Senior Compliance Officer at Merrill Lynch Pleads Guilty to Witness Tampering in Connection with Grand Jury Investigation into "Front-running"
ROSLYNN R. MAUSKOPF, United States Attorney for the Eastern District of New York, and RON WALKER, Inspector-in-Charge, New York Division, United States Postal Inspection Service, today announced the guilty plea of BENJAMIN D. GRIMALDI, an administrative manager who functioned as a senior compliance officer at Merrill Lynch & Co., Inc. ("Merrill"), to a felony information charging him with conspiring to tamper with a witness who testified before a federal grand jury in the Eastern District of New York. The guilty plea was accepted by United States District Judge I. Leo Glasser, at the United States Courthouse in Brooklyn, New York.
According to the information and a previously filed complaint, between May 2004 and April 2005, an Eastern District grand jury was investigating whether stock brokers employed at Merrill's Garden City Branch Office and stock traders employed by several day trading firms ("day traders") participated in a securities fraud scheme involving "front-running." Front-running occurs when stock brokers inform traders outside the brokerage firm, such as day traders, that a customer of the brokerage firm has placed a large order to buy or sell a particular stock. This information enables the day traders to trade in the same stock before the customer's order is executed, in anticipation of the movement in price that the customer's order is likely to cause. As a result, the firm's customers may not obtain as favorable a price for the stock as they would have absent the front-running.
As alleged in a federal complaint previously filed against GRIMALDI, between January 2002 and October 2003, a stock broker at Merrill's Garden City Branch routinely provided day traders with material, non-public customer order information which was disseminated through an internal speaker system at Merrill, known as a "squawk box." Specifically, the stock broker instructed his assistant ("broker's assistant") to call the day traders and leave the telephone off the hook next to a squawk box so that the day traders were able to hear the customer orders that were being broadcast. In exchange for access to Merrill's squawk box, the day traders paid substantial amounts of money to the stock broker through brokerage accounts that they opened at Merrill.
In pleading guilty today, GRIMALDI admitted that in the fall of 2004, after federal investigators requested an interview with the broker's assistant, GRIMALDI agreed with another individual to encourage the broker's assistant to lie to the investigators about her knowledge of the squawk box and the open telephone line. GRIMALDI also admitted that, in early 2005, after the broker's assistant had been subpoenaed to testify before the grand jury, GRIMALDI agreed with another individual to encourage the broker's assistant to withhold information from the grand jury regarding the use of squawk boxes at Merrill Lynch's Garden City branch.
"As a compliance manager in a regulated industry, GRIMALDI had a special obligation to cooperate fully with law enforcement authorities," stated United States Attorney MAUSKOPF. "Instead, he used his position to encourage a subordinate to commit a crime by lying to law enforcement officers and a federal grand jury. Today's guilty plea demonstrates that any individual who attempts to impede a federal investigation will be investigated and prosecuted to the full extent of the law." Ms. MAUSKOPF thanked the United States Securities and Exchange Commission for its assistance in the case.
New York Postal Inspector-in-Charge WALKER stated, "The irony is as the senior compliance officer it was the defendant's responsibility to prevent or report securities fraud. However, not only did he appear to condone this activity, he obstructed a federal investigation probing it. He will now have to pay for his actions, which contradicted the expectations of those for whom he worked."
GRIMALDI faces a maximum sentence of ten years' imprisonment, three years' supervised release, and a $250,000 fine.
The government's case is being prosecuted by Assistant United States Attorneys Michael A. Asaro and Sean Casey.
BENJAMIN D. GRIMALDI
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