NYSE Trading Firms Settle With SEC, Pay $240 Mln, People Say
Feb. 17 (Bloomberg) -- The five largest New York Stock Exchange market makers agreed to pay about $240 million to settle federal authorities' claims they traded ahead of customers, ending a yearlong probe, people familiar with the matter said.
The firms, including LaBranche & Co. and Goldman Sachs Group Inc.'s Spear, Leeds & Kellogg Specialists, would pay about $155 million to cover investors' losses and the rest in fines, the people said. In the settlement, the Securities and Exchange Commission claimed the firms failed to supervise their traders, who allegedly violated an anti-fraud provision of the federal securities laws, the people said. The firms neither admitted nor denied wrongdoing, they said.
The firms, known as specialists, were under pressure to settle with regulators. SEC Enforcement Director Stephen Cutler had set today as a deadline for the companies to come to agreement or face even costlier civil lawsuits.
``It's like a restaurant owner who can't get into a huge fight with the city government because the city can come in at any time and shut him down,'' said Mark Radke, a former SEC official, who now works at the Howrey Simon Arnold & White law firm in Washington.
In addition to LaBranche, the biggest NYSE specialist, and Spear Leeds, the firms that settled are FleetBoston Financial Group's Fleet Specialists, Van der Moolen Holding NV's Van der Moolen Specialists USA and Bear Wagner Specialists LLC, part- owned by Bear Stearns Cos.
Thain's Arrival
LaBranche & Co. Chief Executive Michael LaBranche and Goldman Sachs spokesman Ed Canaday declined to comment. FleetBoston spokeswoman Alison Gibbs and Bear Stearns spokeswoman Elizabeth Ventura didn't return calls for comment. SEC spokesman John Nester didn't respond to messages left after hours. NYSE spokesman Ray Pellecchia declined to comment.
The settlement came less than two months after former Goldman Sachs President John Thain was named as the exchange's chief executive. Thain replaced Richard Grasso, who was forced to resign in September following an outcry over his pay. Grasso received $140 million and turned down another $48 million he said was owed in an unsuccessful attempt to keep his job.
No individuals were named in the SEC settlement. The SEC had refused to promise that it won't pursue potential legal claims against individuals in the future, people familiar with the matter have said.
Shortchanged
Regulators told the specialists last year they shortchanged investors about $155 million over five years by trading for their own accounts before carrying out their duty to pair off customer orders. The firms had said the SEC is applying standards that are not in the NYSE regulations to determine the alleged violations and fix penalties.
The NYSE disclosed its probe of whether specialists traded for their own accounts instead of matching customer trades in April 2003. The SEC took control about six months later, after criticizing the exchange's surveillance and enforcement. It said specialists who let an order sit on their books for more than 10 seconds while trading for their own accounts violated NYSE rules. The specialists denied the NYSE had a 10-second rule.
The NYSE's specialists oversee trading in designated stocks and trade for their own account. They're involved in matching buyers and sellers in more than 90 percent of NYSE trades. At the center of the probe were allegations that the Big Board, which has a market share of about 80 percent in the 2,576 stocks listed on the exchange, were denying investors the best possible prices.
Ending the alleged abuses ``goes to the heart of how the exchange functions to protect investors,'' former SEC Chairman Harvey Pitt said. ``There's going to be very little sentiment in support of people accused of abusing the public's trust.''
NYSE directors this month approved Thain's proposal to increase automated trading and give companies more control over who makes markets in their shares. In December, the California Public Employees' Retirement System, the biggest U.S. public pension fund, sued seven specialists for favoring floor traders.
Most to Lose
LaBranche and Amsterdam-based Van der Moolen had the most to lose in a court battle, said Jefferies & Co. analyst Charlotte Chamberlain. They are the only two publicly traded companies whose primary business is exchange trading. LaBranche shares are off 45 percent in the past year. Van der Moolen is down by 28 percent.
LaBranche, which makes markets in 478 NYSE stocks, lost $155.9 million in the fourth quarter after writing down the value of specialists it bought in the last four years. Standard & Poor's lowered its rating on the New York-based firm's $100 million of bonds due in August 2004 to ``B'' from ``B+'' last month. Moody's Investors Service cut its outlook on LaBranche debt to negative from stable last year.
Last month, LaBranche said it has reserved $1 million to pay for a settlement even though the NYSE in October said it had found that its customers were shortchanged about $43 million, based on the SEC's methodology. The company's shares have lost almost half their value in the past year.
Van der Moolen Loss
Van der Moolen had a fourth-quarter loss of 16 million euros ($20 million), tied to costs to close its Cohen, Duffy, McGowan & Co. options business in the U.S. The shares dropped as much as 8.1 percent, their biggest decline since Dec. 17. The stock has shed 43 percent in the past 12 months.
The company said it hasn't decided how much money it will set aside to cover costs relating to the NYSE probe and plans to announce provisions when it publishes its final 2003 financial statement on March 4. CEO Bottcher in October said Van der Moolen was told it had violations of at least $35 million.
U.S. Representative Richard Baker, a Louisiana Republican and chairman of the House capital markets subcommittee, has scheduled a hearing on the role of specialists. NYSE Chief Executive Thain and Robert Greifeld, Nasdaq's president and chief executive, are slated to testify at the hearing in New York on Friday. |
