New York Stock Exchange officials looked the other way while at least 64 floor brokers made millions of dollars illegally trading stocks, according to a settlement reached today between the world's biggest stock market and the Securities and Exchange Commission.
The exchange "failed to detect and halt illegal schemes" in which groups of independent brokers on the floor sold stocks for a share of the profits, the SEC said. For two years, the Big Board, which as a self-regulatory organization has a duty to police its members, suspended routine surveillance, allowing illegal trading that culminated recently in the guilty pleas of nine brokers.
The settlement of the administrative proceeding marks the first time the Big Board has been cited for regulatory shortcomings. Though the exchange was not censured or fined, the deal revealed shortcomings in how it fulfills its responsibility to oversee how its traders' handling of the billions of dollars in stock transactions made each day through the exchange.
The NYSE has about 500 independent floor brokers, who buy and sell stocks for institutional investors and other large clients. Because they have access to sensitive financial information -- such as impeding big trades -- they are not allowed to trade for themselves. While the trading by itself may not have been large enough to affect stock prices, the SEC suggested it compromised the exchange's implied contract with investors.
The move comes as more small investors strike into the market alone, becoming open targets for fraud and abuse. "Now, more than ever," said Richard Walker, the SEC's director of enforcement, "the investing public needs to count on a strong partnership among self-regulatory organizations and the government in enforcing the law."
While neither admitting nor denying wrongdoing, the exchange has agreed to overhaul its system for regulating brokers. It will, for example, permanently place regulatory staff on the floor and examine brokers every two years. It will also toughen audit procedures, review its rules with an independent consultant and verse brokers on the law.
NYSE Chairman Richard Grasso said many of these steps began 16 months ago, when the SEC investigation began. "Our commitment is to assure fairness and honesty in the market," he said. "We have zero tolerance for any member who does not fully comply with NYSE and SEC rules and regulations."
The SEC said the Big Board has been aware of the rule prohibiting brokers from trading for themselves since at least 1991. Still, from 1993 to 1998 brokers were rampantly buying and selling stocks and secretly splitting profits with firms that handled their trades. To cover up, many falsified trading tickets.
The SEC said the Big Board conducted few routine surveillances and rarely inspected records. The Big Board even suspended its routine independent floor-broker surveillance for extended periods, the SEC said. The longest lapse was from 1995 to 1997.
"Although the NYSE continued to investigate tips and complaints about floor brokers during these periods of suspension," the SEC settlement said, "the NYSE should have devoted sufficient resources to conduct surveillances and investigations simultaneously."
According to federal prosecutors, more than 64 brokers were involved in this activity. They are still investigating individual cases, with the help of NYSE. In one case, floor brokers received $11.1 million in illegal profits by trading through a non-NYSE member, the Oakford Corp.
To date, nine of these Oakford floor brokers have pleaded guilty to criminal charges and three have settled civil charges brought by the SEC. But some brokers contend they did not realize they were breaking the law, because the activity was so routine. It was that defense that persuaded Federal prosecutors recently to defer the case of John D'Alessio, a floor broker, and throw it out in six months if he does not break the law.
"What occurred here is not a failure to supervise," said D'Alessio's attorney Dominic Amorosa. "What occurred at the NYSE was the actual encouragement of people to do this. The more shares transacted on the NYSE, the more money the NYSE made. And the more opportunity for Mr. Grasso and his lieutenants to go on TV and say today we traded 1 billion shares."
CAPTION: Traders at the New York Stock Exchange yesterday. The exchange has agreed to put regulatory staff on the floor and examine brokers every two years.