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NYSE And SEC Jointly Fine Spear, Leeds & Kellogg, L.P. $450,000 - Firm Disciplined For Failing To Reasonably Supervise Its Employees To Prevent Their Aiding And Abetting A Customer To "Mark The Close" Of A Listed Security

Date 21/07/2003

The New York Stock Exchange and the Securities and Exchange Commission, as result of a coordinated investigation, today announced enforcement actions against Spear, Leeds & Kellogg, L.P., an NYSE member firm, in which it was alleged that the firm failed to establish and maintain reasonable supervisory procedures and systems to prevent two of its trading floor order clerks from assisting one of the firm's direct-access customers in marking the close of an NYSE-listed security (Southern Union Company: SUG). The NYSE and SEC actions announced today do not involve Spear, Leeds & Kellogg Specialists LLC, which was not the specialist for Southern Union Company at the time of the misconduct. The actions arose from the floor brokerage business of Spear, Leeds & Kellogg, L.P. (a separate corporation). The firm's customer, Baron Capital, Inc., an NASD member, was a registered broker-dealer and direct-access customer of Spear Leeds at the time of the misconduct.

"Marking the close" is the manipulative practice of attempting to influence the closing price of a stock by executing orders at or near the close of the market.

In settling the matter, Spear Leeds neither admitted nor denied the allegations or findings.

Penalties

With respect to the NYSE action, the firm agreed to pay a penalty in the amount of $450,000, which will be shared with the SEC in connection with its proceeding against Spear Leeds.1 In addition to the censure imposed by the NYSE, to which the firm also consented, Spear Leeds agreed to comply with an undertaking (discussed at the end of this release) concerning its supervisory procedures and systems.

Background

In a previously settled proceeding by the SEC against Baron Capital (in which that firm neither admitted nor denied the findings or allegations), Baron Capital was found to have "marked the close" of SUG stock during October-November 1999, which was the pricing period of SUG's merger with Pennsylvania Enterprises. Baron Capital marked the close by entering purchase orders with Spear Leeds at or near the close of trading to raise and maintain SUG's price during a period when the closing price of SUG stock determined the consideration paid by SUG in consummating its acquisition of Pennsylvania Enterprises. 2

NYSE Hearing Panel Findings

  • "Recorded telephone conversations between Baron Capital traders and the Firm order clerks and other evidence, indicate that the two Firm order clerks were aware, or were reckless in not knowing, that Baron Capital was entering a series of purchase orders for SUG at or near the close of the market to raise or maintain the price of SUG, and that the Firm order clerks assisted Baron Capital in marking the close." Examples of the recorded telephone conversations and details of the specific manipulative trades are included in the NYSE decision.

  • During the relevant period, Spear Leeds lacked adequate supervisory procedures and systems with respect to monitoring for marking the close by its direct access customers and, as a result, the firm failed to prevent two of its trading floor order clerks from assisting Baron Capital in marking the close of an NYSE-listed security. Among other things, the panel found that the firm did not conduct periodic reviews of trades at or near the close of the market to detect patterns of marking the close by these customers.

  • The firm's procedures for supervision of its direct access business on the floor during the relevant period permitted, for example, the firm's floor supervisor and the head order clerk to, in effect, supervise themselves with respect to trades they handled for direct access customers of the firm.

Undertaking Requirement

With respect to the NYSE undertaking requirement, Spear Leeds agreed to retain an independent consultant to review and prepare a report of the firm's procedures and systems, including recommendations for additional systems and procedures, if necessary. Spear Leeds may satisfy the Exchange's requirement by complying with the review conducted and the report prepared by the independent consultant in accordance with the terms set forth in the SEC order against Spear Leeds.

About NYSE Regulation

The New York Stock Exchange is the designated examining authority for the major securities firms in the United States, including more than 250 member firms that deal with the public and account for more than 85 percent of the public customer accounts carried by broker-dealers. These firms service 93 million customer accounts, operate from more than 21,000 branch offices around the world and employ approximately 157,000 registered personnel. The NYSE is committed to strong and effective regulation of its members and member firms to protect investors, the health of the financial system, and the integrity of the capital-formation process. While self regulation in the U.S. securities industry begins with the broker-dealer, the NYSE plays a critical role by maintaining an extensive system for monitoring and regulating the activities of its membership. The Securities and Exchange Commission oversees these activities.

NYSE Regulation consists of three divisions: Member Firm Regulation, responsible for the financial, operational and sales-practice regulation of member organizations; Market Surveillance, responsible for surveillance of all trading activities at the Exchange; and Enforcement, which investigates and prosecutes violators of NYSE rules and federal securities laws. There are approximately 560 people in NYSE Regulation, representing approximately one-third of the Exchange's staff.

1 In See, SEC order against Spear, Leeds & Kellogg, L.P. at Securities Exchange Act of 1934 Release No. 48199/ July 21, 2003; Admin. Proc. File No. 3-11189.
2 In See, SEC order against Baron Capital, Inc. et al. at Securities Exchange Act of 1934 Release No. 47751/April 29, 2003; Admin. Proc. File No. 3-11096.