Fraud scandal at NY Stock Exchange

AM - Wednesday, 13 April , 2005 08:28:00

Reporter: Karen Percy

TONY EASTLEY: There's a dark cloud over the world's biggest stock market this morning with 17
securities specialists at the New York Stock Exchange facing fraud charges. As well, the exchange
is facing censure by the securities regulator.

It's being described as the biggest crackdown on illegal trading at the NYSE and involves a series
of transactions over a four year period in which the securities officers manipulated stock trades
to benefit their companies.

Between them they made the equivalent of about $25 million at the expense of their clients. For the
first time in more than the 200 years of operation of the NYSE, the exchange will be subjected to
outside monitoring.

Karen Percy has been speaking to Joel Seligman, Securities Historian at the University of St Louis.

JOEL SELIGMAN: This is a settlement, but it's a big deal. There have been relatively few
enforcement actions of this magnitude, focusing on the specialists who are the key market makers on
the New York Stock Exchange.

KAREN PERCY: So what does it mean for the stock exchange, given that there's been such a shake-up
in the last couple of years, trying to prevent exactly these actions?

JOEL SELIGMAN: Narrowly, it means they will have a number of new regulatory oversight mechanisms
such as a Chief Regulatory Auditor, which is a novelty. Plus some video and audio equipment placed
on the floor of the exchange. Plus, they'll have to pay a fine.

More broadly though, the question is the one you hint at - you reorganise the exchange after the
former CEO and Chair Dick Grasso resigned because his pay salary was so astonishingly high - there
were concerns about whether or not the board was on top of things. To see a major enforcement
effort like this occur some months later, raises a serious question as to how well the new board is
doing.

KAREN PERCY: What about investors - mum and dad, retail investors - how are they going to be
looking at this when they look at the specialists, you know, more than 15 of them essentially not
looking out for their interests, but looking out for the company's interests?

JOEL SELIGMAN: That's a fair question and at the risk of sounding perhaps more acquiescent than I
like to sound, I'm not sure how big a deal it will seem to ma and pa investors.

If this is an isolated incident if there are no other incidents like this, say, on the National
Association of Securities Dealers or the NASDAQ - with whom, by the way, I'm on the NASDA board, it
should be noted - it's unclear whether or not you're likely to see a significant response to this.

On the other hand, if this is the first of a series of events involving specialists, it may tend to
undermine investor confidence. What we've learned from recent experience with Enron, WorldCom and a
lot of other corporations here, is investors seem to have some reasonable understanding, if there's
one stand alone incident, but when there' s a pattern, they get very troubled.

TONY EASTLEY: Joel Seligman, Dean of the Washington School of Law at the University of St Louis,
talking to Karen Percy.