Four of six defendants accused of illegally tipping day traders to confidential data on internal “squawk boxes” have agreements with the U.S., federal prosecutors said.
“By the end of the this week, I expect that four of the six defendants will have resolved their respective cases with the government,” Assistant U.S. Attorney James McMahon in Brooklyn, New York, said in a letter to U.S. District Judge John Gleeson, who is presiding over the case.
“We have reached an agreement in principle with another defendant, which would also resolve that defendant’s related case with the Securities and Exchange Commission,” McMahon said in the Feb. 4 letter.
In August, a federal appeals court in New York reversed the convictions of former brokers at Merrill Lynch & Co., Citigroup Inc. and Lehman Brothers Holdings Inc. who were convicted of a scheme to sell day traders to confidential data on their internal squawk boxes.
The prosecutor didn’t specify in the Feb. 4 filing which defendants are reaching the agreements or the terms of the deals.
McMahon said that he expects the government will reach a resolution with a fifth unidentified defendant in the criminal case and a related U.S. Securities and Exchange Commission case. A lawyer for one defendant, Robert Malin, the former president of A.B. Watley Group Inc., said his client was the only one who hasn’t reached an agreement with the U.S.
“Mr. Malin hopes to reach a resolution similar to those which the government seems to have reached with his co-defendants” Roland Riopelle, Malin’s lawyer, said yesterday in a phone interview.
Gleeson scheduled the next hearing in the case for March 28.
The U.S. Court of Appeals in New York reversed the convictions of all six men after ruling that prosecutors in withheld evidence and failed to disclose until after the trial 30 deposition transcripts taken by the U.S. Securities and Exchange Commission. The appeals court said that some of the evidence would have supported the defense of ex-Merrill Lynch broker Kenneth Mahaffy Jr. and his co-defendants.
In November, prosecutors told Gleeson at a status conference in the case that they were considering the possibility of retrying the defendants.
In addition to Mahaffy Jr., those convicted in the case include: David Ghysels Jr., formerly of now-bankrupt Lehman Brothers Holdings Inc.; Timothy O’Connell a former Merrill Lynch & Co. broker. Besides Malin, two former day-trading executives at New York-based Watley were also convicted in the cases: Keevin Leonard, who was a supervisor of proprietary trading there, and Linus Nwaigwe, a former Watley compliance director. Each was sentenced to prison.
Andrew Frisch, a lawyer for Mahaffy and Thomas Dunn, a lawyer for Leonard, both declined to comment. Donna Newman, a lawyer for Nwaigwe, and Jeffrey Hoffman, a lawyer for Ghysels, didn’t immediately respond to voice-mail messages yesterday after business hours seeking comment on the government’s letter.
Mildred M. Whalen, a lawyer for O’Connell, didn’t immediately return a phone call yesterday after regular business hours seeking comment.
Prosecutors argued at the trial that the brokers helped the Watley traders engage in “front-running” by holding their phone receivers up to their squawk boxes and transmitting the squawks. This allowed the Watley traders to buy and sell shares at more attractive prices than would have been available once the squawked orders were executed.
In return, Watley traders placed “wash trades” with the brokerages, buying and selling the same security at the same price and paying commissions to the brokers, prosecutors said.
The defendants, who were indicted in 2005, were tried twice. The first trial in 2007 ended with a deadlocked jury on a conspiracy count and acquittals of multiple securities-fraud charges for all the defendants. One defendant, Timothy O’Connell, was convicted of witness tampering. The federal appeals court in New York let that conviction stand.
Mahaffy and his co-defendants were convicted after a second trial in 2009.
The defense argued at the trials that the information broadcast wasn’t confidential. The SEC transcripts, in which brokerage officials testified that the squawked information wasn’t confidential, backed the defense, the appeals court said.
The case is U.S. v. Mahaffy, 1:05-cr-00613, U.S. District Court, Eastern District of New York (Brooklyn).