Fraud Scheme Generated over $800,000 in Illegal Profits

A superseding indictment was unsealed today at the U.S. Courthouse in Brooklyn, New York, charging several former and current officers, directors, and managers of A.B. Watley Group, Inc. (“A.B. Watley”), a Manhattan day trading firm, with crimes related to their participation in a “front-running” securities fraud scheme that generated over $800,000 in illegal trading profits between January 2002 and February 2004. The newly charged defendants are ROBERT F. MALIN, A.B. Watley’s Vice-Chairman and President; LINUS NWAIGWE, A.B. Watley’s Director of Compliance and a former National Association of Securities Dealers (“NASD”) compliance examiner; MICHAEL A. PICONE, A.B. Watley’s former Chief Operating Officer; and KEEVAN H. LEONARD, A.B. Watley’s former supervisor of proprietary trading. The superseding indictment also charges the following individuals, who were originally indicted in August 2005, with crimes arising from their participation in the same fraudulent scheme: KENNETH E. MAHAFFY, JR., a former Merrill Lynch & Co., Inc. (“Merrill”) and Citigroup Global Markets, Inc. (“Citigroup”) stock broker; TIMOTHY J. O’CONNELL, a former Merrill stock broker; and DAVID G. GHYSELS, JR., a former Lehman Brothers (“Lehman”) stock broker.¹ It was also announced today that PAUL F. COUGHLIN, another former Merrill stock broker, and WILLIAM B. DEAKINS, a former A.B. Watley day trader, pleaded guilty to related charges of conspiracy to commit securities fraud for their roles in the scheme pursuant to separately filed felony informations.

The charges and guilty pleas were announced this morning by 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.

MALIN, NWAIGWE, PICONE, and LEONARD will be arraigned this afternoon before United States Magistrate Judge Marilyn D. Go at the U.S. Courthouse, 225 Cadman Plaza East, in Brooklyn. The case has been assigned to United States District Judge I. Leo Glasser. The investigation resulting in the superseding indictment was conducted with the assistance of the United States Securities and Exchange Commission (“SEC”). The SEC filed a civil complaint today against the newly charged defendants in the United States District Court for the Eastern District of New York. 

According to the superseding indictment, the defendants 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 often do not obtain as favorable a price for the stock as they would have absent the front-running.As alleged in the superseding indictment, between January 2002 and February 2004, MAHAFFY, O’CONNELL, GHYSELS, and COUGHLIN (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 material, non-public customer order information, which was disseminated through internal speaker systems, known as “squawk boxes,” at Merrill, Citigroup, and Lehman. Specifically, 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 substantial amounts of money to the defendants in the form commissions from “wash trades” (simultaneously buying and selling the same amount of a security at the same price 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. Some of the broker defendants, including COUGHLIN, also accepted cash bribes from the day traders in exchange for squawk box access.

The superseding indictment alleges that the day traders profited from the scheme by trading in front of the large orders that were broadcast through the squawk boxes. For example, 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 “short sell” the same securities before the larger order was executed. In either circumstance, the day traders profited from the subsequent movement in price that the large customer order caused. The day traders at A.B. Watley, including DEAKINS, engaged in this conduct at the direction and under the supervision of MALIN, NWAIGWE, PICONE, and LEONARD. LEONARD also participated in the execution of the wash trades on behalf of A.B. Watley to compensate the broker defendants for squawk box access.

The superseding indictment also alleges that the defendants took steps to conceal their illegal conduct. O’CONNELL is charged with lying to federal agents and tampering with a witness who subsequently testified falsely before a federal grand jury in the Eastern District of New York. It is also alleged that MAHAFFY, NWAIGWE, and PICONE lied on several occasions to a United States Postal Inspector and SEC staff members about their knowledge and use of the squawk boxes. Finally, the superseding indictment alleges that MALIN, NWAIGWE, and LEONARD took steps to hide A.B. Watley’s squawk boxes from NASD examiners who visited A.B. Watley’s offices to conduct compliance examinations during the period when the fraud was ongoing.

“By bribing unscrupulous stock brokers, the former A.B. Watley managers and day traders who were charged today were able to secretly tap into a steady flow of extremely valuable, confidential information from some of Wall Street’s most well known institutions. The day traders exploited this information to the fullest extent possible and made hundreds of thousands of dollars as a result, all at the expense of other innocent investors,” stated United States Attorney MAUSKOPF. “Those who attempt to cheat the investing public by engaging in fraudulent trading practices such as ‘front-running’ will be prosecuted to the full extent of the law.”

New York Postal Inspector-in-Charge WALKER stated, “The stock market has some inherent risks that most investors know and accept. Those risks, however, should not include the possibility that selfish individuals, such as the defendants, might rely on unfair and illegal trading practices to reap huge profits for themselves at the expense of those honest investors. I commend the postal inspectors, SEC investigators, and Assistant U.S. Attorneys assigned to this case for their continued diligence in this investigation resulting in today’s announcement. I am confident the defendants will be punished to the fullest extent of the law.”

The charges in the superseding indictment carry the following maximum sentences: as to each securities fraud count and conspiracy to commit securities fraud count, 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; as to each Travel Act count and conspiracy to violate the Travel Act count, five years imprisonment, three years supervised release, a $250,000 fine (or twice the gross gain or loss), and an order of restitution; as to each false statement count, five years imprisonment, three years supervised release, and a $250,000 fine; as to the witness tampering and conspiracy to commit witness tampering counts, 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, Sean Casey, and Kathleen A. Nandan.

The Defendants:

Name: KENNETH E. MAHAFFY, JR.
DOB: 5/27/55

Name:TIMOTHY J. O’CONNELL
DOB: 10/13/64

Name:DAVID G. GHYSELS, JR.
DOB: 2/18/58

Name: ROBERT F. MALIN
DOB: 2/26/65

Name: LINUS NWAIGWE
DOB: 9/30/57

Name: MICHAEL A. PICONE
DOB: 6/5/65

Name: KEEVAN H. LEONARD
DOB: 1/23/61

Name: PAUL F. COUGHLIN
DOB: 6/4/71

Name: WILLIAM B. DEAKINS
DOB: 1/16/69

 

 

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¹ The charges contained in the superseding indictment are merely allegations, and the defendants are presumed innocent unless and until proven guilty. The previously filed indictment also contained charges against Ralph D. Casbarro, another former Citigroup broker. Casbarro pleaded guilty to conspiracy to commit securities fraud pursuant to this indictment on October 7, 2005.

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