|BUSINESSWEEK ONLINE : APRIL 26, 1999 ISSUE|
A Double Life at Spear Leeds?
The Amex may have dragged its feet investigating Pat Schettino
Until his last day on the floor of the American Stock Exchange, in the fall of 1998, Pasquale ''Pat'' Schettino was one of the most powerful people on the Amex floor. For years, he held a key position at Spear, Leeds & Kellogg, the largest specialist firm at both the Amex and the New York Stock Exchange. On the Amex, Schettino was in charge of ''professional clearing,'' meaning that he rode herd over the 300 specialists, traders, and floor brokers who have accounts at Spear. If ''Spear Leeds is the Amex,'' as one veteran trader puts it, Schettino was Spear Leeds.
With that power came access to immensely sensitive information. For many of his final years at the Amex, Schettino was a Spear managing director and partner. And that gave him access to a trove of trading data--inside information showing Spear's positions in the hundreds of stocks and options it traded as a specialist.
Schettino's position of trust and power went well beyond his role at Spear Leeds. In 1992 and 1993, and again from 1994 through 1996, he was a ''floor official''--one of the 60 or so Amex traders and specialists who are the first line of defense in the self-regulatory system. But according to a small mountain of documentation in the files of the American Stock Exchange--none of which has been made public--Pat Schettino allegedly had intimate, first-hand knowledge of a whole range of things traders and floor brokers and specialists are not supposed to do.
MAJOR TRADER? As outlined in still-unreleased Amex charges filed in November, 1996, against Schettino--charges that remain unresolved after nearly two and a half years--the 50-year-old Staten Island resident led a double life. At the same time that he was the top Spear official on the exchange floor, he allegedly violated Amex rules by having a major role at a now-defunct trading firm on the Amex floor called Bullseye Securities Inc., which cleared its trades through Spear. He allegedly hired and fired traders, ''provided investment advice and trading instruction''--and, above all, allegedly traded as if it was going out of style. As set forth in the Amex charges, this is what he did from January, 1994, to July, 1995:
-- Traded in some 130 stocks and options for Bullseye, up to 1.3 million shares a month. Among them were 40 stocks and an unspecified number of options in which Spear was the specialist, including Digital Equipment Corp. and Intel Corp. options
-- Made fictitious trades to bolster Bullseye's net capital levels
-- Opened an account at Bullseye to allow a floor broker to improperly trade for the broker's own profit
-- Made a covert loan to Bullseye, passing the money through the bank account of a friend
-- Opened an account in the name of a fictitious person
-- Made false statements in sworn testimony before an exchange official
-- Diverted money to Bullseye from two floor brokers--and allegedly altered a Spear account statement to mislead one of the brokers into thinking the money went to Spear after all.
Neither Spear, Schettino's attorney Eric R. Levine, nor the Amex would comment on the case. In his answer to the charges, Levine denied Schettino ever traded on nonpublic information. He conceded that Schettino traded for Bullseye but said it was ''for no personal gain'' and as a favor to Bullseye owner Joseph Roffler--which Roffler has emphatically denied.
Some of the allegations against Schettino are as grave as the allegations made in the indictments of eight NYSE floor brokers last year. And elements in his case have troubling implications for the Amex, which declined to discuss any aspect of the Schettino affair. BUSINESS WEEK examined thousands of pages of never-released testimony and trading records in the Schettino case. Among the questions they raise:
Did the Amex deliberately delay resolving this case?
The Amex often takes several years to resolve disciplinary charges. But the Schettino case seemed unusually protracted--raising the possibility that the Amex dragged its feet to put off resolution of a potentially explosive case. The case emerged in July, 1995. Charges were not brought against Schettino until 16 months later and were only acted upon by an Amex panel about two years after that, in the fall of 1998. Schettino appealed, and that, too, has not been resolved after half a year. Because the Amex does not announce disciplinary actions until final action, the Schettino case remains under wraps--as it has been for almost four years. Indeed, no documentation from the Schettino case would have emerged were it not for a libel suit Schettino brought against a whistle-blower, Edward R. Manfredonia (page 110), and Bullseye owner Roffler, as well as an arbitration brought against Spear Leeds and Schettino by Roffler.
Did the Amex disregard evidence that Spear Leeds officials--including senior partner Peter R. Kellogg--knew and approved of Schettino's activities?
Spear Leeds was not charged by the Amex, even for failure to supervise Schettino. In its charges against Schettino, the Amex cleared the powerful firm, saying that at no time before July, 1995, had Spear been ''aware of, or approved, Schettino's trading for accounts at Bullseye.'' But testimony before the Amex and other accounts of Schettino's activities obtained by BUSINESS WEEK indicate that Spear knew of and appears to have condoned Schettino's conduct--and that the Amex was aware of that and failed to penalize Spear.
Schettino's trading for Bullseye was an open secret on the Amex floor, where Spear is a dominant presence. ''He'd just walk up to the specialist booths and put in orders,'' says one former Bullseye trader. ''That was the amazing part. He'd just do it, and nobody would question him.'' According to testimony received by the Amex, Schettino's role at Bullseye was known to Spear officials, including a supervising specialist charged with improperly having a Bullseye account and two officials in charge of margin lending. In addition, Bullseye principal Roffler--a former Spear managing director--has told friends that a Spear Leeds senior specialist on the Amex floor, Arthur Rafkind, was aware of Schettino's trading. Roffler and Spear general counsel Carl H. Hewitt declined comment, and Rafkind denied that he had been aware of Schettino's trading.
Even more damaging evidence against Spear came from Schettino himself. In his February, 1996, testimony before an Amex enforcement official, Schettino recounted an August, 1995, conversation between himself and Spear counsel Hewitt. According to Schettino, Hewitt said that an Amex official ''asked to have me removed from the exchange.'' Schettino testified that Hewitt said that ''[Spear senior partner] Peter Kellogg said, 'No, we are not going to remove him from the Exchange. He hasn't done anything that we feel was anything bad.''' Kellogg and Hewitt both declined comment.
Spear's actions also indicate that the firm's management did not find fault with Schettino's conduct--even after it was revealed and the Amex probe was under way. When the Bullseye allegations emerged in July, 1995, Schettino was retained in his job on the floor--after, according to Schettino, Spear rebuffed the Amex' request to remove him. He remained managing director and partner until December, 1995--five months after the scandal surfaced. Spear kept him on the Amex floor until the fall of 1998, removing him only when a disciplinary panel imposed a permanent bar--a decision that, like the charges, has never been made public.
Did the Amex conduct an adequate investigation?
The scandal was apparently much wider--and more embarrassing for Spear and the Amex--than has been portrayed even in the Amex' closed-door proceedings. According to persons with first-hand knowledge of his activities, Schettino secretly traded for and backed yet another trading firm, Viking Securities LP, even after he was charged by the Amex. Schettino's involvement was alleged in a letter that was sent in mid-1997 by Viking's risk manager, Gene Weissman, to Viking's clearing agent, Sage Clearing.
In the letter, Weissman maintained that Schettino told him on June 6, 1997, that ''he is the 'backer' of Viking Securities through a subordinated loan agreement under another name.'' The letter was addressed to a Sage senior vice-president, C. Curtis Richmond. Richmond did not return phone calls. Weissman, who has not been contacted by investigators, declined comment, saying: ''I'm not going to admit or deny I had any type of correspondence with any clearing firm, or anything like that.''
Did the Amex fail to refer the Schettino case to prosecutors to spare Spear--and itself--an embarrassing scandal?
According to persons close to Bullseye and Viking, including essential witnesses in any probe, there has been no Securities & Exchange Commission or law-enforcement investigation of Bullseye or Viking since the scandal erupted nearly four years ago--even though the whistle-blower, Manfredonia, wrote a series of letters calling the case to the attention of authorities.
One former New York law-enforcement official, not contacted by Manfredonia regarding Schettino, expressed surprise when told of the case--which he had never heard of, even though it arose on his watch. He observed that the charges brought against Schettino by the Amex appeared similar to the kinds of allegations that had been the subject of criminal prosecutions of microcap scamsters--including falsification of business records, false testimony, and fictitious trades. ''That is the kind of case that I would think you'd want to take criminally,'' he notes.
But a former high Amex official says that such a referral to prosecutors would have been unlikely at the Amex because of Spear Leeds's clout. ''That could be where the politics come into play,'' he adds. Amex Chairman and CEO Richard F. Syron scoffs at the assertion that Spear was given any special treatment by the Amex. While declining to comment on the Schettino case, because it is still ongoing, Syron was more willing than Spear Leeds itself to defend the firm. He noted that ''they're a pretty big, successful company, and I'd be surprised--I don't see what their motivation would be'' to approve of Schettino's activities at Bullseye. Says Syron: ''I don't think Spear Leeds has been treated any differently than anyone else down here.''
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