Assessing
Wall Street scandals | | |
| "Nasdaq is a computer network," Weiss
points out. "No specialists, no floor brokers, no trading floor. Most stock
markets nowadays, from Tokyo to London, are like that -- all electronic."
But the NYSE maintains that the specialist system is superior
to computer networks. For one thing, the frenzy of market activity can't be captured
by focusing cameras on a computer network. Says Weiss, "The
NYSE and its defenders say that having people throwing papers around on a trading
floor contributes measurably to the smooth flow of the markets generally, thereby
justifying the existence of the specialist system and the existence of the exchange
and the existence of the big building at Wall and Broad with the columns in front,
and all salaries and benefits and pensions paid therein." Weiss's
book is laced with sardonic humor, provoking chortles, guffaws and at times some
rather uneasy laughter. So how did the aforementioned specialists
get into trouble? Apparently some were found to have made trades that were "improperly
positioned between buyers and sellers," putting their customers at a disadvantage.
At the turn of the 21st century, over a period of several years, they made trades
ahead of customers thousands of times, resulting in hundreds of thousands of dollars
(and sometimes millions of dollars) in improper profits for their specialist firms.
But get this: These illicit trades accounted for less than 1 percent of the volume
of trades executed by each specialist. Does that minimize the
sin at all, from your point of view? From the perspective of
federal prosecutors, such gains are your losses. The specialist firms involved
already settled the civil cases related to the trading scandal, having paid out
$248 million in 2004 without admitting or denying wrongdoing. This, by the way,
is the standard way that Wall Street firms handle their misdeeds. When they are
called on by a government regulatory agency to right a wrong, they generally pay
fines, but do not admit or deny any wrongdoing. It seems like a way to do penance
while avoiding the uncomfortable moment in the confessional. Status
of specialists
So far, of the 15 indictments made a year and a half
ago, charges were dropped for a couple of specialists, two were acquitted at trial
and two pleaded guilty in May, receiving prison sentences of 27 months and fines
of $250,000 each. In July, two specialists were convicted of securities fraud.
Six cases have yet to be tried. Most recently, in October,
one specialist, whose trades were found to be more problematic than the others,
was convicted of three counts of securities fraud. The prosecutor said in opening
arguments that the trader "improperly positioned himself between public buy
and sell orders more than 26,000 times between 1999 and 2003. As a result, the
specialist made more than $4.5 million in illegal profits for his firm,"
according to a report in The Wall Street Journal. The defendant's
lawyer argued that the trades represented less than 1 percent of the trades executed
by the specialist and that these "were simply the result of mistakes and
miscommunication during a frenzied period of trading at the Big Board."
Let's see, 26,000 trades resulting from mistakes and
miscommunication. Wow! That has to be a record. Though this trader
potentially faces 20 years in prison, he will likely get a lighter
sentence. Why? Because the presiding judge "raised questions
about the government's case, saying there 'is some fuzziness in
the law,'" according to The Wall Street Journal. Among the
judge's observations: These trades appear to be commonplace at the
Big Board.
Just
because it is common, does that make it OK in your book? And what about other
Wall Street scandals? Are the underhanded slights against individual investors
something we should just accept as part of the cost of investing in the stock
market? Or is there something inherently wrong with companies making profits at
the expense of unwitting investors?
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