Three Former Managers at a .B. Watley Group, Inc., Two Former Merrill Lynch Stockbrokers, and a Former Lehman Brothers Stockbroker Convicted in “Squawk Box” Securities Fraud Conspiracy Case
Following a three and one-half-week trial, a federal jury in Brooklyn returned a verdict today convicting six defendants for crimes related to their participation in a securities fraud scheme that exploited “squawk box” information to generate millions of dollars in illegal trading profits. The defendants are Robert F. Malin, former Vice-Chairman and President of A.B. Watley Group, Inc., a Manhattan day trading firm; Linus Nwaigwe, A.B. Watley’s former Director of Compliance and a former National Association of Securities Dealers (NASD) supervisor; Keevin H. Leonard, A.B. Watley’s former supervisor of proprietary trading; Kenneth E. Mahaffy, Jr., a former Merrill Lynch & Co., Inc. and Citigroup/Smith Barney stock broker; Timothy J. O’Connell, a former Merrill Lynch stock broker; and David G. Ghyseis, Jr., a former Lehman Brothers stock broker. The case was tried before United States District Judge John Gleeson at the U.S. Courthouse in Brooklyn, New York.
The convictions were announced by Benton J. Campbell, United States Attorney for the Eastern District of New York, and Ronald J. Verrochio Inspector-in-Charge, New York Division, United States Postal Inspection Service. The government’s investigation was conducted with the assistance of the United States Securities and Exchange Commission, which previously filed separate civil charges against several of the defendants.
The government’s evidence at trial established that between 2002 and early 2004, Mahaffy, O’Connell, and Ghysels (the broker defendants) routinely provided day traders at three New York City based day trading firms, A.B. Watley, Millennium Brokerage, LLC, and E*Trade Professional Trading, LLC, with confidential customer order information, which was disseminated through internal speaker systems, known as “squawk boxes” or “hoots,” at Merrill, Citigroup, and Lehman. The broker defendants placed telephone calls to the day traders and left the telephones off the hook next to squawk boxes at their respective brokerage firms so that the day traders were able to hear the customer orders that were being broadcast. In exchange for access to the squawk box information, the day traders paid bribes to the defendants in the form commissions from “wash trades” (simultaneously buying and selling the same amount of a security at the same price at the same time for the sole purpose of generating commissions) that were generated through brokerage accounts that the day traders opened with the defendants at Merrill, Citigroup, and Lehman.
The day traders profited from the scheme by trading in front of the large orders that were broadcast through the squawk boxes. When the squawk boxes disseminated information concerning a large buy order for a particular stock, the day traders would purchase shares of the same stock before the larger order was executed. Alternatively, when the squawk boxes disseminated information concerning a large sell order for a particular stock, the day traders would sell short the same securities before the larger order was executed. In both instances, the day traders profited from the subsequent movement in price caused by the execution of large customer orders.
“The defendants in this case orchestrated a scheme that involved dozens of day traders illegally eavesdropping on confidential information from some of our nation’s largest investment banks. The day traders exploited the information to the fullest extent and reaped millions of dollars in ill-gotten gains at the expense of innocent investors by front-running every day,” stated United States Attorney Campbell. “Today’s convictions confirm our Office’s commitment to combating securities fraud and protecting the investing public.” Mr. Campbell expressed his grateful appreciation to the New York Office of the Postal Inspection Service, the agency that led the government’s investigation.
When sentenced by Judge Gleeson, the defendants each face a maximum sentence of 25 years’ imprisonment, five years’ supervised release, a $250,000 fine (or twice the gross gain or loss as a result of the offense), and an order of restitution.
The government’s case is being prosecuted by Assistant United States Attorneys Paul Schoeman, Jay McMahon, Jonathan Green, and Claire Kedeshian, and Special Assistant United States Attorney Brian Morris.
KENNETH E. MAHAFFY, JR.
TIMOTHY J. O’CONNELL
DAVID G. GHYSELS, JR.
ROBERT F. MALIN
KEEVIN H. LEONARD
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