SEC Charges 11 More Individuals in Fraudulent "Squawk Box" Scheme
FOR IMMEDIATE RELEASE
Washington, D.C., March 21, 2006 The Securities and Exchange Commission today charged a former Merrill Lynch broker and ten former day traders and managers from A.B. Watley, Inc. (Watley), a broker-dealer, with participating in a fraudulent scheme that used squawk boxes to obtain the confidential institutional customer order flow of major brokerages, such as Citigroup, Lehman Brothers, and Merrill Lynch. "Squawk boxes" are devices that broadcast, within a securities firm, institutional orders to buy and sell large blocks of securities. This broadcast information was used by traders to "trade ahead" of these large institutional orders. In a separate action in August 2005, the Commission charged five individuals as part of this scheme.
Linda Chatman Thomsen, Director of the Commission's Division of Enforcement, said, "This fraud stretched from the biggest firms on Wall Street to a small day-trading shop. The common denominator was a willingness to steal confidential market information for use in illegal trading."
Mark K. Schonfeld, Director of the Commission's Northeast Regional Office, said, "Institutional customers count on the confidentiality of their orders to insure the best price in the market."
The Commission charged the following defendants.
- Watley Group, a Delaware corporation, is a publicly-traded holding company that conducts its business through broker-dealer subsidiaries, including Watley.
- Paul F. Coughlin, age 34, is a resident of New York, N.Y. Coughlin was a broker at Merrill Lynch in New York City.
- William B. Deakins, age 37, is a resident of Dobbs Ferry, N.Y. Deakins was a proprietary trader at Watley and also was a manager of Watley's proprietary trading desk.
- Warren R. Fellus, age 34, is a resident of Roslyn, N.Y. Fellus was a proprietary trader at Watley.
- Keith M. Geller, age 31, is a resident of New York, N.Y. Geller was a proprietary trader at Watley.
- Keevin H. Leonard, age 45, is a resident of Montvale, N.J. Leonard was a manager of the proprietary trading desk at Watley.
- Robert F. Malin, age 41, is a resident of New York, N.Y. Robert Malin served as President of Watley as well as Vice Chairman of the Board of Directors at Watley Group.
- Steven E. Malin, age 49, is a resident of New York, N.Y. Steven Malin was the Chairman of the Board of Directors at Watley Group.
- Linus N. Nwaigwe, age 49, is a resident of Valley Stream, N.Y. Nwaigwe was director of compliance at Watley.
- Michael A. Picone, age 50, is a resident of New York, N.Y. Picone was the Chief Operating Officer of Watley Group and also worked as a consultant to Watley Group.
- Bryan S. Rogers, age 35, is a resident of East Meadow, N.Y. Bryan Rogers was a proprietary trader at Watley.
- Keith A. Rogers, age 32, is a resident of Franklin Square, N.Y. Keith Rogers was a proprietary trader at Watley.
The Commission alleges that the Watley day traders asked retail brokers at Citigroup, Lehman Brothers, and Merrill Lynch, including Coughlin, to furnish access to their firms' institutional equities squawk boxes. The brokers then placed their telephone receivers next to the squawk boxes and left open phone connections to the Watley office in place for virtually entire trading days. The Watley traders, including Deakins, Fellus, Geller, Keith Rogers, and Bryan Rogers, listened for indications on the squawk boxes that these firms had received large customer orders and then "traded ahead" in the same securities, with the understanding that the prices of the securities would move in response to the subsequent filling of the customer orders.
Between approximately June 2002 and January 2004, the Watley day traders traded ahead of customer orders they heard on the Citigroup, Merrill, and Lehman squawk boxes on more than 400 occasions, making gross profits of at least $675,000. In exchange for live audio access to the squawk boxes, Watley compensated the brokers with commission-generating trades and/or secret cash payments. Watley made over $5 million in processing fees from the Watley day traders from June 2002 through August 2003, in addition to receiving a percentage of the profits generated by the Watley traders.
Leonard, Robert Malin, Steven Malin, Nwaigwe, Picone, and others furthered this trading ahead scheme. For example, Robert Malin and Steven Malin authorized the transformation of Watley into a proprietary day trading firm that relied on Amore's access to the squawk box information. Leonard collected cash from Watley traders in order to make cash bribes to the brokers providing access to the squawk boxes. Robert Malin and Picone authorized the payment of cash bribes to Coughlin. Nwaigwe concealed the trading ahead scheme from regulators.
After leaving Watley in early 2003, Fellus established a day trading desk at another broker-dealer headquartered in Woodcliff Lake, N.J., and continued to engage in a trading ahead scheme. The day traders at this firm generated at least $125,000 in gross profits.
By divulging confidential information concerning customer orders, the brokers, including Coughlin, breached duties of confidentiality and trust they owed to their employers and to their employers' customers. These brokers also violated their firm's written policies requiring confidential treatment of customer information.
The Commission's complaint, which was filed in the United States District Court for the Eastern District of New York in Brooklyn, charges Watley Group, Coughlin, Deakins, Fellus, Geller, Leonard, Robert Malin, Steven Malin, Picone, Bryan Rogers, and Keith Rogers with securities fraud in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also charges Nwaigwe with aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaint charges all of the individual defendants with aiding and abetting A.B. Watley, Inc.'s violations of Section 15(c) of the Securities Act. The complaint seeks disgorgement of illegal profits, penalties, and an injunction against future violations against the defendants, as well as officer and director bars against Robert Malin, Steven Malin, and Picone.
In a separate settled administrative and cease and desist proceeding instituted today, the Commission issued an order against Sanjay Singh, a manager of Watley's day trading desk, who facilitated the trading ahead scheme. This order requires Singh to cease and desist from committing and/or causing violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 15(c) of the Exchange Act; bars Singh from association with any broker or dealer; and orders Singh to pay disgorgement in the amount of $37,500. Singh consented to the entry of the order without admitting or denying any of the findings.
The Commission acknowledges the assistance of the United States Attorney's Office for the Eastern District of New York and the United States Postal Inspection Service.
# # #
Mark K. Schonfeld
Director, Northeast Regional Office
Associate Regional Director
Northeast Regional Office
Kay L. Lackey
Assistant Regional Director
Northeast Regional Office
Additional materials: Litigation Release 19616 and Administrative Proceeding 33-8673.