AB Watley Questioned in SEC's 'Squawk' Probe

The small daytrading firm was subpoenaed and more interviews are scheduled.
By Matthew Goldstein ,

Daytrading firm

AB Watley

(ABWG.OB)

is one of several small brokerages that federal authorities are questioning in their probe of illegal trading tips on Wall Street, people familiar with the inquiry say.

Regulators with the

Securities and Exchange Commission

have subpoenaed documents from the New York-based brokerage and taken testimony from several executives and former traders, and more interviews are scheduled for next week, sources say.

The inquiries at Watley are part of a joint investigation by the SEC and federal prosecutors in Brooklyn into allegations that stock daytrading firms paid brokers for the privilege of listening in on confidential communications at several big Wall Street firms.

As

reported earlier this week by

TheStreet.com

, authorities are looking into allegations that brokers gave hedge funds, daytraders and small, trading-oriented brokerages unauthorized access to internal "squawk box" calls to gather trading advantages, in particular, information about big block trades. The investigation began last summer and is focusing on allegations of either cash payments or agreements to route trades to the brokers.

A block trade is generally a single trade of 10,000 or more shares. Getting a tip about one can be advantageous to traders trying to cash in on sudden price movement in a stock. That's especially the case when it involves a small-cap stock with few shares outstanding.

A person familiar with the inquiry said

Lehman Brothers

(LEH)

was one of the Wall Street firms contacted by the SEC in conjunction with the Watley investigation. A Lehman spokeswoman, however, said she had no knowledge of any investigation.

Meanwhile, officials with Watley, which at one time was the forefront of the daytrading movement before falling on hard times, did not return several telephone calls.

But in a regulatory filing last December, the company reported that it had received subpoenas in conjunction with an SEC investigation of "trading activities that may have occurred on our premises." The company said the "exact scope of the SEC investigation is uncertain."

The filing said Watley's vice chairman, Robert Malin, and others were expected to provide testimony to regulators sometime early this year. The company said its chief compliance officer, Linus Nwaigwe, had already testified. Malin declined to comment on the investigation. Nwaigwe did not return a telephone call.

Up until a year ago, Watley maintained a proprietary daytrading operation that had agreements with a cadre of fast-fingered traders who conducted business for both their own accounts and the firm's. People familiar with Watley said traders in the proprietary operation had access, at times, to squawk box communications coming from several brokerage houses.

Authorities believe Watley and other daytrading firms struck deals with individual brokers to permit them to listen to communications being broadcast internally over a brokerage's squawk-box speaker system. Subscribers to Watley's better-known retail daytrading operation did not have access to the squawk box communications.

A squawk box is part of a network used by brokerage houses to permit direct communications between research analysts, traders and brokers. The communications generally come through a desktop speaker system.

Sources say brokers allowed traders to listen in on these conversations, which can occur throughout the day, by simply leaving a telephone off the hook and placing the receiver next to the speaker.

Bill Singer, a New York securities lawyer and former

NASD

enforcement attorney who has represented a number of large daytrading firms, said that two or three years ago it was not uncommon for daytrading operations to tout their access to brokerage squawk box calls as an inducement to sign up traders.

Even today, it's not uncommon for many daytrading shops to broadcast live squawk box feeds coming from the trading floors of the commodity pits and exchanges that trade futures. In fact, the New York Mercantile Exchange, for a fee, will permit anyone to listen in to squawk box communications from the natural gas or crude oil trading pits.

Traders say these squawk box communications can be helpful in picking up information about fast-changing trends in commodity prices.

But getting a chance to listen into the squawk box communications of a major brokerage house is something completely different because most of the conversations are about stocks. It's not uncommon for specific information about large block trades to be broadcast across the network.

Several Wall Street firms contacted by

TheStreet.com

said they weren't aware of the inquiry, according to the firms' spokespeople. But sources said a number of large firms have been contacted by the authorities over the past few months.

An SEC spokesman declined to comment. Also not commenting was the spokesman for Roslynn Mauskopf, the U.S. attorney for the Eastern District of New York, which encompasses Brooklyn, Queens and Long Island.

People familiar with the inquiry suggest that authorities may be close to bringing an enforcement action in the squawk box investigation.

On Wednesday, federal prosecutors and the SEC filed criminal and civil charges against a former

New York Stock Exchange

floor clerk in a case that has many similarities to the ongoing squawk box investigation.

In that case,

federal prosecutors charged Frank Furino with facilitating an illegal "front-running" scheme by passing confidential trading information about stocks to a daytrader accomplice. The plot generated more than $300,000 in illegal profits from trades placed from August 2001 through December 2001.

The 10-count indictment and SEC civil complaint charges that Furino provided information about "large orders to purchase and sell securities" to an unindicted co-conspirator with a brokerage account at Andover Brokerage, a daytrading firm that at one time was based in Great Neck, N.Y.

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