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SEC Lost Faith in NYSE Division, Court Documents Show

A job change for surveillance chief Robert McSweeney resulted from a high-profile settlement, a lawyer says.

After a landmark scandal on the floor of the New York Stock Exchange, the Securities and Exchange Commission didn't just have a problem with apparently ineffective surveillance procedures at the NYSE. There was a people problem, too.

That's the gist of court documents recently released to the public after a yearlong legal effort by

to force disclosure of sealed testimony from a now-settled lawsuit.

The SEC lost faith in the management of the NYSE division responsible for policing trades at the exchange, according to depositions that the NYSE -- represented by attorney Harvey Pitt, now chairman of the SEC -- fought to keep private. Because of the SEC's unhappiness, according to the sworn testimony, NYSE Chairman Dick Grasso removed longtime surveillance chief Robert McSweeney from his post to a position elsewhere in the organization.

That move came in the wake of one of the exchange's biggest scandals in years, one that emerged in early 1998 when federal prosecutors arrested 10 NYSE independent floor brokers and brokerage officials. Prosecutors charged them with violating federal securities laws by initiating trades from the NYSE floor in exchange for a share of the trading profits and losses; nine of the 10 later pleaded guilty to criminal charges. The brokers involved engaged in a technique known as "flipping" in which they made a rapid series of trades at prices within the spread between the quoted offer and sale prices on securities.

In mid-1999, the SEC concluded an investigation of the NYSE's role in the scandal with a critically worded settlement that said the exchange had failed to enforce compliance with federal securities laws and NYSE rules.

The NYSE, which agreed to the settlement without admitting or denying the SEC's findings, suggested the solution to the flipping case was one of new policies and procedures. In a press release on the occasion of the 1999 settlement, the exchange listed several initiatives it had taken or planned to take in the wake of the floor trading case to prevent a reoccurence of such problems.

The NYSE, however, avoided saying what the newly disclosed testimony makes apparent: The SEC was dissatisfied not just with NYSE surveillance policy, but with surveillance management -- specifically McSweeney. McSweeney, who was senior vice president for market surveillance in the years that the illegal trading was said to have taken place, now works as senior vice president, competitive position.

That unhappiness emerged in a meeting between the NYSE and the SEC following the floor brokers' arrests, according to a 2000 deposition given by the NYSE's Grasso. Describing that meeting, Grasso says he asked the SEC staff whether it "had a question of confidence in the leadership of our market surveillance division." Carmen J. Lawrence, director of the SEC's northeast regional office, "responded affirmatively," remembers Grasso.

In separate testimony from late 2000, Edward Kwalwasser, the group vice president in charge of the NYSE's regulatory group, said Grasso told him that sometime after a meeting between Grasso and members of the SEC staff, "Mr. Grasso either determined or was told that the SEC no longer had confidence in Mr. McSweeney as head of the Division of Market Surveillance."

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Continued Kwalwasser, "And Mr. Grasso said that regardless of whether we believe Bob

McSweeney had done a good job or was doing a good job, it was imprudent for the exchange to have someone interface with the SEC, which was our overseer, who the SEC did not have confidence in."

Kwalwasser remembered the conversation as taking place in the summer of 1999 or before September or October 1999, near the time that the SEC and NYSE reached their settlement on the floor broker case, also known as the Oakford case.

Similarly, NYSE President William Johnston recalled in a 2000 deposition that Grasso had told him McSweeney's job was being changed because McSweeney "was being held responsible for Oakford," in the sense that "someone should have been aware of Oakford."

Asked by attorney Dominic Amorosa, "It was sort of a negative implication for McSweeney to be taken out of one job and put in another?" Johnston replied, "Yes."

An NYSE spokesman said that McSweeney would not be available for comment.

In a statement released last week, the NYSE's Grasso said, "Bob McSweeney's intimate knowledge of markets is integral to our success with critical issues relating to competitive position, strategy and market structure. When the Exchange undertook a major review of our market structure against the competitive landscape, we turned to Bob to work with our independent directors and produce perhaps the most authoritative report on the subject to date -- a report that laid the foundation for the success of our Network NYSE platform." Said Grasso, "Bob's insight, experience and professionalism are vital to the success of the Exchange, and we're proud to have Bob as a member of our team."

If, as the depositions indicate, McSweeney's responsibilities were being changed as a result of the Oakford case, the NYSE kept it quiet. The first explicit acknowledgement that McSweeney had been relieved of his surveillance duties came a year after the NYSE/SEC settlement, in a news release entitled "NYSE Announces Officer Promotions."

In that release, the NYSE stated that McSweeney, who joined the NYSE in 1974, would become senior vice president, market structure and market initiatives, a new position. The release noted that the former senior vice president, market surveillance, most recently had been the executive assigned to the NYSE board's Special Committee on Market Structure, Governance and Ownership.

Amorosa -- who deposed the NYSE executives on behalf of his client John D'Alessio, a former NYSE floor broker who in 2001 settled SEC charges that he violated securities law and against whom criminal charges were dropped -- says the NYSE "misled the public" about the change of McSweeney's duties in the press release because the change "was in fact made under pressure from the SEC."

Says Amorosa, "This disingenuousness of the press release is the typical manner in which the NYSE has conducted itself with respect to the floor broker case."