The Securities and Exchange Commission has charged four brokers for overcharging clients $18.7 million by using hidden markups and markdowns, while retaining portions of profitable customer trades.

Marek Leszczynski, Benjamin Chouchane, Gregory Reyftmann and Henry Condron, who worked on the cash desk at a New York-based broker-dealer, purported to charge customers very low commission fees - typically pennies or fractions of pennies per transaction. Instead, they reported  false prices when executing the orders to purchase and sell securities on behalf of their customers.

"The brokers made their scheme especially difficult to detect because they deceptively charged the markups and markdowns during times of market volatility in order to conceal the fraudulent nature of the prices they were reporting to their customers," the regulator said. "The surreptitiously embedded markups and markdowns ranged from a few dollars to $228,000 and involved more than 36,000 transactions during a four-year period. Some fees were altered by more than 1000 per cent of what was being told to customers," it continued.

Further, the SEC alleges that when a customer placed a limit order seeking to purchase shares at a specified maximum price, the brokers filled the order at the client's limit price but used "opportune times" to sell a portion of the order back to the market, obtaining a secret profit for the firm and falsely reporting back to the customer that they could not fill the order at the limit price.

The US Attorney’s Office for the Southern District of New York has announced criminal charges against Leszczynski and Chouchane. Condron has pled guilty.

According to the SEC’s complaint - filed in federal court in Manhattan - the brokers further defrauded customers by stealing portions of their profitable trades and keeping them for the firm. They received "substantial performance bonuses" of over $15.6 million.

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 is seeking disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and a permanent injunction against the brokers.

The investigation continues.