4 accused of letting day traders eavesdrop on clients

N.Y. indictment, SEC suit allege brokers conspired, accepted bribes


NEW YORK - Four former stockbrokers at major securities firms were accused yesterday of accepting bribes from day traders who wanted to eavesdrop on customer order information to make easy profits.

In separate actions, the Justice Department and the Securities and Exchange Commission contended that day traders paid thousands of dollars to the four brokers - who worked at Citigroup, Lehman Brothers and Merrill Lynch - for access to their so-called squawk box intercoms, which broadcast their biggest customers' stock orders. The traders, in turn, used that information to buy those same stocks before the large orders bid up the price, and quickly sold them for hundreds of thousands of dollars in gains. This type of stock-selling scheme is known as front running.

The Justice Department unsealed a criminal indictment and the SEC filed a separate civil complaint in U.S. District Court in Brooklyn, N.Y.

Regulators have been investigating whether customer order information is being used improperly by Wall Street brokerage houses, either to generate business from outside investors or to enhance their own proprietary trading. The actions suggest that the investigation may be expanded to include criminal indictments of at least two day traders.

Yesterday, the spotlight was on the four brokers, who appeared with their lawyers at the federal court in Brooklyn: Ralph D. Casbarro, 43, a former Citigroup broker from Bayside, N.Y.; David G. Ghysels Jr., 47, a former Lehman broker who lives in West Palm Beach, Fla.; Kenneth E. Mahaffy Jr., 50, a former Citigroup and Merrill Lynch broker from Huntington, N.Y.; and Timothy J. O'Connell, 40, a Merrill Lynch broker from Carle Place, N.Y.

Speaking in soft voices, all entered pleas of not guilty to securities fraud and conspiracy charges cited in the criminal indictment; they face a maximum of 25 years in prison and $250,000 in fines for each count. They must return for a hearing before Judge I. Leo Glasser Sept. 12. All but O'Connell was released on $250,000 bail; O'Connell, who was previously indicted on related witness-tampering charges, was released with $500,000 bail.

But absent from the arraignment was John J. Amore, the former chief executive of the day trading firm A.B. Watley Group, who, the SEC alleges, orchestrated the entire scheme. In addition, the complaint alleged at least one other executive from another day trading firm was involved with O'Connell in a similar scheme.

Amore was not named in the criminal indictment. Sean Casey, an assistant U.S. attorney, declined to say whether Amore was being investigated. Nor would he discuss any potential links between the unnamed day trader and Millennium Brokerage LLC, a day trading firm that was named in both actions.

The hearing yesterday was the latest development in a case that the Justice Department, the SEC and the U.S. Postal Inspection Service have been examining since at least May 2004. So far, at least two people have pleaded guilty recently to charges related to the investigation: Benjamin D. Grimaldi, a former Merrill Lynch compliance officer who was charged with witness tampering; and Irene Santiago, O'Connell's assistant, who was charged with conspiracy to obstruct justice by lying to investigators.

But the details that emerged in the actions yesterday shed new light on the scheme itself. Federal prosecutors allege that a conspiracy lasted from January 2002 to December 2003, but both actions highlight improper trades only after June 2002.

According to the SEC's complaint, the A.B. Watley investors traded ahead more than 400 times after hearing live orders from telephone receivers placed next to the Citigroup, Merrill and Lehman squawk boxes. After learning that institutional investors planned to buy thousands of shares in companies such as Commerce Bancorp and EMC, they made similar decisions and landed a windfall, the complaint said. The day traders made at least $650,000 in profits, the SEC charged.

The four brokers, according to the SEC complaint, personally profited from the more than $310,000 in commissions generated from the trades.

In addition, the prosecutor's indictment alleges that O'Connell lied to a U.S. postal inspector and encouraged his assistant, Santiago, to provide false testimony to a grand jury and federal investigators.

Lawyers for O'Connell, Casbarro and Mahaffy declined to comment. But Jeffrey C. Hoffman, the lawyer for Ghysels, said his client would be vindicated because the information was not confidential.

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