In 2011, most Wall Street firms were coping with the aftermath of the financial crisis. Convergex, an agency-focused global brokerage and trading-related services provider, had grown and prospered during that period. In 2011, however, the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) began investigating the company for routing orders to an offshore affiliate in Bermuda, Convergex Global Markets Limited (CGM).
CGM engaged in net trading, which means adding a markup or markdown to the price of a security rather than charging an explicit commission. According to the SEC and DOJ, certain clients were not aware of this practice and believed that the commissions they paid to other Convergex affiliates were their total execution costs.
Steven Heineman, general counsel, left French bank Société Générale, where he was general counsel for the Americas, to join Convergex in mid-2012 in the midst of the government’s investigation. Earlier, he had managed the bank’s litigation and regulatory affairs, served as a federal prosecutor in the US Attorney’s Office in Manhattan, and had been a litigator at Debevoise & Plimpton. In addition to all of the usual duties performed by a general counsel and corporate secretary, his primary responsibilities were to manage the ongoing investigation, help negotiate a settlement with the government, and enhance the company’s internal compliance culture.
When Heineman arrived, the company had already terminated certain employees, closed CGM, stopped routing US securities to offshore affiliates, and enhanced its compliance program in various ways. Beginning day one, Heineman focused on stabilizing the legal and compliance departments, and worked extensively with law firm Wilmer Cutler Pickering Hale and Dorr, which represented the Audit and Risk Committee of the board of directors; and Bracewell & Giuliani (now Bracewell), which represented the company; to fully cooperate with the government’s ongoing investigation.
In partnership with outside counsel, Heineman established the company’s credibility and “good faith” with the government, and continued the process of providing government investigators with facts and conclusions reached by the company’s own extensive investigation. Once that had been accomplished, under the direction of the board and management, Heineman and outside counsel began negotiating to reach a settlement with the government.
“Convergex has, in many ways, become an entirely different company in the last two-and-a-half years.”
During nearly a dozen separate meetings with senior DOJ and SEC officials in Washington, DC, Heineman discussed the nature of the specific alleged violations and the sanctions that might be imposed. “We spent a great deal of time talking about the facts and what we viewed as flaws in the government’s theories, such as the fact that Convergex’s client agreements and other documents disclosed the practice of net trading including by affiliates,” Heineman explains. “We also emphasized the remedial actions we had taken and those we were still planning to take; our overall cooperation, along with penalties and sanctions that would be appropriate to a company of our size; and the resulting collateral consequences to our business and reputation.”
Unfortunately for Convergex, timing is everything, and its settlement was negotiated in an environment in which politicians, the public, and others were demanding that regulators extract ever harsher punishments from Wall Street firms, which many blamed for the financial crisis. Discussions revealed that certain points were viewed by the SEC as non-negotiable. The points included a significant civil penalty as well as enforcement of a new policy that required parties to admit to the facts of the case. Previously, companies were usually able to reach a settlement without admitting or denying the allegations against them.
In December 2013, settlements were reached with both the DOJ and SEC. Convergex’s cooperation and remediation played a significant role in reaching the terms of the final settlement. Heineman points out that the SEC highlights the company’s “substantial cooperation . . . and significant remedial measures.” Likewise, the DOJ’s own press release refers to the company’s “extraordinary and ongoing cooperation, its extensive remediation . . .
and enhancing its compliance program and internal controls.”
He reports that customer reactions to the company’s actions and the settlement have been mixed. For the most part, even clients that ceased trading through Convergex have come back, and many never left.
“We found there was a large group of customers who wanted to better understand what happened, who wanted to know that we had addressed and rectified the situation so it would not and could not happen again. That group stopped doing business with us for a period of time, but a very large percentage of them have now come back to work with us again,” Heineman explains.
Ongoing remediation efforts have all been part of rebuilding the company’s culture of compliance. To date, Convergex developed a mission statement, core values, and business principles; significantly enhanced its code of conduct; revised all compliance manuals and disclosure documents; improved training and communication programs; created an accountability policy and a committee to oversee it; implemented an enhanced internal whistle-blower program; and replaced the firm that performs its internal audits. At Heineman’s recommendation, it also engaged an independent ethics and compliance expert to review the firm’s compliance program and culture, and by December 2014 implemented all of the resulting recommendations.
“Aside from myself, we have a completely different senior management team than when these issues first arose,” Heineman explains. “Most significantly, under the leadership of Eric Noll, Convergex chief executive officer, the company now also has a new chief financial officer, chief information officer, chief compliance officer, head of equities, and head of options, among many others. When you also consider the many programs and policies put in place and enhanced, Convergex has, in many ways, become an entirely different company in the last two-and-a-half years.”