One Less Brokerage

Direct Access Partners (DAP), an institutional brokerage firm, closed after the SEC accused two employees of bribing a Venezuelan official for bond business. Separately, the firm was building a distribution platform for third party research.

In early May, the SEC accused 2 DAP employees of generating $66 million in transaction fees on riskless principal trades in Venezuelan sovereign or state-sponsored bonds for Banco de Desarrollo Económico y Social de Venezuela (BANDES), a state-owned bank. A portion of this revenue was illicitly paid to an official at BANDES who authorized the fraudulent trades.

Tomas Clarke, an Executive Vice President at DAP, was hired by DAP in October 2008, along with two other fixed income traders from Lighthouse Financial, which subsequently shut its doors in 2010.  Clarke and the other two executives formed a subsidiary, DAP Global, which received 60% of profits generated by the group, and shared by Clarke and the other two former Lighthouse traders.

Prior to hiring Clarke, DAP was an equity brokerage, generating $15 million in revenues in 2007 and $27 million in 2008, according to the SEC complaint. After hiring the fixed income trading team from Lighthouse, DAP’s revenues soared to $75 million in 2009. According the SEC complaint, the increase was entirely caused by the fraudulent BANDES trading.

According to the SEC’s complaint, Clarke’s share of DAP Global’s profits was $3.8 million between January 2009 and June 2010. 90% of this amount, or $3.4 million, was purportedly linked to fraudulent BANDES trading. In addition, $20 million was paid by DAP to a relative of Clarke’s in “foreign finder’s fees” and “foreign associate fees”. $6 million was channeled through payments to a DAP employee who was an unregistered “back office” employee, and another $8 million was paid to the DAP employee’s wife in “foreign finder’s fees”.  A portion of these fees was paid to the BANDES official authorizing the fraudulent trades.

As part of the scheme, DAP Global would mark up the sovereign bonds transacted on behalf of BANDES in riskless trades by as much as 8%, according to the SEC complaint. DAP Global also apparently purchased bonds from BANDES and sold them back the same day. In one example cited by the SEC, DAP purchased $132 million of Electricidad de Caracas (ELECAR) from BANDES at $66 and then immediately sold them back at $70. On the following day, DAP bought $131 million of the same bonds at $66 and sold them back at $70. The total markup on the two transactions was over $10.5 million.

The SEC also claimed that Clarke and his associates regularly cheated the bent Venezuelan official. The original deal was to pay the official 50-70% of the fraudulent markups, but in reality she received only around 10% of the markups, according to the SEC.

The only evidence of compliance supervision in the SEC complaint was a query from the compliance department of one of the clearing brokers, asking for a biography for one of the individuals receiving foreign finder’s fees. The finder’s fees were apparently raising questions with clearing brokers, but not with DAP’s own internal compliance department.

DAP’s meltdown results in one less distributor of independent research. DAP was building an independent research distribution platform, and had announced a distribution arrangement with Merchant Forecast.  Given the difficulty in marketing research in the current environment, DAP’s demise is unfortunate for independent providers looking for assistance in expanding their client base.

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