New York Stock Exchange
officials will have to take the stand in federal court and testify about what they knew of, and did about, years of illegal trading on the
floor in the 1990s, according to a ruling handed down Thursday.
U.S. District Court
Judge Jed Rakoff authorized New York defense attorney Dominic Amorosa to call the exchange officials to testify during part of a trial involving the floor trading that's scheduled to start next week in U.S. District Court for the
Southern District of New York
Amorosa's client is John D'Alessio, a former NYSE floor broker fighting a civil charge related to the trading. Amorosa claims the NYSE not only was aware of, but also encouraged the trading by dozens of floor brokers because the exchange profited from it. As a result, Amorosa has argued, D'Alessio shouldn't be sanctioned for taking part in the trading, which led to jail sentences for some traders.
Rakoff questioned the validity of Amorosa's argument. "I think the defendant's showing with respect to that defense is rather thin, and his showing of the stock exchange's alleged motivation for taking the positions it took is thinner still," Rakoff said. But the judge nonetheless said Amorosa could call three NYSE executives during the penalty portion of D'Alessio's trial, which won't take place before the jury considering the fraud charge.
The judge's decision was a defeat for the NYSE, which once had hoped the trading scandal was behind it. Instead, it's reliving the embarrassing issue thanks to this case. Earlier this year, the
Securities and Exchange Commission
and the U.S. attorney's office in Manhattan
asked new questions about how much senior NYSE officials might have known about or enabled the illegal trading. And now Amorosa, who already has deposed some top NYSE officials including Chairman Richard Grasso, has a forum to publicly grill the exchange.
The NYSE declined to comment on Rakoff's decision.
Amorosa said he was "pleased that we're going to have an opportunity to show what the facts were."
The floor trading case centers on a scandal that emerged in 1998 when federal prosecutors arrested 10 NYSE independent floor brokers and brokerage officials, charging them with violating federal securities laws by taking a share in the profits from trades they executed on the exchange floor. The brokers involved engaged in a technique known as "flipping" in which they made a rapid series of trades between the quoted offer and sale prices on securities, making money in the process.
The SEC charged the same brokers with civil violations of the securities laws for the trading. The SEC also began an investigation of the exchange itself, which ended in 1999 with a critically worded settlement that said the exchange failed to carry out its oversight responsibilities in allowing the illegal trading to occur. The U.S. attorney's office in Manhattan eventually dropped the criminal charges against D'Alessio. All of the other defendants pleaded guilty to crimes and received varying sentences, including prison terms in some instances.
But the SEC continued pressing the civil charges against D'Alessio, although it recently dropped all but one fraud count. The SEC now is charging that D'Alessio failed to inform his clients that he was taking a share of the profits on trades he made for them. That charge will be the core of the trial set to begin next week.
Robert Knuts, the lawyer handling the SEC's case, said in pressing its fraud charge the agency will show D'Alessio ignored requirements to properly record trades he was making. "This is a guy who literally didn't care whether he was following the law," Knuts said during Thursday's hearing. "This is a very reckless person."
Amorosa said it's significant that the SEC has dropped all charges against D'Alessio except the one fraud count. "The SEC will not contend at trial that Mr. D'Alessio was acting improperly with respect to profit sharing," Amorosa said. He added that he'll call other floor brokers to the stand to testify about how widespread the practice of flipping for self profit was at the NYSE in the 1990s.
Part of Amorosa's case rests on documents the NYSE recently turned over to the SEC concerning the floor trading. Those included handwritten notes from exchange officials who studied the flipping practice in the early 1990s. One of the notes says, "Do not tell the SEC." Another says: "Nothing in writing." The notes, Amorosa contends, demonstrate the NYSE was attempting to cover up the flipping practice and its knowledge of it.
Waiting for the Lineup
Amorosa said he hadn't yet decided which exchange officials he'll call to the stand, although he said it will include Brian McNamara, vice president of regulatory development and market evaluation for the NYSE's Market Surveillance Division.
The NYSE, meantime, has continued its own efforts against D'Alessio. On Wednesday, the exchange announced that its board affirmed the prior decision of a hearing panel that concluded D'Alessio violated securities rules and barred him permanently from the exchange floor. The NYSE, as a self-regulatory organization, also polices the activities of its members and floor brokers and has authority to sanction them for violations. D'Alessio has appealed that decision to the SEC.