Associated Press

Charges Filed Against 15 NYSE Specialists

Tuesday April 12, 1:08 pm ET

By Tom Hays, Associated Press Writer

Justice Department, SEC File Charges Against 15 NYSE Specialists for Improper Trading

NEW YORK (AP) -- Fifteen specialists who managed trades on the floor of the New York Stock Exchange were indicted Tuesday, charged with using their inside positions to earn an estimated $20 million in illicit profits for themselves and their firms.

The Securities and Exchange Commission also filed civil charges against 20 specialists, including the 15 charged in the criminal indictment, and the NYSE as well.

The defendants cheated the market ``by putting their own interests and the interests of their firms before the interests of the unwitting investors,`` U.S. Attorney David Kelley told a Manhattan news conference.

Federal authorities said that between 1999 and mid-2003, specialists at five firms put their firms` orders ahead of customers` orders, causing those customers to get inferior prices.

``Over time, these small thefts accumulate into large profits that translate into higher compensation and bonuses for specialists who execute the trades,`` Kelley said.

Specialists run the open-outcry auctions on the floor of the NYSE and keep trading orderly. They match buy and sell orders for customers of the stocks they oversee and use their firm`s money to buy shares when nobody else wants to buy and to sell shares from their own inventory when nobody else wants to sell.

The defendants were awaiting arraignment in federal court in Manhattan on multiple securities fraud charges. If convicted, they face up to 20 years in prison and fines of up to $5 million.

In addition to the federal indictment and civil charges, the NYSE`s regulatory enforcement arm announced charges against 17 former specialists, including those indicted, in connection with the case.

Responding to the SEC charges and settlement, NYSE Chief Regulatory Officer Richard Ketchum noted that the exchange revamped its enforcement arm starting in late 2003.

``The New York Stock Exchange accepts and acknowledges the SEC`s criticisms,`` Ketchum said. ``Our board and entire organization are committed to take whatever additional steps are necessary ... to meet our surveillance and enforcement obligations. Specialist firms have changed, as have we.``

Last year, NYSE specialist firms paid a total of $247 million to settle the same allegations brought by the SEC.

The firms` profits come from fees on each transaction as well as their own stock trading. Critics of the specialist system claim this is an inherent conflict of interest, while the NYSE has noted that the specialist firms gained $155 million in illegal profits over five years, a time when the exchange handled $50 trillion in trades.

ads