Thursday, March 10, 2005

Insider Trading on the Floor of the NYSE

The SEC and the U.S. Attorney for the Eastern District of New York (Brooklyn) have filed civil and criminal insider trading charges against Frank Furino, who was employed as a clerk for one of the floor brokers at the New York Stock Exchange.  The floor brokers are responsible for maintaining an orderly market in the stocks they are responsible for overseeing, and the government accused Furino of tipping off a day-trader about large block trades so the trader could buy or sell ahead of the larger transaction, i.e. front-running.  Accord to the SEC's Litigation Release:

As a floor clerk, Furino had access to the purchase and sell orders of the floor broker’s customers. Furino routinely informed the day trader by telephone of the security, quantity, price, and side (buy or sell) associated with large customer orders, after the floor broker received, but before it executed, these orders. On at least 58 occasions, the day trader used the information obtained from Furino to trade ahead of the floor broker’s customers. For example, after Furino informed the day trader about a customer’s block order to purchase shares of Computer Associates International, Inc. stock on October 25, 2000, the day trader bought 17,000 shares of Computer Associates stock at an average price of $28.27. Within one minute, the day trader sold the 17,000 shares of Computer Associates stock through the floor broker at $29 per share, at the same time that the floor broker’s customer’s buy order for 84,500 shares was executed. The rise in share price resulted in the day trader making a profit of approximately $12,091. Overall, the day trader made more than $300,000 from this scheme. Additionally, the day trader compensated Furino for the confidential order flow information through undisclosed cash payments (approximately $50,000) and commissions.

Furino was arrested and arraigned on the criminal charge.  The press release issued by the USAO is here. (ph)

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