SEC charges four brokers in squawk box case

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Prosecutors and regulators on Monday pressed criminal and civil fraud charges against former brokers at leading investment banks who allegedly let day traders listen in on their clients' orders to buy and sell securities.

The market-sensitive information which was relayed from the banks' system of “squawk boxes” enabled the traders to make profits of at least $650,000, it was claimed. In return, the brokers allegedly received kickbacks and bribes that amounted to thousands of dollars.

Squawk boxes are devices that are used internally by Wall Street firms to broadcast details of orders to buy or sell securities. The information relayed over the systems is supposed to be kept confidential.

The Securities and Exchange Commission is expected to bring more cases to court as it intensifies its focus on the leaking of privileged information.

Four former employees of Citigroup, Lehman Brothers and Merrill Lynch pleaded not guilty to criminal fraud charges in a Brooklyn courtroom yesterday. The case was brought by the US attorney for the eastern district of New York and the SEC.

Civil fraud charges were also issued by the SEC against John Amore, former chief executive of Watley Group, whose day traders allegedly used the information to generate profits for the firm.

The SEC alleged that Watley's employees were able to make profits of $650,000 by trading ahead of the large institutional orders they heard being placed on the squawk boxes at Citigroup, Lehman and Merrill.

The practice took place on more than 400 occasions between June 2002 and September 2003, the SEC said. Mr Amore's lawyer declined to comment.

Roslynn Mauskopf, US attorney for the eastern district of New York, said the four brokers “received thousands of dollars in kickbacks and bribes” after “stealing valuable, confidential information and selling it to unscrupulous day traders”.

The SEC claimed that the brokers relayed the market-sensitive trades by making telephone calls to Watley's headquarters and then placing the receiver next to their squawk box, sometimes for entire trading days.

“Amore directed traders working for him to listen to the pirated squawk boxes and trade ahead of the institutional orders to profit from price movements that resulted from execution of the large customer order,” the SEC said.

The four brokers are Ralph Casbarro, who worked for Citigroup until March 2005; David Ghysels, who worked for Lehman until March 2003; Kenneth Mahaffy, who worked for Merrill Lynch and then Citigroup between December 1997 and June 2005; and Timothy O'Connell, who worked for Merrill Lynch until February 2005.

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