|BUSINESSWEEK ONLINE : APRIL 26, 1999 ISSUE|
The Flaws in Self-Policing
Both the Amex and the feds turned a blind eye to big trouble
In December, 1997, an Amex disciplinary panel alleged that a specialist named Sol Reischer made phony options trades to benefit the firm he works for, Joseph Giamanco's GHM Inc. Reischer, who declined comment on the case, paid a $35,000 fine, neither admitting nor denying the charges. As is usual in such instances, Reischer's alleged transgression received no publicity. For all intents and purposes, it was a nonevent.
Twenty years before, nine Amex specialists were accused of the same alleged offense as Reischer--phony options trades. They allegedly performed those trades not for profit but for the innocuous purpose of bringing thinly traded options in line with the prices of more actively traded ones. But the penalty was dramatically different. The nine were indicted by a New York grand jury in a widely publicized case. The specialists settled the charges without admitting or denying wrongdoing.
Similar allegations, two dramatically different responses. Whichever was the more appropriate, this much is for sure: Time and again, when alleged transgressors are penalized by the Amex, they are let go with a fine or a brief suspension. And that routinely happens for the same magnitude of wrongdoing that led to indictments at the Amex in 1978 and again last year at the New York Stock Exchange. Amex officials feel they have been tough, however. ''If you ask people on the floor, I think a lot of them would tell you that we're Attila the Hun,'' says Amex Chairman Richard F. Syron.
Asked for a specific instance of a tough penalty, Amex officials cite a decision released in 1996 involving the punishment of alleged improper trading by AGS Specialist Partners, run, they note, by Amex Governor Andrew Schwarz. Without admitting or denying the allegations, the firm agreed to penalties that included a $75,000 fine and suspension of one of its specialists for six months. But an Amex disciplinary committee--without being asked, says Schwarz--cut the fine to $50,000 and the suspension to three months, calling them ''too severe.'' Schwarz says the public was not hurt by his firm and the penalties imposed were tough. But did his status as a governor affect the panel's decision? ''I would like to think that it didn't, but I think it's possible,'' he concedes.
NO PROBLEM. Syron defends the Amex' commitment to rooting out transgressors. Amex officials note that the Amex has suspended three specialists and nine traders within the past three years. Syron and other Amex officials say that the Amex' vigilance has long passed muster with the SEC and now with the Amex' new owners, the National Association of Securities Dealers Inc. At no time, he says, have the SEC or NASD indicated that they have any problem with the Amex as a regulator. ''I think [the SEC] would tell that there's been a real uptrend in how we handle regulation.''
But SEC and NASD officials are mum on the subject. NASD Regulation Chief Executive Mary L. Schapiro declined comment on the Amex' track record as a regulator, as did SEC enforcement chief Richard Walker and the SEC official in charge of overseeing enforcement activities at the Amex, Lori Richards. Still, the SEC's inaction at the Amex speaks for itself. Although the Amex is a self-regulatory organization, it operates under the scrutiny of the SEC. And there is troubling evidence that, time and again, the SEC has disregarded allegations of trouble on the exchange floor.
A good example can be found in the case of Amex specialist Giamanco, who is described by persons with knowledge of his activities as allegedly trading in GHM Inc. stocks for his own benefit (page 104). Amex whistle-blower Edward R. Manfredonia sent, by certified mail, no fewer than 50 letters to the SEC and law enforcement from September, 1995, to August, 1998, maintaining that Giamanco was engaged in such conduct. ''We do take any kind of claims of purported fraud seriously,'' says an SEC spokesman, adding that letters of that kind were referred to Richards. However, Manfredonia says he was never contacted for additional information, and people close to Giamanco say that no SEC inquiry has taken place.
Likewise, Manfredonia told SEC officials and law enforcement of Pasquale ''Pat'' Schettino's alleged involvement in Viking Securities (page 102). Again, the allegations were substantiated by BUSINESS WEEK. But officials of Viking and Bullseye Securities Inc., the other firm in which Schettino was involved, were never contacted by regulators.
Recipients of Manfredonia's many letters note that their volume and often overwrought tone undercut his credibility. But such excuses are unconvincing. The malaise at the Amex has persisted too long to go unnoticed.
Indeed, the true flaw may lie at the very heart of the system of self-regulation at the Amex. The evidence is clear that the exchange has been too insular, too secretive, and too intent on protecting the status quo. However, the exchange's new owners at the NASD have an impressive track record for cleaning up their own house and may well be ready to do the same for their new partners. There is an old Chinese proverb: ''The laws sometimes sleep, but never die.'' At the American Stock Exchange, the laws have been slumbering for a very long time.
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