The specialists also were accused of using a trick in which they bought a customer "sell" order and then sold at a higher price into an opposite "buy" order from another customer, pocketing the difference. Such moves helped the traders lock in guaranteed profit at the expense of their customers.
The fraudulent practices enriched the specialist firms and resulted in higher salaries and bonuses for people who took part in the manipulation, U.S. Attorney Kelley said.
The SEC settled civil charges against the NYSE for failing to police and discipline the errant specialists. The exchange, which did not admit or deny wrongdoing, agreed to spend $20 million to beef up regulatory audits by hiring an independent reviewer. The exchange also said it would start an 18-month pilot program to provide video and audio surveillance of activity related to at least 20 stocks on the trading floor.
The SEC criticized the exchange's monitoring system, saying it was set up to uncover "only the most egregious instances of trading violations."
Richard G. Ketchum, the exchange's chief regulatory officer, said the NYSE has strengthened its enforcement unit and installed new technology to prevent improper trading since the investigation began in 2003. The regulatory unit now reports directly to the board of directors, rather than the NYSE chief executive, to help insulate it from pressure from traders and member firms.
"Specialist firms have changed, as have we," Ketchum said in a news release.
"It's highly unusual and somewhat shocking to see criminal activity on the floor of the New York Stock Exchange," said Jacob H. Zamansky, a securities lawyer who represents individuals suing Wall Street firms. "It also highlights that the NYSE seems incapable of supervising [traders]. It's a big setback for investor confidence."
U.S. Attorney Kelley pointed out that 14 of the people indicted yesterday at some point served as supervisors or managers at their respective firms -- Fleet Specialist Inc., now Banc of America Specialist Inc.; Bear Wagner Specialists LLC; LaBranche & Co.; Spear, Leeds & Kellogg Specialists LLC; and Van der Moolen Specialists USA. Most of the defendants, except for one authorities say is at large in the Netherlands, surrendered yesterday morning and were scheduled to appear in court for arraignments.
These firms and two others, SIG Specialists Inc. and Performance Specialist Group LLC , agreed to pay $247 million to settle related civil charges last year.
Indicted were David A. Finnerty, Donald R. Foley II, Scott G. Hunt and Thomas J. Murphy Jr. of Fleet; Frank A. Delaney IV and Kevin M. Fee of Bear Wagner; Freddy DeBoer of LaBranche; Robert A. Johnson Jr. at Spear, Leeds; and Patrick J. McGagh Jr., Joseph Bongiorno, Michael J. Hayward, Richard P. Volpe, Michael F. Stern, Gerard T. Hayes and Robert A. Scavone of Van der Moolen.
A defense lawyer for Finnerty, Frederick P. Hafetz, said that his client pleaded not guilty and that Finnerty "did nothing wrong." Other defense lawyers did not return calls or could not be reached for comment.
Columbia University law professor John C. Coffee Jr. said the criminal charges against specialists based on fundamental trading practices are unprecedented -- and a direct result of increased scrutiny by law enforcement authorities across the financial services industry.
"What prosecutors are recognizing is that across the financial field, the one weapon that seems to work, frightening as it is, is the criminal sanction," Coffee said.
The NYSE previously settled civil charges related to inadequate policing of independent floor brokers in 1999. Eight brokers connected to Oakford Corp. faced criminal charges for setting up secret accounts using phony documentation and illegally profiting from them in the late 1990s.
The investigation by federal prosecutors continues, according to spokeswoman Megan L. Gaffney.
Securities regulators also continue to probe the actions of individuals "who may have fallen down on the job and contributed to the failure that resulted in the case we bring today," SEC enforcement chief Stephen M. Cutler said.
