The Securities and Exchange Commission has signed off on a $241 million settlement with five New York Stock Exchange specialist firms accused of putting their own interests ahead of those of their customers, the commission and the exchange said Tuesday.
The five firms — Bear Stearns subsidiary Bear Wagner Specialists, FleetBoston subsidiary Fleet Specialist Inc., LaBranche & Co., Van der Moolen Specialists and Goldman Sachs subsidiary Spear, Leeds & Kellogg — violated securities laws by executing their own orders for the shares they managed ahead of customers’ orders, thus depriving clients of fair trades and possibly better prices, the statement said.
Under the settlement, $154 million will go to customers damaged by the firms’ actions. The rest of the money represents fines that will go to the SEC and NYSE, according to the commission.
The firms, without admitting or denying the charges, will take steps to improve their regulatory compliance procedures and oversight, the SEC said.
A spokesman for the NYSE said the exchange had no further comment beyond the joint statement issued with the SEC.
Specialists on the floor of the New York Stock Exchange bring buyers and sellers together in auction-style trading, attempting to match them at a mutually acceptable price. Specialists also buy and sell the shares that they manage, and use their stock to help meet supply or demand where lacking.
However, the specialist firms named in the settlement stepped in front of other trades to make profits on their own shares, putting their customers at a disadvantage, the statement from SEC and NYSE said.
Since the NYSE announced its investigation in April, the exchange has implemented computer systems that flag questionable trades, notifying the NYSE’s internal regulators.
Van der Moolen confirmed the settlement and said it had set aside $55 million toward its share. The firm is slated to pay $57.7 million.
Goldman Sachs spokesman Ed Canaday said the firm was pleased to put the matter behind it, and that the company will continue to expand its compliance training and oversight. Spear, Leeds & Kellogg will pay $43.5 million.
A source close to the Goldman subsidiary noted that the traders responsible for illegal trading in the stocks cited by the SEC are no longer with the company, and that violations dropped off considerably as Goldman Sachs took over and merged the specialist firms in late 2000 through 2002.
Calls to the other firms involved were not immediately returned Tuesday.