Brokers Squawk Box frontrunning wash trades
Brokers Believed They Could Share Squawk Box Info
Last Update: 5/2/2007 7:33:40 AM
By Chad Bray
Of DOW JONES NEWSWIRES
(This article was originally published Tuesday)
NEW YORK (Dow Jones)--Three former brokers at Merrill Lynch & Co. (MER), Lehman
Brothers Inc. (LEH) and Citigroup Inc.'s (C) Smith Barney believed they could
legitimately share information about pending trades broadcast over brokerage firm
"squawk boxes" with clients, their lawyers said Tuesday.
As part of their closing arguments on Tuesday, lawyers for Kenneth Mahaffy Jr., a
former Merrill Lynch and Smith Barney broker; Timothy O'Connell, who worked with
Mahaffy at Merrill Lynch's Garden City, N.Y., branch; and David G. Ghysels Jr., a
former Lehman Brothers broker, said the ex-brokers believed they could discuss
information about pending trades by institutional clients with others in hopes of
getting them to participate in the trades.
In his summation on Tuesday, Stephen Scaring, a lawyer for Mahaffy, said Mahaffy
kept his telephone on his shoulder and would tell clients he kept on a conference
call about potential trades they might be interested in participating in. He said
those clients gave him a focus list of stocks in which they might be interested
in and he updated that list.
Mahaffy testified at trial that he allowed some clients, while he was at Merrill
Lynch, to listen into analyst calls twice a day or a rebroadcast of the firm's
morning call, but never longer than that.
"Why would you need a focus list if all you're doing is putting the phone on the
box?" Scaring said. "The answer is you wouldn't."
Mahaffy, O'Connell, Ghysels and four former A.B. Watley Inc. executives on trial
in federal court in Brooklyn, accused of either improperly providing or misusing
squawk box information to front run, or improperly jump ahead, of block orders by
institutional clients between January 2002 and February 2004. They face a variety
of charges, including conspiracy, securities fraud, witness tampering and making
false statements. They have denied wrongdoing.
The brokers allegedly placed open telephone lines next to their squawk boxes all
day long and were bribed with cash and so-called "wash" trades: transactions made
between two brokerage accounts simply to generate a commission, prosecutors said.
Closing statements in the case are expected to continue Wednesday.
The former A.B. Watley executives accused of wrongdoing are Robert F. Malin, the
firm's president; Linus Nwaigwe, A.B. Watley's director of compliance; and
Michael A. Picone, the company's one-time chief operating officer; and Keevin H.
Leonard, who supervised and trained the firm's day traders.
Malin and Nwaigwe continue to work at A.B. Watley Group Inc. (ABWG), the defunct
day-trading firm's former holding company. Watley continues to operate an online
broker-dealer.
Scaring, Mahaffy's lawyer, argued the brokerage firms didn't instruct brokers
with access to the squawk boxes about how to use them or that the information
broadcast over them was confidential, calling the government's case "fiction."
"If (the brokerage firms) believed for a second, for a moment, that the
information you, Mr. Mahaffy, got from the squawk box was material, nonpublic,
they would have told him that," Mahaffy said.
Mildred Whalen, a lawyer for O'Connell, said there was "no restriction" for
brokers at Merrill Lynch from sharing information broadcast over the squawk box
with their clients and O'Connell - because he saw it as a way to ease his
workload - simply put the phone by the speaker system.
She described O'Connell as a "mediocre" broker who it took three tries to pass
the basic exam to be licensed as a broker.
"He's not an all-star broker. He's not a first stringer," Whalen said. "He's a
bench warmer."
Whalen said her client kept his phone next to the squawk box out in the open at
his office and "nobody else at the Garden City office saw this as a problem."
She said O'Connell, when he learned of an internal investigation at Merrill
Lynch, told a "white lie" to the company's lawyers about not putting his phone up
to the squawk box because he was afraid of losing his job. That lie snowballed
after the government began its own investigation, she said.
"It's a reason to be fired, but not to be federally prosecuted," Whalen said.
Jeffrey Hoffman, a lawyer for Ghysels, said the government's case was one of
"hindsight" and Ghysels had no knowledge the traders were using the squawk-box
access to front run.
"If David Ghysels didn't now there was front running going on, the case is over,
kaput," Hoffman said.
The lawyers also argued that John J. Amore, Watley's one-time chief executive,
was a con man who lied to the brokers about how he intended to use the squawk box
information, representing himself as being from a hedge fund rather than a
day-trading firm. Amore, a key prosecution witness, pleaded guilty to mail fraud
and conspiracy to commit securities fraud in 2004.
"Jay Amore took advantage of Merrill Lynch's policy or lack of a policy to steal
from them," Whalen said.
-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com
(END) Dow Jones Newswires
May 02, 2007 07:33 ET (11:33 GMT)
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