July 9, 1998
Nasdaq Dealers and 100 Traders
Face SEC Case Over Violations
By ANITA RAGHAVAN and MICHAEL SCHROEDER
Staff Reporters of THE WALL STREET JOURNAL
Nearly three dozen Wall Street securities firms have begun preliminary
settlement discussions with the U.S. Securities and Exchange Commission over
alleged trading violations in the past on the Nasdaq Stock Market.
The SEC has already been telling the firms and more than 100 traders -- a
higher number than originally expected -- that it is preparing civil charges
against them. The talks, while in the early stages, could lead to an
industrywide SEC settlement over disciplinary cases stemming from the SEC
and Justice Department investigations begun in 1994 over alleged price
manipulation by dealers on Nasdaq.
Nasdaq's Trouble
May 1994: Study from two finance professors suggests Nasdaq
dealers "tacitly collude" on prices.
October and November 1994: The Justice Department and the SEC
launch probes into Nasdaq dealers and their self-regulator, the National
Association of Securities Dealers.
July 1996: 24 firms agree to beef up oversight of Nasdaq desks in
settlement with Justice Department
July 1998: Nearly three dozen Wall Street securities firms have
begun preliminary settlement discussions with the SEC over alleged
trading violations on Nasdaq.
This is the first time that Wall Street firms have discussed a settlement of the
Nasdaq matter with the SEC.
The SEC and U.S. Justice Department probe, started in 1994, yielded
thousands of hours of taped conversations between Nasdaq traders upon which
the SEC has built its cases, people familiar with the situation say.
First Set of Fines
The settlement talks, if successful, are likely to result in Wall Street forking
over its first set of fines to settle regulators' allegations of trading violations
on the Nasdaq market. The firms have, however, agreed to pony up more
than $1 billion in total in a settlement made in December of class-action
litigation on behalf of investors who said they were overcharged in the
Nasdaq market.
While Wall Street reached a settlement in 1996 with the Justice Department,
the accord was more injunctive in nature, requiring securities firms to beef up
oversight of their trading desks but falling short of imposing fines on Nasdaq
dealers.
Among the firms that the SEC has held settlement discussions with are Merrill
Lynch & Co., the nation's biggest brokerage firm; Morgan Stanley Dean
Witter & Co.; PaineWebber Group Inc.; Warburg Dillon Read, formerly
known as UBS Securities Inc.; and Charles Schwab Corp.'s Mayer &
Schweitzer Inc. unit.
Spokesmen at the firms declined to comment. The SEC also declined to
comment.
Although the SEC hasn't sent out so-called Wells notices, formally notifying
traders that they are about to be charged, the commission has been briefing
Wall Street lawyers in recent weeks on the cases against the individual traders
and the firms, people familiar with the situation say.
It was reported earlier this year in The Wall Street Journal that the SEC was
planning civil charges against dozens of traders, but the recent briefings and
preliminary settlement talks suggest that the SEC is ready to file civil charges
against the Nasdaq traders and Wall Street firms.
It's unclear at this stage if the settlement talks will actually yield an accord or
result in litigation, these people say. Any accord, they say, is likely to result in
securities firms paying fines, ranging from a couple of hundred thousand
dollars to between $5 million and $10 million, depending on the firm.
The SEC has been informing each firm about its liability, and, people familiar
with the situation say, PaineWebber and Warburg Dillon Read, formerly
UBS, are two of the Wall Street securities firms that have a bigger exposure
than most rank-and-file firms and could be subject to the heftiest fines. Both
firms declined to comment.
Fate of Individual Traders
One of the main issues that the SEC and the Wall Street securities firms are
tussling over is the fate of the individual traders. The SEC is seeking 30-day,
90-day and, in some cases, lifetime suspensions for individual traders, these
people say. But Wall Street firms have been battling such suspensions, arguing
that it would be career-killing, these people say. In addition, it appears that
Wall Street firms would hold out for the SEC not to name any individual
traders as part of an accord with the commission, these people say.
The SEC's two-year probe into Nasdaq dealers resulted in the publication of a
157-page supplemental report that shed light on trading practices in the
Nasdaq Stock Market. The so-called 21(a) report, chock full of conversations
among Nasdaq traders, both to one another and in sworn testimony, offered
instances of traders coordinating their price quotations in a bid to fix prices
on Nasdaq.
In one tape transcript, one trader holding a position in a stock in spring 1994,
Parametric Technology, asked another to move up his bid -- what he will pay
for it -- to 1/4 point above the selling price. At one point in the conversation
between the two traders, the second trader admitted to "goosing [the stock],
cuz." To which the first trader replied: "Thank you."
In another tape transcript, two traders unwittingly predicted what many
traders say is the result of the SEC's investigation and the remedies it is
forcing on the National Association of Securities Dealers. "It's the end of your
profits," one trader laments to another, explaining that publicity about wide
Nasdaq trading spreads forced his firm to narrow them. "If you make 600 a
month, you gonna make 400 a month."
The talks with the SEC come just two years after two dozen securities firms
agreed to random taping of conversations on over-the-counter trading desks
and stepped up monitoring of these conversations as part of an accord with the
Justice Department.
The discussions also follow an accord the SEC reached with the NASD in
August 1996 that called for the NASD to spend $100 million over five years
to prevent abuses on Nasdaq. The 21(a) report was issued in conjunction with
that settlement.
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