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Big Board specialists charged
Fifteen indicted on allegations of improper trading
By David Weidner, MarketWatch
Last Update: 7:08 PM ET April 12, 2005  
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NEW YORK (MarketWatch) -- Fifteen current and former New York Stock Exchange floor specialists have been indicted on charges of improper trading that allegedly cheated investors out of the best available prices on stocks.

Federal prosecutors unveiled nine indictments in connection with trading practices during a four-year period.

If convicted, the specialists could face jail terms of up to 20 years in some cases and fines as high as $5 million, or twice the gross gain or loss from the offense, according to the U.S. Attorney's Office for the Southern District of New York.

"They had a duty to execute trades fairly and put the interest of their customers ahead of their own," said David Kelley, the U.S. Attorney for the district.

Kelley added that the specialists either traded ahead of customers to take advantage of price changes or failed to match buyers and sellers.

"It's akin to shoving a customer out of line," he said.

Twenty traders in all face civil charges from the Securities and Exchange Commission in the matter, including the 15 who face criminal charges. For its part, the NYSE has issued charges for securities fraud to 17 of the specialists.

The individual specialists earned between $150,000 and $4 million in profit and earned $14 million combined, according to prosecutors. Investors lost between $400,000 and $5 million in profits each and a combined $20 million, prosecutors said.

Among the stocks in which the alleged fraudulent trading occurred were General Electric (GE: news, chart, profile) , Goldman Sachs (GS: news, chart, profile) , Johnson & Johnson (JNJ: news, chart, profile) , J.P. Morgan Chase (JPM: news, chart, profile) , Nokia (NOK: news, chart, profile) , Texas Instruments (TI: news, chart, profile) and Verizon Communication (VZ: news, chart, profile) .

The Wall Street Journal reported that defense lawyers representing the specialists have argued to investigators that the trading conduct in question was widespread and not illegal.

Named in the complaint

Prosecutors charged individual specialists at units of Bank of America Corp. (BAC: news, chart, profile) , Bear Stearns (BSC: news, chart, profile) , Goldman Sachs, LaBranche (LAB: news, chart, profile) and Van der Moolen (VDM: news, chart, profile) .

Fourteen of the 15 specialists facing criminal charges surrendered this morning. One is in Netherlands and considered "at large," prosecutors said.

Named in criminal complaints were former Fleet Specialists' David Finnerty, Donald R. Foley, Scott G. Hunt and Thomas J. Murphy Jr.; and former LaBranche specialist Fred DeBoer.

Van der Moolen specialists named in the complaint were Joseph Bongiorno, Michael Hayward, Gerard Hayes, Patrick McCagh, Robert Scavone, Michael Stern and Richard Volpe.

Frank A. Delaney and Kevin M. Fee of Bear Wagner Specialists were also named.

Of those, five specialists also served as quasi-policemen for the NYSE. Hayward, Scavone, Stern and Volpe were "floor officials" charged with monitoring the trading activities of floor brokers, who trade for investors, as well as watching other specialists. Bongiorno served in a higher office, floor governor.

Prosecutors say some of the defendants not only traded ahead of customers but pushed the price of a security higher or lower to benefit his firm's account.

In addition, five specialists not named in the criminal complaints face civil charges from the SEC. They are the former Bear Wagner specialists Delaney and Fee; Spear Leeds Kellogg specialists Robert W. Luckow and James V. Parlisi; and Van der Moolen specialist Warren E. Turk.

The specialists "showed a disregard for their legal duty" and committed offenses at once "profound and profane." said Mark Schonfeld, director of the SEC's Northeast regional office

Delaney and Fee were still employed at Bear Wagner's proprietary trading desk, according to the U.S. Attorney's office.

Ongoing probe

The charges are the latest in nearly two years of investigations into improper trading on the Big Board floor. The Securities and Exchange Commission and Federal Bureau of Investigation also participated in the probe.

The NYSE was part of an earlier probe that resulted in a $245 million settlement against five specialist firms announced in March 2004.

Prosecutors also filed and settled charges against the NYSE for not properly policing floor traders, but it's unclear if that settlement will come Tuesday.

"The exchange's market surveillance failed," Schonfeld said. "It allowed conduct to go unchecked for years."

Under the settlement, the NYSE agreed to set aside $20 million to improve enforcement at the exchange, and also to audit its enforcement every two years.

"Our board and entire organization are committed to take whatever additional steps are necessary, including carrying out the undertakings contained in the settlement agreement, to meet our surveillance and enforcement obligations," NYSE enforcement chief Richard Ketchum said in a statement.  "Specialist firms have changed, as have we." 

David Weidner covers Wall Street for MarketWatch.

New York Stock Specialists

I said for years that specialists were crooked, but I still believe that this was just a play act to cover much more serious crimes.

Dow Jones News Services
(Copyright © 2003 Dow Jones & Company, Inc.)


=DJ Specialists' Proprietary Trading Seen As Conflict -Study


   By Phil McCarty 

WASHINGTON (Dow Jones)--A majority of institutional traders don't think New York Stock Exchange specialists or Nasdaq market makers "add value" in trading liquid stocks and consider proprietary trading by specialists on the NYSE a conflict of interest.

A new study commissioned by Instinet Group Inc. (INET) and released late Tuesday by Greenwich Associates shows that 71% of institutional traders said specialists and market makers do not "add value" in highly liquid stocks, such as International Business Machines Corp. (IBM).

Meanwhile, the study showed that 78% of those traders polled said specialists' ability to trade on a proprietary basis constitutes a conflict of interest. The study was released at the American Enterprise Institute here as part of the public-policy research group's ongoing study into the structure of domestic securities markets.

Instinet, a member of the Reuters Group PLC (RTRSY) family of companies, provides investors with electronic trading services. It operates the largest electronic financial marketplace that enables buyers and sellers to trade securities directly and anonymously with each other, without the use of market makers or specialists.

John Colon, a managing director of Greenwich Associates who presented the study, said "specialists are likely to be more of a hindrance than help in executing orders" in large, liquid stocks.

The survey included traders at 103 large institutions that collectively manage more than $2.5 trillion in assets, Colon said.

In reviewing the study's findings, Colon said many traders view specialists as "competitors rather than facilitators."

One institutional trader called specialists "well-funded competitors," Colon said.

   Study's Methods May Be Biased, Says Professor 

Meanwhile, Kenneth Lehn, a professor of finance and law at the University of Pittsburgh who was also present when the study was released, wondered about potential bias in the study's methods.

Lehn noted that while the study talked to large institutional investors, many others were left out, including American Funds, Delaware Investments, Dreyfus, Putnam and Vanguard. "Is there a potential selection bias, perhaps in favor of Instinet or other ECNs (electronic communication networks)," he asked.

Lehn did note, however, that ECNs "trump NYSE on anonymity and speed of execution," based on the study's findings.

The study comes at a tough time for specialist firms.

Last week the NYSE notified five specialist firms that it plans disciplinary action against them, alleging they improperly traded ahead of customer orders, intervening between buyers and sellers to make a profit for themselves in situations where they should have stood back and let the trades be paired naturally.

Under the NYSE's auction system, human beings do the pairing of customer buy and sell orders for stocks that electronic networks have taken over elsewhere.

The five specialist firms that are facing action from the NYSE are LaBranche & Co. Inc. (LAB), the Spear Leeds & Kellogg unit of Goldman Sachs Group Inc. (GS), the Fleet Specialist unit of FleetBoston Financial Corp. (FBF), the Van Der Moolen Specialists USA unit of Van Der Moolen Holding NV (VDM) and Bear Wagner Specialists, which is minority-owned by Bear Stearns Cos. (BSC).

The specialists could face substantial fines on top of any reimbursement to customers, the NYSE has said.

Almost half of survey the respondents said they would prefer to trade somewhere else besides the NYSE, the report showed. And most of those cited mistrust of specialists as their reason for wanting to trade off of the NYSE.

While critical of some of the study's findings, Lehn said the fact that almost half of the respondents want to trade away from the exchange floor "should be a wake-up call for the NYSE."

Many of the traders who took part in the study are concerned over the lack of anonymity on the NYSE, Colon said. Several traders indicated that the information which specialists have "ultimately results in front running," Colon added.

ECNs hold a clear advantage over the NYSE in delivering anonymity, the study showed. The study indicated that ECNs are more than twice as likely to deliver anonymity when compared with an exchange.

Almost three quarters of the traders contacted also said they would consider it "very valuable" if the NYSE changed its rules to prevent specialists from competing with customer orders.

However, Stephen Sachs, the director of trading for Rydex Global Advisors, said rules are already in place to limit specialists from competing with customers. "The rules just need to be enforced," he said.

Sachs also noted that specialists are needed to facilitate trading in mid-cap and small-cap companies because of their lower liquidity.

Officials from LaBranche and FleetBoston Financial didn't return phone calls seeking comment on the study.

Ray Pellecchia, a spokesman for the NYSE, declined to comment specifically on the report, but said the exchange excels in many areas that institutional traders are concerned with, including "certainty of order execution, low market impact and price improvement."

-By Phil McCarty, Dow Jones Newswires; 202-862-9251;


(END) Dow Jones Newswires

10-22-03 1309ET



Dow Jones News Services

   By Gaston F. Ceron 



NEW YORK (Dow Jones)--Senior officials and traders at five New York Stock Exchange "specialists" were aware of trading improprieties that eventually led to a combined $241.8-million penalty against the firms, incuding fines and disgorgement, NYSE regulatory documents allege.

The documents, which were released by the NYSE Tuesday when the long-awaited settlement was made official, also show that transactions in which the specialists improperly "interpositioned" themselves between investors' orders were concentrated in 30 stocks - six per firm - including such blue-chip names as Walt Disney Co. (DIS), General Electric Co. (GE) and International Business Machines Corp. (IBM).

The regulatory papers document the Big Board's cases against each of the five firms - the specialist units of LaBranche & Co. (LAB) and Van der Moolen Holding NV (VDM); Goldman Sachs Group Inc.'s (GS) Spear, Leeds & Kellogg; FleetBoston Financial Corp.'s (FBF) Fleet Specialist; and Bear Wagner Specialists, which is majority-owned by Bear Stearns Cos. (BSC). At the NYSE, specialists oversee the trading in assigned stocks. Their duties include keeping a fair and orderly market.

But the Big Board and the SEC found that specialists at the five firms failed to live up to their obligations, breaking securities laws and exchange rules by executing orders for their own "dealer" accounts ahead of customer orders.

In one type of misconduct, the NYSE and SEC addressed so-called interpositioning by specialists. In a statement, regulators described this behavior as "for example, buying into a customer market sell order first, and then selling, at a higher price, into the opposite market buy order, thus allowing the firm dealer account to profit from the spread."

At each of the five firms, the NYSE found that certain senior officials or traders were aware of the illicit activity. For example, at Van der Moolen, or VDMS, "certain members of VDMS's management committee engaged in interpositioning in one or more of six stocks . . . and these members of the management committee had the supervisory responsibility for VDMS's trading operations on the exchange floor, including supervising a floor captain who himself engaged in such interpositioning in one or more of the six stocks," the NYSE said in its hearing-panel decision regarding the firm.

In LaBranche's case, "certain senior executives at LaBranche knew about the illicit trading because certain of the LaBranche specialists who were engaged in such interpositioning in these six stocks were senior executives at LaBranche, including managing directors, post managers, and a floor captain, some of whom had supervisory responsibility for LaBranche's trading activities on the exchange floor," the NYSE decision said.

At Spear Leeds, "certain senior executives . . . knew about the illicit trading because certain of the specialists who were engaged in some of the most egregious cases of violative conduct in the six stocks were among the most senior executives . . . including managing directors and team captains," the NYSE said.

At Fleet, "senior managers . . . were made aware of specific instances of violative conduct by certain specialists, at least as early as May 2001," the NYSE said. And at Bear Wagner, the exchange found that "certain of the specialists who were engaged in such interpositioning in these six stocks were also senior specialists with supervisory responsibilities for Bear Wagner's trading activities on the exchange floor."

As part of the settlement, the firms agreed to improve their compliance procedures. An exchange official noted that the NYSE has put in place software to help prevent future trading abuses. "We also have tightened up our surveillances to review trading that might be violative that might escape that process," the official said.

Another NYSE official, spokesman Raymond Pellecchia, said in response to a question that the improper trading activity accounted for a "miniscule" portion of the NYSE's overall trading during the period in question, 1999 to 2003. "That's not to say that we don't take it seriously," Pellecchia added.

None of the five firms admitted or denied the NYSE and SEC charges. LaBranche and Bear Stearns have declined to comment on the settlement. A spokesman for Fleet said the firm cooperated with regulators and was pleased to reach a settlement.

A Goldman spokesman said, "although the vast majority of the alleged violations occured before we owned the specialist businesses, anything that reflects adversely on our reputation is a matter we take very seriously." The settlement pact "is a positive step forward and we are glad to put the matter behind us."

In a statement, Van der Moolen said it entered into the settlement, "for the sole purpose of settling this disciplinary proceeding, and without admitting or denying guilt." A spokeswoman for the firm couldn't immediately be reached for further comment.

   Trading Encompassed Well-Known Stocks 

At each specialist firm, the NYSE identified six stocks in which a large part of the interpositioning took place. For example, at LaBranche, from 1999 through 2003, 40.7% of the firm's "customer disadvantage" from interpositioning occurred in companies including Lucent Technologies Inc. (LU), Morgan Stanley (MWD), Tyco International Ltd. (TYC) and Merck & Co. (MRK).

During the same period at Fleet, 79.6% of the firm's customer disadvantage from interpositioning took place in the shares of GE, Goldman Sachs Group Inc. (GS), Celera Genomics (CRA), J.P. Morgan Chase & Co. (JPM), Charles Schwab Corp. (SCH) and Johnson & Johnson (JNJ). GE was a standout - trading in the company's shares "accounted for more than 61% of (Fleet's) customer disadvantage from interpositioning for the period 1999 through 2003," the NYSE said.

At Bear Wagner, the interpositioning activity was concentrated on stocks such as Citigroup Inc. (C) and Motorola Inc. (MOT). Van der Moolen's interpositioning included trading in companies such as Disney and Eli Lilly Co. (LLY), while Spear Leeds's encompassed trades in stocks such as IBM and American International Group Inc. (AIG).

-By Gaston F. Ceron, Dow Jones Newswires; 201-938-5234; 
-(Lynn Cowan contributed to this article.) 

(END) Dow Jones Newswires

03-31-04 0731ET


Specialist Firms
1.  LaBranche & Co.,LLC
2.  Spear Leeds & Kellogg
3.  Fleet Specialist, Inc.
4.  Van Der Moolen Specialists USA
5.  Bear Wagner Specialists LLC
6.  Performance Specialist Group, LLC
7.  Susquehanna Specialists, Inc.