15 traders indicted on fraud charges

U.S. accuses current, former NYSE specialists

April 13, 2005|By Andrew Countryman | Andrew Countryman,CHICAGO TRIBUNE

NEW YORK -- In yet another black eye for scandal-tarred Wall Street, 15 current and former specialists at the New York Stock Exchange were indicted yesterday, accused of improper trading that took millions from investors.

The 15 all were charged with securities fraud. Federal prosecutors alleged that they illegally profited between 1999 and April 2003 by conducting thousands of trades from their own accounts, rather than properly matching customers' orders.

The Securities and Exchange Commission also filed civil suits against the 15 and five others, alleging securities laws violations for the same activities.

The SEC also censured the New York Stock Exchange, claiming it failed to adequately monitor and detect the improper trading.

Several of the specialists pleaded innocent in U.S. District Court in Manhattan yesterday and were released on bond. If convicted, each could receive up to 20 years in prison and a $5 million fine.

"These defendants broke the rules repeatedly, they cheated the markets, and they cheated the investors who relied upon them," said U.S. Attorney David N. Kelley.

Stock exchange specialists handle trades first by matching buy-and-sell orders and then by making trades from their own accounts when necessary to provide liquidity.

By positioning themselves between customers' matchable buy-and-sell orders, prosecutors said, the specialists made illegal profits of about $13.5 million, and investors lost more than $19 million.

Among the stocks in which the alleged fraudulent trading occurred were General Electric Co., Goldman Sachs Group Inc., Johnson & Johnson, JPMorgan Chase & Co., Nokia Corp., Texas Instruments Inc. and Verizon Communications Inc.

Those charged worked for the same five firms that agreed a year ago to pay nearly $242 million to settle similar allegations. The firms neither admitted nor denied guilt.

The five are Bank of America Corp., Bear Stearns Cos. Inc., Goldman Sachs (Spear Leeds & Kellogg), LaBranche & Co. Inc. and Van der Moolen Holding NV.

The specialists were accused of "interpositioning" and "trading ahead," in which they would trade from their own accounts for their own benefit, rather than matching customer orders as required.

For example, by buying shares for their firm's accounts at one price to match a sell order, then selling the shares at a higher price to match a buy order, the indictments said, the specialists could profit a few dollars to several hundred dollars in a matter of seconds.

"Over time, these small thefts accumulate into large profits that translate into higher compensation and bonuses for specialists who execute the trades," Kelley said.

SEC officials are seeking to have the specialists it charged repay "ill-gotten" gains, plus penalties.

"These individuals violated the public trust by abusing the privileged position they had as specialists," said SEC enforcement director Stephen M. Cutler. "We have zero tolerance for specialists who trade for the firm's proprietary account when they should be trading for the accounts of their customers."

As part of its own settlement, the NYSE did not face a civil penalty because it agreed to spend $20 million for auditors to examine its regulatory program every two years through 2011 and to start a pilot audio and video surveillance program to monitor specialists.

SEC officials allege the exchange failed to detect the violations and didn't adequately investigate them despite evidence that such activity might be occurring.

"The exchange must be the front line of regulation," said Mark K. Schonfeld, director of the SEC's Northeast regional office. "They didn't find the misconduct, when they found it they didn't investigate it, and when they investigated it they didn't punish it."

The activities occurred when the exchange was run by then-Chairman Richard A. Grasso. Big Board officials stressed that times have changed.

"Major strides have been taken to enhance the exchange's regulatory program and investor protection," said the exchange's chief regulatory officer, Richard G. Ketchum. He pointed to the hiring of additional staff and new heads of surveillance and enforcement divisions, along with improved regulatory technology.

Others find the accusations troubling.

"This occurred under the watch of the NYSE. It raises questions about whether the NYSE can properly supervise the people there," said Jacob H. Zamansky, a lawyer who represents investors in arbitrations against brokers."

The Chicago Tribune is a Tribune Publishing newspaper. Wire services contributed to this article.

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