Brokers Charded With Accepting Bribes

By Eric Dash
The New York Times
August 17, 2005

Four former stockbrokers at major U.S. securities firms have been accused of accepting bribes from day traders who wanted to eavesdrop on customer order information to make easy profits. In separate actions on Monday, the U.S. Justice Department and the Securities and Exchange Commission contended that day traders had paid thousands of dollars to the four brokers - who worked at Citigroup, Lehman Brothers and Merrill Lynch - for access to their so-called squawk box intercoms, which broadcast their biggest customers' stock orders. The traders, in turn, used that information to buy those same stocks before the large orders bid up the price, then quickly sold them for hundreds of thousands of dollars in gains.

This type of stock-selling scheme is known as front running. The Justice Department unsealed a criminal indictment, and the SEC filed a separate civil complaint in U.S. District Court in New York. Regulators have been investigating whether customer order information is being used improperly by Wall Street brokerage houses, either to generate business from outside investors or to enhance their own proprietary trading. The actions suggest that the investigation may be expanded to include criminal indictments of at least two day traders.

On Monday, the spotlight was on the four brokers, who appeared with their lawyers at the federal court: Ralph Casbarro, 43, a former Citigroup broker; David Ghysels, 47, a former Lehman broker; Kenneth Mahaffy Jr., 50, a former Citigroup and Merrill Lynch broker; and Timothy O'Connell, 40, a Merrill Lynch broker.

All four entered pleas of not guilty to charges of securities fraud and conspiracy cited in the criminal indictment; if convicted, they could face as much as 25 years in prison and $250,000 in fines on each count. They must return for a hearing before Judge I. Leo Glasser on Sept. 12. Absent from the arraignment was John Amore, the former chief executive of the day-trading firm A.B. Watley, who the SEC alleges orchestrated the scheme. The complaint also alleged that at least one other executive from another day-trading firm was involved with O'Connell in a similar scheme.

Amore was not named in the criminal indictment. Sean Casey, an assistant U.S. attorney, declined to say whether Amore was being investigated, nor would he discuss any potential links between the unnamed day trader and Millennium Brokerage, a day-trading firm that was named in both actions. The hearing on Monday was the latest development in a case that the Justice Department, the SEC and the U.S. Postal Inspection Service have been examining since at least May 2004. So far, at least two people have pleaded guilty to charges related to the investigation: Benjamin Grimaldi, a former Merrill Lynch compliance officer who was charged with witness tampering; and Irene Santiago, O'Connell's assistant, who was charged with conspiracy to obstruct justice by lying to investigators.

According to the SEC's complaint, the A.B. Watley investors traded ahead more than 400 times after hearing live orders from telephone receivers placed next to the Citigroup, Merrill and Lehman squawk boxes. After learning that institutional investors planned to buy thousands of shares in companies like Commerce Bancorp and EMC, they made similar decisions and landed a windfall, the complaint said. The day traders made at least $650,000 in profits, the SEC charged. Lawyers for O'Connell, Casbarro and Mahaffy declined to comment. But Jeffrey Hoffman, the lawyer for Ghysels, said his client would be vindicated because the information was not confidential.

Labels: Department of Justice