NYSE, SEC in $242 Million Settlement With Specialists

Five specialist firms will pay $241.8 million in fines and restitution to resolve a yearlong regulatory investigation into improper trading at the New York Stock Exchange.

The Securities and Exchange Commission and the NYSE announced the deal Tuesday morning, following disclosure of most of the details by the firms themselves over the past several months.

The settlement comes out to $87.7 million in penalties and $154 million in restitution. Regulators contend the firms, which drive trading on the NYSE, violated their obligation to give investors the best possible price on a stock.

"When an exchange specialist unlawfully takes advantage of its privileged position by seizing trading opportunities it should leave for public customers, it fundamentally undermines the fair and orderly operation of the exchange auction system,'' said SEC Director of Enforcement Stephen Cutler.

Under the agreement, LaBranche ( LAB) and Van der Moolen ( VDM), the two largest publicly traded specialist firms, will pay the stiffest penalties. LaBranche will cough up $63.5 million, while Van Der Moolen is paying $57.6 million.

Shares of LaBranche and Van Der Moolen have taken a beating over their role in the trading scandal. Investors also hammered the stocks in the aftermath of the public uproar over the hefty pay package the NYSE awarded former Big Board Chairman Richard Grasso.

Wall Street appears to have come to the conclusion that specialist companies won't be as profitable in the future as the Big Board is pushed by regulators (and public opinion) to allow greater opportunity for trading stocks on less labor-intensive electronic trading networks. In early trading, shares of both LaBranche and Van Der Moolen rose on news that the settlement was a done deal. LaBranche was up 30 cents, or 2.7%, to $11.29, while Van Der Moolen's stock rose 22 cents or 2.5%, to $9.13.

The other firms settling with regulators are Goldman Sachs' ( GS) Spear Leeds & Kellogg, FleetBoston's ( FBF) Fleet Specialists and Bear Wagner, which is majority owned by Bear Stearns ( BSC). In the deal, Fleet will pay $59 million, Spear Leeds will pay $45.2 million and Bear Wagner will pay $16.2 million.

As is customary in regulatory settlements, the five firms neither admitted nor denied the allegations of improper trading.

The specialist firms, however, still face other legal action. In December, the California Public Employees Retirement System filed a lawsuit against the five firms and the NYSE over the alleged trading infractions. Calpers claims the system by which stocks are bought and sold on the exchange is regularly abused and nothing is ever done about it.

More from Markets

Online Retailers Hit by Supreme Court Ruling Requiring Sales Tax Collection

Online Retailers Hit by Supreme Court Ruling Requiring Sales Tax Collection

U.S. Drillers at Mercy of Iran, Saudi Production Spat as OPEC Meeting Begins

U.S. Drillers at Mercy of Iran, Saudi Production Spat as OPEC Meeting Begins

Stocks Tumble as Dow Heads for Eighth Straight Drop

Stocks Tumble as Dow Heads for Eighth Straight Drop

This Is What's Hot Thursday - Stocks Slide, Intel's CEO Woes & Major Movers

This Is What's Hot Thursday - Stocks Slide, Intel's CEO Woes & Major Movers

Video: Jim Cramer on Netflix, Disney, Intel, Micron and Goldman Sachs

Video: Jim Cramer on Netflix, Disney, Intel, Micron and Goldman Sachs