July 29, 1999
The Big Board Slaps Large Fines
On Three of Its 'Specialist' Firms
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
As its regulatory role and market quality come under scrutiny as never
before, the New York Stock Exchange has slapped three of its floor
"specialist" firms with big penalties for allegedly failing to do their
jobs.
The penalties announced Wednesday, the first of their kind in almost three
years, include two of the three largest fines ever meted out against
specialists. The events involved include two of the most controversial
specialist-related incidents in recent years: trading in Citicorp's stock
during the October 1997 market plunge, and November's addition of
supermarket concern Safeway Inc. to the Standard & Poor's 500-stock
index.
Specialists are the floor traders assigned to
manage the trading of specific stocks on the
exchange floor, matching buyers and sellers
and using their own capital as necessary to
keep price movements fair and orderly.
The disciplinary actions come just a month
after the exchange settled a Securities and
Exchange Commission administrative order that alleged its supervisory
procedures had failed in not catching illegal trading by floor brokers
for
years. They also come as the stock exchange contemplates selling stock
in
itself to better combat upstart electronic trading systems that don't use
specialists.
Robert Zito, the exchange's senior vice president of communications, said
the actions and their timing are "absolutely not" related to the plans
to go
public or the SEC settlement. "We've always had and maintained a policy
of zero tolerance with any infractions."
Still, given concerns that for-profit status might compromise the exchange's
regulatory role, outsiders believe the exchange feels pressure to be more
vigorous than ever in its enforcement efforts.
"By bunching these together, the exchange really wants to send a signal
to
the investing public right now that, 'You should have confidence in our
auction market,' " said David E. Robbins, a New York securities lawyer
and former head of compliance at the American Stock Exchange.
Added Edward Fleischman, a former SEC commissioner and a securities
lawyer at Linklaters law firm in New York, "The exchange tripped badly
on the floor [brokers' illegal] trading." Given the questions over its
regulatory role as the exchange pushes to go public, "They want the best
possible relationship with the SEC and with Congress. ... The exchange
could in a sense be saying, 'We're tough regulators, even for our very
own,
and there's nobody more our very own than our specialists.' "
The most extensive penalties were levied against M.J. Meehan & Co.
LLC and three of its specialists for allegedly failing, on eight occasions
from October 1996 to September 1998, to maintain fair and orderly
markets in CapMAC Holdings Inc., Citicorp (which later merged into
what is now Citigroup Inc.), Colgate-Palmolive Co., Donaldson, Lufkin &
Jenrette Inc., Eaton Vance Corp. and Unibanco-Uniao de Bancos
Brasileiros SA.
The exchange fined the firm $200,000 (tying as second-largest against a
specialist); William D. Berghold of Pawling, N.Y. $75,000; James F.
McMullin of New York City $50,000; and David A. Hand of New York
City $20,000. The firm and its specialists, who consented to findings of
exchange and SEC rule violations without admitting or denying guilt, were
all censured. The exchange required the firm to hire an independent
consultant to review and advise on its supervision and control of trading
activities, and refrain for six months from applying to trade any new stocks
other than those related to its current stocks.
On Monday, Oct. 27, 1997, the market tumbled amid the Asian crisis,
and the next day Citicorp opened at $113, down more than $10 from
Monday's close. As the market rallied, it soared to $127.50 by day's end,
leading some to accuse the specialist of setting the opening price too
low
and failing to curb its rise. On both days, the exchange alleged, the firm
and Mr. McMullin "failed to participate adequately as a dealer against
a
market trend during certain periods of significant price movement."
The penalty suggests Meehan was inadequately equipped to handle high
volume in its stocks under exceptional conditions, rather than deliberately
taking advantage of investors. In a statement, the firm's managing partner,
Terence Meehan, said, "The firm has taken significant steps over the past
two years to enhance our supervisory and compliance systems, and
continues to monitor these systems to ensure they are the state of the
art.
M.J. Meehan & Co. is committed to maintaining the highest standards
of
compliance and providing high-quality markets."
Messrs. Berghold, Hand and McMullin couldn't be reached for comment.
The exchange, as expected, fined and censured Spear, Leeds & Kellogg
LP's specialist unit, Spear Leeds & Kellogg Specialists LLC, the Big
Board's largest specialist firm, $275,000 -- a record for a specialist
-- and
Robert Luckow, of Wyckoff, N.J., the unit's chief executive officer,
$75,000, for allegedly failing "to adhere to the principles of good business
practice" in not keeping the floor crowd adequately informed as Safeway's
stock was added to the S&P 500 index on Nov. 12.
Safeway leapt more than $5 to $55 at the close that day, upsetting
investors whose purchases were executed at that price. The exchange said
floor brokers didn't have enough time just before the close to ask their
clients if they wanted to place more orders. Spear didn't admit or deny
wrongdoing in the settlement. Spear officials have previously maintained
they used their best judgment under the circumstances. Wednesday, a
spokesman declined to comment and said Mr. Luckow was on vacation
and not available for comment.
The exchange fined Einhorn & Co. LLC $75,000 and censured it for
allegedly failing in June 1998 "to maintain a fair and orderly market"
in
Time Warner Inc. through a member associated with the firm as specialist,
who is subject to a related disciplinary action. It also alleged Einhorn
failed
on several occasions from April 1997 to January 1998, to narrow the
bid-ask spread as appropriate in various stocks, didn't have adequate
systems and procedures to review its trading, and failed to reasonably
supervise certain of its activities.
Einhorn consented to the findings without admitting or denying guilt. A
recording at the firm's phone number referred callers to Van der Moolen
Specialists USA, which has acquired Einhorn's operations. A
representative at Taylor Rafferty Associates in New York, an
investor-relations consultant to Van der Moolen's parent, Van der Moolen
Holding NV of the Netherlands, said there is "no Van der Moolen
spokesman available to comment."
Meanwhile, in a separate case against a Big Board-member securities firm,
the Big Board said it disciplined Deutsche Bank AG's Deutsche Bank
Securities in New York for violating various rules and securities laws
related to finances and bookkeeping. The exchange imposed a censure
and fine of $175,000. Deutsche Bank, which consented to the findings
without admitting or denying wrongdoing, declined to comment.
An exchange hearing panel found that, at certain times between 1996 and
May 1998, the firm failed, among other things, to maintain the required
level of net capital and give timely notice that its books and records
weren't current. The panel also found that the firm filed incorrect forms
containing data on transaction volume and commissions.