NEW YORK — Fifteen specialists who managed trades on the floor of the New York Stock Exchange used their inside positions to earn an estimated $20 million in illicit gains for themselves and their firms, federal authorities charged Tuesday.
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. An SEC official decried the violations as "profound and, at times, profane."
Federal authorities said that between 1999 and mid-2003, specialists at five firms put their companies' orders ahead of customers' orders, causing those customers to get inferior prices — a scheme the NYSE's internal regulators failed to catch.
"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 said at a Manhattan news conference.
Specialists run the open-outcry auctions on the floor of the NYSE, matching buy and sell orders for customers of the stocks they oversee. They also use their firms' 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 expected to "refrain from trading for their firm's proprietary
account except when necessary to maintain a fair and orderly market," said Mark Schonfeld, director of the SEC's New York office. "The specialists named in today's action showed a disregard for their legal duty that was both profound and, at times, profane."
Four pleaded not guilty to multiple securities fraud charges in federal court in Manhattan and were released on bail, and 10 more were awaiting arraignment. The 15th was believed to be in Europe.
If convicted, they each face up to 20 years in prison and fines of up to $5 million.
A lawyer for David Finnerty, a former trader with Fleet Specialists, who pleaded not guilty, said Finnerty had done nothing wrong and "is fully convinced he will be vindicated at trial."
Lawyers for the other three who pleaded not guilty Tuesday afternoon — Donald R. Foley II, Frank A. Delaney IV and Thomas J. Murphy Jr. — declined comment.
Four of the 15 people indicted worked for Fleet Specialist, a unit of Bank of America Corp. Two continue to work for Bear Wagner Specialists, a unit of Bear Stearns Cos., though they now work on the firm's proprietary trading desk, regulators said. Seven worked for Van der Moolen Specialists USA, a unit of Van der Moolen Holdings NV. One worked for LaBranche & Co. Inc., while another worked for the Spear, Leeds & Kellogg subsidiary of Goldman Sachs Group Inc.
A settlement with the SEC requires the NYSE to spend $20 million on regulatory audits through 2011, Schonfeld said. The exchange also agreed to implement a pilot program of electronic surveillance of its trading floor for 18 months.
The NYSE's regulatory enforcement arm also 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.