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Fifteen NYSE Traders Indicted

Investors Were Cheated, U.S. Says

By Carrie Johnson
Washington Post Staff Writer
Wednesday, April 13, 2005; Page A01

Fifteen current and former traders at the New York Stock Exchange were criminally charged yesterday with cheating investors out of the best prices for their stock trades in what could be unparalleled abuse of their position at the world's largest and most prestigious stock market.

The exchange also faces disciplinary action for failing to adequately police its sprawling floor, where 1,366 traders handle an average of 1.6 billion shares a day. The traders are accused of getting in between orders to buy and sell, taking for themselves the best prices and depriving investors who ordered the trades of at least $32.5 million.

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"These defendants broke the rules repeatedly, they cheated the markets, and they cheated the investors who relied upon them," said Manhattan U.S. Attorney David N. Kelley.

The indictments are the result of a two-year investigation into one of the widest-ranging manipulations ever of trading at the exchange, known as the Big Board, and they follow a series of ethical breaches in recent years that have tarnished the exchange's image as the most transparent and fair market in the world.

The stocks at issue in the improper trading include some of the nation's biggest companies, including Bank One Corp., Eli Lilly and Co., Hewlett-Packard Co., Merrill Lynch & Co., Pfizer Inc., Time Warner Inc. and the Walt Disney Co., according to court papers.

The charges come at a time when investor confidence already has been eroded by years of accounting scandals and revelations of illegal mutual fund trading. The abuses operated within the heart of a system that was designed to protect the interests of investors and to ensure they receive the best price for their trades.

At the same time the indictments were announced, the Securities and Exchange Commission filed separate civil charges against the 15 traders and five others. The traders "showed a disregard for their legal duty that was both profound and at times, profane," said Mark K. Schonfeld, director of the SEC's Northeast regional office.

In some cases, these traders, known as specialists, made statements explicitly denigrating investor orders placed through the exchange's electronic trading system, known as the designated order turnaround system, or DOT. Unnamed specialists said, "Screw the DOTs," according to an SEC news release.

Most purchases and sales of securities on the NYSE go through a system in which specialists are assigned to monitor particular stocks. They are obliged to match customer orders with each other whenever possible and ensure that the trading system works smoothly to find the best prices for buyers and sellers, experts said. Trades in the stocks may be made only through the specialists, which is why their role is so critical.

Traders were accused yesterday of buying or selling stock for their own accounts at prices that were better than those they gave to existing public orders. That practice is known as "trading ahead," regulators said.

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