- The Washington Times - Friday, January 23, 2004

NEW YORK (AP) — The Securities and Exchange Commission is contemplating civil charges against at least five New York Stock Exchange specialist firms for violating securities laws and exchange rules against improper trading activities.

LaBranche & Co. Inc., Van Der Moolen Holdings NV and Fleet Specialist, a subsidiary of FleetBoston Financial Corp., each confirmed they received a “Wells notice” from the SEC, a formal notice in which the commission warns a company that civil enforcement charges may be recommended against it.

Sources close to the investigation told the Associated Press, on the condition of anonymity, that two other firms also received notices, though the sources declined to name the firms.

All five firms have also received a similar notice from the NYSE, which intends to bring a formal disciplinary proceeding against the firms for violating exchange rules.

An SEC spokesman said the commission does not comment on ongoing investigations. Separate statements from LaBranche, Van Der Moolen and Fleet Specialist firms said they would cooperate with both SEC and NYSE investigations. Spokesmen for each company would not provide additional comment.

Specialist firms have been under fire recently for reputedly slanting customer trades to benefit their firms instead of customers. The NYSE and SEC have been investigating these practices for months.

In October, the NYSE said it would seek tens of millions of dollars in fines against five specialist firms — Bear Wagner Specialists, Spear, Leeds & Kellogg Specialists, Fleet Specialist, LaBranche and Van Der Moolen — for improper trading.

An NYSE spokesman had no comment on the notices issued yesterday, nor on the status of its own investigation.

Last month, the California Public Employees Retirement System announced a class action lawsuit against the NYSE and seven specialist firms reputed to have bilked investors out of millions of dollars through fraudulent trading practices. Besides the aforementioned firms, the CalPERS suit also named Performance Specialist Group and Susquehanna Specialists Inc.

Spokesmen for Goldman Sachs, parent company of Spear, Leeds & Kellogg, and Performance Specialist Group would not comment on whether their firms also received Wells notices. A spokesman for Susquehanna said his company did not receive an SEC notice. Bear Wagner did not return repeated calls seeking comment.

On the floor of the exchange, each stock has a specialist that matches sellers and buyers. In cases where there are more sellers than buyers, the specialist temporarily buys the stock himself to smooth out the market until there are more buyers, at which point the specialist can sell.

Specialist firms have been investigated by the NYSE and SEC for artificially inflating the price of the shares they hold in order to make an additional profit, a practice called “front-running.”

“This is why many of the large brokerages are so upset with the NYSE,” said Steve Thel, professor of securities regulation at the Fordham University School of Law.

“On the one hand, specialists provide stability and liquidity, but when they start doing things like this, the control they can exert over prices makes people nervous.”

Front-running has been a particular concern at the NYSE since early 2001 when the exchange began trading stocks in 1-cent increments, making it easier for specialists firms to step in front of their customers.

Former LaBranche CEO Robert M. Murphy resigned his post Nov. 14, but said his departure was not related to the SEC or NYSE probes.

Shares of LaBranche rose 89 cents to close at $10.10 on the New York Stock Exchange, while shares of Van Der Moolen remained unchanged at $8.21 and the price of FleetBoston was down 24 cents to close at $44.27. Goldman Sachs shares fell 93 cents to close at $99.50.

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