NEW YORK (AFX) - Two specialists who supervised trades on the floor of the New York Stock Exchange each made more than $1 million illegally by cheating the public of pennies and nickles a share on thousands of trades, a prosecutor charged at a trial's opening.
Assistant U.S. Attorney Lauren Goldberg pointed at the defendants -- Michael Hayward, 55, and Michael Stern, 53, -- as she accused them of cheating the public from January 1999 through June 2003 by putting their greed ahead of their obligations to stock purchasers.
'The defendants made money by cheating the public,' Goldberg said as she gave a crash course in Wall Street lingo and trading methods to jurors in U.S. District Court in Manhattan, just blocks from the historic building housing the stock exchange.
Goldberg explained the stock market and how it worked in grade school terms, telling jurors it was a 'marketplace where buyers and sellers meet' to trade shares of companies rather than cars or computers.
She said Hayward and Stern were among five directors of Van der Moolen Specialists USA LLC, a firm of specialists and clerks who on the NYSE floor decided at what price buyers and sellers would be matched up on stocks such as Pfizer Inc. and Time Warner Inc.
The golden rule of the job was to make sure members of the public who wanted to buy or sell a stock were served before any trades were carried out on behalf of the specialist firm, the prosecutor said.
Goldberg said Hayward and Stern broke the rule repeatedly and told other specialists to do the same. She said specialist firms keep the market operating smoothly by trading their own accounts to correct imbalances when there are not enough buyers or sellers.
She said the pair conspired with a third director, Joseph Bongiorno, to gain control of the company and force other specialists and clerks who envied their power and trading positions to comply with their crooked methods.
Goldberg said the pair made money for the firm illegally by taking advantage of their inside knowledge of set prices that customers were asking to buy or sell shares at. Even though there were willing buyers of a stock, the men stranded those buyers and bought the shares for their own company's account, knowing they had buyers waiting to pay slightly more money for the stock, she said.
'They were supposed to play matchmaker. Instead, they played middlemen,' she said.
Goldberg said the money went into the firm's pockets but indirectly benefited Hayward and Stern because bonuses and other compensation was based in part on how much profit they could earn for the company.
If convicted of conspiracy and securities fraud, the men could face up to 20 years in prison.
David Meister, a defense lawyer, said he looked forward to making his opening statement on Friday but declined to comment further.
The defendants were among 15 people charged after a probe of specialists working on the floor of the stock exchange revealed they had allegedly used their inside positions to earn an estimated $20 million in illicit gains for themselves and their firms.
Last month, specialists Bongiorno, 51, and Patrick McGagh Jr., 40, pleaded guilty to securities fraud charges. They face sentencing in August. The rest of the defendants are awaiting trial in cases before five different judges. Bongiorno and McGagh, who are no longer registered NYSE specialists, were members of the management committee at Van der Moolen Specialists.
NYSE specialist firms have paid a total of $247 million to settle SEC charges.
The NYSE has said specialist firms gained $155 million in illegal profits over five years, a time when the exchange handled $50 trillion in trades.
Since the criminal probe and Securities and Exchange Commission charges brought against individuals and firms, the NYSE has said it has made major changes in its floor surveillance and enforcement plans.
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