Six men charged in a scheme to tip off traders to communications on internal brokerage “squawk boxes” reached deferred-prosecution agreements, the government said.
Assistant U.S. Attorney James McMahon announced the deals today in Brooklyn, New York, federal court, marking the end of a seven-year-long effort by the Justice Department to prosecute “front-running,” or trading ahead of market-moving orders.
In the case, former brokers at Merrill Lynch & Co., Citigroup Inc. (C), Lehman Brothers Holdings Inc. and Smith Barney were accused of conspiring with employees at day-trading firm A.B. Watley Group Inc. (ABWG) to use order information transmitted on “squawk boxes” for front-running.
The deals were reached after a Manhattan federal appeals court reversed the men’s convictions in August, finding that prosecutors had withheld critical evidence.
“The government has entered into deferred prosecution agreements with each of the six defendants,” McMahon said today to U.S. District Judge John Gleeson. Under the deals, the men face waiting periods ranging from six months to five years when the charges against them could be revived if they engage in other crimes.
The charges would eventually be dropped if defendants meet the conditions of their agreements, attorneys said. Some defendants face other conditions under separate deals reached earlier with the U.S. Securities and Exchange Commission.
The men were first tried in 2007 on securities fraud, conspiracy and other charges. A jury acquitted them of 20 separate securities fraud charges, remained hung on a conspiracy charge and convicted one of the defendants, former Merrill broker Timothy O’Connell of witness tampering and making a false statement, according to the appeals court’s ruling.
In a second trial in 2009, a jury found the men guilty of conspiracy to commit honest services and property fraud, according to the ruling.
The appeals court said that prosecutors failed to disclose until after the trial 30 deposition transcripts taken by the SEC, some of which would have supported the defense of ex- Merrill Lynch and Smith Barney broker Kenneth Mahaffy Jr. and others. Turning over the materials was required under the U.S. Supreme Court’s ruling in Brady v. Maryland, the appeals court found.
‘Should Have Dismissed’
“The government should have dismissed the case,” Andrew J. Frisch, a lawyer for Mahaffy, said after the brief hearing today. “It should never have been brought in the first place.”
Prosecutors alleged that the brokers helped the Watley traders gain an edge by holding their phone receivers up to their squawk boxes, which carried notifications about major customer orders that could move the markets. The traders could then buy or sell shares before the larger deals made an impact on prices.
The information on the squawk boxes was confidential and should not have been acted on by outside parties, prosecutors alleged in court filings.
To return the favor, Watley traders placed “wash trades” with the brokerages, buying and selling the same security at the same price and paying commissions, which essentially amounted to bribes for the brokers, according to prosecutors.
Along with Mahaffy and O’Connell, defendants who reached deals with the government included former Lehman broker David Ghysels Jr.; Keevin Leonard, former Watley supervisor of proprietary trading; Linus Nwaigwe, a former Watley compliance director; and Robert Malin, the former president of the day- trading firm. Each had been sentenced to prison.
Prosecutors said in a February letter to the court that they had reached agreements with four the defendants and were working on a fifth. At the time, Malin had not yet made a deal, according to his attorney Roland Riopelle.
The deferred-prosecution agreement was “a favorable and fair outcome for Mr. Malin,” Riopelle said in a phone interview today. “I think he’s relieved.”
Donna Newman, a lawyer for Nwaigwe, Thomas Dunne, a lawyer for Leonard, and Susan Wolfe, a lawyer for Ghysels, didn’t immediately return calls for comment. Marshall Miller, head of the criminal division of the Brooklyn U.S. Attorney’s office, declined to comment.
The case is U.S. v. Mahaffy, 1:05-cr-00613, U.S. District Court, Eastern District of New York (Brooklyn).
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