SEC Settles Nasdaq Price-Fixing Case; Cites Broad Supervisory Failures

Last month, the SEC concluded its nearly five-year-old investigation of widespread price-fixing and manipulation on Nasdaq. Twenty-eight firms and 51 individuals were cited and fined a total of $26 million.But top industry execs are off the hook despite almost complete supervisory collapses at several firms.In its enforcement order, the SEC says some (unspecified) firms simply failed to supervise

Last month, the SEC concluded its nearly five-year-old investigation of widespread price-fixing and manipulation on Nasdaq. Twenty-eight firms and 51 individuals were cited and fined a total of $26 million.

But top industry execs are off the hook despite almost complete supervisory collapses at several firms.

In its enforcement order, the SEC says some (unspecified) firms simply failed to supervise their head traders. In other cases, compliance personnel and senior management to whom the traders reported were not adequately staffed or were not familiar with trading operations, the SEC says.

In fact, the "head traders of these firms sometimes themselves engaged in underlying violations," the SEC claims.

Yet out of 28 firms, only three head traders were sanctioned--the OTC trading chiefs from PaineWebber, J.P. Morgan and UBS Securities (which merged with Warburg Dillon Read last summer). No senior executives of any firms were personally cited in the case regarding Nasdaq problems--one of the largest and most widespread Wall Street scandals ever.

Paul Gerlach, an associate director in the SEC's division of enforcement, defends the settlement. "We went as high [up in the firms] as we thought appropriate based on the facts of the investigation."

The three trading heads were sanctioned because "the evidence disclosed that they were aware of red flags ... that there was misconduct occurring by their subordinates," Gerlach says.

Because the overall settlement dealt with inadequate or nonexistent procedures, "that caused us to conclude that the firm should be charged with failure to supervise, rather than single out a particular person in management or compliance."

PaineWebber got an especially tough punishment--a $6.3 million fine, and eight individuals cited. Bill Singer, a New York securities attorney who both sues and defends market makers, speculates that PaineWebber and other hard-hit firms simply had more trader tapes archived. Tapes were a principal source of evidence in the cases.

Gerlach dismisses that idea, saying some firms that had tapes were not punished, and some of the dealers named had no tapes.

The tapes, covering trading activity during parts of 1994, show rampant price manipulation and collusion. For example, instead of competing, traders routinely colluded to move prices up before selling to clients, or vice versa.

The current enforcement action is a follow-up to an investigation of Nasdaq and the NASD completed in 1996. In that action, the SEC ordered the NASD to undertake a series of reforms. Evidence disclosed in a report from that investigation showed that an "even-eighth" pricing convention between most Nasdaq dealers occurred for as long as three decades. The current action penalizes firms and traders for specific cases of illegal quote movement.

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