First Arrest in 'Squawk' Probe

A former Merrill Lynch(MER) broker was arrested last week in conjunction with a federal investigation into allegations that daytraders were permitted to eavesdrop on the internal communication systems of some of Wall Street's biggest brokerages.

The arrest is the first directly tied to the so-called squawk box investigation being conducted by federal prosecutors in New York and the Securities and Exchange Commission. Federal authorities confirmed the arrest, the details of which were revealed in a copy of the criminal complaint obtained by TheStreet.com

Federal prosecutors last Friday charged Timothy O'Connell, who had worked in Merrill's Garden City, N.Y., branch office up until February, with using "intimidation" to threaten and encourage a witness to lie to a federal grand jury about O'Connell's alleged role in the affair. The witness is identified in court papers as O'Connell's former broker assistant.

O'Connell was arraigned on the charges and released after posting $500,000 bail. His attorney Lee Richards could not be reached for comment.

A Merrill Lynch spokesman had no comment.

To date, prosecutors in the Eastern District of New York and the SEC have not officially commented on the squawk box investigation, which was first reported last month by TheStreet.com. But the 14-page criminal complaint in the case against O'Connell reveals some of the scope of the inquiry.

The complaint says that the investigation began last May and is being aided by two cooperating witnesses, who are former employees of separate daytrading shops. The former daytraders have told authorities that O'Connell permitted daytraders to listen in on the squawk box communications in order to gather information about large block trades.

The informants claim O'Connell enabled the daytraders to eavesdrop on the internal communications "through a telephone line that remained open between the Garden City branch and the daytrading firms throughout the course of the trading day." In return, the daytraders compensated O'Connell by making trades in a Merrill brokerage account and "generating substantial commissions" for the broker.