamin Chouchane are charged with amassing $18.7 million in ill-gotten gains by overcharging customers on more than 36,000 transactions.
In some cases, the brokers simply executed trades at one price, and reported trades at another, like so (from the complaint):
On April 10, 2007 at 3:06 p.m., a customer sent Chouchane an email placing an order to buy shares of Dow Chemical Co. (“DOW”). Interdealer Broker executed the trade, purchasing 39,600 shares of DOW on the customer’s behalf at $45.4335 per share. The trade blotter reflects an execution price of $45.4335, a gross price of $45.4535, and a net price of $45.4635. At 4:11 p.m., Chouchane emailed the customer a trade recap confirming the trade at the false execution price of $45.4535 per share. The commission for this transaction was $0.01 per share, resulting in a total commission of $396 for this trade, which Interdealer Broker charged the customer. However, Chouchane failed to disclose the additional fraudulent markup of $792.
In other cases, the defendants sought to take a portion of their customers’ profits by first buying shares for the client, then selling some of the client’s shares at a higher price, and capturing the difference. Like so:
On April 26, 2007 from 2:48 p.m. until 2:49 p.m., Interdealer Broker executed a customer’s order to sell 22,576 shares of Qualcomm, Inc. (“QCOM”) at an average price of $45.7500. At 3:41 p.m., Interdealer Broker bought back 3,000 shares—shares that should have been allocated to the customer—for an average price of $45.3500. At 4:30 p.m. Leszczynski falsely reported to the customer that Interdealer Broker was only able to sell 19,576 shares for the customer and was not able to fill the remaining shares ordered by the customer. Specifically, Leszczynski stated: “Remaining balance cancelled as stock didn’t trade @ the limit.” At 4:40 p.m., despite having sold 22,576 shares, Interdealer Broker allocated sell executions representing only 19,576 shares of QCOM to its customer for a gross execution price of $45.7500 per share. Interdealer Broker recognized an additional secret profit of approximately $1,200 on the purchase of the 3,000 shares. In total, Interdealer Broker recognized approximately $1,335 in profits from the transaction while only disclosing a commission of $135.07 to the customer.
Mr. Henning notes that with 36,000 transactions to be entered into evidence, proving the case won’t be easy: “Imagine trying to put together a puzzle with that many pieces.” Our sympathies in this instance are less with the prosecutors and more with the jurors tasked with keeping their eyes open should the case go to trial.