SEC INSTITUES ENFORCEMENT ACTION AGAINST 20 FORMER
NEW YORK STOCK EXCHANGE SPECIALISTS ALLEGING
PERVASIVE COURSE OF FRAUDULENT TRADING
Respondents Include Two Former CEOs of Spear Leeds & Kellogg Specialists and Four Former Members of Van der Moolen Specialist's Management Committee
FOR IMMEDIATE RELEASE
Washington, D.C., April 12, 2005 – The Securities and Exchange Commission today instituted administrative and cease-and-desist proceedings against 20 former New York Stock Exchange specialists for fraudulent and other improper trading practices. In the Order Instituting Proceedings, the Division of Enforcement alleges that between 1999 and mid-2003 these specialists pervasively executed proprietary orders for their firms' proprietary accounts ahead of executable public customer or "agency" orders that were placed through the NYSE electronic trading system, known as the "DOT" system. Through these transactions, these specialists violated their basic obligation not to fill customer orders through trades from their firms' proprietary accounts when those customer orders could be matched with other customer orders.
Stephen M. Cutler, Director of the Commission's Division of Enforcement, said: "These individuals violated the public trust by abusing the privileged position they had as specialists on the New York Stock Exchange. We have zero tolerance for specialists who trade for their firm's proprietary account when they should be trading for the accounts of their customers."
Mark K. Schonfeld, Director of the Commission's Northeast Regional Office, stated, "These specialists took advantage of the very customers they had an obligation to serve. Their unlawful actions hurt the trading public and undermined confidence in the capital markets. We will hold the individuals who engaged in such fraudulent proprietary trading accountable for their actions."
The Division of Enforcement alleges that the named specialists abandoned one of their most basic obligations, the obligation to refrain from trading from a specialist's proprietary account when customer buy and sell orders could have simply been paired off with one another. Instead of doing so, these specialists treated customer orders that should have been paired off as personal trading opportunities, often to the detriment of customer orders. The fraudulent conduct took at least two forms: "interpositioning" and "trading ahead." In the first form of trading, the specialists "interpositioned" their firms' proprietary accounts between two customer orders by trading into both customer orders in succession – for example, buying into a customer sell order first, and then selling, at a higher price, into the opposite market buy order. In this fashion, the specialists were able to make guaranteed, riskless profits for their firms' proprietary accounts at the expense of customer orders. In the second form of trading, the specialist filled one agency order through a proprietary trade for the specialist firm's proprietary account – and thereby improperly "stepped in front" of, or "traded ahead" of, the other agency order – simply to allow the specialist firm to take advantage of market conditions promptly. By "trading ahead," the specialist locked in a better price for the proprietary trade, and then later filled the agency order at an inferior price, thus disadvantaging the agency order. The 20 specialists charged in this action committed thousands of these illicit trades, causing customer losses in the millions of dollars between 1999 and 2003.
The order also charges that several of the specialists engaged in particularly egregious conduct. For example, in several instances of "interpositioning," the specialists not only disadvantaged both a buy and a sell order, but also moved the price up or down from the last sale price to further advantage the specialist firm's proprietary account. In other instances, several of the specialists punctuated their improper trading with statements such as "f—k the DOTs" and "screw the DOTs" as they were in fact disadvantaging agency orders.
The action charges the following former specialists.
Fleet Specialist, Inc.
- David A. Finnerty, age 38, resides in Weehawken, N..J.
- Donald R. Foley II , age 44, resides in Darien, Conn.
- Scott G. Hunt, age 36, resides in Campbell Hall, N.Y.
- Thomas J. Murphy, age 41, resides in Rockville Center, N.Y.
Bear Wagner Specialists LLC (Bear Wagner)
- Kevin M. Fee, age 37, resides in Ridgewood, N.J. Fee is currently employed as a managing director at Bear Wagner, working at Bear Wagner's proprietary trading desk.
- Frank A. Delaney IV, age 42, resides in Bay Head, N.J. Delaney is currently employed as a managing director at Bear Wagner, working at Bear Wagner's proprietary trading desk.
LaBranche & Co. LLC
- Freddy DeBoer, age 43, formerly of Southport, Conn., is believed to reside currently in the Netherlands.
Spear Leeds & Kellogg Specialists LLC (Spear Leeds)
- Todd J. Christie, 40, resides in Morris Township, N.J. During the relevant period, Christie served as Spear Leeds' Chief Executive Officer.
- James V. Parolisi, age 42, resides in Massapequa, N.Y.
- Robert W. Luckow, age 57, resides in Wyckoff, N.J. Luckow served as Spear Leeds' co-Chief Executive Officer during the relevant period.
- Patrick E. Murphy, age 45, resides in Monmouth Beach, N.J.
- Robert A. Johnson, Jr., age 40, resides in Freehold, N.J.
Van der Moolen Specialists USA, LLC (Van der Moolen)
- Patrick J. McGagh, Jr., age 39, resides in Little Silver, N.J. McGagh served on Van der Moolen's management committee during the relevant period.
- Joseph Bongiorno, age 50, resides in Brooklyn, N.Y. Bongiorno served on Van der Moolen's management committee during the relevant period.
- Michael J. Hayward, age 51, resides in Ramsey, N.J. Hayward served on Van der Moolen's management committee during the relevant period.
- Richard P. Volpe, age 45, resides in Port Washington, N.Y.
- Michael F. Stern, age 54, resides in New Canaan, Conn. Stern served on Van der Moolen's management committee during the relevant period.
- Warren E. Turk, age 36, resides in New York, N.Y.
- Gerard T. Hayes, age 44, resides in Easton, Conn.
- Robert A. Scavone, age 45, resides in Franklin Lakes, N.J.
The Division of Enforcement alleges that through their fraudulent trading, the specialists willfully violated Section 17(a) of the Securities Act, Sections 10(b) and 11(b) of the Exchange Act, and Rules 10b-5 and 11b-1 thereunder, and Rules 104, 92, 123B, and 401 of the New York Stock Exchange. The proceedings will determine what relief is in the public interest against the specialists, including disgorgement, pre-judgment interest, civil penalties, and other remedial relief.
Last year, the Commission brought settled enforcement actions against all seven specialist firms operating on the New York Stock Exchange in connection with unlawful proprietary trading at the firms. Those enforcement actions resulted in payments to date of over $243 million in disgorgement and penalty payments, which have been placed in fair funds to be distributed to customers disadvantaged by improper specialist trading. See In the Matter of Bear Wagner Specialists LLC, Rel. No. 34-49498 (March 30, 2004); In the Matter of Fleet Specialist, Inc., Rel. No. 34-49499 (March 30, 2004); In the Matter of LaBranche & Co. LLC, Rel. No. 34-49500 (March 30, 2004); In the Matter of Spear, Leeds & Kellogg Specialists LLC, Rel. No. 34-49501 (March 30, 2004); In the Matter of Van der Moolen Specialists USA, LLC, Rel. No. 34-49502 (March 30, 2004); In the Matter of SIG Specialists, Inc., Rel. No. 34-50076 (July 26, 2004); In the Matter of Performance Specialist Group LLC, Rel. No. 34-50075 (July 26, 2004).
The staff acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York, the Federal Bureau of Investigation, and the NYSE Division of Enforcement in this matter.
The Commission's investigation of individual misconduct is continuing.
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Mark K. Schonfeld, Regional Director
Northeast Regional Office
David Rosenfeld, Associate Regional Director
Northeast Regional Office
David A. Markowitz, Assistant Regional Director
Northeast Regional Office
Additional materials: Administrative Proceedings, Release No. 33-8566