The SEC has charged four brokers and a daytrader with cheating investors through a fraudulent scheme that used squawk boxes to eavesdrop on confidential order flow information, enabling them to “trade ahead” of large orders at more favorable prices.
In a complaint filed in a U.S. district court in Brooklyn, daytrader John Amore of Manhasset, N.Y., is accused of paying brokers at Citigroup, Lehman Brothers and Merrill Lynch to give him live audio access to squawk boxes broadcasting institutional orders to buy and sell securities. Amore, 42, instructed traders working for him to listen to the pirated transmissions for large customer orders and trade ahead in the same securities, betting that prices would move in response to the orders being filled.
Amore, the CEO of Watley Group from February 2002 to September 2003, allegedly conspired with four brokers—Ralph Casbarro, formerly of Citigroup Global Markets; former Lehman rep David Ghysels, Jr.; Kenneth Mahaffy, Jr., formerly at Merrill and Citigroup; and Timothy O’Connell, a former Merill rep—to place phone receivers next to the squawk boxes at their respective firms while leaving an open phone connection to the Watley offices for the duration of trading sessions.
According to the complaint, Watley daytraders traded ahead of orders they heard on those squawk boxes more than 400 times to the tune of at least $650,000 in profits. In exchange for providing access to the live transmissions, the brokers were compensated with commission-generating trades. On top of that, Casbarro and Mahaffy received a series of under-the-table kickbacks for their services, the complaint said.
By disclosing confidential customer information, the brokers violated their firms’ written policies as well as the trust owed to their employers and their fiduciary duty to investors, the SEC said. The commission is seeking disgorgement of the ill-gotten gains, fines and an injunction against future violations.
“By using that information for their personal gain, the defendants not only harm the customer, they threaten to undermine the integrity of our markets,” said Mark Schonfeld, director of the SEC’s Northeast regional office, in a prepared statement.
Linda Chatman Thomsen, director of the commission's division of enforcement, noted that its joint action with the U.S. attorney's office “sends a clear message that such abuses will not be tolerated.”