Alleged Illegal NYSE Trading Ring Broken

Federal authorities and New York Stock Exchange officials say they have cracked an illegal trading conspiracy operating on the floor of the Big Board that reaped $11.1 million in illicit profits over five years.

For the first time in NYSE history, eight floor brokers were criminally charged with exploiting their positions to secretly make stock trades for their own profit, authorities announced Wednesday.

One of the eight is a stock exchange official whose job included policing floor brokers.

Also charged were a brokerage firm, Oakford Corp., and its two owners, who allegedly conspired with the floor brokers to draw up backdated order tickets and other phony documents to cover up the scheme.

The floor brokers and Oakford allegedly split the profits, with 70% to 90% going to the brokers and the rest to the firm and its owners, Chief Executive William S. Killeen and Chief Financial Officer Thomas W. Bock.

Authorities said the brokers received illegal gains of $8.8 million while Oakford, Killeen and Bock got $2.3 million.

The Big Board summarily suspended the eight floor brokers and four brokerage firms affiliated with them and is seeking to permanently bar them from the exchange.

The floor brokers are John D’Alessio, the NYSE official; Christine Beyer; Robert Carucci; Thomas Cavallino; Michael Frayler; Edward Mueger; John Savarese; and Mark Savarese.

Lawyers for the brokers and firms either declined to comment or could not be reached. If convicted, most of the defendants face a maximum of 25 years in prison and fines of up to $2.25 million or double the illegal gains, plus restitution.

The alleged scheme is akin to insider trading. As NYSE Chairman Richard A. Grasso explained in a news conference announcing the enforcement actions, floor brokers often hear about large block trades or other transactions before the information reaches the public.

“On the floor, you can hear and feel certain things going on and feel the momentum building around a stock,” said an experienced trader in NYSE stocks who asked not to be identified.

Even a head start of only a few seconds would give a floor broker an opportunity to mimic such trades and profit from the price changes they create.

Because of the unfair advantage, floor brokers are barred by federal law--except under limited exceptions--from trading for their personal benefit. They are allowed only to buy or sell stocks on behalf of customers--individuals or securities firms--who pay them a commission for the service.

Most of the NYSE’s 900 floor brokers are employees of securities firms, but about 200--including those named in the alleged scheme--are independent, accepting orders from firms that don’t have their own floor brokers.

Although it is difficult to pinpoint a specific victim in such a fraud, officials said widespread violations would undermine public confidence in the markets.

The alleged scheme was “a direct assault on the integrity of one of the nation’s foremost securities markets,” said Carmen J. Lawrence, regional administrator of the U.S. Securities and Exchange Commission, which filed a civil suit seeking fines and disgorgement of the illegal profits.

U.S. Atty. Mary Jo White, whose office led the investigation, said the alleged scheme “certainly is not an isolated activity.” The probe is continuing, she said.

Grasso said he does not believe such activity is pervasive on the Big Board. He said the exchange has learned some “new lessons” and will make appropriate changes in its regulatory practices, although he did not specify what measures would be taken.

According to a federal criminal complaint, Killeen and Bock began recruiting floor brokers around October 1993 and setting up accounts at Oakford to handle their trades.

Trades were made in such Big Board stocks as AT&T;, General Motors Corp., IBM and Loew’s Corp., the complaint states.

The account and trading information allegedly was falsified to make it appear that the brokers were executing orders initiated by Oakford customers. The profits were distributed to the brokers through monthly payments disguised as normal commissions on the trades, according to the charges.

Killeen and Bock also were charged in a separate, 17-count indictment with conspiracy and tax evasion along with securities traders Gerald Petrillo and Richard Solomon.

According to the indictment, Killeen and Bock paid Petrillo $400,000 in alleged kickbacks in 1993 and 1994 for steering business to Oakford.

Those three and Solomon are accused of diverting profitable securities trades to accounts held by a corporation Solomon controlled which had preexisting tax losses. The tax losses allegedly were used to wipe out taxable gains from the trades, and the proceeds split among the four.