Floor-Brokers Case Is Proving
                   To Be Awkward for Big Board

                   By GREG IP and ANN DAVIS
                   Staff Reporters of THE WALL STREET JOURNAL

                   Months after pleading guilty to a variety of illegal-trading charges, several
                   former New York Stock Exchange brokers continue to indicate that
                   exchange officials failed to make clear the activity was illegal.

                   Testimony during an evidentiary hearing last
                   week, as the defendants await sentencing, is
                   proving an awkward issue for the Big Board.
                   The testimony has underlined how the
                   exchange's rules governing the principal
                   activity in question -- trading for a broker's
                   own benefit instead of only his customer's --
                   were spottily enforced and that the activity
                   was more widespread than the original
                   charges against eight brokers indicated.

                   The Big Board's top regulatory official, Edward Kwalwasser, testified that
                   while the exchange's training for brokers dealt with rules against trading for
                   an account in their own name, it didn't touch on the legality of sharing
                   profits with customers -- a distinction at the heart of the original case.

                   Big Board Chairman Richard Grasso has argued publicly that the stock
                   exchange can continue to regulate itself even if it converts from
                   member-owned to for-profit status as a public company, as planned. A
                   series of embarrassing disclosures in the floor brokers' case are
                   strengthening Securities and Exchange Commission Chairman Arthur
                   Levitt's view that a for-profit Big Board shouldn't keep all of its regulatory
                   powers.

                   "It's hard to imagine a more timely or more opportune time for the
                   commission to be pushing for what Levitt is seeking here," says James
                   Doty, a former SEC general counsel and currently a partner with Baker &
                   Botts law firm in Washington. As electronic-trading networks start to
                   compete with the Big Board, traditionally considered a model
                   self-regulatory organization, competitors are likely to question whether the
                   exchange's regulatory structure favors its own members, he says.

                   "The SEC views itself as holding the shotgun behind the door that keeps
                   the regulatory system on track and effective," Mr. Doty adds. If the
                   brokers' allegations "have substance," he says, "the commission's going to
                   have to take the shotgun out from behind the door."

                   The floor-brokers' case dates to early 1998, when the U.S. attorney's
                   office in Manhattan charged a now-defunct brokerage, Oakford Corp.,
                   two of its principals and eight independent floor brokers with operating a
                   scheme under which the brokers, using falsified tickets from Oakford,
                   traded on their privileged access to information on the floor and split the
                   profits with Oakford. Securities law and stock-exchange rules bar floor
                   brokers from trading for their own account or an account over which they
                   have control.

                   Two other brokers and a brokerage-firm clerk also were eventually
                   charged. Of the 10 brokers charged, nine pleaded guilty to various
                   charges, including front-running, or trading ahead of their customers, and
                   improperly exercising their investment discretion. One broker, Robert
                   Carucci, was sentenced to 15 months in prison and began serving his term,
                   but the judge overseeing the case recently released him on bail and agreed
                   to resentence him along with the other brokers. In May, the government
                   agreed to drop charges of illegal profit sharing against the brokers, and it is
                   expected to drop all charges against the 10th broker.

                   The Big Board Wednesday said it censured and permanently barred three
                   of the brokers who pleaded guilty.

                   While neither the stock exchange nor any of its officials were accused of
                   any criminal wrongdoing, the exchange did earlier this year settle an
                   unprecedented administrative proceeding brought by the SEC that found it
                   inadequately enforced its own rules from 1993 to 1998.

                   The most awkward aspect of last week's hearing, involving the question of
                   how much money was made on allegedly illegal floor trades, is testimony
                   by at least two brokers that appears to contradict what they said when
                   they pleaded guilty. While these brokers said in their pleas that they knew
                   what they did was illegal when they did it, they said last week that they
                   didn't consider many of the things they did to be wrong.

                   Rather than helping them win a lighter sentence, these brokers' testimony
                   could actually hurt them. U.S. District Judge Jed Rakoff has the option of
                   stiffening their sentences if they don't accept responsibility for the crime to
                   which they pleaded guilty. Those brokers who testified agreed to plea
                   deals as part of cooperation agreements with the government, according to
                   comments the judge made at the hearing.

                   The judge called the witnesses' inconsistencies "troubling," and said at one
                   point: "We have had repeated situations ... with witnesses who have given
                   statements ... that appear ... to be inconsistent with the statements they
                   gave under oath at the time of their guilty plea. Both of those statements
                   were sponsored by the government."

                   In response, Douglas Jensen, an assistant U.S. attorney, said, "The
                   government remains in the process of trying to explain that inconsistency,
                   and I must say to the court, sitting here today, I don't have a clear
                   explanation for the inconsistency."

                   Rob Khuzami, chief of the securities- and commodities-fraud task force of
                   the U.S. attorney's office, said: "The government questioned several
                   witnesses at the court's request, and their testimony represents their
                   positions and views on their conduct as floor brokers."

                   One broker, Michael Frayler, testified he believed his trading for Oakford,
                   which began in 1993, was legal. He didn't get his first inkling otherwise
                   until sometime in 1996. He had just bought, then sold, 5,000 shares of
                   AT&T Corp., making 37.5 cents a share.

                   "The specialist turned to me and said, nice trade," Mr. Frayler testified.
                   Mr. Frayler said the specialist, a trader who manages the order flow for a
                   particular stock, in that case was William Johnston. Mr. Johnston was then
                   also serving as the nonexecutive vice chairman of the exchange's board.

                   "I said, 'Thanks, 70% of it is mine,' " Mr. Frayler testified, adding he
                   quickly was warned by someone nearby not to speak so openly. "There
                   was a gentleman in the crowd named Barry Kaplan, who said, 'Don't do
                   that,' " testified Mr. Frayler. When Mr. Frayler mentioned his 70%, Mr.
                   Johnston "turned around and said, 'I didn't hear that,' " testified Mr.
                   Frayler.

                   Mr. Johnston at the time was head of LaBranche & Co., one of the
                   exchange's largest specialist firms. Since June 1996, he has been president
                   of the Big Board. While the testimony indicates at least one senior official,
                   Mr. Johnston, may have been aware of profit sharing, it also suggests that
                   Mr. Johnston didn't explicitly condone it, even if he didn't act on it. A Big
                   Board spokesman, speaking for Mr. Johnston, declined to comment on the
                   Frayler testimony. Mr. Kaplan, an active independent broker who hasn't
                   been named in the case, also declined to comment.

                   Mr. Frayler said Wednesday that he regrets pleading guilty last year.
                   Asked why he said in his plea that he knew what he was doing was wrong
                   at the time, he said he hadn't understood the question.

                   The government's case has suffered from revelations that the stock
                   exchange in the early 1990s didn't regard a broker's sharing profits with a
                   customer as necessarily illegal trading for his own account. Mr.
                   Kwalwasser, in response to a government question, agreed a suspicion of
                   illegal trading could hinge on whether the broker was getting 90% of the
                   profits in his customer's account or only 50%. "The larger the percentage
                   that we found, the more that it would look like it was the account of the
                   broker," he said.

                   But Mr. Kwalwasser also acknowledged the exchange didn't look for
                   profit-sharing arrangements, because first, it didn't know there were any,
                   and second, it was afraid it would be accused of setting commissions,
                   which Congress prohibited.

                   Marvin Pickholz, an attorney who frequently defends brokers in the
                   securities industry but doesn't represent any of the floor-broker
                   defendants, says this case highlights the need for coordination between the
                   SEC and the exchanges so that multiple sets of regulators won't interpret
                   the same law differently. "It's almost like beauty is in the eye of the
                   beholder," he says.

                   Write to Greg Ip at gregory.ip@wsj.com and Ann Davis at
                   ann.davis@wsj.com