Judge Orders Unsealed Depositions of Top NYSE Officials in Trading Scandal Suit

A federal judge in Manhattan Tuesday ordered the unsealing of testimony from top New York Stock Exchange officials about illegal trading on the exchange's floor and interactions between the NYSE and the Securities and Exchange Commission.

Over objections from the exchange, U.S. District Court Judge Jed Rakoff reversed a ruling he had made in January that had sealed portions of depositions given by NYSE President William Johnston and Edward Kwalwasser, the group vice president in charge of the NYSE's regulatory group.

Rakoff's decision came in response to a motion TheStreet.com filed seeking to make public the sealed deposition testimony and other documents produced in an ongoing case involving trading at the NYSE.

The issue stems from an investigation by the SEC and U.S. Attorney's Office in the late 1990s of a type of trading by NYSE floor brokers known as "flipping," which involves rapidly buying and selling shares of stock at prices between the quoted sale and purchase prices for the security. The SEC has said the practice is illegal when traders take a share of the profits. In 1998, 10 traders and brokerage officials were arrested and charged with securities law violations for that type of flipping. Many of the traders pleaded guilty and several served prison terms.

Settlement

The SEC also investigated the exchange's role in the illegal trading. That investigation ended in 1999 when the SEC and the NYSE agreed to a settlement that was sharply critical of the exchange's oversight of trading on its floor.

Meanwhile, the SEC continued to press a civil case against floor trader John D'Alessio, who had the criminal charges against him dropped. And it was in his case that questions arose anew about the NYSE's role in the trading. Earlier this year the NYSE produced new documents in the case, documents the SEC had originally sought two years earlier.

TheStreet.com filed its motion for the release of the documents last month.

"Here we have a case of inordinate public importance. ... The fundamental basis for access to these records is a compelling one,'' Robert Raskopf, a lawyer with the firm White & Case representing TheStreet.com, said during Tuesday's hearing. ''This case involves charges and counter-charges about government agencies. ... It's how government operates."

Important Information

Rakoff said that while the sealed testimony may be damaging to the reputation of the NYSE official who provided it, the testimony provides important information about the interaction between the SEC and the stock exchange. The testimony should be made public because of "the strong public interest in the scrutiny of the interelations between a government agency and a quasi-government agency," he said. The SEC is the nation's top securities regulatory agency. The NYSE is considered quasi-governmental because it's a self-regulatory agency with authority from Congress to police its own members and trading floor.

Rakoff gave the NYSE and SEC 48 hours to appeal his decision. The NYSE indicated that it would appeal, but the SEC didn't say whether it would.

The NYSE, which has sought to keep portions of the testimony under seal, argued Tuesday that those parts of the top exchange officials' statements were irrelevant to the pending case against D'Alessio.

"Discovery in this case does not exist to assist the media in exploring matters of public interest," Debra Torres, a lawyer with the New York firm Fried Frank Harris Shriver & Jacobsen, which is representing the NYSE, told Rakoff.

The NYSE declined to comment on Rakoff's ruling.

D'Alessio's attorney, New York lawyer Dominic Amorosa, has argued that D'Alessio shouldn't be sanctioned by the SEC because the NYSE not only knew of the illegal trading on its exchange floor, but also encouraged the practice because it too profited from the arrangement. NYSE Chairman Richard Grasso said in a sworn statement in the D'Alessio case late last year that he hadn't not been aware of the illegal trading at the time it occurred.

Objection

The SEC hasn't taken a position on the sealing of the NYSE officials' testimony in the D'Alessio case, said Robert Knuts, a lawyer with the agency. But Knuts on Tuesday objected to an effort by TheStreet.com to have all papers in the case filed publicly, as opposed to simply exchanged between the parties in the case, as has been done with many documents thus far. ''I don't want to file every single document with the court,'' Knuts said. Rakoff denied TheStreet.com's effort on that front.

Knuts also argued the focus of the case should be limited to D'Alessio. "It is not supposed to turn into a trial of the New York Stock Exchange," Knuts said.

Rakoff said the NYSE officials' depositions touch on "the degree to which the SEC interrelates with the stock exchange with respect to the underlying issues" of the floor trading controversy.

Rakoff also ruled, in response to TheStreet.com's motion, that he would personally review numerous documents that the parties in the case, including lawyers for D'Alessio, the SEC and the NYSE, have exchanged among themselves, but which thus far haven't been made public. Rakoff denied TheStreet.com's request that all those documents be released immediately.