Washington, D.C., Aug. 15, 2005 – LAWFUEL – The Law News Network – The Securities and Exchange Commission today charged four brokers and a day trader with cheating investors through a fraudulent scheme that used squawk boxes to eavesdrop on the confidential order flow of major brokerages so they could “trade ahead” of large orders at better prices.
The day trader, John J. Amore, is charged with paying brokers at Citigroup, Lehman Brothers and Merrill Lynch to provide live audio access to those firms’ “squawk boxes” – devices that broadcast, within a securities firm, institutional orders to buy and sell large blocks of securities. Amore directed traders working for him to listen to the pirated squawk boxes and trade ahead of the institutional orders in order to profit from price movements that resulted from execution of the large customer order. The brokers charged are Ralph D. Casbarro, formerly at Citigroup Global Markets, David G. Ghysels, Jr., formerly at Lehman Brothers, Kenneth E. Mahaffy, Jr., formerly at Merrill Lynch and Citigroup, and Timothy J. O’Connell, formerly at Merrill Lynch.
Linda Chatman Thomsen, Director of the Commission’s Division of Enforcement, said, “These brokers sold day traders real-time access to their firms’ confidential information on institutional orders to enable the day traders to profit from the information. Our joint action with the U.S. Attorney’s Office sends a clear message that such abuses will not be tolerated.”
Mark K. Schonfeld, Director of the Commission’s Northeast Regional Office, said, “These brokers were duty-bound to keep information about large customer orders confidential and to use it to benefit the customer. By using that information for their personal gain, the defendants not only harm the customer, they threaten to undermine the integrity of our markets.”
The Commission charged the following individuals:
Amore, age 42, a resident of Manhasset, N.Y. From approximately February 2002 to September 2003, Amore was the chief executive officer of Watley Group, a publicly-traded company that was the parent of A.B.Watley, Inc., a registered broker-dealer.
Casbarro, age 43, a resident of Bayside, N.Y. From February 1995 to March 2005, Casbarro was employed as a registered representative in a Citigroup office in New York, N.Y.
Ghysels, age 47, a resident of West Palm Beach, Fla. From March 27, 2001 to March 28, 2003, Ghysels was employed as a registered representative in the Lehman office in Boca Raton, Fla.
Mahaffy, age 50, a resident of Huntington, N.Y. From December 1997 to February 2003, Mahaffy was employed as a registered representative at the Merrill Lynch office in Garden City, N.Y., and from February 2003 to June 2005 was employed as a registered representative in the Citigroup office in Melville, N.Y.
O’Connell, age 40, a resident of Carle Place, N.Y. From August 1997 through February 2005, O’Connell was employed as a registered representative in Merrill Lynch’s office in Garden City, N.Y.
The Commission alleges the following: Amore and others at Watley asked Casbarro, Ghysels, Mahaffy, and O’Connell to furnish access to their respective firms’ institutional equities squawk boxes. The brokers then placed their telephone receivers next to the squawk boxes and left open phone connections to the Watley office in place for virtually entire trading days. Amore and the proprietary traders at Watley listened for indications on the squawk boxes that firms had received large customer orders and then “traded ahead” in the same securities, betting that the prices of the securities would move in response to the subsequent filling of the customer orders.
Between at least June 2002 and September 2003, the Watley day traders traded ahead of orders they heard on the Citigroup, Merrill, and Lehman squawk boxes on more than 400 occasions, making gross profits of at least $650,000. The Commission alleges that, in exchange for live audio access to the squawk boxes, Amore, together with others at Watley, compensated the brokers with commission-generating trades. Additionally, Watley traders compensated Casbarro and Mahaffy with secret cash payments.
By divulging confidential information concerning customer orders, the brokers breached duties of confidentiality and trust they owed to their employers and to their employers’ customers. These brokers also violated their firm’s written policies requiring confidential treatment of customer information.
The Commission’s complaint, which was filed in the United States District Court for the Eastern District of New York in Brooklyn, charges the defendants with securities fraud in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5, and seeks disgorgement of illegal profits, penalties, and an injunction against future violations.
The Commission acknowledges the assistance of the United States Attorney’s Office for the Eastern District of New York and the United States Postal Inspection Service.