NYSE, SEC Reach Settlement In Fraud Case

April 12, 2005
Securities Industry News

The New York Stock Exchange has agreed to a settlement with the Securities and Exchange Commission over charges against former NYSE specialists for alleged securities fraud violations.

The SEC said that the NYSE, over a nearly four-year period, had failed to police specialists who engaged in widespread and unlawful proprietary trading.

Without admitting or denying the findings, the NYSE agreed Tuesday to fund audits of its regulatory program every two years through 2011, at a cost of $20 million. The exchange also will implement a pilot program for video and audio surveillance on its trading floor for at least an 18-month period.

“This settlement is about protecting investors,” said Mark Schonfeld, director of the commission’s Northeast office, in a press release. “The relief we have obtained in this action will raise the bar for regulation at the NYSE and help prevent misconduct on the NYSE floor from going undetected again. The video and audio surveillance will help the NYSE keep a watchful eye on the specialists, and the regulatory auditor will keep a watchful eye on the NYSE’s performance as a regulator.”

Earlier Tuesday, the U.S. attorney for the Southern District of New York indicted 15 current and former NYSE specialists for alleged violations of federal securities laws between 1999 and 2003. The accused were employed by Fleet Specialist, now known as Banc of America Specialist, as well as Bear Wagner Specialists, Spear Leeds & Kellogg, LaBranche & Co. and Van der Moolen Specialists USA.

Richard Ketchum, chief regulatory officer of the NYSE, said in a statement: “Major strides have been taken to enhance the exchange’s regulatory program and investor protection. Staff and technology resources have been increased. New heads of the market surveillance, member firm regulation, and enforcement divisions were appointed. A new department within market surveillance was created to analyze surveillances and propose new or modified surveillances. To further protect investors, we have proposed to the SEC that when a specialist has completed a trade with the crowd for his own account but not yet reported it and an incoming customer order appears, the specialist must yield to the customer order.”

Lawrence L. Klayman, a senior partner at Klayman and Toskes, a law firm which specializes in securities arbitration and litigation, said he did not find the indictment and settlement to be very compelling because there will be more similar charges in the future. “I don’t think things will change much,” he said. “There is a wave of regulatory actions that occur. You’ll probably see some more. I think the penalties aren’t as harsh as they could or should be. The fine is probably an hour’s pay. If they were harsher, you’d see less hanky-panky. Trading desks make a lot of money on order flow as well as the specialists handling the orders. That’s at the cost of the small retail investor or the institutional investor.”

Leave a Reply

Do you have a question or need more information? Get in touch with us