New York Stock Exchange Chairman Richard Grasso maintains in a new deposition that he knew nothing of years of illegal trading for personal profit by brokers on the exchange's floor.
Grasso, who was the exchange's president when much of the trading occurred, said he couldn't recall having seen memos addressed to him that touched on the legality of the practice in the early 1990s, or having discussed it with other top exchange officials. In the sworn statement, Grasso also said he couldn't recall seeing a memo that suggested the exchange discuss the self-trading with brokers in personal meetings rather than in writing to avoid "unwarranted media attention" to the practice.
Grasso made the comments in a Nov. 29 deposition in the case of a former floor broker who has been charged by the
Securities and Exchange Commission
with violating federal securities laws by trading for his own profit on the NYSE floor. Lawyers for that former broker, John D'Alessio, have argued that he shouldn't be sanctioned for personal trading on the exchange floor because such self-trading was not only condoned but was encouraged by the NYSE.
Dominic Amorosa, a New York lawyer defending D'Alessio from the SEC charges,
won approval from a federal court judge in Manhattan to question both Grasso and current NYSE President William Johnston under oath about the floor trading practices at the Big Board.
Grasso and Amorosa both declined to comment on the deposition.
But a transcript of that deposition shows that much of Amorosa's questioning of Grasso centered on whether Grasso believed it was appropriate for floor brokers to be compensated based on the profitability of their trades, or, in other words, to share in the profits. This is at the heart of the floor-trading scandal, in which 10 former brokers and executives of a broker-dealer firm were arrested in February 1998 and charged with trading for personal gain. The practice, known as "flipping," involved the floor brokers making a series of rapid trades between the spreads on securities -- that is, between the sale price offered and the purchase price bid on the stocks -- and reaping a profit in the process.
Most of those arrested pleaded guilty to various charges and were sentenced to prison terms of as much as 20 months and fines of up to $100,000 earlier this year. The
U.S. Attorney's Office
in Manhattan dropped the criminal charges against D'Alessio, but the SEC is continuing to press securities charges against him. The SEC, in a 1998 letter from Richard Lindsay, former director of the agency's division of market regulation, ruled that such flipping is illegal.
But immediately after the arrests of the floor brokers that year, Grasso, who was by then chairman of the NYSE, signed a lengthy letter to the SEC explaining the exchange's position on the trading.
"It is not uncommon in the securities industry for compensation arrangements, whether for floor brokerage, 'upstairs trading,' investment banking or investment advisory services, to include aspects of 'pay performance' whereby financial remuneration may be tied to the profitability of trading," the letter said. The letter states it was the "securities industry's and the exchange's understanding that compensation based on the profitability of trading did not, in and of itself, create an ownership interest in an account," and hence was not illegal in that sense.
Just What Do You Mean?
Amorosa, during the deposition, asked Grasso repeatedly to explain what he meant by those passages in the letter. Grasso noted that NYSE staff officials and lawyers wrote the letter, although he said he did read and sign it. "The sentence is very broad," Grasso said. "It is a very abstract statement. It does not attempt to specifically identify a particular professional category and tie any of these descriptors to that category."
But Amorosa pressed for what he considered a more definitive answer. And at times the exchange during that line of questioning became heated.
"This is now becoming quite offensive," Grasso's attorney, New York securities lawyer Harvey Pitt, interjected.
"Mr. Grasso, unfortunately, I don't view that as an answer to my question, and I don't want to have to put us all through a proceeding before the court," Amorosa responded.
Said Pitt, "I think this is an enormous waste of time. Threatening proceedings before the judge isn't going to intimidate anybody."
Amorosa asked Grasso if he agreed with a statement the NYSE's executive vice president for regulation, Edward Kwalwasser, made during a court hearing about floor trading. Kwalwasser had said personal trading by the floor brokers wasn't illegal.
"Now I'm asking you, as the chairman of the New York Stock Exchange for a number of years, whether Mr. Kwalwasser's view is consistent with your view about whether these types of transactions violate the law?" Amorosa said.
"Since Mr. Kwalwasser is the head of our regulatory group, I would defer to him as to whether they do or they don't," Grasso said.