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October 14, 2008

NYSE Regulation Could Charge More Specialists

By Peter Chapman

New York Stock Exchange Regulation, which charged 17 specialists with trading violations in 2005, could add more names to the list.

The regulator is waiting for the Securities and Exchange Commission to finish its administrative proceedings against several former specialists (see related article). The cases stem from the trading ahead and interpositioning scandal of the early part of the decade that resulted in five specialist firms paying about $250 million in fines.

NYSE Reg already settled the cases of six of the 17 ex-traders. It has put the fate of the remaining 11 on hold until the SEC wraps up its cases. The SEC is working through its caseload now that the cases prosecuted by the U.S. Department of Justice have wrapped up.

Sources say the list of 11 men charged is likely to grow. NYSE Reg would not comment, but there is precedent. NYSE Reg brought two cases after the original 17 men were charged in 2005. In February 2007, NYSE Reg announced "disciplinary actions" against two former specialists, Myles Gillespie, former president and chief supervisory specialist of Fleet Specialist, now Banc of America Specialists, and Thomas Verdiglione, a specialist with Van der Moolen Specialists USA, for their roles in the scandal. Both men agreed to a settlement with NYSE Reg.

But one legal source at a trading firm familiar with NYSE Reg's thinking doubts that its case has much of a leg to stand on, given that specialists have beaten the charges handily in federal criminal court. He said that, despite NYSE Reg's lower burden of proof than the feds, NYSE is "rattling its saber" to get the defendants to settle and has no intention of charging more specialists. "These cases have been exceedingly cumbersome and difficult to prove," he said.

A NYSE Reg spokesperson could not say when the regulator would begin its hearings. As to the impact the SEC cases could have on the NYSE Reg hearings, the spokesperson would only say: "We reserve the right to consider our options once the SEC cases are finalized."

Most of the six traders who settled with NYSE Reg were charged only with violating NYSE rules. At least two, though-Joe Bongiorno and Pat McGagh-were charged with violating the anti-fraud rules of the Securities Exchange Act of 1934.

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