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Day traders accused in securities fraud scheme

/ Source: The Associated Press

Several former and current officers, directors, and managers of a Manhattan day trading firm were charged Tuesday in a superseding indictment with participating in a “front-running” securities fraud scheme that generated more than $800,000 in illegal profits, prosecutors said.

New charges were filed against Robert F. Malin, vice chairman and president of A.B. Watley Group Inc., and Linus Nwaigwe, the company’s director of compliance and a former National Association of Securities Dealers compliance examiner; Michael A. Picone, Watley’s former chief operating officer, and Keevan H. Leonard, Watley’s former supervisor of proprietary trading.

Also named in the superseding indictment were several people originally indicted in August 2005. They include Kenneth E. Mahaffy, Jr., a former Merrill Lynch & Co. and Citigroup Global Markets Inc. stock broker; Timothy J. O’Connell, a former Merrill stock broker; and David G. Ghysels, Jr., a former Lehman Brothers stock broker.

In addition to the criminal charges, the Securities and Exchange Commission filed a civil complaint against Malin, Nwaigwe, Picone and Leonard.

“Front-running” occurs when stock brokers inform traders outside the brokerage firm, such as day traders, that a customer of the brokerage firm has placed a large order to buy or sell a particular stock, prosecutors said. The information allows day traders to trade in the same stock before the customer’s order is executed, in anticipation of a movement in price. As a result, the firm’s customers often do not obtain as favorable a price as they might have.

Steven Scaring, counsel for Mahaffy, has not seen the new indictment yet, but expects that his client will plead not guilty to it as he did to the original indictment.

“We will try to get this case tried as soon as possible. Mr. Mahaffy fully expects to be vindicated,” Scaring said.

O’Connell’s lawyer, Mildred Whalen, also said she hadn’t seen the superseding indictment. “But it is my understanding that there are no new charges against Mr. O’Connell, that the new indictment added on defendants,” she said.

Attorneys representing Ghysels, Malin, Nwaigwe, Picone and Leonard were unavailable for comment.

The superseding indictment unsealed Tuesday alleges that between January 2002 and February 2004, Mahaffey, O’Connell, Ghysels and Coughlin routinely provided day traders at three New York City-based day trading firms with customer order information, which was disseminated through internal speaker systems, known as “squawk boxes.”

Some of the brokers also accepted cash bribes from the day traders in exchange for squawk box access, prosecutors said.

The superseding indictment alleges that the day traders profited from the scheme by trading ahead of the large orders that were broadcast through the squawk boxes. When the squawk boxes disseminated information concerning a large sell order for a particular stock, the day traders would “short sell” the same securities before the larger order was executed.

Either way, the day traders profited from the movement in price, prosecutors said.

“By bribing unscrupulous stock brokers, the former A.B. Watley managers and day traders who were charged today were able to secretly tap into a steady flow of extremely valuable, confidential information from some of Wall Street’s most well known institutions,” U.S. Attorney Roslynn Mauskopf said in a statement.

Prosecutors also announced Tuesday that Paul F. Coughlin, another former Merrill broker, and William B. Deakins, a former Watley day trader, pleaded guilty to related charges of conspiracy to commit securities fraud for their roles in the scheme. Ralph D. Casbarro, another former Citigroup broker, pleaded guilty to conspiracy to commit securities fraud last October.

Attorneys for Coughlin and Deakins were also unavailable for comment.