Edward John McCarthy

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 48554 / September 26, 2003

Admin. Proc. File No. 3-10999

ORDER SUSTAINING DISCIPLINARY ACTION TAKEN

BY NATIONAL SECURITIES EXCHANGE

On the basis of the Commission's opinion issued this day, it is

ORDERED that the disciplinary action taken by the New York Stock Exchange, Inc. against Edward John McCarthy, be, and it hereby is, sustained.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes

1 15 U.S.C. § 78k(a). Section 11(a), subject to certain exemptions not relevant here, makes it "unlawful for any member of a national securities exchange to effect any transaction on such exchange for its own account, the account of an associated person, or an account with respect to which it or an associated person thereof exercises investment discretion." For a discussion of the regulatory framework governing floor brokers and their trading for accounts in which they have an interest or over which they exercise discretion, see John R. D'Alessio and D'Alessio Securities, Inc. , Exchange Act Rel. No. 47627 (Apr. 3, 2003), 79 SEC Docket 3627, appeal pending, No. 03-4883 (2d Cir.).

2 17 C.F.R. § 240.11a-1. Rule 11a-1, with certain exceptions not relevant here, prohibits an exchange member, while on the trading floor, from initiating any transaction in any security traded on the exchange for any account "in which such member has an interest, or for any such account with respect to which such member has discretion."

3 NYSE Rule 95(a) provides that "[n]o member while on the Floor shall execute or cause to be executed on the Exchange, . . . any transaction for the purchase or sale of any stock with respect to which transaction such member is vested with discretion as to (1) the choice of security to be bought or sold, (2) the total amount of any security to be bought or sold, or (3) whether any such transaction shall be one of purchase or sale."

4 NYSE Rule 91 prohibits a member from crossing trades of a customer with an account in which the member or its member organization, among others, "is directly or indirectly interested," without first ensuring that the order has an opportunity for an improved price on the Exchange floor and providing notification to, and obtaining acceptance of the trade from, the member who placed the trade.

5 NYSE Rule 92 prohibits a member from purchasing or selling a security for an account in which the member or its member organization, among others, "is directly or indirectly interested" while holding an unexecuted order for a customer on the same side of the market.

6 NYSE Rule 123, among other things, requires exchange members to preserve for at least three years a record of every order originated or received by the member. The record must include the name and amount of the security, the terms of the order and the time when such order was received.

NYSE Rule 440 requires brokers and dealers to make and preserve books and records prescribed by the NYSE and by Exchange Act Rules 17a-3 and 17a-4.

Exchange Act Rules 17a-3 and 17a-4 require brokers and dealers to make and preserve current books and records regarding executed securities transactions and customer accounts. 17 C.F.R. §§ 240.17a-3 and 240.17a-4.

7 A zero-minus tick securities trade takes place at the same price as the previous sale but at a lower price than the last different price. A zero-plus tick securities tradetakes place at the same price as the previous sale but at a higher price than the last different price.

8 A short sale on a minus tick also is a violation of NYSE Rule 440B(a)(1)(i), which specifies, in pertinent part, that:

[n]o person shall, for his own account or for the account of any other person, effect a short sale of any [registered] security . . . (A) below the price at which the last sale thereof, regular way, was reported pursuant to an effective transaction reporting plan; or (B) at such price unless such price is above the next preceding different price at which a sale of such security, regular way, was reported pursuant to an effective transaction reporting plan.

9 The Hearing Panel also determined by a unanimous vote that the Exchange's Division of Enforcement had failed to establish that McCarthy violated NYSE Rule 95(c) by representing market orders at the minimum variation on both sides of the market. NYSE Rule 95(c) states that:

If a Floor broker acquires a position for an account during a particular trading session while representing at the same time, on behalf of that account, market or limit orders at the minimum variation on both sides of the market, the broker may liquidate or cover the position established during that trading session only pursuant to a new order (a liquidating order) which must be time-recorded upstairs and upon receipt on the trading Floor.

The Hearing Panel concluded that Rule 95(c) applied to limit orders, not market orders, because market orders are by definition executable without regard to variations. Given this perceived ambiguity, the Hearing Panel found that McCarthy had not violated Rule 95(c).

10 The Board also affirmed the Hearing Panel's finding that the Exchange's Division of Enforcement failed to establish that McCarthy violated NYSE Rule 95(c).

11 As we recently stated in D'Alessio, "any compensation arrangement that results in the exchange member sharing in the trading performance of an account, however structured, makes the account that member's 'own account,' or constitutes an 'interest' in the account." John R. D'Alessio, 79 SEC Docket at 3637, citing New York Stock Exchange, Inc., Exchange Act Rel. No. 41574 (June 29, 1999), 70 SEC Docket 153, 156 (Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Ordering Compliance With Undertakings).

12 The Exchange offered expert testimony that, during the period at issue, floor brokers knew that it was impermissible to be compensated on the basis of the profits accruing to the account for which they were trading. This expert witness was Kenneth Polcari, a member of the Exchange who has been working on the floor of the Exchange since 1985, has been a floor official since 1997 and, at the time of the hearing, was co-president of the Organization of Independent Brokers.

13 McCarthy also argues that two NYSE hearing panels have declined to find profit-sharing arrangements when faced with calculations showing inconsistent percentages of profit payments. These cases are distinguishable from McCarthy's case. In one case, the Exchange hearing panel dismissed the case because the Exchange's Division of Enforcement maintained that the floor broker consistently received 70 percent of the profits and the hearing panel determined that he had not received this percentage. In the other case, the hearing panel determined that the Exchange's Division of Enforcement had failed to establish that the floor broker was responsible for many of the trades made for the trading account in question.

14 This manner of executing trades contrary to Oakford's instructions and Oakford's failure to reject any of these unauthorized trades led the Exchange's expert witness to conclude that McCarthy's trades for the Oakford account were not executed for a "real customer," but were instead executed for an account in which McCarthy had an interest and over which he exercised investment discretion.

15 Rule 91 provides that, when crossing a customer order with the member's own account, a member may take securities for its own account, provided "(1) he shall have offered the same in the open market at a price which is higher than his bid by the minimum variation permitted in such securities, and (2) the price is justified by the condition of the market, and (3) the member who gave the order shall directly, or through a broker authorized to act for him, after prompt notification, accept the trade." A member may supply securities from its own account provided that he shall have "bid for the same in the open market at a price which is lower than his offer by the minimum variation permitted in such securities," and provided that he meets the second and third conditions for taking securities for his own account.

16 NYSE Rules 123 and 410.

17 Id.

18 5 U.S.C. § 706.

19 Specifically, NYSE Rule 476(f) provides that the Board:

may sustain any determination or penalty imposed, or both, may modify or reverse any such determination, and may increase, decrease or eliminate any such penalty, or impose any penalty permitted under the provisions of this Rule, as it deems appropriate.

20 See Daniel Turov, 51 S.E.C. 235, 239 (1992); see also Gary Roth, 52 S.E.C. 808, 811 n.7 (1996).

21 Cf. Turov, 51 S.E.C. at 239 (finding that the sanction imposed by the Exchange Board of Directors was based not on blind adherence to precedent but on the egregious nature of particular misconduct).

22 Due process requires that "laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited." Upton v. SEC, 75 F.3d 92, 98 (2d Cir. 1996).

23 79 F. Supp.2d 357 (S.D.N.Y. 1999).

24 Oakford, 79 F. Supp.2d at 366.

25 The court identified the source of this bright-line rule as New York Stock Exchange, Inc. , Exchange Act Rel. No. 41574 (June 29, 1999), 70 SEC Docket 153, 156 (Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Ordering Compliance With Undertakings), our settled action in which we noted that "any compensation arrangement that results in the exchange member sharing in the trading performance of an account, however structured, makes the account that member's 'own account,' or constitutes an'interest' in the account."

26 Oakford, 79 F. Supp.2d at 366 (concluding that the NYSE did not hide from Exchange members that sharing in a customer's profits could violate Section 11(a) and Rule 11a-1).

27 Id.(citing New York Stock Exchange, Inc., 70 SEC Docket at 159. The report of the Exchange's Committee on Trading for Eighths noted that, if an independent floor broker "is compensated for his services based on the profitability of transactions in such a way that he becomes, in effect, a partner with his customer in the trade, such a broker may then become subject to the restrictions contained in Section 11(a).").

28 In that appeal, we rejected a similar argument that brokers operating on the floor of the Exchange during the period at issue here did not have fair notice that sharing in the profits and losses of an account gives the broker an interest in the account. John R. D'Alessio, 79 SEC Docket at 3644 n.44 (holding that D'Alessio, who traded for an account at Oakford from June 1994 until February 1998, had fair notice of the requirements of Section 11(a) and Exchange Act Rule 11a-1).

The October 7, 1998 letter sent to the Commission's Director of the Division of Enforcement by Richard Grasso, the Chairman and Chief Executive Officer of the Exchange, on which McCarthy also relies, lends no support to his claim of lack of fair notice. The letter, rather, reflects the Exchange's position that partnership relationships such as the arrangement that McCarthy had with Oakford in which heshared in not only the profits but the losses of each transaction -- a traditional indication of ownership -- were prohibited. For a detailed discussion of this letter see John R. D'Alessio, 79 SEC Docket at 3645.

29 William D. Hirsch, Exchange Act Rel. No. 43691 (Dec. 8, 2000), 73 SEC Docket 3597, 3605-06 (holding that the passage of approximately twenty months from the time that the Exchange learned of the misconduct until it issued charges did not result in an inherently unfair proceeding) (citing Jeffrey Ainley Hayden, Securities Exchange Act Rel. No. 42772 (May 11, 2000), 72 SEC Docket 1125, 1128).

30 Section 19(e)(2) of the Exchange Act, 15 U.S.C. § 78s(e)(2). McCarthy does not claim, and the record does not show, that the NYSE's action has imposed an undue burden on competition.

31 See Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 187 (1973); Jonathan Feins, Exchange Act Rel. No. 41943 (Sept. 29, 1999), 70 SEC Docket 2116, 2131 n.36; ChristopherJ. Benz, 52 S.E.C. 1280, 1285 (1997), petition denied, 168 F.3d 478 (3d Cir. 1998) (Table).

32 In his reply brief, McCarthy relies primarily on two NYSE cases in support of this argument. In Robert G. Puglisi, Exchange Hearing Panel Decision 03-7 (Jan. 24, 2003), the NYSE found that Puglisi executed orders for an account in which he had an interest, crossed orders for this account with those of his customers and failed to make and preserve required records. Puglisi consented to a one-month suspension and a $50,000 fine. In Anthony H. Soriano, Exchange Hearing Panel Decision 03-6 (Jan. 24, 2003), the NYSE found that Soriano committed similar violations as well as certain supervisory and net capital violations. Notably, neither of these cases involved trading ahead of or along with customer orders. In addition, in both cases, the disciplinary sanctions were consented to by the parties. As we have previously stated, "it is well established that respondents who offer to settle may properly receive lesser sanctions than they otherwise might have received based on pragmatic considerations such as the avoidance of time-and-manpower consuming adversary proceedings." Robert Sayegh, Exchange Act Rel. No. 41226 (Mar. 30, 1999), 69 SEC Docket 1307, 1315, citing Richard H. Puccio, 52 S.E.C. 1041, 1045 (1996) (citing cases).

33 We have considered all of the contentions advanced by the parties. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed in this opinion.