SG Cowen

and

Lehman Brothers

(LEH)

will pay fines totaling $7.5 million to the

Securities and Exchange Commission

and the

New York Stock Exchange

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for failing to watch over a former broker who stole millions of dollars from clients while employed at different times at the two firms.

A statement from the SEC said the firms failed to supervise Frank D. Gruttadauria, a former branch office manager and broker, during the time he worked at the companies.

Beginning in 1987, while at a series of broker-dealers, Gruttadauria, who is now in prison, misappropriated more than $115 million from his customers, the SEC said. He stole approximately $47 million during the 27 months he worked at SG Cowen and $21.5 million during the 15 months he was employed by Lehman Brothers, according to regulators.

SG Cowen will pay penalties of $5 million and Lehman will pay $2.5 million, split equally between the SEC and the NYSE. In connection with the settlement, SG Cowen has agreed to pay customers who haven't already been compensated for the losses they suffered while Gruttadauria was their broker. This process has largely been completed.

Last year, Lehman paid back to clients the amount Gruttadauria took from their accounts. Customers also will have an opportunity to pursue additional claims through arbitration.

"At both SG Cowen and Lehman Brothers, the primary responsibility for overseeing Gruttadauria's daily retail brokerage activity was entrusted to Gruttadauria's own subordinates," Stephen Cutler, the director of the SEC's enforcement division, said in a statement. "We have grave doubts that such a structure -- absent frequent and meaningful involvement by independent supervisors -- could ever be effective."

While employed as a broker, Gruttadauria sent his victims falsified account statements that "vastly inflated" the holdings in their accounts and diverted the genuine statements for most of the victims of the scheme, the SEC said. When Gruttadauria surrendered to authorities in February 2002, records showed that the accounts of his victims had a total of over $285 million, when they actually had less than $2 million. Gruttadauria is serving a seven-year jail term.

Neither firm admitted to or denied the findings of the SEC and the NYSE.

"The decisions announced today by both the NYSE and SEC against SG Cowen and Lehman put an end to one of the most egregious examples of misconduct in the securities industry," said David P. Doherty, executive vice president of enforcement at the NYSE. "This matter highlights the importance of strong supervision and internal controls and the degree to which member firms will be held accountable for misconduct within their firms when they fail to fulfill those responsibilities."