In re Bear Wagner Specialists LLC
summary
Twenty former NYSE specialists were charged by the SEC with pervasive fraud between 1999 and mid-2003 by manipulating trades through 'interpositioning' and 'trading ahead' to profit their firms at customers' expense, causing millions in losses and violating securities laws, with the SEC seeking disgorgement, penalties, and cease-and-desist orders while firm-level settlements had already totaled over $243 million.
paragraph
The SEC initiated administrative proceedings against twenty former NYSE specialists for engaging in fraudulent 'interpositioning' and 'trading ahead' schemes between 1999 and mid-2003, prioritizing their firms' proprietary trades over customer orders to generate riskless profits. These actions violated Section 17(a) of the Securities Act, Sections 10(b) and 11(b) of the Exchange Act, and multiple NYSE rules, resulting in millions of dollars in customer losses, with some specialists making derogatory remarks like 'f—k the DOTs.' While the seven specialist firms had already paid over $243 million in disgorgement and penalties to a fair fund for harmed customers, the SEC now seeks individual accountability through disgorgement, prejudgment interest, civil penalties, and cease-and-desist orders.
narrative
Between 1999 and mid-2003, twenty former NYSE specialists from seven firms—including those from Fleet Specialist, Bear Wagner, LaBranche, Spear Leeds & Kellogg, and Van der Moolen—engaged in a pervasive pattern of fraudulent trading by manipulating the Exchange’s DOT system to prioritize their firms’ proprietary accounts over customer orders. They employed two primary schemes: 'interpositioning,' where they inserted their firm’s trades between matching customer buy and sell orders to lock in riskless profits, and 'trading ahead,' where they executed proprietary trades ahead of customer orders to capture better prices at customers’ expense. These actions caused millions of dollars in losses to customers, violated Section 17(a) of the Securities Act and Sections 10(b) and 11(b) of the Exchange Act, and breached multiple NYSE rules, including Rules 104, 92, 123B, and 401. Some specialists engaged in particularly egregious conduct, including manipulating prices beyond normal market movements and making vulgar remarks like 'f—k the DOTs' while executing the fraud. In the prior year, the SEC had settled enforcement actions against all seven specialist firms, resulting in over $243 million in disgorgement and penalties deposited into a fair fund for harmed customers. This proceeding targets the individuals directly, seeking disgorgement, prejudgment interest, civil penalties, and cease-and-desist orders, with an initial decision required within 300 days and the investigation into individual misconduct still ongoing.
Classified corporate-fraud(confidence 100%). EDGAR detection: forms 10-K/10-Q/8-K· recall 56% / precision 8%. detection rule →
Statutes
Parties
Securities and Exchange Commissiontrading ahead
Keywords
specialiststradingllcspecialistexchangedivision enforcementcustomer ordersmarch matterorderordersproprietarycustomerbear wagnerwagner specialistsstock exchange
Extracted insights
Dollar amounts 1
- $243 $243 <$10K
Entities 2
- agency Securities and Exchange Commission
- person trading ahead
Triples 10
- Securities and Exchange Commission announced institution of administrative and cease-and-desist proceedings
- Securities and Exchange Commission institutes administrative and cease-and-desist proceeding
- Division of Enforcement alleges specialists engaged in fraudulent trading
- specialists violated Section 17(a) of the Securities Act
- specialists violated Sections 10(b) and 11(b) of the Exchange Act
- specialists caused customer losses in the millions of dollars
- specialists engaged in interpositioning
- specialists engaged in trading ahead
- specialists executed orders for proprietary accounts
- specialists made guaranteed, riskless profits
Text layers
Extracted body text (5,715c)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
SECURITIES ACT OF 1933
RELEASE NO. 8566 / April 12, 2005
SECURITIES EXCHANGE ACT OF 1934
RELEASE NO. 51525 / April 12, 2005
ADMINISTRATIVE PROCEEDING
FILE NO. 3-11893
COMMISSION INSTITUES ADMINISTRATIVE AND CEASE-AND-DESIST
PROCEEDING AGAINST 20 FORMER NEW YORK STOCK EXCHANGE
SPECIALISTS
DIVISION OF ENFORCEMENT ALLEGES THAT THE SPECIALISTS
ENGAGED IN A PERVASIVE COURSE OF FRAUDULENT TRADING
The Securities and Exchange Commission today announced the institution of
administrative and cease-and-desist proceedings against twenty former New York Stock
Exchange specialists: David A. Finnerty, Donald R. Foley II, Scott G. Hunt, and Thomas
J. Murphy – formerly of Fleet Specialist, Inc.; Kevin M. Fee and Frank A. Delaney IV of
Bear Wagner Specialists LLC; Freddy DeBoer – formerly of LaBranche & Co. LLC;
Todd J. Christie, James V. Parolisi, Robert W. Luckow, Patrick E. Murphy and Robert A.
Johnson, Jr. – formerly of Spear Leeds & Kellogg Specialists LLC; and Patrick J.
McGagh, Jr., Joseph Bongiorno, Michael J. Hayward, Richard P. Volpe, Michael F.
Stern, Warren E. Turk, Gerard T. Hayes and Robert A. Scavone, Jr. – formerly of Van
der Moolen Specialists USA, LLC.
The Division of Enforcement alleges that between 1999 and mid-2003 these specialists
pervasively engaged in fraudulent and other improper trading by executing orders for
their firms’ proprietary accounts ahead of executable public customer or “agency” orders
that were placed through the Exchange’s electronic trading system, known as the DOT
system. Through these transactions, these specialists violated their basic obligation to
match executable public customer buy and sell orders and not to fill customer orders
through trades from their firms’ proprietary accounts when those customer orders could
be matched with other customer orders.
The Division of Enforcement further alleges that the specialists engaged in at least two
forms of fraudulent trading, “interpositioning” and “trading ahead.” In the first form of
trading, the specialists “interpositioned” their firms’ proprietary accounts between
customer orders by trading into both of them in succession – for example, buying into a
customer sell order first, and then selling, at a higher price, into the opposite market buy
order. In this fashion, the specialists were able to make guaranteed, riskless profits for
their firms’ proprietary accounts at the expense of customer orders. In the second form of
trading, the specialist filled one agency order through a proprietary trade for the specialist
firm’s proprietary account – and thereby improperly “stepped in front” of, or “traded
ahead” of, the other agency order – simply to allow the specialist firm to take advantage
of market conditions promptly. When “trading ahead,” the specialist would lock in a
better price for the proprietary trade, and then later fill the agency order at an inferior
price, thus disadvantaging the agency order. By virtue of these two forms of improper
trading, these specialists caused customer losses in the millions of dollars during the
years in question.
The order also alleges that several of the specialists engaged in particularly egregious
conduct. For example, in several instances of “interpositioning,” the specialists not only
disadvantaged both a buy and a sell order, but also moved the price up or down from the
last sale price to further advantage the specialist firm’s proprietary account. In other
instances, several of the specialists punctuated their improper trading with statements
such as “f—k the DOTs” and “screw the DOTs” as they were in fact disadvantaging
agency orders.
The Division of Enforcement alleges that through this course of fraudulent trading, the
specialists willfully violated Section 17(a) of the Securities Act, Sections 10(b) and 11(b)
of the Exchange Act, and Rules 10b-5 and 11b-1 thereunder, and Rules 104, 92, 123B,
and 401 of the New York Stock Exchange. The proceedings will determine what relief is
in the public interest against the specialists, including disgorgement, prejudgment
interest, civil penalties, and other remedial relief. The order requires the Administrative
Law Judge to issue an initial decision no later than 300 days from the date of service of
the order.
Last year, the Commission brought settled enforcement actions against all seven specialist
firms operating on the New York Stock Exchange in connection will unlawful proprietary
trading at the firms. Those enforcement actions resulted in payments to date of over $243
million in disgorgement and penalty payments, which have been placed in fair funds to be
distributed to customers disadvantaged by improper specialist trading. See In the Matter of
Bear Wagner Specialists LLC, Rel. No. 34-49498 (March 30, 2004); In the Matter of
Fleet Specialist, Inc., Rel. No. 34-49499 (March 30, 2004); In the Matter of LaBranche &
Co. LLC, Rel. No. 34-49500 (March 30, 2004); In the Matter of Spear, Leeds & Kellogg
Specialists LLC, Rel. No. 34-49501 (March 30, 2004); In the Matter of Van der Moolen
Specialists USA, LLC, Rel. No. 34-49502 (March 30, 2004); In the Matter of SIG
Specialists, Inc., Rel. No. 34-50076 (July 26, 2004); In the Matter of Performance
Specialist Group LLC, Rel. No. 34-50075 (July 26, 2004).
The staff acknowledges the assistance of the U.S. Attorney’s Office for the Southern
District of New York, the Federal Bureau of Investigation and the NYSE Division of
Enforcement in this matter.
The Commission’s investigation of individual misconduct is continuing. OCR text (5,712c · tika · 95% conf)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
SECURITIES ACT OF 1933
RELEASE NO. 8566 / April 12, 2005
SECURITIES EXCHANGE ACT OF 1934
RELEASE NO. 51525 / April 12, 2005
ADMINISTRATIVE PROCEEDING
FILE NO. 3-11893
COMMISSION INSTITUES ADMINISTRATIVE AND CEASE-AND-DESIST
PROCEEDING AGAINST 20 FORMER NEW YORK STOCK EXCHANGE
SPECIALISTS
DIVISION OF ENFORCEMENT ALLEGES THAT THE SPECIALISTS
ENGAGED IN A PERVASIVE COURSE OF FRAUDULENT TRADING
The Securities and Exchange Commission today announced the institution of
administrative and cease-and-desist proceedings against twenty former New York Stock
Exchange specialists: David A. Finnerty, Donald R. Foley II, Scott G. Hunt, and Thomas
J. Murphy – formerly of Fleet Specialist, Inc.; Kevin M. Fee and Frank A. Delaney IV of
Bear Wagner Specialists LLC; Freddy DeBoer – formerly of LaBranche & Co. LLC;
Todd J. Christie, James V. Parolisi, Robert W. Luckow, Patrick E. Murphy and Robert A.
Johnson, Jr. – formerly of Spear Leeds & Kellogg Specialists LLC; and Patrick J.
McGagh, Jr., Joseph Bongiorno, Michael J. Hayward, Richard P. Volpe, Michael F.
Stern, Warren E. Turk, Gerard T. Hayes and Robert A. Scavone, Jr. – formerly of Van
der Moolen Specialists USA, LLC.
The Division of Enforcement alleges that between 1999 and mid-2003 these specialists
pervasively engaged in fraudulent and other improper trading by executing orders for
their firms’ proprietary accounts ahead of executable public customer or “agency” orders
that were placed through the Exchange’s electronic trading system, known as the DOT
system. Through these transactions, these specialists violated their basic obligation to
match executable public customer buy and sell orders and not to fill customer orders
through trades from their firms’ proprietary accounts when those customer orders could
be matched with other customer orders.
The Division of Enforcement further alleges that the specialists engaged in at least two
forms of fraudulent trading, “interpositioning” and “trading ahead.” In the first form of
trading, the specialists “interpositioned” their firms’ proprietary accounts between
customer orders by trading into both of them in succession – for example, buying into a
customer sell order first, and then selling, at a higher price, into the opposite market buy
order. In this fashion, the specialists were able to make guaranteed, riskless profits for
their firms’ proprietary accounts at the expense of customer orders. In the second form of
trading, the specialist filled one agency order through a proprietary trade for the specialist
firm’s proprietary account – and thereby improperly “stepped in front” of, or “traded
ahead” of, the other agency order – simply to allow the specialist firm to take advantage
of market conditions promptly. When “trading ahead,” the specialist would lock in a
better price for the proprietary trade, and then later fill the agency order at an inferior
price, thus disadvantaging the agency order. By virtue of these two forms of improper
trading, these specialists caused customer losses in the millions of dollars during the
years in question.
The order also alleges that several of the specialists engaged in particularly egregious
conduct. For example, in several instances of “interpositioning,” the specialists not only
disadvantaged both a buy and a sell order, but also moved the price up or down from the
last sale price to further advantage the specialist firm’s proprietary account. In other
instances, several of the specialists punctuated their improper trading with statements
such as “f—k the DOTs” and “screw the DOTs” as they were in fact disadvantaging
agency orders.
The Division of Enforcement alleges that through this course of fraudulent trading, the
specialists willfully violated Section 17(a) of the Securities Act, Sections 10(b) and 11(b)
of the Exchange Act, and Rules 10b-5 and 11b-1 thereunder, and Rules 104, 92, 123B,
and 401 of the New York Stock Exchange. The proceedings will determine what relief is
in the public interest against the specialists, including disgorgement, prejudgment
interest, civil penalties, and other remedial relief. The order requires the Administrative
Law Judge to issue an initial decision no later than 300 days from the date of service of
the order.
Last year, the Commission brought settled enforcement actions against all seven specialist
firms operating on the New York Stock Exchange in connection will unlawful proprietary
trading at the firms. Those enforcement actions resulted in payments to date of over $243
million in disgorgement and penalty payments, which have been placed in fair funds to be
distributed to customers disadvantaged by improper specialist trading. See In the Matter of
Bear Wagner Specialists LLC, Rel. No. 34-49498 (March 30, 2004); In the Matter of
Fleet Specialist, Inc., Rel. No. 34-49499 (March 30, 2004); In the Matter of LaBranche &
Co. LLC, Rel. No. 34-49500 (March 30, 2004); In the Matter of Spear, Leeds & Kellogg
Specialists LLC, Rel. No. 34-49501 (March 30, 2004); In the Matter of Van der Moolen
Specialists USA, LLC, Rel. No. 34-49502 (March 30, 2004); In the Matter of SIG
Specialists, Inc., Rel. No. 34-50076 (July 26, 2004); In the Matter of Performance
Specialist Group LLC, Rel. No. 34-50075 (July 26, 2004).
The staff acknowledges the assistance of the U.S. Attorney’s Office for the Southern
District of New York, the Federal Bureau of Investigation and the NYSE Division of
Enforcement in this matter.
The Commission’s investigation of individual misconduct is continuing.