Risk & Compliance

Specialists Charged with Illegal Trading

The individuals are accused of putting their firm's orders ahead of their customers, which caused their customers to receive inferior prices.
Stephen TaubApril 13, 2005

Federal authorities indicted 15 New York Stock Exchange specialists for using their inside positions to illegally earn about $20 million for themselves, reported the Associated Press.

U.S. Attorney David Kelley asserted at a press conference that the 15 specialists at five firms cheated the market “by putting their own interests and the interests of their firms before the interests of the unwitting investors.” The firms in question are LaBranche & Co., Van der Moolen N.V., Bear Wagner Specialists, Goldman Sachs Group Inc.’s Spear Leeds & Kellogg unit, and Banc of America Specialists (formerly Fleet Specialists).

The individuals are accused of putting their firm’s orders ahead of their customers, which caused their customers to receive inferior prices, according to the report. “Over time, these small thefts accumulate into large profits that translate into higher compensation and bonuses for specialists who execute the trades,” said Kelley.

If the individuals are convicted, they face up to 20 years in prison and fines of between $1 million and $5 million, according to wire service reports. The New York Times added that 14 have surrendered and were to be arraigned in Federal District Court for the Southern District of New York; the other specialist, who has not turned himself in, is believed to be living in the Netherlands, the paper added.

Separately, the Securities and Exchange Commission settled related civil charges against the 15 specialists and the NYSE itself, as well as another five specialists who were not criminally charged, reported Bloomberg. In a statement, Director of the SEC Division of Enforcement Stephen Cutler said that “these individuals violated the public trust by abusing the privileged position they had as specialists on the New York Stock Exchange. We have zero tolerance for specialists who trade for their firm’ proprietary account when they should be trading for the accounts of their customers.”

The SEC also accused the exchange of failing to police specialists, “who engaged in widespread and unlawful proprietary trading on the floor of the NYSE,” and failing to enforce compliance with the federal securities laws and exchange rules that prohibit specialists from “interpositioning” and “trading ahead” of customer orders.

Without admitting or denying the SEC charges, the Big Board agreed to pay $20 million to fund regulatory audits every two years through 2011 and to implement a pilot program for video and audio surveillance on its trading floor for at least 18 months.

As for the individuals facing SEC charges, Bloomberg reported that the commission is seeking civil penalties including fines, disgorgement of illegal profits, and bans against working in the brokerage industry.

The criminal indictments and the civil charges are based on a two-year probe of abuses that took place between 1999 and April 2003. Last year the investigation resulted in disciplinary actions against all seven of the Exchange’s specialist firms and disgorgement totaling about $247 million. Two of those firms, SIG Specialists Inc. and Performance Specialist Group, were not mentioned by name in yesterday’s criminal indictments or civil action, according to Bloomberg.