“It is vital for firms to carefully supervise trades relating to business strategies pegged to the closing price to protect customers and the market from excess volatility,” said Susan Merrill, chief of enforcement, NYSE Regulation.
Lehman entered into irrevocable facilitation contracts with certain customers to purchase blocks of a certain stock at a 0.33 cent to two cent premium over the stock’s closing price. On December 11, 2002, the Firm effected several transactions for the sale of 2,050,191 shares of the stock at or near the close of trading that were disruptive and caused excess market volatility. The Firm’s final transaction in the stock for the day was a sale of 1.6 million shares, i.e., approximately 78 percent of its position. The Firm asked for a bid on this block as the closing bell was ringing. These circumstances did not provide an opportunity for contra side interest to develop and react to its order. The Firm should have been aware that the price of the stock could decline. As a result, this transaction had the effect of causing the price of the stock to close down from $59.61 to $59.00 and Lehman’s customers to potentially receive a lower price on the facilitation contracts. Further, because Lehman sold approximately 22 percent of its position minutes earlier at prices higher than the closing price, the Firm also realized a profit by its conduct.
In violation of NYSE Rule 342, Lehman failed to have reasonable policies and procedures in place to supervise the manner in which trades relating to facilitation contracts for the purchase of stock at prices derived from the closing price were submitted, such as those involving the stock at issue, particularly where there was an economic incentive for the Firm to impact the closing price. Lehman also failed to have adequate controls in place to evaluate and scrutinize the risks associated with such trading and to prevent such trades from occurring at the close when they could be disruptive or cause excess market volatility. Thus, Lehman also failed to adhere to principles of good business practices with respect to the trades at issue in violation of NYSE Rule 401.
Member Firms have been on notice since the NYSE issued Information Memo 95-28 in 1995 that a firm positioning itself to facilitate a customer order that leaves a portion of its position to be executed at or near the close must proceed consistent with just and equitable principles of trade and must establish and maintain procedures reasonably designed to review facilitation activities for compliance with Exchange rules and the federal securities laws.
In settling these charges brought by NYSE Regulation, Lehman Brothers neither admitted nor denied the charges.
