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Nasdaq Dealers Weigh $900 Million Settlement

NEW YORK - More than two dozen Nasdaq dealers are in talks to reach в $900 million settlement with investors in в class action lawsuit alleging that the firms rigged prices in past years on the Nasdaq Stock Market, according to people familiar with the matter.

At the same time, the Securities and Exchange Commission is preparing civil

By Wall Street Journal staff reporters Deborah Lohse, Scot J. Pal-Iruw and Patrick UcGeehan.

charges against dozens of traders In Its own Investigation of alleged price manipulation in the past on Nasdaq, according to people familiar with the SEC probe.

The possible class-action settlement-which would bring the total settlements

The Penny-Stock Sting

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agreed to by Wall Street firms to St billion, one of the largest civil antitrust payouts in history - arises from a highly publicized lawsuit tiled in U.S. District Court in Manhattan in 1994 against 37 firms, includ ing giants Merrill Lynch & Co.; Goldman, Sachs & Co.; Bear Stearns Cos.; and the firm then known as Smith Barney inc., which is now the Salomon Smith Barney unit of Travelers Group Inc.

The investors alleged that market makers at the firms conspired from 1989 to 1391 to keep the trading "spreads" between the buy end sell price of 1,659 Nasdaq stocks overly wide. In a separate case, two dozen of the firms settled similar charges with the Justice Department last year, agreeing to beef up compliance end tape-record a smell percentage of their trading-desk calls, though they neither admitted nor denied the allegations.

The SEC has largely completed the latest phase of Its own probe. Including Interviews with traders, though It hasnt yet sent out "Wells notices" formally notifying them that charges are likely to be filed, say iawyers familiar with the Inquiry. It remained uncienr whether the SBC also will file charges against securities firms fur which the traders worked.

Earlier this week, brokerage firm PalneWebber Group Inc. announced It was reorganizing its over the counter, or Nasdaq, trading operations under new co-heads, William Heenan and Patrick Davis, with PaineWebber President Joseph Grano citing "the significant challenges faced by over-the-counter firms in the

The Nasdaq-Dealer Saga

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changing competitive end regulatory environment."

PaineWebber officials declined to say whether the changes were connected to the SECs investigation. But after announcing the changes, Mr. Grano told Bloomberg News that "hundreds of I Nasdaq traders on the Street, Including ours, are under some sort of Inquiry." People familiar with the Inquiry say only severe! dozen are likely to face charges. Mr. Grano added in the same interview, "Because of the in quiries, because of the changes in economics, the old ways werent appropriate." A firm spokesman said Mr. Grano was quoted accurately.

Meanwhile, the possible clan-action settlement, which is still under negotiation but could be announced by year end, would bring the total amount settled in the suit lo around SI billion, people familiar with I he matter say. Since April, six brokerage firms, Including Montgomery Securities end Jefferies Group Inc., have settled individually Гот в total of 1100 million.

Garret Rasmussen, в Washington antitrust lawyer with Patton Boggs who is unaffiliated with the case, said the settlement would be the largest for any clvlf antitrust class action. Many antitrust lawyers say that until now. the largest such settlement pool was paid by companies In the corrugated-box Industry that settled a price-fixing lawsuit for a total of around S550 million, including Interest.

Arthur Kaplan, co-tead counsel for the plnlnliffs. said he wouldnt discuss the negotiations, nor would Robert Sklrnick. another co-lead counsel for the plaintiffs. An attorney for the Wall Street defendant, Jay Fastow, didnt return calls. Spokespeo-ple for Goldman Sachs, Salomon Smith Please Turn to Page CM, Column 5

Nasdaq Dealers Seek Settlement

Continued From Page CI Barney, Merrill Lynch and Bear Stearns each declined to comment.

It is unclear whether all 31 of the firms that havent settled individually will join the global class-action settlement Some people dose to the issue say one or two smaller firms were considering opting out of the deal. Smaller firms might find it more debilitating to pay тиШпШиоп-аЧЯ-lar settlements than giant brokerages that are experiencing record profits this year.

While every firm is likely to deny wrongdoing in settling the issue, there has been pressure to get this lawsuit settled by year end, people close to the firms say.

For one thing, record profit levels, estimated at S12 billion before taxes across all Wall Street firms, make a big settlement easier to absorb this year, say some people dose to the firms. Moreover, many of the firms named in the dass action are involved in mergers or merger discussions and dont want the uncertainty of a jury trial hanging over their heads.

Before investors get their hands on аду of this SI billion, members of the dass must be notified, possibly through mailings in their account statements or over the Internet, that they may have a claim. The court must approve the settlement after a hearing in which dass members can object to tha settlement if they wish. All that could take a year or more, some antitrust lawyers say.

The good news for investors is that with a settlement this large, the lawyers fees may represent well under 10% of the total. Mr. Rasmussen estimated. How to distribute the remaining funds to investors who can prove they have claims, and now much will go to each, will be worked out over the next year or more, he estimated.

A global settlement has been under discussion since Sherwood Securities became the first firm to opt to settle the case in April, people familiar with the matter say. As five other firms settled individually, it Increased the pressure on the other firms to settle together or singly, since under antitrust rules defendants who dont settle may face liabilities incurred by those who do, according to Mr. Rasmussen.

Last year, capping the first phase of its investigation, the SEC censured Nasdaqs parent, the National Association of Securities Dealers, for allegedly failing to police the market. Among the SECs findings: that Nasdaq dealers colluded to keep spreads artificially wide, thus boosting their profit margins. The SEC also concluded that dealers failed to honor their publidy quoted prices and deliberately delayed reporting trades until after the end of the trading day.

The SEC also ordered sweeping rule changes meant to prevent manipulation of spreads and to put small investors on a more equal looting with brokerage firms and institutions In getting access to the best available prices. Firms have complained that the new rules have significantly eroded their profits from acting as dealers, or market makers. In Nasdaq stocks.

Once the rule changes were put into effect, the SEC aimed to investigating specific Instances of allegedly illegal acts that came to light In thousands of hours of audiotapes the agency and the Justice Department had subpoenaed from the firms. Many Nasdaq dealer firms had routinely taped traders phone conversations to use as a reference if a trade was disputed.

Several PaineWebber traders were heard on tape discussing the manipulation of prices of slocks traded on Nasdaq, people familiar with tha firm said. But PaineWebber officials declined to say whether any of six departing traders were among them.

The firm said the longtime head of its. OTC desk. Richard Bruno, retired at the age of 51 but would remain a consultant. PaineWebber also said the six OTC traders were leaving the firm "to pursue other opportunities." They are Peter F. Comas. Robert D. Coppola. Gerard Kane. Joseph J. Palma. Arthur Raiola and Joseph H. Raiola.

Joseph Raiola declined to comment on the reasons for his departure from PaineWebber. None of the others could be reached for comment

Воспроизводится с разрешения «The Wall Street Journal*. © 1997 Dow Jones & Company, Inc. All rights reserved worldwide.



Comeback Player Of1997: Nasdaq

The movements of stock markets are often ephemeral, on the front page one day and forgotten the next as prices fluctuate. We remember the 1929 crash because It foretold disaster, but the 1967 one, which dkt not. Is already fading from memory.

Thus it is that the enduring news made In

the financial markets in 1997 will probably not prove to be any of the it«ms that sent prices soaring or f ailing. It will not be the extraordinary gains of the year or the brief plunge brought on by Asian concerns.

Instead, it is likely to be the reforms made at the National Association of Securities Dealers, which runs the Nasdaq stock market and licenses stockbrokers. It is well on Its way to being the first-class stock market that its advertisements used to say It already was. And its regulatory arm has made real progress in cleaning up the sleazy side of die brokerage business.

The N.A.S.D. should be honored as the Wall Street organization of the year.

Not all the credit for that goes to the association, of course. Change came only after the Feds cracked down in 1996 on trading practices that assured profits for market makers at the expense of investors. Credit should go to Arthur Levitt Jr., the chairman of the Securities and Exchange Commission; to Richard Lindsay, the S.E.C.s director of market regulation, and to Anne Binga-man, who headed the antitrust division of the Justice Department

Still, the people who took over top posts at the NA.S.D. have done a magnificent job fa

turning around an organization that once appeared to be more responsive to the interests of its brokerage-firm members than it was to the interests of the investing public. Frank Zarb, the new head of the N.A.S.D.; Mary Schapiro. the boss of its regulatory arm, and Al Berkeley, the head of the Nasdaq stock market, all deserve praise.

On the regulatory front, Ms. Schapiro has moved to discipline not only the brokerage firms that routinely rip off customers, but also the brokers that used to go from one sleazy firm to another. Crooks now have good reason to fear the NA.S.D.

But tt is at the Nasdaq stock market that the roost far-reaching changes are being made. Investors are much more likely to get a good price-defined as a higher price if they are selling or a lower one If they are buying - than they ever were before. It may or may not be as good a market as the New York Stock Exchange, but until this year it was impossible to make the comparison without snick-

A Better Deal

Average change In quoted spreads between bid and asked prices on Nasdaq. Jan. 1997 to Nov. 1997.

Those savings for investors come from the brokerage Arms that make markets and that used to dominate Nasdaq. There have been forecasts of widespread withdrawals by market makers, and publicity has been given to some big firms that cut back on the number of stocks they trade. But the statistics snow that there are more market makers, not fewer, than before the reforms.

That may change. There probably were more market makers than were needed in many stocks, and some will find It hard to compete in the new environment. Also, the Jury is still out as to how much liquidity vlll be available in a prolonged bear market. The Nasdaq market grew out of the oil

over-the-counter market, a dicey place in which customers were often treated badly. And it was slow to change even as classy companies were listed.

One can argue that improvements should have been made years ago. But the important thing Is that the market is better. Frank Zarb and his colleagues deserve investors thanks.

Воспроизводится с разрешения.

© 1998 by The New York Times Company.

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