March 30 (Bloomberg) -- The Securities and Exchange Commission and the New York Stock Exchange said the five biggest market-makers agreed to pay $241.8 million to settle accusations of trading violations.

The settlement calls for $88 million in civil penalties, $154 million to compensate customers hurt by the alleged violations, and that the firms improve oversight of their traders. The firms profited by making unnecessary trades that short-changed clients, the SEC and the NYSE said.

The SEC is pursuing a probe of individual traders, or specialists, who were responsible for managing buying and selling shares of specific companies on the exchange floor. Investigators also are examining possible failures by the NYSE to enforce its own regulations.

``No entity or person is off the table other than the firms we're settling with today,'' SEC Enforcement Director Stephen Cutler said in an interview.

LaBranche & Co., the biggest specialist firm, will pay $21.8 million in fines and disgorge another $41.7 million; Van der Moolen Specialists, the fourth biggest and a unit of Van der Moolen Holding NV, will pay $22.7 million and $35 million; Spear Leeds & Kellogg Specialists, a unit of Goldman Sachs Group Inc., will pay $16.5 million and $28.7 million; Fleet Specialists, a unit of FleetBoston Corp, will pay $21.1 million in fines and $38 million; and Bear Wagner Specialists LLC, a unit of Bear Stearns Cos., will pay $5.5 million and $11 million.

Settlement Agreement

The firms agreed to settle with the SEC's enforcement division in February, after Cutler demanded they accept the basic terms within four days or face SEC lawsuits.

Earlier today, the New York Post said the firms and the SEC had agreed to final terms of the settlement. The firms neither admitted nor denied guilt.

The NYSE said it was investigating the firms last March after Fleet reported that it found potential violations in trading by the specialist who handled General Electric Co. shares. The exchange said the probe focused on whether specialists violated a rule prohibiting them from trading with customers from their own account when they had the opportunity to match client buy and sell orders.

Expanded Probe

Under pressure from the SEC, the exchange expanded the probe to review cases when specialists made trades for their own accounts while letting customers orders wait 10 seconds or longer. Interim NYSE Chairman John S. Reed, who replaced former Chairman Richard Grasso after he was forced out last September following disclosure of his $188 million pay package, said that the SEC had replaced the NYSE in conducting the investigation.

The specialist firms negotiated to avoid fraud violations, while leaving individual traders vulnerable to possible criminal charges. More than a dozen shareholder lawsuits seeking class- action status have been filed against the firms.

The California Public Employees Retirement System, the biggest U.S. pension fund, has sued the NYSE and all seven of the specialist firms for failing to enforce trading rules.

Goldman, Fleet

Six Goldman Sachs employees who managed trading and allegedly violated exchange rules have left the company's Spear Leeds & Kellogg specialist unit, said Goldman spokesman Lucas Van Praag. Todd Christie, president of the unit, left the second- biggest NYSE specialist last March.

Fleet spokesman Charles Salmans said the firm, whose parent bank is combining next month with Bank of America Corp., will make ``appropriate decisions regarding employment'' of four individuals who are no longer trading on the exchange floor. David Finnerty, the specialist who managed trading in General Electric shares, was put on leave last year and has since left the firm.

Bear Stearns declined to comment. LaBranche and Van der Moolen didn't return calls seeking comment.

The NYSE said the settlement involves alleged violations that occurred between 1999 and early 2003 by firms that traded the following stocks:

LaBranche: Nokia Oyj, Lucent Technologies Inc., Morgan Stanley, Tyco International Ltd., Compaq Computer Corp., Merck & Co.

Spear, Leeds: America Online Inc., International Business Machines Corp., Micron Technology, Inc., American International Group, Teradyne Inc. and Verizon Communications Inc.;

Fleet: General Electric Co., Goldman Sachs Group Inc., Applera Corp.-Celera Genomics Group, J.P. Morgan Chase & Co., Charles Schwab Corp. and Johnson & Johnson.

Van der Moolen: Pfizer Inc., Nortel Networks, Ltd., Hewlett- Packard Co.; Time Warner Inc.; Walt Disney Co.; Eli Lilly & Co.;

Bear Wagner: Texas Instruments Inc., Motorola Inc., Merrill Lynch & Co., Inc., Citigroup Inc., EMC Corp., Corning Inc.

To contact the reporter on this story: Jed Horowitz in New York at jhorowitz2@bloomberg.net.

Last Updated: March 30, 2004 11:54 EST