Five New York Stock Exchange specialist firms tentatively agreed to pay $240 million in a settlement with the Securities and Exchange Commission to avoid civil charges for allegedly mishandling trades and skimming profits on the floor of the Big Board, according to people close to the talks.
The five firms have agreed to pay $155 million to disgorge their allegedly illegal profits, and another $85 million in fines, two sources told The Associated Press Tuesday on condition of anonymity.
The deal will not be final, however, until all five firms officially agree on all of the provisions in the settlement. The full commission, due to meet Thursday, must also approve it.
The sources said there are still some questions to be resolved that could torpedo the agreement.
“There’s still some discussion as to how much liability and blame the firms want to take on,” said one source with knowledge of the discussions.
NYSE officials had worked with the SEC on the case, though it was not clear whether the deal reached Tuesday would also include a resolution of NYSE rules violations.
The five firms — LaBranche & Co., FleetBoston Financial subsidiary Fleet Specialist, Bear Stearns subsidiary Bear Wagner Specialists, Van Der Moolen Holdings LV and Goldman Sachs subsidiary Spear, Leeds & Kellogg — received notices from the SEC last month that they could face civil charges for their activities.
Specialist firms manage the sale of stocks on the floor of the NYSE, and often buy or sell shares from their own holdings to keep the market in balance and orderly. The specialist system, which involves an open auction for each trade, has been in place since 1792.
The five specialist firms were accused of artificially inflating the price of the shares they hold in order to make an additional profit, a practice called “front-running.”
The specialist firms, the SEC and the NYSE did not immediately return calls seeking comment.
The scandal, first made public in October, has led many major brokerage houses to call for an end to the specialist system, or at least major adjustments to it. Newly installed NYSE chief executive John Thain introduced a number of new initiatives Feb. 5 to answer the system’s critics.
New technologies would automatically execute trades with matching buy and sell orders, while NYSE-listed companies would have an easier time replacing specialists for their stock. Thain’s initiatives are awaiting approval by the SEC.
