Updated from 11:38 a.m. EDT
Federal authorities arrested a
administrative branch manager in New York Monday as part of an expanding investigation into illegal Wall Street stock tips.
Benjamin Grimaldi, who was arrested on Saturday, was arraigned Monday afternoon on charges of witness tampering and instructing a person to lie to a federal grand jury after pleading not guilty. He was released after posting $250,000 bond and putting up his home as surety.
Grimaldi is the second person to be arrested from Merrill Lynch's Garden City, N.Y., branch office in conjunction with the so-called squawk box investigation. Grimaldi serves as the senior compliance officer for the branch office, which is one of Merrill's largest on Long Island.
previously reported, federal prosecutors on April 15 also filed witness tampering charges against former Merrill Lynch broker Timothy O'Connell. Prosecutors contend O'Connell used "intimidation" to encourage a witness to lie to a grand jury about the broker's alleged role in permitting daytraders to eavesdrop on Merrill's internal communications system.
The witness is identified in court papers as O'Connell's former brokerage assistant.
Prosecutors from the Eastern District of New York allege that O'Connell enabled traders at two daytrading shops to eavesdrop on Merrill's internal squawk box communication system by leaving a phone off the hook for the entire day. In return, the daytraders compensated O'Connell by making trades in a Merrill brokerage account and "generating substantial commissions" for the broker.
Now prosecutors allege that Grimaldi took part in that same effort to pressure the brokerage assistant to lie about O'Connell's alleged role in the affair, according to a copy of the 16-page criminal complaint lodged against him. The complaint alleges that Grimaldi was aware of some of O'Connell's activities.
Grimaldi's attorney, Frank Geoly, declined to comment, following the arraignment in federal court in New York City. A person who answered the phone at Grimaldi's office early Monday said she was unaware of the arrest.
At the arraignment, Assistant US Attorney Sean Casey said Grimaldi was part of a "conspiracy'' to engage in witness tampering and to "coach'' a witness. He said it was an unusual action for a person who is supposed to be Merrill Lynch's "internal beat cop."
"We have no comment on the allegations filed against Mr. Grimaldi, other than to say that the firm expects its employees to cooperate with government investigations, not impede them," said Merrill Lynch spokesman Mark Herr. "Merrill Lynch policies prohibit front running, or doing anything to aid front running, and if anyone used confidential information to do so, they not only violated our policies, but stole Merrill Lynch property. We are reviewing the matter and will take appropriate action."
Prosecutors contend O'Connell and "certain stock brokers" in Merrill's Garden City branch office provided the daytrading firms with access to Merrill's squawk box communications from January 2002 through October 2003.
The identities of the daytrading firms O'Connell allegedly had deals with were not disclosed by prosecutors. But one of the daytrading firms believed to have had an arrangement with O'Connell is
Sources familiar with Watley say the brokerage offered elite daytraders access to squawk box communications from Merrill,
Smith Barney brokerage group. Former Watley CEO John Amore, indicted last summer by federal prosecutors on an unrelated securities offense, is believed to be cooperating with the investigation.
reported that a person familiar with Watley's operation says the firm worked with at least two Smith Barney brokers to gain access to the big brokerage's squawk box system. The source did not know the names of the brokers. A Smith Barney spokeswoman declined to comment, but noted the firm's policy is to cooperate with all investigations.
Block trades, or single trades of 10,000 or more shares, usually cause price fluctuations in the underlying stock. Advance knowledge of such a trade would be a major advantage to a market participant who was willing to buy or sell shares beforehand.
Meanwhile, a person familiar with the investigation says at least one former Lehman broker is drawing scrutiny from investigators over similar allegations. A Lehman spokeswoman declined to comment.
There are indications that the squawk box scandal may extend beyond Watley and the other unnamed daytrading shop.
A former Lehman broker says that when he worked at the Wall Street firm, he knew of several brokers who permitted traders to listen to the firm's squawk box communications. The broker declined to identify his former colleagues. A Lehman spokeswoman declined to comment.
Securities and Exchange Commission
and the U.S. Postal Inspection Service is also involved in the investigation.