Early this morning, Amsterdam-based Van der Moolen (NYSE: VDM) reached an accord with the SEC and the Enforcement Division of the New York Stock Exchange, pending final SEC approval. The settlement comes on charges that Van der Moolen and several other trading specialists violated their charter to maintain an orderly market and failure to supervise. VDM employees are accused of stepping into the middle of trades where no such intervention was required, scalping a few pennies per share for the company in the process.
VDM is awaiting SEC approval of its petition, and states that the amount paid will range from $51.8 million to $57.7 million, depending on the SEC's decision. As part of the accord, VDM does not admit or deny the charges, which include alleged wrongdoing as far back as 1993.
Within hours of VDM's lead, other specialist firms got in line to settle with regulators. The largest, LaBranche (NYSE: LAB), agreed to pay $63.5 million, of which $41.6 million is restitution and the remainder civil penalty. Once again, this settlement does not include admission of guilt on any charges. All told the big specialist firms -- VDM, LaBranche, Bear Stearns' (NYSE: BSC) Bear Wagner division, Goldman Sachs' (NYSE: GS) Spear, Leeds & Kellogg division, and Fleet Boston's (NYSE: FBF) Fleet specialist unit have agreed to pay more than $240 million to settle charges.
It remains to be seen whether this settlement forestalls the end of the specialist system at the NYSE. In the midst of the controversy, Fidelity Investments, which can account for as much as 5% of the exchange's daily volume, urged the NYSE to scrap the system and go to an electronic system such as the one at the Nasdaq. Fidelity noted that the specialist system is potentially harmful to investors since the specialists can trade for their own accounts, building an intractable conflict of interest. Fidelity was joined by other companies, including insurance and finance giant American International Group (NYSE: AIG), in expressing displeasure over the system and abuses within it.
Under that backdrop, it was probably pretty smart for the firms to settle as quickly as possible. There's really nothing like an overhanging regulatory and legal action to convince groups to press harder for change. Better to take the medicine and maintain control than to fight and have the rug pulled out from under you.
The rise of John Thain to the chief executive's chair at the NYSE has created plenty of speculation that the age of the specialists is on the wane. He has long championed increased technology to improve trading. Sure enough, the NYSE last week announced its initiative to improve its electronic trading capabilities. The best thing that the specialists could do in such an environment is make themselves look as clean as a whistle. Getting the specter of SEC action out of the way was step one.
Bill Mann owns no companies mentioned in this article.
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