By Gary Weiss
Since coming to the Securities & Exchange Commission in February, William H. Donaldson has taken some positive steps -- most notably by naming William J. McDonough to head the new Public Company Accounting Oversight Board (page 84). But he has yet to resolve questions that have dogged him since he was nominated: Will this veteran Wall Street exec, a former chairman of the New York Stock Exchange, move aggressively against misconduct on the floors of the stock exchanges? Will he act harshly, when required, against the largest firms?
A recent, little-publicized settlement between Goldman Sachs & Co. (GS) and the American Stock Exchange underlines the significance of this issue. The case indicates that improprieties continue unchecked at the exchanges, which seem loath to impose meaningful penalties on powerful firms.
At issue is a 12-page Amex disciplinary panel decision that saw the light of day in an Amex publication on Apr. 4. Spear, Leeds & Kellogg, a unit of Goldman Sachs, and four employees agreed to be censured and fined $435,000 for alleged trading misconduct on the floor of the exchange between 1999 and 2002. Although Spear's Amex floor operations were sold off in late 2002, it remains the largest NYSE specialist outfit.
Specialists are traders who are required to make a fair and orderly market in the stocks entrusted to them. They are not permitted to buy stocks using knowledge of an upcoming trade -- an offense, known as front running, that led to criminal charges against NYSE floor brokers in 1998. These are not mere technicalities: They go to the heart of the integrity of the trading floor. The Amex charges, which were neither admitted nor denied by Spear and the brokers, include alleged front-running. "The stuff that these people are accused of is just as serious, if not more serious, than what was alleged by the NYSE [in 1998]," says Dominic Amorosa, a New York attorney who represents one of the NYSE floor brokers. A Goldman spokesman declined comment on Amorosa's remarks, but said, "we take this very seriously and in a number of cases have made the customers whole." He would not elaborate on the number of customers affected or their losses.
True, Spear employees, unlike the NYSE floor brokers, were not accused of personally profiting from the trades. And the recent Amex penalties were tough compared with previous Amex and NYSE enforcement actions, notes Saul S. Cohen, a partner at Proskauer Rose LLP in New York. But critics like Amorosa have a point. The accusations against Goldman clearly warranted more than just the fines meted out against the firm and its employees, one of whom received a retroactive 18-month ban from acting as a supervisor. Since the employee was no longer a supervisor, the ban had no practical effect.
Further SEC action is possible but unlikely. Through spokespeople, Goldman and the Amex said they are unaware of any pending SEC investigation. So it seems Goldman Sachs has dodged a bullet. Serious accusations were followed by tolerable penalties -- and not much publicity. A good deal for the guys on Trinity Place. But Bill Donaldson may want to ask himself a question: Who is his constituency? His old pals on the trading floor? Or the investors who expect him to act like a cop on the beat -- and not president of the Wall Street Alumni Association? Senior Writer Weiss covers corporate crime.