A federal judge has ordered New York Stock Exchange Chairman Richard Grasso and President William Johnston to testify under oath about what they knew of years of illegal trading by brokers on the floor of the exchange.
The two executives will be called in coming weeks by attorneys for a former floor broker, John D'Alessio, who is being charged with violating securities laws. D'Alessio claims that the exchange not only knew of and allowed, but actually encouraged, the illegal self-trading by floor brokers. The decision was made last week by U.S. District Court Judge Jed Rakoff, of the
Southern District of New York
, who said Grasso and Johnson had to give as much as 3 1/2 hours of testimony each to D'Alessio's lawyers.
The exchange's lawyers have fought for months to keep Grasso and Johnson from testifying in the case.
But D'Alessio's attorneys have pressed for the testimony as part of their client's defense against securities charges he's facing from the
Securities and Exchange Commission
"The court is skeptical that many of the areas defendants seek to explore with these witnesses will be found in the end to be within the personal knowledge of Messrs. Grasso and Johnston," Rakoff said in his order. "Nonetheless, the court will allow defendants' counsel free to inquire of these witnesses as to any of the subjects as to which such leave as was sought in the defendants' motion."
D'Alessio's chief counsel, New York lawyer Dominic Amorosa, called the order a significant development in the longstanding case. "I intend to ask them whether they were aware that the floor-broker activity, including the sharing of profits, was approved by the exchange," Amorosa said.
Barry Raskover, associate regional director of the SEC's New York regional office and a lawyer handling the case against D'Alessio, declined to comment on Rakoff's order Thursday. The New York Stock Exchange also declined to comment.
D'Alessio was among 10 floor brokers who were arrested in 1998 and criminally charged with illegal floor trading. The other brokers agreed to plea bargains, while criminal charges were dropped against D'Alessio.
However, the SEC proceeded to charge D'Alessio with civil securities law violations.
Late last year, D'Alessio sued the NYSE seeking $22.5 million. He claimed the NYSE was aware of the floor brokers' "flipping" -- a practice in which traders took advantage of the spread between the
ask prices for a security by making multiple, rapid personal trades in the stock and taking profits. Amorosa argued that the exchange encouraged the practice because it, too, profited from those trades.
Rakoff dismissed that suit in July, ruling that the NYSE is immune to such legal challenges because of its status as a quasi-governmental body that enforces its own members.