SECURITIES AND EXCHANGE COMMISSION
NORTHEAST REGIONAL OFFICE
NEW YORK, NY
In the Matter of the New York Stock Exchange, Inc.
In the Matter of Certain Specialist Trading - New York Stock Exchange, Inc.
Press Conference, Tuesday, April 12, 2005
Mark K. Schonfeld
Director, Northeast Regional Office
U.S. Securities and Exchange Commission
Tel. (646) 428-1650
Good morning. I am Mark Schonfeld, Director of the SEC's New York office.
Last year, my office announced enforcement actions against all seven specialist firms for unlawful trading and obtained settlements with the firms totaling over $245 million. Today we announce two more major enforcement actions - one against the individual specialists and one against the New York Stock Exchange - arising from the unlawful trading.
First, we have today instituted an enforcement action against 20 individuals - former specialists - who engaged in the unlawful trading. The 20 respondents include the 15 defendants charged in the U.S. Attorney's criminal charges, plus 5 additional specialists against whom we are bringing these civil administrative charges.
The specialists play an integral role at the Exchange. They have a legal obligation to match customer orders with each other whenever possible and to refrain from trading for their firm's proprietary account except when necessary to maintain a fair and orderly market. The specialists named in today's action showed a disregard for their legal duty that was both profound and, at times, profane.
Time and again, the respondents "interposed" their proprietary accounts between customer orders that they could have matched with each other. The respondents thereby captured a risk-free profit from the spread. The respondents also "traded ahead" of customer orders, leaving the customer orders to be executed at an inferior price. The respondents engaged in this conduct thousands of times over several years, reaping millions of dollars for their firms and causing millions of dollars in harm to customers. These specialists took advantage of the very customers they were obliged to serve and undermined the public's confidence in the market.
In the administrative proceedings, the respondents face potential sanctions including disgorgement of ill-gotten gains, penalties and bars from the industry.
New York Stock Exchange
In our second case today, we have instituted an enforcement action against the New York Stock Exchange for its failure to adequately police the specialists. The Exchange has agreed to a settlement that includes significant forward-looking relief.
As a self-regulatory organization, the Exchange has a legal obligation to enforce compliance by its members with the federal securities laws and New York Stock Exchange rules. The Exchange must be the front line of regulation. Here, the Exchange's market surveillance group failed to enforce compliance by the specialists with the laws that prohibit interpositioning and trading ahead. The Exchange failed in three respects: surveillance, investigation and discipline. They didn't find the misconduct, when they found it they didn't investigate it, and when they investigated it they didn't punish it. The failure of the Exchange's market surveillance allowed the specialists' conduct to continue unchecked for several years.
The settlement with the Exchange is focused on protection of investors. In addition to a cease and desist order and censure, the Exchange has agreed to significant remedial measures to strengthen its oversight of specialists and other floor members, including (1) setting aside $20 million to pay for a regulatory auditor to review the Exchange's regulatory program every two years through 2011, and (2) a pilot program for video and audio surveillance on the floor of the Exchange for at least eighteen months in at least 20 stocks. The video and audio surveillance will help the Exchange keep an eye on the specialists, and the regulatory auditor will keep an eye on the Exchange's performance as a regulator. This settlement will raise the bar for regulation at the Exchange and help prevent misconduct on the Exchange floor from going undetected again.
Together, these enforcement actions demonstrate a central theme of our enforcement efforts - accountability. We will hold accountable all those - both entities and individuals - who bear responsibility for committing unlawful conduct. We will also hold accountable the self-regulatory organization that fails in its responsibility to detect and deter the unlawful conduct that takes place under their watch.
In closing, I would like to recognize the tremendous job done by the SEC staff on these investigations, only some of whom I have time to mention, including David Rosenfeld, Helen Glotzer, David Markowitz, Bruce Karpati, Sanjay Wadhwa, Joe Dever, Laura Yeu, Scott Black, Brenda Chang, and Mona Akhtar. I would also like to thank the SEC's Office of Compliance Inspections and Examinations for their work on developing this case. I would also like to thank United States Attorney David Kelley and his office and the FBI for their assistance and commitment to the investigation of the individual specialists. I would also like to thank the New York Stock Exchange Division of Enforcement for its assistance in investigating the individual specialists. On this point, I emphasize that, although the Exchange is being charged today in one of our enforcement actions, the staff of the Exchange's Enforcement Division has been a valuable resource in developing the cases against the individual specialists.