The Securities and Exchange Commission

[thepennyking]

Reading Toe Tags on Wall Street

By Bill Singer - Contributing Columnist

I don't think the SEC and the NYSE are entitled to kudos for the specialists settlements announced today. They're supposed to try to prevent crime. They're doing a lousy job of it.

March 30, 2003 - Once again, Wall Street's ever-vigilant regulators have polished their trumpets and herald a "Settlement Reached With Five Specialist Firms for Violating Federal Securities Laws and NYSE Regulations Firms Will Pay More Than $240 Million in Penalties and Disgorgement." Yes, that's what the U.S. Securities and Exchange Commission and the New York Stock Exchange announced on March 30, 2004. The five settling specialist firms (Bear Wagner Specialists LLC; Fleet Specialist, Inc.; LaBranche & Co., LLC; Spear, Leeds & Kellogg Specialists LLC; and Van der Moolen Specialists USA, LLC.) will pay a total of $241,823,257 in penalties and disgorgement, consisting of $87,735,635 in civil money penalties and $154,087,622 in disgorgement, and implement steps to improve their compliance procedures and systems. You apparently have to be doing a lot of mischief in order to be making enough moolah to pay a quarter of a billion in fines - crime certainly seems to pay.

And to whom do we taken-advantage-of investors owe our gratitude? Well, our caped crusader and super-hero were the New York Stock Exchange and the SEC. And what did those hard-working regulators find? Well, between 1999 and 2003, the five specialist firms violated federal securities laws and NYSE rules by executing orders for their dealer accounts ahead of executable public customer or "agency" orders. Through these transactions, the firms violated their basic obligation to match executable public customer buy and sell orders and not to fill customer orders through trades from the firm's own account when those customer orders could be matched with other customer orders. Through this conduct, the firms improperly profited from trading opportunities; disadvantaged customer orders, which either received inferior prices or went unexecuted altogether; and breached their duty to serve as agents to public customer orders.

Barry W. Rashkover, Associate Director of the SEC's Northeast Regional Office, said, "This landmark settlement underscores the obligation of exchange specialists to serve public customer orders over the specialist's own proprietary interests. The settlement is excellent news for injured customers. Because of the Distribution Fund, they will be the ultimate beneficiaries of the firms' sizeable payments." We are also promised that the investigation is continuing. And, gee, there's even the possibility that some human beings might be named and more charges brought. Oh, and did I tell you that there's even a rumor that the SEC might even bring charges against the NYSE itself?

With all due respect to the Mr. Rashkovers of the world, this ain't no landmark settlement, it's not underscoring anything, there's no excellent news, and I doubt most of us investors will truly realize any meaningful monetary compensation. I mean can we stop with all the bureaucratic doublespeak already? What's landmark is that the charged misconduct has been going on for years under the noses of Wall Street's regulators. What today's press release underscores is that the securities cops are a dollar short and a day late, again. The excellent news is what . . . I keep missing that one. We're supposed to be happy that there's yet more misconduct and malfeasance uncovered on Wall Street?

Here's my point. The misconduct charged in the recent SEC action dates back to 1999 . . . that's five years ago! And it's not like the august joint task force of the SEC and the NEW YORK STOCK EXCHANGE (did I make the name of the latter clear enough?) was absolutely unfamiliar with the comings and goings of the specialists on the NYSE (again, please note the name of the second member of the joint task force). You've all read about the NYSE lately, you know, that's the employer that paid former Chariman Grasso the big bucks to efficiently run the Exchange. Oh, and by the way, you all do recall that the current SEC Chairman Donaldson is one and the same as the former NYSE Chairman Donaldson? Plus the NYSE was helping to investigate something it was very familiar with - itself. Not exactly a set of facts calculated to stump the SEC and NYSE. Or so you'd think.

I could go on and on, but I've done so in the past. I don't think the SEC and the NYSE are entitled to kudos for reading the toe tags on corpses and telling us who the body is. That's not their job - or, at least, that's not what they should be bragging about. They're supposed to try to prevent crime. They're doing a lousy job of it. Frankly, the size of the fines is a mere smokescreen. I guarantee you that the specialist firms survive. I promise you that the NYSE will be open for business tomorrow.

Discordant Notes Copyright 2004 by Bill Singer. Reprinted by permission, Bill Singer. All rights reserved.

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