Nasdaq Dealers Mull Next Move in Light of U.S. Probe Evidence

Big Wall Street firms are scrambling to come up with a strategy after being shown what the Justice Department contends is massive evidence of collusion in setting prices of Nasdaq stocks, sources close to the civil antitrust investigation said Thursday.

Over the last week, more than 20 Nasdaq dealer firms--including some of the best-known Wall Street investment houses--were finally shown a compilation of the department’s evidence in an investigation that has been underway since late 1994.

Sources with access to the information said the Justice Department has enough evidence to make a credible threat of filing civil antitrust charges. But although the sources say officials believe they have obtained “smoking guns”--in the form of taped conversations among traders and cooperation by some traders with the investigation--some individuals working for dealer firms denied that any of the evidence was surprising or conclusive.

After months of intense investigation, the department decided to show its strongest cards in hope of persuading dealers to negotiate a settlement. The firms that have been called in are said to include such brokerage houses as Merrill Lynch & Co. and Smith Barney & Co., as well as big firms that do little besides trading in hundreds of Nasdaq stocks, including firms such as Mayer & Schweitzer, a unit of Charles Schwab & Co., and Herzog, Heine, Geduld Inc. The sources said lawyers for these firms are now mulling over the evidence and consulting with their clients on whether to begin settlement talks.

The firms, all of which have denied any wrongdoing, declined to comment or did not respond to phone calls. A Justice Department spokeswoman declined to answer any questions about the evidence.

In order to be able to show lawyers the confidential evidence, the department first had to obtain a strict secrecy agreement from them. None of the lawyers reached by The Times would talk on the record, and details of the evidence remain sketchy. But sources said the evidence includes excerpts from thousands of hours of taped telephone conversations among traders, which officials contend include overt talk among traders at different firms about fixing the “spreads” on Nasdaq stocks.

Spreads, essentially dealers’ profit margins, are the gap between the price dealers are willing to pay to buy a stock and the higher price at which they offer to sell it. Until recently, few Nasdaq stocks traded with spreads smaller than a quarter of a point, or 25 cents, even though stocks listed on the New York Stock Exchange commonly trade with spreads of only one-eighth, or 12.5 cents.

The evidence shown to the lawyers is also said to focus on a private meeting, first reported in The Times, that took place May 24, 1994, at the New York headquarters of Bear, Stearns & Co. At the meeting, Richard Ketchum, chief operating officer of the National Assn. of Securities Dealers, advised top traders from Nasdaq dealer firms to narrow spreads on some big, widely traded stocks or risk intervention from regulators. Beginning three days later, the spreads on three of the biggest Nasdaq stocks, Apple Computer, Microsoft and Amgen, suddenly narrowed to one-eighth and stayed there.

The Justice Department contends this proves that the dealer firms acted in concert to set the spreads, rather than allowing them to be set by market forces. Dealer firms have denied that the sudden narrowing of the spreads is evidence of wrongdoing.

In a separate development, Securities and Exchange Commission Chairman Arthur Levitt said Thursday that he expects a separate SEC investigation of Nasdaq to be concluded by August.

In the wake of a major reorganization at the NASD and changes designed to eliminate the alleged abuses, sources said the SEC now is unlikely to file charges against the NASD in federal court. Instead, it is expected to publicly file a lengthy report detailing numerous alleged violations. It is also considering the possibility of a settlement with the NASD that would include some SEC administrative charges of violations.