updated 5/12/2006 12:14:11 PM ET 2006-05-12T16:14:11

Two specialists who managed trades on the floor of the New York Stock Exchange pleaded guilty Friday to securities fraud in what a prosecutor called a "groundbreaking" development in a new area of prosecution.

Joseph Bongiorno, 51, and Patrick McGagh Jr., 40, entered the pleas in U.S. District Court in Manhattan, admitting that they put their companies' orders ahead of customers' orders.

Assistant U.S. Attorney Lauren Goldberg said the pleas "are groundbreaking on their own because they are expected to change the tenor" of cases against a dozen other specialists facing criminal charges in a case brought last year.

Goldberg said leniency was built into a plea agreement the government reached with both of the men, an acknowledgment of the significant role the pleas could play in an area of law where charges had never before been brought.

U.S. District Judge Sidney H. Stein set sentencing for both men for Aug. 10.

According to their plea agreements, Bongiorno faces a recommended prison term of between three years and 10 months and four years and nine months. McGagh would face between four years and nine months and five years and 11 months.

Without the agreements, both men would face a maximum penalty of 20 years in prison and fines of up to $5 million or twice their gain or victims' loss, whichever is greater.

The defendants were among 15 people charged after a probe of specialists working on the floor of the stock exchange revealed they had allegedly used their inside positions to earn an estimated $20 million in illicit gains for themselves and their firms. One specialist is a fugitive; cases are pending against the others before five different judges in Manhattan.

Federal authorities said the crimes occurred between 1999 and mid-2003 as specialists at five firms put their companies' orders ahead of customers' orders, causing those customers to get inferior prices — a scheme the NYSE's internal regulators failed to catch.

Specialists operate "open-outcry" auctions — a method of commodities trading involving often loud verbal bids and offers — on the floor of the NYSE. They match buy and sell orders for customers of the stocks they oversee. They also use their firms' money to buy shares when nobody else wants to buy and to sell shares from their own inventory when nobody else wants to sell.

Bongiorno admitted during his plea that he improperly traded shares of the technology company Hewlett-Packard Co. "I knew it was wrong," he told the judge.

McGagh admitted that he improperly traded shares of the drugmaker Pfizer Inc. "I knew at the time that I was doing this that I was wrong and I am sorry," he said.

Outside court, both men declined to comment. They remain free on bail until sentencing.

Since the criminal investigation and civil charges brought against individuals and firms by the Securities and Exchange Commission, the exchange has said it has made changes in its surveillance and enforcement plans on its floor.

NYSE specialist firms have paid a total of $247 million to settle SEC charges.

The NYSE has said specialist firms gained $155 million in illegal profits over five years, a time when the exchange handled $50 trillion in trades.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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