Risk & Compliance

SEC Settles with Five Specialist Firms

The firms were charged with executing orders for dealer accounts before doing the job for public customers.
Stephen TaubMarch 31, 2004

Five New York Stock Exchange specialist firms have agreed to pay $242 million as part of a settlement with the Securities and Exchange Commission over alleged trading abuses.

The five firms, which will shell out nearly $88 million in civil penalties and $154 million in disgorgement, also agreed to carry out steps to improve their compliance procedures and systems. They are Bear Wagner Specialists; Fleet Specialist.; LaBranche & Co.; Spear, Leeds & Kellogg Specialists; and Van der Moolen Specialists USA.

Between 1999 and 2003, the five firms violated federal securities laws and NYSE rules by executing orders for their dealer accounts ahead of executable public customer or “agency” orders, according to the NYSE and the SEC, which are conducting an ongoing joint investigation.

As a result of those dealer-account orders, the firms violated their basic duty to match public-customer buy and sell orders and to avoid filling customer orders through trades from the firm’s own account when those customer orders could be matched with other customer orders, the SEC asserted.

The SEC charged the firms with improperly profiting from trading opportunities; putting customer orders at a disadvantage by providing either inferior prices or failing to execute transactions altogether; and breaching their duty to serve as agents to public customer orders. The firms have neither admitted nor denied the allegations.

“When an exchange specialist unlawfully takes advantage of its privileged position by seizing trading opportunities that it should leave for public customers, it fundamentally undermines the fair and orderly operation of the exchange auction system,” said Stephen M. Cutler, the SEC’s Director of Enforcement, in a statement. “As the sanctions imposed in this case indicate, the commission will aggressively punish such conduct.”

The settlement provides that the firms’ $241 million payment will go to a distribution fund for the benefit of injured customers.

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