Brokers Indicted in `Squawk Box' Eavesdropping Scheme
Aug. 15 -- Four former stock brokers at Citigroup Inc., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. were charged with securities fraud for letting day traders eavesdrop on internal conversations with institutional clients.
U.S. Attorney Roslynn Mauskopf in Brooklyn, New York, unsealed a 40-count indictment today alleging that the four men let day traders listen in on conversations with large institutional clients over ``squawk boxes,'' the intercoms used by brokers to discuss pending trades.
``The defendants put their own interests ahead of their firms and their firms' clients by stealing valuable, confidential information and selling it to unscrupulous day traders,'' Mauskopf said in a statement. The defendants received ``thousands of dollars in kickbacks and bribes, and the day traders reaped hundreds of thousands of dollars in illegal profits,' she said.
The U.S. Securities and Exchange Commission earlier today sued all four brokers and the former head of one of the day trading companies implicated in the alleged scheme. The brokers allowed day traders to hear internal communications with firm clients that the traders then used to generate more than $600,000 in unlawful profits, according to the indictment.
The indictment charges Ralph Casbarro, 43, who worked at Citigroup's New York office; David Ghysels Jr., 47, formerly of Lehman's Boca Raton, Florida, office; Kenneth Mahaffy Jr., 50, formerly of Merrill Lynch's Garden City, New York, office and Citigroup's Melville, New York, office; and Timothy O'Connell, 40, formerly of Merrill's Garden City office.
Lied to Agents
All four are charged with securities fraud and conspiracy to commit securities fraud. They're also accused of receiving bribes in exchange for giving day traders access to internal communications over the firms' squawk boxes.
They face a maximum sentence of 25 years in prison on each of the securities fraud and conspiracy counts and fines of $250,000.
The indictment also alleges that O'Connell tried to conceal his illegal conduct by lying to federal agents and tampering with a witness who testified before a grand jury. On June 7, 2004, O'Connell lied when he told a U.S. Postal Inspector that he never gave anyone access to a Merrill Lynch squawk box, when in fact, he routinely provided day traders with such access, Mauskopf's statement said.
Between November 2004 and March 2005, O'Connell instructed his assistant at the firm to lie to federal investigators and testify falsely before a grand jury about use of the squawk box at Merrill, according to the statement.
Brooklyn Arraignment
Messages left for Lee S. Richards, an attorney for O'Connell, and Martin Auerbach, a lawyer for Mahaffy, weren't immediately returned. Casbarro's attorney, Lawrence Iason of the New York firm Morvillo, Abramowitz, Grand, Iason & Silberberg, and Jeffrey Hoffman of Hoffman & Pollok in New York, the attorney for Ghysels, didn't return calls.
The four men are scheduled to be arraigned in Brooklyn federal court this afternoon.
John Amore, who was chief executive officer of the Watley Group, parent of A.B. Watley Inc., a New York-based day trading firm, paid the brokers to allow him to listen in on the firms' squawk boxes, the SEC said today in a statement. Amore then took positions in anticipation of market movements that followed the trades, the agency said.
`Real-Time Access'
Day traders eavesdropping on the firms' squawk boxes could hear information coming in on large orders for a particular stock, the indictment explains. ``The day traders would purchase shares of the same stock before the larger buy order was executed, expecting that the imminent execution of the large buy order would cause the market price of the particular stock to rise,'' according to the indictment.
``These brokers sold day traders real-time access to their firms' confidential information on institutional orders to enable the day traders to profit from the information,'' Linda Thomsen, director of the SEC's division of enforcement, said in a statement.
Amore, 42, who was named as a defendant in the SEC civil suit, is not charged in the indictment. His attorney, Nelson Boxer, couldn't immediately be located. Robert Malin, president of A.B. Watley, referred inquiries to attorney Jerry Bernstein of the Blank Rome firm. Bernstein couldn't immediately be reached for comment.
`Stole Confidential Information'
``While the charges lodged against these former employees remain at this point only allegations, they would constitute not only a violation of the applicable laws, but also of Merrill Lynch polices,'' Merrill Lynch spokesman Mark Herr said in a statement. ``If the allegations are true, this means they stole confidential and proprietary information from the firm.''
Kim Atwater, a spokeswoman for Citigroup's Smith Barney unit, said, ``Anyone who violates our policies is held accountable.'' Atwater said Casbarro was fired.
Spokeswoman Hannah Burns of Lehman didn't immediately return a call seeking comment.
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