U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19616 / March 21, 2006
SECURITIES AND EXCHANGE COMMISSION vs. A.B. WATLEY GROUP, INC., PAUL F. COUGHLIN, WILLIAM B. DEAKINS, WARREN R. FELLUS, KEITH M. GELLER, KEEVIN H. LEONARD, ROBERT F. MALIN, STEVEN E. MALIN, LINUS N. NWAIGWE, MICHAEL A. PICONE, BRYAN S. ROGERS, AND KEITH A. ROGERS, CV-06-1274 (ILG) (E.D.N.Y.)
The Securities and Exchange Commission today filed a civil injunctive action in the United States District Court for the Eastern District of New York against a former Merrill Lynch broker and ten former day traders at A.B. Watley, Inc. (“Watley”), a now-defunct broker-dealer, and their managers (collectively, “Defendants”). The complaint alleges that the Defendants participated 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, so the traders could “trade ahead” of these large orders. (“Squawk boxes” are devices that broadcast, within a securities firm, institutional orders to buy and sell large blocks of securities.) In a separate action in August 2005, the Commission charged five individuals as part of this scheme.
The Commission filed its complaint against:
More specifically, the complaint alleges that the Watley day traders asked retail brokers at Citigroup, Lehman Brothers, 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, betting that the prices of the securities would move in response to the subsequent filling of the customer orders.
Between at least 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, Geller, Bryan Rogers, and Keith Rogers, together with others at 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 Singh 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 and Singh collected cash from Watley traders in order make cash bribes to the brokers providing access to the squawk boxes, Robert Malin and Picone authorized the payment of cash bribes to Coughlin, and 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, New Jersey 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 charged 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 charged Nwaigwe with aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaint also charged all of the defendants (except Watley Group) 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.