THE NYSE'S DIRTY LITTLE SECRET IS FINALLY OUT
By JOHN CRUDELE
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TRADERS on the floor of the New York Stock Exchange can now start to sweat.
While the agreement this week between the NYSE and the Securities & Exchange Commission might lead some people to believe that the issue of illegal activity on the world's biggest stock trading floor has been wrapped up, that could be very far from the truth.
As proof of this, I refer you to page 5 of the settlement agreement between the two organizations. Oh, you don't have a copy? Let me quote.
"(The U.S. Attorney's Office), following consultation with the SEC and the NYSE, has stated that, as of April 30, 1999, there was probable cause to believe that 64 Independent Floor Brokers prior to Feb. 1998 had effected transactions on the NYSE floor for accounts as to which those floor brokers received a share of the profits."
Translated: Sixty-four floor brokers broke the law.
Now the footnote on that page: "Each of the USAO, the SEC and the NYSE is continuing its investigation of on-floor trading at the NYSE, and it's possible that this number will increase." Translation: Even though the SEC has settled with the NYSE, the investigation is continuing; people are still in trouble, and the number of people in trouble could exceed the 64 Independent Brokers we are mentioning here.
How about over 100? That's the number of floor brokers that I'm hearing have trouble with profit sharing agreements.
The SEC says in the filing that the allegations include front running customer trades and falsifying ticket orders.
To be fair, the NYSE has contended - and I assume that the floor brokers themselves do too - that it didn't know such profit-sharing arrangements are illegal. Which is a stupid assertion if you understand what this profit sharing is all about.
Here's an example. An order is sent to the floor of the NYSE. A floor broker gets it and rather than working on a straight commission for doing the trade, he is cut a slice of the profit as his pay. A rational person has to assume that the floor broker will do everything and anything possible - including illegal stuff - to protect his share of that trade's profit.
But the floor brokers are claiming they didn't know - not, anyway, until last fall when the SEC screamed about this practice.
The SEC dealt with this claim in its filing too, making it very clear that it wasn't buying the excuse.
"Since at least 1991, the NYSE understood that if an Independent Floor Broker were to share in the profitability of an account, the Independent Floor Broker executing orders for that account on the NYSE floor might violate Section 11 (a)(1) and Rule 11 a-1, unless" blah, blah, blah, it said.
This whole mess started when the U.S. Attorney's Office in New York bagged 10 floor brokers involved in a scheme to illegally trade in connection with Oakford Corp., a brokerage firm, and NYSE floor brokers. The owners of Oakford and the company itself were also indicted. The folks connected with Oakford were charged with an assortment of things including profit sharing and tax evasion. Nine out of 10 of the floor brokers have pleaded guilty to criminal charges and three have settled with the SEC. The principals of Oakford have also pleaded guilty to the charges.
All of this occurred before the investigators discovered how widespread these practices were. Back when this was unfolding, I mentioned in this column that the Oakford people should argue that they were just doing what everyone else does. Sources were telling me that authorities were going after the fish and leaving the sharks alone.
In fact, the Oakford gang may have actually been doing less than the others. Here's what the SEC said in the settlement with the exchange. "Similarly, the Commission's staff uncovered evidence suggesting that NYSE Independent Floor Brokers engaged in other unlawful trading schemes ... by effecting or initiating trades on the NYSE trading floor for performance-based compensation over several years up to 1998."
The SEC referred to "other schemes" going on at the NYSE. Do these involve the 64 other brokers? Or the 100? And are there more antics that haven't been uncovered yet?
The SEC won't say. But it referred me to the agreement with the NYSE that had the "investigation is continuing" in the footnote.
But are the SEC, NYSE and the U.S. Attorney's Office really willing to go after big Wall Street firms if that is where the trail leads?
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