Three Former Managers at A.b. Watley Group, Inc., a Former Merrill Lynch Stockbroker, and a Former Lehman Brothers Stockbroker Sentenced in “Squawk Box” Securities Fraud Conspiracy Case
Five of the six “Squawk Box” defendants convicted in April 2009 following a three-and-one-half week jury trial were sentenced yesterday by United States District Judge John Gleeson at the federal courthouse in Brooklyn. Robert Malin, the owner of A.B. Watley, was sentenced to 48 months’ imprisonment; Linus Nwaigwe, Watley’s compliance officer, was sentenced to 12 months and a day; Keevin Leonard, the supervisor of the day traders, was sentenced to 34 months; Ken Mahaffy, the Merrill Lynch, and later Smith Barney, broker who took bribes for access to his “squawk boxes,” was sentenced to two years; and David Ghysels, the Lehman Brothers broker, received three years’ probation. In addition, each defendant was ordered to forfeit the gross proceeds of his crime. Tim O’Connell, another Merrill Lynch broker, will be sentenced next week.
The sentencings 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 government’s case was prosecuted by Assistant United States Attorneys Jay McMahon, Jonathan Green, and Claire Kedeshian, former Assistant United States Attorney Paul Schoeman, and Special Assistant United States Attorney Brian Morris.
KENNETH E. MAHAFFY, JR.
DAVID G. GHYSELS, JR.
ROBERT F. MALIN
KEEVIN H. LEONARD
The Department of Justice believes that it is important to keep victims/witnesses of federal crime informed of court proceedings and what services may be available to assist you.