For Immediate Release 99-2 SEC Fines 28 Brokerage Firms $26 Million and Suspends 51 Individual Traders for Fraudulent Market-Making Activities in the Nasdaq Market Washington, DC, January 11, 1999 -- The Securities and Exchange Commission today imposed civil penalties of more than $26 million on 28 broker-dealers and suspended 51 individuals from the industry for various lengths of time for numerous federal antifraud or other violations resulting primarily from market-making activities in the Nasdaq stock market. Richard H. Walker, Director of the Division of Enforcement said, "These settlements effectively bring to a close the long- standing investigation of the Nasdaq market first begun by the SEC in 1994. The settlements require the firms to improve their trading policies and procedures, building upon other reforms already implemented." Chairman Arthur Levitt said, "Thanks to effective leadership, today Nasdaq is stronger and better. The sound reforms implemented over the past several years and the commitment to strong oversight greatly enhance investor protections and reaffirm confidence in the Nasdaq market." The firms and individuals consented to a variety of sanctions, including: civil monetary penalties totaling $26,302,500, disgorgement of wrongful gains totaling $791,525, suspensions or bars for the individual respondents, and cease and desist orders. All of the firms and individuals involved in this action settled the cases without admitting or denying the charges. The SEC found that the firms had engaged primarily in one or more of the following types of violations: (a) the coordination of quotations and transactions by traders making markets in Nasdaq stocks in violation of antifraud and fictitious quotation rules, (b) the intentional delay of trade reports, (c) other manipulative activity, (d) failure to honor quoted prices, (e) failure to provide customer orders with best execution, (f) trading as principal with advisory clients or discretionary customers without disclosure and consent, (g) failure to comply with the books and records requirements, and (h) failure to supervise. The sanctions on the broker-dealer respondents include: (a) civil monetary penalties, (b) disgorgement of wrongful gains, where appropriate, (c) cease and desist orders, and (d) in the case of twenty-two of the broker-dealers, a review of their policies and procedures relating to the areas of their violations by an independent consultant to be appointed by the Commission. The sanctions on the individual respondents include: (a) suspensions or bars from the securities industry, (b) civil monetary penalties, (c) cease and desist orders, and (d) disgorgement of wrongful gains, where appropriate. Details of the Commission's actions, including the names of the firms and individuals and the respective penalties assessed, are identified in the Commission's order, which is available at: www.sec.gov. The SEC acknowledges the assistance of the NASD in these cases. # # # SECURITIES AND EXCHANGE COMMISSION Washington, D.C. ADMINISTRATIVE RELEASE, January 11, 1999 SECURITIES EXCHANGE ACT OF 1934 Release No. 34-40900 In the Matter of Certain Market Making Activities on Nasdaq, Administrative Proceeding File No. 3-9803 The Securities and Exchange Commission today announced the institution of administrative proceedings against 28 broker- dealers and 51 individuals who worked at those broker-dealers for various antifraud violations and other violations of law resulting primarily from market making activities in the Nasdaq stock market. The respondents are identified on the attached list. The respondents have simultaneously consented, without admitting or denying the Commission's findings, to the entry of Orders which impose civil monetary penalties totalling $26,302,500, disgorgement of wrongful gains totalling $791,525, suspensions or bars for the individual respondents, cease and desist orders and other sanctions. The Orders found that the respondents had engaged primarily in one or more of the following types of violations: (a) the coordination of quotations and transactions by traders making markets in Nasdaq stocks in violation of antifraud and fictitious quotation rules, (b) the intentional delay of trade reports, (c) other manipulative activity, (d) failure to honor quoted prices, (e) failure to provide customer orders with best execution, (f) trading as principal with advisory clients or discretionary customers without disclosure and consent, (g) failure to comply with the books and records requirements, and (h) failure to supervise. The sanctions on the broker-dealer respondents include: (a) civil monetary penalties, (b) disgorgement of wrongful gains, where appropriate, (c) cease and desist orders, and (d) in the case of twenty-two of the broker-dealers, a review of their policies and procedures relating to the areas of their violations by an independent consultant to be appointed by the Commission. The sanctions on the individual respondents include: (a) suspensions or bars from being in the securities industry, (b) civil monetary penalties, (c) cease and desist orders, and (d) disgorgement of wrongful gains, where appropriate. The Commission issued two different but related types of Orders in this proceeding. The Order Instituting Proceedings provides a broad discussion of the various types of unlawful conduct that occurred in 1994 in connection with market making by the respondents in the Nasdaq market. In addition, specific Orders Making Findings and Imposing Sanctions were separately issued for each broker-dealer respondent and the individual respondents, usually traders, who worked at that particular broker-dealer. Each Order Making Findings and Imposing Sanctions describes the extent to which any particular respondent engaged in the types of unlawful conduct described in the Order Instituting Proceedings. The types of violative conduct found by the Commission include the following: 1. Market Manipulation. Market makers coordinated the entry of bid and/or ask quotations into the Nasdaq system for the purpose of artificially affecting the market price of a particular security in order to obtain an unfair trading advantage for the participating market makers. These undisclosed arrangements typically involved one market maker requesting another market maker to move its quotations in a manner that changed the inside spread or disadvantaged customers or other market participants. Such coordinated activity violated the antifraud provisions of Section 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder, and the prohibition on the entry of fictitious quotations provided in Section 15(c)(2) of the Exchange Act and Rule 15c2-7 thereunder. 2. Undisclosed Coordination of Quotations. Another type of misconduct involved undisclosed arrangements between market makers to coordinate the entry of quotations that did not have a manipulative impact. In many instances, this activity was intended to paint a deceptive picture of market conditions, or induce another market participant into buying or selling at an artificial price. Although the Commission did not find that, in these instances, there was any manipulative impact, such as a change in the inside market, or harm to a customer or other market participant, such conduct violated the rules prohibiting undisclosed coordinated quotations. In other instances, one market maker would enlist another market maker to disseminate a quotation to buy or sell Nasdaq stocks on its behalf, such as a request to the second market maker to join the existing inside bid or ask, or create a new inside market price, in the hopes of buying or selling stock. These undisclosed arrangements violated the prohibition on the entry of fictitious quotations provided in Section 15(c)(2) of the Exchange Act and Rule 15c2-7 thereunder. 3. The Intentional Delaying of Trade Reports. In a number of instances, market makers intentionally delayed reports of significant trades to the Nasdaq market. The purpose of delaying these trade reports was to provide the relevant trader with an unfair informational and trading advantage over other market participants. The failure to properly report trades in such cases violated the antifraud provisions of Section 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder. 4. Other Market Maker Misconduct . Market makers engaged in other manipulative activity which did not involve arrangements for the entry of quotations. This activity involved transacting with other market makers that were quoting the inside bid or inside ask, for the specific purpose of altering the inside market prices where customer orders were executed, which resulted in a worse price for the customer (or for another market participant, in some instances). Such conduct improperly benefitted the market maker and harmed the interests of its customer (or another market participant), in violation of the antifraud provisions of Section 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder. 5. Best Execution Violations In a number of instances, Nasdaq market makers failed to provide best execution for their customers' orders. These instances involved a market maker deliberately favoring its own interests, or those of a cooperating market maker, over the interests of its customers, such that the customer did not receive the most favorable price reasonably available under the circumstances. This violated the antifraud provisions of Section 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder. 6. Failure to Honor Quotations. Another type of misconduct was the failure by market makers to honor their Nasdaq quotations in various instances. In these instances, the market makers did not honor their quotations because they did not like the trading practices of firms that presented the orders or because of other improper reasons, in violation of the Commission's firm quote rule (Exchange Act Rule 11Ac1-1, 17 C.F.R. 240.11Ac1-1). 7. Failure to Keep Accurate Books and Records. In many instances, market makers failed to create or maintain records of their trading activity, particularly with respect to the terms and conditions of customer orders, or the times of entry or execution of such orders. These failures violated the recordkeeping requirements of 17(a) of the Exchange Act and Rules 17a-3 and 17a-4 thereunder . 8. Failure to Reasonably Supervise Nasdaq Trading. Most of the respondent firms failed to reasonably supervise traders and other persons involved in transactions in Nasdaq stocks. Most of the respondent firms did not prescribe procedures or guidelines for their traders or supervisors concerning the potential problems of discussing quotations with traders at other firms. Other respondent firms had inadequate procedures in this regard. In addition, most respondent firms had no procedures or guidelines for supervisors to review activities of traders for potential coordination or collaboration with respect to quotations. Other respondent firms had inadequate procedures or guidelines for such supervisory reviews. Certain respondent firms relied on their head Nasdaq trader to perform much or most of the supervisory function without effective oversight of the head trader's activities. This proved to be a flaw in the supervisory structure in some instances when the head trader engaged in one or more of the violations of the federal securities laws found by the Commission in these proceedings to have occurred. Further, certain respondent firms did not provide their Compliance Departments with resources adequate to perform their assigned responsibilities relating to trading in the Nasdaq market. The complexities of the Nasdaq market and trading in Nasdaq stocks will often require, at firms with sizeable Nasdaq trading departments, a substantial commitment of compliance resources. In addition, the Orders Making Findings and Imposing Sanctions as to a few specific firms made findings of certain other unlawful conduct in 1994, as is described below: a. Improper DSPG Trading. PaineWebber, Inc., S.G. Cowen & Co., CIBC Oppenheimer Corp., and Herzog, Heine, Geduld, Inc., and certain of their employees engaged in manipulative conduct involving the stock of DSP Group, Inc. ("DSPG"). Certain traders at these firms engaged in quote coordination and other collaborative conduct involving DSPG stock on various days over a period of several months. In the manner and to the extent described in the applicable Order Making Findings and Imposing Sanctions, they artificially depressed prices in order to enable PaineWebber or Cowen to purchase stock more cheaply from customers or others, and artificially elevated prices in order to enable PaineWebber or Cowen to sell at higher prices to customers or others. Among other things, a PaineWebber registered representative and certain of its traders failed to fulfill their obligation of best execution for certain customer orders, in order to enhance the profits and compensation obtained from executing these orders. This conduct violated the antifraud provisions of Section 10(b) of the Exchange Act and Rule 10b- 5 thereunder. b. Section 15(f) Charge. J.P. Morgan Securities, Inc. ("J.P. Morgan") violated Section 15(f) of the Exchange Act. This provision requires that a registered broker-dealer establish, maintain and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information. A J.P. Morgan Nasdaq trader accumulated approximately 100,000 shares of Perrigo Company ("Perrigo") after learning that J.P. Morgan investment bankers working for Perrigo were analyzing a potential stock buyback by Perrigo as a means to enhance its stock price. Perrigo subsequently decided not to proceed with a buyback and the trader sold this position without profiting from his knowledge of the consideration of a buyback. J.P. Morgan's then existing policies and procedures were deficient in not requiring any consultation with the Compliance Department or legal personnel before the trader bought this position under these circumstances. c. Principal Trading with Advisory Clients and Discretionary Customers. Legg Mason Wood Walker, Incorporated ("Legg Mason") violated Section 206(3) of the Investment Advisers Act of 1940 ("Advisers Act") by engaging in indirect principal transactions with its advisory clients, and violated the antifraud provisions of Section 15(c)(1) of the Exchange Act and Rule 15c1-2 by engaging in indirect principal transactions with its discretionary customers. These provisions prohibit a broker-dealer from trading as principal with its advisory clients and discretionary customers, without certain disclosures to them and their consent. In executing certain orders to transact stocks for the account of advisory clients and discretionary customers, Legg Mason delivered the order to another market maker, purportedly on an agency basis. Legg Mason then simultaneously arranged to trade itself with the other market maker the same amount of the same stock, such that it indirectly filled the customer's order. The customer confirmation inaccurately indicated that Legg Mason acted in an agency capacity in the transaction. This arrangement gave Legg Mason the potential to make a trading profit from the orders of advisory and discretionary clients, or to dispose of an unwanted inventory position, in violation of the previously cited provisions. The Commission acknowledges the assistance of the National Association of Securities Dealers, Inc. in the investigation. Respondent Firms and Individuals Bear Stearns & Co., Inc. and Philip D. Zeifer Cantor Fitzgerald & Co. S.G. Cowen Securities Corp., Kennedy M. Buckley, David D. Dube, Peter M. Gilfillan, John P. Mottes and Richard S. Striefler CS First Boston Corp. Dean Witter Reynolds, Inc. Donaldson, Lufkin & Jenrette Securities Corp. and Lawrence H. Kurtz Gruntal & Co., L.L.C. Hambrecht & Quist LLC and Edward L. Albert Herzog, Heine, Geduld, Inc., Ronald F. Cullen, Jr. and Bradley Zipper J.P. Morgan Securities, Inc., Donald A. Dunworth, Mark A. Gallagher and David J. Mottes Jefferies & Company, Inc. Legg Mason Wood Walker, Incorporated Lehman Brothers Inc. Mayer & Schweitzer, Inc., Robert Burns and Christopher D. Colgan Merrill Lynch, Pierce, Fenner & Smith Incorporated Morgan Stanley & Co., Inc., Peter W. Ferriso, Jr. and Robert S. Ranzman Olde Discount Corp., Jack G. Monopoli, Frank W. Schwarz, III, and John F. Watson, Jr. CIBC Oppenheimer Corp. and William G. Clark, Jr. PaineWebber Inc., Richard A. Bruno, Peter F. Comas, Robert D. Coppola, Gerard Kane, Joseph J. Palma, Arthur A. Raiola, Joseph H. Raiola and Reuben G. Taub Piper Jaffray Inc. and Stacey R. Rickert Prudential Securities Inc., Michael T. Burke, Jr., Joseph G. Candela and Robert D. Sprotte Raymond James & Associates, Inc., Thomas J. Dudenhoefer and Timothy J. Kane The Robinson-Humphrey Company, LLC Salomon Smith Barney Inc. (as successor to Salomon Brothers Inc) Salomon Smith Barney Inc. (formerly known as Smith Barney Inc.), Glenn Y. Blitzer, Barry J. Dusti and George C. Ross, Jr. Sherwood Securities Corp., Brian J. Deegan, Richard M. Marino, Edward G. Schmitz and David M. Zitman Spear, Leeds & Kellogg, L.P. (by virtue of the activities of its Troster Singer division), Michael J. Ling, James P. Morris, John J. Quigley and Eric J. Scherzer Tucker Anthony Inc. Warburg Dillon Read, LLC, Michael R. Antolini, Steven D. Murphy, Joel I. Zweig and David S. Rothman William P. Heenan