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15 NYSE specialists charged with fraud

Alleged to have improperly traded ahead of orders

NEW YORK -- Still smarting from past scandals, the New York Stock Exchange suffered another blow to its credibility yesterday when 15 current and former specialist traders who operate on its trading floor were indicted for allegedly defrauding investors.

The criminal charges, which cover trading activity from more than two years ago, came at the conclusion of a lengthy investigation by the U.S. Justice Department and the Securities and Exchange Commission into complaints that specialist traders were fattening their own accounts at the expense of Big Board customers.

The NYSE -- which was hammered just 18 months ago over outcries of cronyism under the leadership of former chairman Dick Grasso -- was itself censured by the SEC and ordered to institute thorough and independent audits of its trading system.

In a news conference in Manhattan yesterday, U.S. Attorney David Kelley said the 15 traders improperly traded ahead of customer orders or positioned themselves between buyers and sellers. By doing so, they bilked investors of $32-million (U.S.) over three years, he alleged.

The accused, many of whom held supervisory positions, worked for the five leading specialist firms that execute the bulk of NYSE trading through a system of verbal bids and offers on a hectic trading floor.

Virtually all other exchanges, including the TSX, have moved to electronic trading, and the NYSE is under enormous pressure to automate its systems.

Mr. Kelley said the traders had taken advantage of their special access to investors' trading information -- bid and offer prices and size of orders -- to either trade ahead of an order or position themselves between buyer and seller.

"They had a duty to those investors to execute the trades fairly and to put the investors' interest above their own," Mr. Kelley said.

Seven of the traders worked for Van der Moolen Specialists USA LLC, while others worked for Bear Wagner Specialists, LaBranche & Co. LLC, Spear Leeds & Kellogg Specialists LLC and Fleet Specialist Inc., now known as Banc of American Specialist.

If convicted, they face penalties of up to 20 years in prison and fines of $1-million (U.S.). The five specialist firms agreed last year to a settlement with the Securities and Exchange Commission concerning the same improper trading charges and paid a $245-million penalty.

"Van der Moolen Specialists continues to co-operate with all government investigations and the NYSE, and has taken steps to put these past matters behind the firm," said Robert Giuffra, a lawyer representing the firm.

The New York Stock Exchange itself has agreed to conduct regular independent audits of its monitoring systems to ensure specialist floor traders are acting above board.

In a statement, the NYSE's chief regulatory officer, Richard Ketchum, said the exchange has already addressed many of the investigators' concerns. Among other things, the NYSE separated business operations from enforcement, beefed up its monitoring and introduced new technology that tracks trading information more effectively.

"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," Mr. Ketchum said. "Specialist firms have changed, as have we."

Prosecutors face a daunting task in securing criminal convictions against the individual specialist traders who operate in an arcane world in which oral orders were not always recorded instantaneously.

However, John Coffee, a professor of securities law at Columbia University, said federal prosecutors have succeeded in winning convictions in complicated white-collar cases, usually on the strength of co-operating witnesses.

Mr. Coffee said yesterday's indictment is another black eye for the NYSE, which has battled to recover its reputation battered by Mr. Grasso's excesses while fending off competition from electronic exchanges. "It is certainly an embarrassment for the NYSE," he said.

© The Globe and Mail

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