Federal Prosecutors Indict 15 Traders at Stock Exchange

The New York Times
April 12, 2005
Federal Prosecutors Indict 15 Traders at Stock Exchange
By TERENCE NEILAN
and COLIN MOYNIHAN

Fifteen former and current New York Stock Exchange specialist traders were indicted today on charges that they traded to benefit themselves and their firms at the expense of their customers in deals worth millions of dollars.

The 15, if convicted, face jail terms of 5 to 20 years and fines of at least $250,000 to $5 million, according to federal prosecutors.

The defendants, who worked for five leading specialist firms at the exchange, had a duty to investors "to execute their trades fairly and to put the investors' interests above their own," the United States Attorney for the Southern District of New York, David N. Kelley, said at a news conference today.

"Instead, these defendants are alleged to have systematically cheated the investors by putting their own interests and the interests of their firms before the interests of the unwitting investors."

In a brief explanation of the key role of specialist traders on the stock exchange floor, Mr. Kelley said purchases and sales were transmitted to the traders in one of two ways: either orally or electronically over the stock exchange computer system.

The traders are expected to buy and then sell within the same price range, Mr. Kelley said, and have what he called a unique knowledge of what the stock can sell for and what clients are willing to pay.

"Today's indictments allege that the named traders systematically violated" the rules of the exchange that they are obliged to follow in a variety of ways, Mr. Kelley said.

The traders traded ahead, by buying or selling stock for their companies' accounts, at prices that would be better than the public would get, Mr. Kelley said. They would also engage in inter-positioning, in which they buy the stock at one price and then turn around and sell it at a profit to another client, instead of executing a direct sale between interested parties, he added.

"The harm to investors by each of these specialists trading ahead ranged from some $400,000 to $5 million, for a total of nearly $20 million," Mr. Kelley said.

"The defendants functioned at the heart of the New York Stock Exchange," he said.

At the news conference, an official of the Securities and Exchange Commission, Mark K. Schonfeld, said the agency had instituted and at the same time settled today what he called an enforcement action against the New York Stock Exchange.

For almost four years, he said, the exchange failed to police the specialists, who he said "showed a disregard for their legal duty that was both profound and, at times, profane."

The stock exchange has not admitted or denied the S.E.C. findings, but it has agreed to several measures, including include an undertaking to set up a $20 million fund to finance audits of the regulatory program every two years through 2011.

The agency has also agreed to implement a pilot program for video and audio surveillance for the trading floor for at least 18 months.

The S.E.C. said it would bring an enforcement action against the 15 defendants named today, and five others who were not identified. The 20 will face civil administrative charges.

Fourteen of the traders named have turned themselves in and will be arraigned today in Federal District Court, Southern District. The 15th is believed to be living in the Netherlands and has not turned himself in.

The criminal case grew out of a civil action against seven firms, in which they agreed last year to pay $247 million for profiting from unnecessary trades that short-changed clients from 1999 to 2003. The traders, a number of whom were later fired, were said to have taken advantage of their knowledge of which way the market was moving.

Four of the defendants worked for Fleet Specialists Inc., now known as Banc of America Specialists; two worked for Bear Wagner Specialists; one worked for LaBranche and Company; another was employed by Spear, Leeds and Kellogg Specialists.

Seven others worked for Van der Moolen Specialists USA.

Seven of the defendants worked as floor officials, supervising and regulating trading floor activities, and another served as one of only 20 senior floor officials known as governors.