The Securities and Exchange Commission and the U.S. attorney's office in Manhattan are asking new questions about how much senior New York Stock Exchange officials might have known about or enabled illegal trading by dozens of floor brokers at the exchange in the 1990s.
At least one NYSE official was questioned late last month, more than a year after the SEC reprimanded the NYSE in a settlement agreement in which the SEC was highly critical of the exchange's role in overseeing the activities of brokers on its trading floor.
Exchange officials did not admit to wrongdoing in the 1999 settlement, but in 1998 and 1999 several brokers pleaded guilty and some were later jailed for a practice known as flipping, in which they made rapid stock trades at prices between the quoted sale and buy prices and pocketed money for themselves in the process.
The SEC and U.S. attorney's Office began questioning the exchange anew last month after the exchange suddenly produced documents about the floor trading that the SEC had sought two years ago.
In addition, one of the brokers that the SEC has continued to pursue is fighting back, arguing that top exchange officials approved of and even encouraged the practice because it was good for business, and concealed evidence from the SEC.
In a deposition by attorneys for that former floor trader, John D'Alessio, NYSE market surveillance rule development director Donald Siemer acknowledged participating in several meetings about the flipping issue and taking handwritten notes about them, one of which said "Do not tell the SEC" and another with the notation "nothing in writing." The notes and other documents were among those that recently surfaced and were handed over to the SEC and D'Alessio's attorneys.
In his Jan. 23 deposition, Siemer said he could not recall what he had done with the notes after he wrote them, when he last saw them or many details about what they meant. He said the SEC questioned him about his handwritten notes on Jan. 17, and the U.S. attorney's office questioned him about other documents concerning the trading at the NYSE.
The SEC and the U.S. attorney's office declined to comment on their questioning of Siemer or on the documents the NYSE recently produced. The NYSE would only say that it discovered the documents recently and turned them over to the SEC. Siemer didn't respond to several requests for an interview.
But Dominic Amorosa, an attorney suing the NYSE on behalf D'Alessio, said in a letter to the exchange this week that the documents provide new evidence that the exchange not only knew of, but encouraged illegal trading on its floor. That the documents only surfaced recently is further proof of that, he wrote.
"They were suppressed for the obvious reason that they show that senior officials of the NYSE were involved in illegal conduct concerning their approval of flipping for a share of profits," Amorosa wrote to the exchange this week. "Senior officials of the NYSE were well aware that the flipping they permitted on the floor was illegal and wanted to conceal details of it from the SEC."
Amorosa is asking the NYSE to reinstate D'Alessio's trading privileges, which the exchange revoked as a result of the flipping allegations.
D'Alessio is among the various brokers and brokerage executives the SEC filed a civil suit against last year involving flipping. D'Alessio sued the NYSE and three of its officers in 1999, alleging that exchange officials condoned and encouraged the illegal trading and that the NYSE also profited from it by collecting fees on the trades. The case was dismissed last year and D'Alessio has appealed.
Amorosa said in a court hearing last month that the recently produced documents provide new information about the NYSE's role in the illegal trading. Amorosa contends that the NYSE allowed the practice to continue and encouraged it. The SEC's counsel agreed during the hearing that the documents were relevant to Amorosa's defense in SEC's civil suit.
During the January deposition, D'Alessio's lawyers asked Siemer to explain numerous notes and other documents pertaining to meetings NYSE officials had in the early 1990s about the stock flipping practice at the exchange. Those meetings and other discussions at the exchange on the issue involved such high-ranking NYSE officers as Senior Vice President of Market Surveillance Robert McSweeney and Edward Kwalwasser, the group vice president in charge of the NYSE's regulatory group, according to Siemer's testimony.
The documents appear to describe discussions top NYSE officials had about whether the flipping practice was legal, or should be stopped, according to Siemer's testimony.
Siemer, in the deposition, acknowledged that in many cases the notes were in his own handwriting, but said he couldn't remember them or other details of the meetings they described.
In a separate deposition taken from NYSE Chairman Richard Grasso in November by Amorosa in the SEC civil suit against D'Alessio, Grasso said he
the illegal trading was occurring on the exchange floor at the time it did.
The exchange, in a court hearing last month and in an interview, said it only recently discovered the new documents. "We discovered the documents and promptly produced them to the SEC," NYSE spokesman Ray Pellecchia said. He refused to discuss them further or release them publicly.
The SEC wouldn't comment on the amount of time it took the NYSE to produce the documents. Amorosa argued in court that the exchange should have provided him these documents months ago. At the recent court hearing, the NYSE's lawyer disagreed.
The SEC originally asked for the NYSE documents in 1998 as part of its flipping investigation. Amid the investigation, the exchange asked the SEC for guidance on flipping. The SEC responded in a letter in August of that year saying that flipping was illegal when the trader took a share of the profits from the trades. The SEC has maintained that traders who engaged in the practice even before that 1998 letter was written broke the law. The floor brokers who went to prison made the trades between 1993 and 1998.
After receiving the letter, the NYSE adopted new rules regulating floor trading, and issued to brokers a memo stating that the type of trading that had occurred was prohibited. Floor brokers, agents who execute stock transactions on the
floor of the exchange
, have a distinct advantage over public investors in their knowledge of market movements, according to the SEC's settlement with the NYSE, and hence are regulated.
The SEC also found that: "The NYSE, without reasonable justification or excuse, failed to enforce compliance" with federal securities laws governing floor trading. "Between approximately 1993 and early 1998, groups of independent floor brokers violated Section 11(a), Rule 11a-1, and NYSE Rules 90, 95, and 111, by engaging in illegal schemes of trading on the NYSE floor while sharing in the profits or losses generated from those trades. The NYSE failed for several years to uncover and halt these illegal schemes," the SEC's findings read.
As part of the settlement, the NYSE consented to the entry of findings by the SEC, and neither admitted nor denied its findings, which is typical for such agreements with the SEC. No NYSE officials were charged with wrongdoing in the investigation.