Pleas Sought in 'Squawk' Probe at Merrill

Two former employees are in talks with prosecutors.
Author:
Publish date:

Updated from 1:43 p.m. EDT

Federal prosecutors are negotiating plea agreements with two former

Merrill Lynch

(MER)

employees as part of the investigation into the illegal use of Wall Street "squawk box" systems to convey trading tips, people familiar with the inquiry say.

The former employees, broker Timothy O'Connell and compliance manager Benjamin Grimaldi, were both charged in April with trying to coerce O'Connell's former assistant in Merrill Lynch's Garden City, N.Y., branch to lie before a grand jury.

Prosecutors allege that O'Connell is one several Merrill Lynch brokers who permitted at least two daytrading firms to listen in to the big Wall Street firm's internal communications system, which is used by Merrill Lynch traders to disseminate information about big block trades by institutional customers, according to court filings.

In return for this access, the daytraders allegedly compensated O'Connell by making trades in a Merrill brokerage account and "generating substantial commissions" for the broker. Prosecutors in New York contend that the daytraders used the squawk boxes to gather trading tips in order to engage in front-running, an illegal practice in which a person buys or sells shares ahead of a trade he suspects will move a stock's price.

Federal authorities in the Eastern District of New York have not publicly identified the two daytrading firms, but

TheStreet.com

previouslyreported that they are

AB Watley

(ABWG)

and

Millennium Brokerage

, on the basis of interviews with people familiar with the investigation.

Lawyers for Grimaldi and O'Connell either did not return telephone calls or declined to comment. Assistant U.S. Attorney Michael Asaro declined to comment. A Merrill Lynch spokesman declined to comment.

On Wednesday, Asaro filed a motion with the court in Grimaldi's case, saying prosecutors intend to "file an information upon the defendant's waiver of indictment.'' Such a motion usually precedes a guilty plea.

A week ago, an attorney for O'Connell told a federal judge that the former broker is engaged in plea negotiations with prosecutors, according to a transcript of the proceeding. Patricia Northrop, the attorney, said she was "working with

prosecutors towards disposition before an indictment.''

Court filings indicate the plea negotiations with the former Merrill Lynch employees could be wrapped up by the middle of August. It couldn't be determined whether prosecutors are trying to secure Grimald's and O'Connell's cooperation as part of those plea agreements.

If they agree to a deal with prosecutors, Grimaldi and O'Connell would be first two employees to plead guilty in the ongoing squawk box probe.

John J. Amore, the former CEO of Watley who was indicted last summer on an unrelated securities offense, is believed to be cooperating with prosecutors. Amore allegedly negotiated the deals to get Watley traders access to Merrill Lynch's squawk box system, people familiar with the investigation say.

Prosecutors and regulators from the

Securities and Exchange Commission

also are looking at whether brokers from

Citigroup's

(C) - Get Report

Smith Barney and

Lehman Brothers

(LEH)

provided similar access to day trading firms and possibly several hedge funds, according to sources.

TheStreet.com

previously reported that the SEC has notified Kenneth Mahaffy, a former Merrill Lynch broker who later took a job at Smith Barney, that he could face civil charges in conjunction with the investigation. A person at Smith Barney says Mahaffy recently left the firm. Mahaffy could not be reached for comment.

Mahaffy and O'Connell worked together in the Merrill Lynch Garden City office as a team, before Mahaffy went to Smith Barney in February 2003.

In March, Smith Barney fired broker Ralph Casbarro for providing "inappropriate" squawk-box information, according to Casbarro's broker registration statement and conversations with sources. Last month, the SEC notified Casbarro that he too could face civil charges in the squawk box investigation, according to a copy of his broker registration statement.

Casbarro, who now works for

First Montauk Securities

, declined to comment. On his broker registration statement, Casbarro said providing squawk box access to others was a "common practice'' in the Manhattan office where he worked and that "management knew and gave blessing'' to it.

Last month, investigators from the SEC interviewed several people at Lehman's Park Avenue office in Manhattan in conjunction with the investigation, a source says. A Lehman spokeswoman declined to comment.

Prosecutors and regulators are trying to determine just how widespread the practice was. People familiar with the investigation say authorities believe a number of daytrading firms and hedge funds may have had similar arrangements with other brokers.

In fact, more than a hundred brokers at Merrill Lynch may have had access to the kind of "trading'' squawk box that O'Connell and Mahaffy allegedly used in their offices, according to a person familiar with the investigation.

O'Connell had more than a squawk box in his office. He also had a separate phone line installed that allegedly made it easier for him to provide access to the daytraders. Prosecutors contend O'Connell left the phone off the hook for the most of they day and placed it next to the squawk box speaker.

In December 2003, Merrill Lynch removed squawk boxes from offices where it believed the potential for abuse was too great. Merrill Lynch began the investigation after receiving an anonymous tip that some brokers were misusing the firm's squawk-box system. Around that same time, regulators from the

NASD

also notified Merrill Lynch that they discovered some day traders had been given access to the firm's squawk box system.