The US government last week charged 15 New York Stock Exchange (NYSE) specialists with fraud in the biggest crackdown on illegal trading at the "Big Board," saying they manipulated orders for four years to pocket US$19 million for their firms at clients' expense.

The NYSE itself was censured for self-regulatory failures and will submit to outside monitoring for the first time in its 213-year history as part of a US$20 million settlement with the US Securities and Exchange Commission.

The SEC also accused 20 specialists, including two former top officials at Spear Leeds & Kellogg, of filling orders for their own firms' accounts instead of executing trades for customers.

The indictments and the SEC's civil suit stem from a two-year probe of specialists, the market makers who match buy and sell orders on the exchange floor and trade for their own accounts. They follow a March 2004 settlement with the SEC and the NYSE in which the exchange's seven specialist firms paid a total of US$247 million over allegations that they profited on trades at the expense of their customers.

"To see criminal activity on the floor is really astounding," said Jacob Zamansky, a New York lawyer who represents investors in arbitrations against brokers. "This occurred under the watch of the NYSE. It raises questions about whether the NYSE can properly supervise the people there."

US Attorney David Kelley said the abuses occurred from 1999 through April 2003, during the tenure of former Chairman Richard Grasso. The NYSE initiated the investigation of the specialists.

Specialist Firms

The indicted specialists are current and former employees of LaBranche & Co, Van der Moolen NV, Bear Wagner Specialists, Spear Leeds unit and Banc of America Specialist, five of the NYSE's seven specialist firms.

Spear Leeds is a unit Goldman Sachs Group Inc, the world's third-largest securities firm, and Banc of America Specialist is owned by Bank of America Corp, the third-biggest US bank. Bear Stearns Cos, the sixth-largest securities firm, has a stake in Bear Wagner. NYSE Chief Executive Officer John Thain, who was hired after Grasso's September 2003 ouster, is a former Goldman president.

Spokesmen for Goldman, Bear Stearns and Bank of America were not immediately available for comment when called after business hours.

Fourteen of the 15 turned themselves in to authorities, and appeared at a US District Court in Manhattan.

Abuses

The specialists were charged with abusing their positions as referees by seizing opportunities to profit instead of matching up compatible buy and sell orders. For example, when stock prices were falling, the specialists would first sell shares they owned and then execute customer sell orders at lower prices, according to the indictments.

As a specialist with Fleet Specialist Inc, David Finnerty handled NYSE trading of General Electric Co shares.

"Finnerty bought or sold stock for Fleet's dealer account at the most advantageous price available, then, after proprietary trades, executed the agency orders with which he was entrusted at a less advantageous price than he received for the dealer account," the indictment against him alleged.

Fleet Specialist is now known as Banc of America Specialist, a unit of Bank of America Corp.

Other indicted specialists made markets in shares of Eli Lilly and Co; International Paper Co; Pfizer Inc; Nortel Networks Corp and Hewlett-Packard Co.

Kelley said profits from the illegal trading were as high as US$4.4 million. If convicted, the specialists face a maximum of 20 years in jail on each count of securities fraud and fines of US$1 million to US$5 million.

"These defendants broke the rules repeatedly," Kelley said at a press conference.

Seven of the 15 specialists charged worked at Van der Moolen. Five, Joseph Bongiorno, 50; Michael Hayward, 51; Michael Stern, 54, Richard Volpe, 45; and Robert Scavone, 45, had supervisory roles at the exchange. Bongiorno was among the 20 senior NYSE officials known as floor governors.

The remaining two former Van der Moolen specialists charged are Patrick McGagh, 39, and Gerard Hayes, 44. Together, the seven conspired to break securities laws and their actions cost customers at least US$5.9 million, according to the indictments.

In addition to Finnerty, Fleet employed three of the indicted specialists: Thomas Murphy Jr., 41; Scott Hunt, 36; and Donald Foley, 44. The remaining four specialists charged are Robert Johnson, 40, of Spear Leeds; Kevin Fee, 37, and Frank Delaney, 42, of Bear Wager; and Freddy DeBoer, 43 of LaBranche.

Pleas

Murphy and Finnerty pleaded not guilty and were released by a federal judge on separate US$5 million bonds. Foley and Delaney pleaded not guilty and each was released on a US$3 million bond.

Bongiorno, McGagh, Hayward, Volpe, Scavone, Stern and Hayes also pleaded not guilty.

Hunt, Johnson and Fee are scheduled to enter a plea. Fee's lawyer, Lawrence Robbins, said his client will fight the charges and expects to be "fully exonerated." Lawyers for the other three were not immediately available for comment.

DeBoer remains "at large," Kelley said. SEC lawyer David Markowitz said he believes DeBoer is in the Netherlands.

Penalties Sought

The SEC's suit names the same 15 specialists, as well as five more not criminally charged. The five include Todd Christie, 40, and Robert Luckow, 57, both former CEOs of Spear Leeds, the specialist firm that Goldman acquired for more than US$6.1 billion in 2000.

"Mr Luckow does not believe he did anything wrong," said Richard Morvillo, a lawyer representing him in the SEC suit.

Christie's lawyer, Paul Shechtman, said: "Todd Christie took his responsibility as a specialist very seriously and the SEC charges of wrongdoing are baseless."

Two more, James Parolisi, 42, and Patrick Murphy, 45, also worked at Spear Leeds. The third, Warren Turk, 36, worked at Van der Moolen.

Patrick Murphy's lawyer, Robert Katzberg, said his client "has long enjoyed a well-deserved reputation for great skill and integrity as a specialist at the NYSE. Murphy fully expects that reputation will remain intact when the matter is over."

Defence Planned

Parolisi's lawyer, Paul F. McCurdy of Stamford, Connecticut, said he and his client "look forward to defending the case and clearing his name."

Turk's lawyer did not immediately return a call for comment.

The SEC is seeking civil penalties including fines, forfeiture of ill-gotten profits, and bans against working in the brokerage industry.

The two remaining NYSE specialist firms, both of which are not mentioned by name in the indictments or the SEC suit, are SIG Specialists Inc and Performance Specialist Group.

The "Big Board" itself is a repeat offender. The SEC rebuked the exchange in 1999 for failing to properly oversee its floor trading. The following year, SEC inspectors visited the floor and found lingering deficiencies in surveillance, according to a 2001 agency report.

The US Government first targeted illegal trading on the NYSE in 1998, when it charged eight floor brokers and two executives of Oakford Corp.

Seven of those brokers pleaded guilty and were barred permanently from working for NYSE member firms. One received a 10 year ban. In all, dozens of floor brokers who were implicated or failed to co-operate received bans against working for NYSE member firms.

The exchange first said in April 2003 that it was investigating the seven specialists to determine whether they illegally traded stocks ahead of their clients. That probe was begun under Grasso, who was ousted five months later over his US$140 million retirement package.

Eric Starkman, a spokesman for Grasso, declined to comment.

NYSE Censured

The SEC censured the NYSE for failing to police specialist trading from 1999 through 2003. It required the exchange to submit to new outside oversight as part of a civil settlement.

The NYSE agreed to spend US$20 million for independent "regulatory audits" of its monitoring and enforcement operation every other year through 2011. The exchange also will submit to audio and video surveillance of trading floor for at least 18 months, the SEC said.

The first audit will be conducted this year. The SEC did not say who it will retain to conduct the audits.

The exchange neither admitted nor denied wrongdoing as part of the settlement. The SEC said its investigation into "individual misconduct" at the NYSE continues, raising the prospect of further allegations.

Kelley said the Justice Department's probe also continues.

The main criminal case is: US v. Bongiorno, US District Court, Southern District of New York.

Bloomberg News

(China Daily 04/21/2005 page19)