Ethics Newsline®

NEW YORK
Federal prosecutors last week hit 15 current and former New York Stock Exchange (NYSE) traders with criminal charges for allegedly cheating clients to enrich themselves and their employers.

The traders — all of them specialists who handle designated stocks — are accused of engaging in fraudulent and improper trading practices that allowed them to pocket a few thousand dollars at a time.

“Over time, these small thefts accumulate into large profits that translate into higher compensation and bonuses for specialists who execute the trades,” U.S. Attorney David Kelley charged last week.

“These defendants broke the rules repeatedly, they cheated the markets, and they cheated the investors who relied upon them” of more than $32 million, Kelley said.

In addition to the criminal charges filed by the Justice Department, the 15 specialists and five of their colleagues face related civil charges filed last week by the U.S. Securities and Exchange Commission (SEC).

The traders “showed a disregard for their legal duty that was both profound and at times, profane,” said Mark Schonfeld, director of the SEC’s Northeast regional office.

The NYSE itself was charged also by both agencies for failing to properly supervise the trading floor. It immediately settled the civil charges by the SEC, agreeing to improve video and audio surveillance of trading and spend $20 million on audits.

The SEC said the NYSE “routinely ignored scores of likely violations” and then “routinely failed to take disciplinary action or imposed only the most minor of sanctions,” reported the Post.

“When they found it, they didn’t investigate it — and when they investigated it, they didn’t punish it,” Schonfeld charged.

The Justice Department’s decision to file criminal instead of civil charges against the traders may be designed to send a signal to brokerages and the exchange itself that the rules are changing, observers said.

“What prosecutors are recognizing is that across the financial field, the one weapon that seems to work, frightening as it is, is the criminal sanction,” Columbia University law professor John Coffee, Jr., told the Washington Post.

If convicted, the traders face maximum prison terms of 10 to 20 years and fines of $1 million to $5 million, noted the New York Times. Of the 14 arrested to date, all have pleaded not guilty.

The papers note that last week’s lawsuits stem from a two-year investigation by federal prosecutors, who settled related civil charges against the traders’ employers last year for $247 million.

Firms implicated in the scandal include the specialist units of Banc of America, Bear Wagner, Fleet, LaBranche & Co., Leeds & Kellogg, and Van der Moolen. Performance Specialist Group and SIG Specialists Inc. were not involved in last week’s suits, but were part of the 2004 settlement, noted the Post.