Probe Is Bearing Down on Nasdaq
The Justice Department, nearing the end of its antitrust investigation of the Nasdaq Stock Market, is poised to notify major Wall Street trading firms of the evidence against them and the civil charges they may face, sources close to the investigation said Monday.
Since 1994 the department’s antitrust division has been investigating allegations that Nasdaq dealers, including some of the biggest, best-known Wall Street brokerage firms, colluded to keep profit margins wide on Nasdaq stocks. The dealers have strongly denied any wrongdoing.
Sources said the Justice Department might invite the Wall Street firms to meetings as early as next week if it can clear one last legal hurdle. The department must work out an agreement with the potential defendants under which its lawyers may divulge to one firm confidential evidence obtained from another. The sources said Justice was close to reaching an agreement on the issue with the firms.
Sources estimated the number of potential target firms at between 33 and 50, from such well-known, full-service Wall Street investment houses as Smith Barney and Morgan Stanley to other firms that do little besides make markets in Nasdaq stocks. Among the largest are Troster Singer Corp. and Herzog, Heine, Geduld Inc.
But it was not clear how many firms would actually be notified or what the scope of the threatened charges would be.
Initiating settlement talks has been a goal of government lawyers since at least last August, when Justice issued a broad invitation to Nasdaq dealers to consider a settlement.
The dealers balked, demanding to know first what evidence Justice had amassed. After months of further investigation, including an estimated 100 depositions, Justice is now prepared to show its cards, the sources said.
Gina Talamona, a spokeswoman for the antitrust division, declined to comment on the investigation. Catherine A. Ludden, a lawyer representing the big Nasdaq dealer Mayer & Schweitzer who was designated by the various firms’ lawyers to answer press questions, also declined to comment.
In court papers filed last October, Justice said its investigation focused on “allegations of anti-competitive conduct among Nasdaq market makers, including possible collusion, boycotts, and refusals to deal.”
The investigation was prompted by a study by two business school professors who noted that the “spread” on even the most heavily traded Nasdaq stocks was seldom smaller than one-quarter, or 25 cents. The spread, essentially dealers’ profit margin, is the gap between the price at which a dealer offers to buy a stock and the higher price at which it offers to sell.
The study found that the only reasonable explanation that Nasdaq did not trade with narrower spreads of one-eighth, which are typical on the New York Stock Exchange, was “tacit collusion” by Nasdaq dealers. Since the study appeared, a number of large Nasdaq-listed stocks have begun trading regularly with one-eighth spreads.
Justice also is understood to be looking into allegations that dealers retaliated against firms that tried to narrow spreads.
Although no settlement is on the table, sources said one might include an injunction under which the firms neither admit nor deny wrongdoing but agree not to engage in anti-competitive practices such as manipulating spreads.
Some of the target firms have been reluctant to consider a settlement for fear if harming their defense in a private class-action lawsuit in federal court in New York. The lawsuit, which seeks treble damages as allowed under antitrust law, could be extremely costly to the firms.
