Monday, April 30, 2007
Following a joint investigation, NASD and the Chicago Stock Exchange (CHX) today announced fines and suspensions against two traders for artificially inflating the price of the stock of Material Science Corporation (MSC), a New York Stock Exchange-listed company, in connection with MSC's repurchase of its stock. NASD imposed a $25,000 fine and a three-month suspension on Klaus Offenbacher, a trader with NASD-registered First Analysis Securities Corporation of Chicago. Offenbacher is receiving credit for a 60-day suspension already imposed by his employing firm. CHX imposed a $20,000 fine and a two-month suspension on Bruce Kaminski, a floor broker with Dougall & Associates of Chicago, a CHX Participant firm.
The regulators' joint investigation found that Offenbacher was responsible for repurchasing MSC stock on behalf of the issuer pursuant to the company's stock repurchase program. MSC wanted its repurchases to fall within the safe harbor provision of the Securities and Exchange Commission's (SEC) rule governing issuer buy-backs, which provides that issuer purchases cannot be the opening purchase of the day and cannot exceed the highest independent bid or last independent transaction price.
The regulators found that on Aug. 21, 2006, Offenbacher received authorization from MSC to repurchase 100,000 shares of MSC stock pursuant to the repurchase program. The same day, Offenbacher located an institutional customer willing to sell a 174,300-share block of MSC stock with a limit price of $9.90. Later that day, Offenbacher attempted to contact the principals of MSC to get approval to purchase the entire block. MSC stock closed that day at a price of $9.80 per share. Early the following day, Offenbacher received approval from MSC's principals to purchase the block at $9.90 per share. Before the market opened, Offenbacher directed Kaminski to purchase 1,000 shares of MSC stock at $9.90 per share, in the event MSC opened below $9.90 per share. When MSC opened at $9.75 per share, Kaminski executed the 1,000 share transaction at $9.90 per share which artificially drove the stock's price up 15 cents to the level Offenbacher needed to execute the cross trade.
Kaminski's execution of the 1,000-share transaction on the New York Stock Exchange established an artificial reference price at which the larger block transaction was then executed on the CHX. As a result, the regulators found that Offenbacher and Kaminski knowingly and intentionally artificially increased the market price of MSC stock in an attempt to make it appear that the purchase fell within the SEC's safe harbor provision for issuer buy-backs. Both individuals settled without admitting the charges. See NASD and Chicago Stock Exchange Fine and Suspend Traders for Cross-Market Manipulation