3rd UPDATE: ConvergEx, CVC Capital End $1.9 Billion Deal Amid Probe

ConvergEx Group's plan to sell a majority stake to private equity firm CVC Capital Partners has been called off amid parallel investigations by the Securities and Exchange Commission and the U.S. Justice Department.

ConvergEx, which operates electronic trade-execution platforms and options-routing services, said Friday in a press release the parties terminated the transaction due to the investigations involving "certain non-electronic trade execution practices conducted through its Bermuda subsidiary, ConvergEx Global Markets." The unit is expected to generate about 7% of the company's total revenue in 2011.

The deal, announced in July, was worth $1.9 billion and would have allowed CVC to become ConvergEx's largest shareholder, a person familiar with the situation said Friday.

"While we regret that a transaction could not be consummated at this time, the company's obligations to focus on the regulatory questions raised by the inquiries made it difficult to execute the transaction at this time," said ConvergEx Chairman and Chief Executive Joseph M. Velli.

He added that actions were taken to "remedy any lapses that have occurred" and to ensure the company is in compliance with the firm's and regulatory requirements.

"We have zero tolerance for misconduct by any employees of the company," the firm said.

The thwarted transaction came as regulators are stepping up scrutiny of electronic trading platforms.

In October, the SEC sanctioned Direct Edge Holdings LLC for having weak internal controls that resulted in $2.8 million in trading losses and a systems outage, a case which Direct Edge settled.

That same month, Pipeline Trading Systems LLC agreed to pay $1 million to settle allegations it falsely represented itself as a "dark pool" where institutional investors can hide their trading intentions, when it was only fielding customer orders from a sister trading entity.

The aborted stake sale also delays any monetization by existing ConvergEx shareholders. The CVC deal would have allowed private equity firm GTCR Golder Rauner LLC to completely cash out on its investment and Bank of New York Mellon (BK) a partial exit. They each own a 33.2% stake in ConvergEx, while the remainder is held by ConvergEx management and directors, according to the company's May IPO filing.

The company was seeking to sell shares in the public market and had filed for a $400 million initial public offering in May but abandoned it in July for the deal with CVC.

Going forward, ConvergEx said Friday it has no plans to raise new capital.

"Our balance sheet is the strongest that it has ever been. We have discussed this development with our major shareholders, who remain committed to the company's growth strategy, organically and through acquisitions," Velli said.

BNY Mellon declined to comment, while GTCR couldn't be immediately reached.

-By Amy Or, Dow Jones Newswires; 212-416-3142; [e-mail]