On Mar. 16, 1998, Edward R. Manfredonia wrote a 10-page letter to Frank G. Zarb, chief executive of the National Association of Securities Dealers. Word was just out that the NASD was planning to merge with the American Stock Exchange. Manfredonia, a trader turned whistle-blower, wanted Zarb to know about what he alleged was a pattern of illegal activity at the Amex. The outcome: Nothing. No one at the NASD contacted him.
Well, Zarb and other regulators are starting to pay more attention to allegations about the Amex. In a statement on Apr. 16, the Amex' new overlord pledged to "follow up all claims of improper activity in any of our marketplaces." The reason for the sudden change in attitude was simple: Zarb was reacting to a BUSINESS WEEK Cover Story that hit newsstands that day. The article reported allegations of widespread misconduct at the Amex, including improper trading, price-fixing in the options market--and lax enforcement by the Amex. BUSINESS WEEK also found that the Securities & Exchange Commission and law enforcement failed to investigate Manfredonia's allegations, important aspects of which were substantiated by BUSINESS WEEK.
The Amex may have no choice but to finally confront its problems--if only because the lawsuits have begun. On Apr. 16, two of the Amex' largest specialist firms--Spear, Leeds & Kellogg and Susquehanna Investment Group Inc.--were named in a class action alleging options price-fixing. The suit was filed in Federal District Court in Manhattan by the four lead law firms in an antitrust case alleging price collusion by NASDAQ market-makers. That case has resulted in $1 billion in settlements.
The Amex case alleges that Spear, Susquehanna, and other unnamed defendants violated the federal antitrust laws through a "conspiracy to raise, fix, and maintain" the bid-ask spreads of Amex options at artificially high levels. "They have combined to create a two-tier market, apparently, and are operating it for their benefit and to the detriment of the general trading public," says Robert A. Skirnick, one of the lawyers bringing the suit. Spear declined comment, and Susquehanna's general counsel did not return phone calls.
Zarb's statement did not directly address dual-pricing and said that the "options pricing matter is an industrywide issue." However, as described by Amex sources, the alleged Amex price-fixing stems from the trading system at the exchange--with market-makers offering narrower spreads than specialists who set the prices. Thus it would be more difficult to implement at the "open outcry" system used by the other major options trading center, the Chicago Board Options Exchange.
In the end, all the allegations surrounding the Amex will have to be sorted out by the SEC, which for years has demonstrated a hands-off attitude. On Mar. 26, the SEC sent a letter to all four options exchanges, asking for information on options pricing and bid-ask spreads, as well as documents reflecting possible collusion by market-makers. The SEC request, however, was an "informal inquiry," not an investigation.
NO CONTACT. If the SEC acts on options pricing, it will be a changed approach. Officials of the new NASDAQ-Amex Market Group--including Amex Chairman Richard F. Syron--say that the SEC has long expressed satisfaction with the Amex' record as a regulator. Contrary to a report in The Wall Street Journal, officials deny that any broader investigation of the Amex has begun. Indeed, persons with firsthand knowledge of Amex floor scandals say that they have never been contacted by the SEC.
For that matter, Amex whistle-blower Manfredonia says he did not even get replies to most of his letters. The only outcome of his letters was a libel suit by a former Spear Leeds managing director, Pasquale Schettino, who has been accused by the Amex of a long list of improper acts. Schettino has denied wrongdoing. Late in 1995, Schettino sued Manfredonia for libel because of some letters Manfredonia had written.
But Schettino has had second thoughts about his libel suit over the past few days. On Apr. 20, he abruptly agreed to dismiss the suit. It was, for Manfredonia, the end of a legal nightmare. But for the Amex and its most powerful firms, the bad dreams may be only just beginning.