Former Broker Sues Big Board Over Floor Compliance

The floor broker claims the NYSE knew of and profited from the illegal activity.
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A former

New York Stock Exchange

floor broker is suing the exchange, claiming high-ranking officials knew of illegal trading and profit-sharing activities, according to a $22.5 million lawsuit filed Tuesday in New York County Supreme Court.

The floor broker, John D'Alessio, charges in his suit that Big Board officials knew hundreds of floor brokers were trading illegally and sharing the profits in millions of trades the floor brokers made on customer accounts. The suit also alleges that exchange officials condoned the practice for years and lied to prosecutors about it.

D'Alessio was arrested in 1998 for taking part in such profiting, but in May 1999, federal prosecutors dropped the charges against him. D'Alessio, according to his attorney, lost his broker job and was forced to sell his seat on the exchange last year as a result of the prosecution.

"My client has gone through hell here for two years because of what these people did to him," says Dominic Amorosa, D'Alessio's attorney. "He wants recourse. He wants money."

The suit comes as six other floor brokers, who have pleaded guilty to federal charges related to the profit-sharing arrangements, await sentencing.

D'Alessio's charges keep the 3-year-old floor-broker controversy simmering as the Big Board continues on its path to becoming a publicly traded entity sometime next year. The

Securities and Exchange Commission

and other critics have questioned the ability of the exchange to police its own members as a for-profit entity. Currently, the exchange is member-owned.

These kinds of allegations and the discovery process that goes along with the suit could tarnish the Big Board and some of its practices. "The New York Stock Exchange has a long history of being blind to fraudulent activity and being blind to enforcement of its own rules," says Robert Parks, a professor of finance at

Pace University's Lubin School of Business

. "The floor-broker situation will inevitably lead to additional questions being asked" about the NYSE's ability to police itself.

"The New York Stock Exchange could go public, but there would have to be increased regulation and control," he says.

Along with the Big Board, the suit names Richard Grasso, the NYSE's chairman, Edward Kwalwasser, the exchange's top regulatory official, and Robert McSweeney, the exchange's senior vice president, as defendants.

A Big Board spokesman declined Tuesday to comment on the lawsuit.

The issue centers on a practice known as "flipping," in which floor brokers would take advantage of the difference between the bid and offer price for a security by making a series of rapid trades on the stock and making personal profits in the process.

The practice was widespread and well known at the exchange, according to statements filed in the pending criminal cases.

The judge in the federal case, U.S. District Court Judge Jed Rakoff, said in an opinion Monday that the exchange encouraged floor brokers to "push the envelope" by allowing them to earn commissions equal to 50% of profits on the trades.

In Tuesday's lawsuit in state court, D'Alessio argues the NYSE was aware of the floor-broker profit-sharing, and approved it, dating back to 1991.

Brokers flipped millions of shares for profits every day, and in one case, a single broker flipped 169,400 shares of one stock, the suit claims.

D'Alessio charges that top NYSE officials falsely told federal prosecutors they were unaware of the practice when the U.S. Attorney's Office for the Southern District of New York began a criminal investigation of the floor-broker activity in 1997.

The U.S. Attorney's Office refused to comment on the suit's allegations Tuesday.

Not only did NYSE officials know the flipping occurred and that it was illegal, but the exchange also profited from the arrangement by taking a percentage of the brokers' commissions, D'Alessio charges. Other firms, such as clearing houses, also profited through the trades, his suit says.

D'Alessio has spent $250,000 in legal fees defending himself in the floor-broker case, and lost $1 million in income when he lost his job and another $1 million when he sold his exchange seat in 1998, according to Amorosa.

In addition to those alleged costs, the suit seeks $20 million in punitive damages.