April 12, 2005
Federal prosecutors announced the indictment of 15 current and former New York Stock Exchange specialists, accusing them of trading to benefit themselves and their firms at the expense of their customers. Specialists match buyers' and sellers' orders on the exchange floor.
If convicted of fraud, the 15 face jail terms of 5 to 20 years and fines of at least $250,000 to $5 million.
The 15 defendants in the criminal case had a duty to investors "to execute their trades fairly and to put the investors' interests above their own," David N. Kelley, United States Attorney for the Southern District of New York, said.
"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," he said.
The Securities and Exchange Commission also announced civil actions against 20 specialists, alleging that between 1999 and mid-2003 the specialists executed proprietary, violating their basic obligation not to fill customer orders through trades from their firms' proprietary accounts when those customer orders could be matched with other customer orders.
"These individuals violated the public trust by abusing the privileged position they had as specialists on the New York Stock Exchange," said Stephen M. Cutler, Director of the SEC's Division of Enforcement. "We have zero tolerance for specialists who trade for their firm' proprietary account when they should be trading for the accounts of their customers."
Mark K. Schonfeld, Director of the Commission' Northeast Regional Office, stated, "These specialists took advantage of the very customers they had an obligation to serve. Their unlawful actions hurt the trading public and undermined confidence in the capital markets. We will hold the individuals who engaged in such fraudulent proprietary trading accountable for their actions."
The Division of Enforcement alleges that the named specialists abandoned one of their most basic obligations, the obligation to refrain from trading from a specialist' proprietary account when customer buy and sell orders could have simply been paired off with one another. Instead of doing so, these specialists treated customer orders that should have been paired off as personal trading opportunities, often to the detriment of customer orders.
The 20 specialists allegedly committed thousands of these illicit trades, causing customer losses in the millions of dollars between 1999 and 2003.
The order also charges that several of the specialists engaged in particularly egregious conduct. For example, in several instances of "interpositioning," the specialists not only disadvantaged both a buy and a sell order, but also moved the price up or down from the last sale price to further advantage the specialist firm's proprietary account.
Schonfeld also said that the S.E.C. agency had instituted and at the same time settled 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 agreed to several measures, including include setting up a $20 million fund to finance audits of the regulatory program every two years through 2011.
Those charged worked for Fleet Specialist, Inc., Bear Wagner Specialists LLC, LaBranche & Co. LLC, Spear Leeds & Kellogg Specialists LLC, and Van der Moolen Specialists USA, LLC.
