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IN RE NYSE SPECIALISTS SECURITIES

December 13, 2005.

In re NYSE SPECIALISTS SECURITIES LITIGATION.


The opinion of the court was delivered by: ROBERT SWEET, District Judge

OPINION

LaBranche & Co., LLC ("LaBranche LLC"), LaBranche & Co., Inc. ("LaBranche & Co."), George M.L. LeBranche, IV ("M. LaBranche"), Spear, Leeds & Kellogg Specialists LLC ("Spear Leeds LLC"), Spear, Leeds & Kellogg, LP ("Spear Leeds LP"), Goldman Sachs & Co., Inc. ("Goldman Sachs & Co."), The Goldman Sachs Group, Inc. (the "Goldman Sachs Group"), Van der Moolen Specialists USA, LLC ("VDM Specialists"), Van der Moolen Holding, NV ("VDM Holding"), Fleet Specialist, Inc. ("Fleet Specialist"), FleetBoston Financial Corp. ("FleetBoston Corp."), Bank of America Corp. ("Bank of America"), Quick & Reilly, Inc. ("Quick & Reilly"), Bear Wagner Specialists LLC ("Bear Wagner LLC"), Bear Stearns & Co., Inc. ("Bear Stearns & Co."), SIG Specialists, Inc. ("SIG Specialists"), Susquehanna International Group, LLP ("SIG LLP"), Susquehanna Financial Group, LLP (Susquehanna), and Performance Specialist Group, LLC ("Performance Specialist") (collectively, the "Specialist Defendants")*fn1 have moved pursuant to Rules 12 (b) (6) and 9 (b), Fed.R.Civ.P., to dismiss Plaintiffs' Consolidated Complaint ("the Complaint"). Defendant New York Stock Exchange ("NYSE")*fn2 has moved to dismiss the Complaint pursuant to Rule 12(b) (6). Lead Plaintiffs California Public Employees' Retirement System ("CalPERS") and Empire Programs, Inc. ("Empire") (collectively, the "Plaintiffs") have moved to modify the discovery stay set forth in Section 21D(b)(3)(B) of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), 15 U.S.C. § 78u-4 (b) (3) (b).

For the reasons set forth below, the motions to dismiss of the Specialist Defendants are granted in part and denied in part. The motion of NYSE to dismiss is granted. To the extent that claims have not been dismissed with prejudice, leave is granted to replead within thirty (30) days of the entry of this opinion.

  Prior Proceedings

  On October 17, 2003, this action was initiated by Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust, which filed a complaint (03 Civ. 8521) on behalf of itself and all others similarly situated. On November 11, 2003, Empire filed its complaint (03 Civ. 8935). On December 16, 2003, CalPERS filed its complaint (03 Civ. 9968). On March 16, 2004, Rosenbaum Partners, LP filed a complaint (04 Civ. 2038) in its individual capacity. By Opinion dated May 27, 2004, the above-referenced actions were consolidated for all purposes under docket number 03 Civ. 8264, CalPERS and Empire were appointed as lead plaintiffs, and lead counsel was selected. See Pirelli Armstrong Tire Corp. v. LaBranche & Co., Inc., No. 03 Civ. 8264 (RWS), 2004 WL 1179311 (May 27, 2004). A Consolidated Complaint (the "Complaint") was filed on September 17, 2004. On November 16, 2004, the Specialist Defendants moved to dismiss the Complaint pursuant to Rules 9 (b) and 12 (b) (6), Fed.R.Civ.P. On November 17, 2004, the NYSE moved to dismiss the Complaint pursuant to Rule 12 (b) (6). Pursuant to a briefing schedule agreed to by the parties, these motions were heard and marked fully submitted on April 13, 2005.

  A motion to modify the PSLRA discovery stay was filed by the Plaintiffs on October 1, 2004. This motion was heard and marked as fully submitted on November 17, 2004.

  The Parties

  CalPERS is the largest public employee retirement system in the United States, with assets of over $166 billion and nearly 1.4 million beneficiaries, including active and retired public employees. CalPERS is alleged to have purchased and/or sold almost three billion shares of NYSE-listed stock between October 17, 1998 and October 15, 2003 (the "Class Period").

  Empire is a New Jersey corporation that has its principal place of business in Saddle River, New Jersey. Empire is alleged to have purchased and/or sold over four billion shares of NYSE-listed stock during the Class Period.

  The NYSE is a not-for-profit corporation organized under the laws of New York State.*fn3 Pursuant to the Exchange Act, it is registered with the SEC as a national stock exchange. Each of the specialist firms and their individual employee specialists are members of the NYSE.

  LaBranche LLC, is a registered broker-dealer with the SEC and an NYSE member organization. LaBranche LLC is the largest NYSE specialist firm, serving as a specialist for more than 600 companies listed on the NYSE. During the Class Period, LaBranche LLC accounted for about 29% of the annual trading volume on the NYSE. The parent company of LaBranche LLC is LaBranche & Co. M. LaBranche is the Chairman, President, and CEO of LaBranche & Co., and he has served as a LaBranche LLC specialist since 1977. During the Class Period, he served as a Special Governor of the NYSE, in which capacity he was charged with overseeing the trading activities of the specialist firms, and he was a member of the NYSE Market Performance Committee.

  Spear Leeds LLC is an NYSE specialist firm and a registered broker-dealer. Spear Leads LLC is a subsidiary of parent company Spear Leads LP, which is a wholly owned subsidiary of the Goldman Sachs Group. Spear Leeds LLC is the second largest specialist firm on the NYSE, serving as a specialist for the stocks of more than 550 NYSE-listed companies and accounting for about 20% of the annual trading on the NYSE during the Class Period. Spear Leeds LLC is affiliated with Goldman Sachs & Co., which is a member firm of the NYSE.

  VDM Specialists is an NYSE specialist firm responsible for trading in the stocks of more than 370 public companies listed on the NYSE. During the Class Period, VDM Specialists accounted for about 12.5% of the annual trading volume on the NYSE. Van der Moolen Holding is the parent company of VDM Specialists.

  Fleet Specialist is an NYSE specialist firm that is responsible for trading in more than 430 NYSE-listed companies. It accounted for some 18% percent of the NYSE's annual trading volume during the Class Period. Since April 1, 2004, the parent company of Fleet Specialist has been Bank of America. Prior to that time, Fleet Specialist' parent company was FleetBoston Corp., which merged with Bank of America. Quick & Reilly is a member of the NYSE and an affiliate of Fleet Specialist and Bank of America. Prior to its merger with Bank of America, FleetBoston Corp. was the parent of Quick & Reilly.

  Bear Wagner LLC is a member of the NYSE and a registered broker-dealer that operates as an NYSE specialist. Bear Wagner LLC acts as specialist for more than 340 NYSE-listed stocks and accounted for some 16% of the NYSE's annual trading volume during the Class Period. Bear Stearns & Co. is a member of the NYSE and is the broker-dealer affiliate of Bear Wagner LLC.

  SIG Specialists is a member of the NYSE and a wholly-owned subsidiary of SIG LLP. SIG Specialists is a registered broker-dealer that operates as an NYSE specialist firm. SIG Specialists is responsible for trading in more than 150 NYSE-listed stocks and accounted for some 3% of the NYSE trading volume during the Class Period. Susquehanna, a member organization of the NYSE, is affiliated with SIG Specialists and SIG LLP.

  Performance Specialist, a member of the NYSE, is a registered broker-dealer that operates as a NYSE specialist. Performance Specialist is responsible for the trading of more than 165 NYSE-listed stocks. During the Class Period, it accounted for some 1.5% of the NYSE's annual trading volume.

  The Action

  This is a securities class action brought on behalf of public investors who purchased and/or sold shares listed on the New York Stock Exchange ("NYSE") during the Class period, for which specialist firms were responsible for maintaining the trading market. The Consolidated Complaint (the "Complaint") alleges that Defendants violated the Securities Exchange Act of 1934 (the "Exchange Act") and violated the fiduciary duty owed to the class members, and/or aided and abetted the breach of such duty.

  Count One of the Complaint asserts that all Defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. Count Two asserts that all Defendants violated Section 20(a) of the Exchange Act. Count Three asserts that NYSE violated Section 6(b) of the Exchange Act. Count Four asserts that all Defendants breached the fiduciary duty owed to the Plaintiffs and/or aided and abetted the breach of such duty. Count Five asserts that Spear Leeds LP, Goldman Sachs & Co., Quick & Reilly, Bear Stearns, and Susquehanna breached fiduciary duties owed to the Plaintiffs. The Role Of The NYSE Specialist

  The Complaint involves allegations that the specialist firms of the NYSE violated their legal duties to investors, thereby causing injury. In order to assess the sufficiency of these allegations, an understanding of the function and obligations of the specialist firms is necessary.

  The purchase and sale of securities on the NYSE must be carried out by a specialist who works on the floor of the exchange.*fn4 Each security listed for trading on the NYSE is assigned to a particular specialist. To execute purchases and sales of a particular security, buyers and sellers must present their bids to buy, and offers to sell, to the specialist assigned to the security. These orders could be brought to a specialist in one of two ways. First, the order could be conveyed orally and in person to the specialist by a floor broker on the floor of the exchange. Second, an order could be transmitted to the specialist electronically using the NYSE's Super Designated Order Turnaround System ("Super DOT"). Orders transmitted over the Super DOT system would appear on a special computer screen often referred to as the "display book."*fn5 Each specialist has a computerized "display book" screen at his or her trading post.

  After receipt of an order, a specialist could execute the order in two different manners. Generally, orders were executed in the "agency" or "broker" manner, in which the specialist was required to match any open orders to buy from one investor with an open order to sell from another investor within the same price range. Specialists generally received no compensation for filling orders on an agency basis.

  Second, specialists were permitted to execute, in certain limited circumstances, trades on a "principal" or "dealer" basis, when required to do so to maintain a fair and orderly market. In such circumstances, such as if there were no matching orders to sell and orders to buy, the specialist was permitted to execute an investor's order to buy stock by selling the stock from the specialist's proprietary account, or "inventory" of stock, to the investor. Additionally, the specialist was permitted to execute an investor's order to sell stock by buying that stock and holding the stock in the investor's inventory. A respected treatise provides the following description of the duties performed by the NYSE specialist:
The specialist firm occupies a unique dual role in the operation of the New York Stock Exchange, which is also the case with the other securities exchanges. First, a specialist firm acts as a "broker's broker," maintaining a "book" on which other brokers can leave customers' "limit orders" (i.e., orders to buy or sell at a price at which they cannot currently be executed). Second, a specialist acts as the exclusive franchised dealer, or "market maker" in its assigned stocks, buying and selling shares from other brokers when there are no customer orders on its book against which they can be matched.
The functions of the specialist can be illustrated by the following example. A firm is the specialist in an actively-traded stock, in which the market is $40 to $40.10. This means that customer orders are on the specialist's book to buy specified numbers of shares at $40.10 or less, and other orders are on his book to sell at $40.10 or more (for historical reasons, shares formerly were quoted in halves, quarters and eighths, rather than cents but now are traded in decimals). A broker who comes to the specialist with an order to sell "at the market" will sell to the customer with the first buy order on the book at $40, and a broker who comes with a market order to buy will buy from the customer with the first sell order on the book at $40.10. The specialist acts solely as a subagent, receiving a portion of the "book" customer's commission to his broker.
Now assume the same firm is also the specialist in an inactively traded stock. The only orders on the book are an order to buy at $38 and an order to sell at $42. If the specialist acted solely as agent, a broker who came in with a market order to sell would receive $38, and another broker who came in an hour later with a market order to buy would pay $42. The report of these two trades on the "tape" would indicate the stock had risen 4 points, or 10%, in an hour. The exchange therefore imposes an obligation on the specialist to maintain an "orderly market" in his assigned stocks, buying and selling for his own account to even out swings which would result from buyers and sellers not appearing at his post at the same time. In this case he might make his market at $40 to $40.25, trading for his own account as long as necessary, but yielding priority to customers' orders on his book whenever they provide as good a price to the party on the other side.
In essence, exchange trading and the specialist system is based on a "continuous two-way agency auction market" in which the firms acting as specialists "are responsible for the quality of the markets" for the securities in which they specialize. The specialist's obligation is also phrased in terms of the duty to maintain a fair and orderly market. The SEC has explained that a fair and orderly market is one that is not marred by manipulation or deception and characterized by reliable price continuity.
Specialists on an exchange are viewed as having two primary duties: to secure the best execution of orders with "minimal dealer intervention" and at the same time to manage supply and demand imbalances. Specialists carry out these obligations by participating in the market both as a broker or agent in acting as an intermediary between two matching orders and also as a dealer or principal when there is no available counter party to the transaction. Thus, specialists should not interposition themselves between matching offsetting orders. In other words, specialists may obtain the best execution by matching transactions and crossing customer orders. In fact, it is the specialist's obligation to do so if possible.
4 Thomas Lee Hazen, Law of Securities Regulation § 14.11 [1] [C] (5th ed. 2005).

  NYSE Rules Governing the Conduct of Specialists

  NYSE Rule 104 places a negative obligation on specialists by prohibiting a specialist from trading for his own account unless it is reasonably necessary to maintain a fair and orderly market. Rule 104 states in relevant part: "No specialist shall effect . . . purchases or sales of any security in which such specialist is registered . . . unless such dealings are reasonably necessary to permit such specialist to maintain a fair and orderly market."

  NYSE Rule 92, as amended, provides that "no member or member organization shall cause the entry of an order to buy (sell) any Exchange-listed security for any account in which such member or member organization . . . is directly or indirectly interested (a `proprietary order'), if the person responsible for the entry of such order has knowledge of any particular unexecuted customer's order to buy (sell) such security which could be executed at the same price." Rule 92 also applies to the specialist buying or selling a security while holding an unexecuted customer market buy or sell order, as well as to circumstances where the specialist holds unexecuted customer limit orders at a price that could be satisfied by the proprietary transaction effected by the specialist.

  NYSE Rule 123B (Exchange Automated Order Routing Systems) requires specialists to cross orders received over the DOT system. Rule 123B (d) states in relevant part: "a specialist shall execute System orders in accordance with the Exchange auction market rules and procedures, including requirements to expose orders to buying and selling interest in the trading crowd and to cross orders before buying or selling from his own account."

  NYSE Rule 401 requires NYSE member organizations to "adhere to the principles of good business practice in the conduct of his or its business affairs." Similarly, NYSE Rule 476 (a) (6) provides sanctions if NYSE member organizations engage in conduct "inconsistent with just and equitable principles of trade." Pursuant to NYSE Rule 476 (a) (7), member organizations must also refrain from engaging in "acts detrimental to the interest or welfare of the Exchange."

  NYSE Rule 342 provides that "[e]ach office, department or business activity of a member or member organization . . . shall be under the supervision and control of the member or member organization establishing it and of the personnel delegated such authority and responsibility."

  The Allegations

  The following facts are drawn from the Complaint and do not constitute findings of the Court.

  Seven specialist firms — LaBranche LLC, Spear Leeds LLC, Van der Moolen Specialist, Fleet Specialist, Bear Wagner LLC, SIG Specialists, and Performance Specialist — handle the trading in stocks for all of the NYSE's more than 2,800 listed companies. The approximate share of the NYSE annual trading volume handled by each of these defendants during the Class Period is as follows: Firm % NYSE Annual Volume LaBranche LLC 29% Spear Leeds LLC 20% VDM Specialists 12.5% Fleet Specialist 18% Bear Wagner LLC 16% SIG Specialists 3% Performance Specialist 1.5%

  The stock of each of the approximately 2,800 companies listed on the NYSE is assigned by the NYSE to one of these seven specialist firms. Only one specialist can be designated for a given stock listed on the NYSE, although a given specialist firm may handle more than one stock.

  It is alleged that the Specialist Defendants engaged generally in the following illegal practices: (1) interpositioning (see Compl. ¶¶ 76-82 (defining interpositioning as "taking advantage of the spread between the bid and offer prices by buying stock from one public investor, and then selling it to another, locking in a guaranteed, riskless profit")); (2) trading ahead (see id. ¶¶ 83-90 (defining trading ahead as filling public orders from a specialist's own firm accounts ahead of orders received from customers)); (3) freezing the book (see id. ¶¶ 91-104 (defining freezing the book as improperly facilitating proprietary trading by freezing the NYSE Display Book and thereby halting customer interaction and trading)); (4) manipulating the tick (see id. ¶¶ 105-09 (defining manipulating the tick as asking or signaling a member in the crowd to purchase part of a public offer so that the specialist could then, under NYSE rules, engage in proprietary trading)); and (5) falsifying trade reports (see id. ¶¶ 110-26 (describing how certain specialist firms falsified NYSE-mandated weekly reports concerning proprietary trading)).

  A. The SEC/NYSE Investigation

  On March 30, 2004, the Securities and Exchange Commission ("the SEC") announced that: (1) pursuant to Section 15(b)(4) and 21C of the Exchange Act, it had instituted administrative and cease-and-desist proceedings against LaBranche LLC, Spear Leeds LLC, VDM Specialists, Fleet Specialist, Bear Wagner LLC, SIG Specialists, and Performance Specialist; and (2) these seven firms had all settled the SEC and NYSE investigations. Pursuant to this settlement, the specialist firms agreed to pay more than $240 million in penalties and disgorgement. The allegations with respect to each of the Specialist Defendants are summarized below.

  1. LaBranche LLC

  The SEC and NYSE determined that between January 1999 and 2003, LaBranche LLC engaged in interpositioning, trading ahead, and non-execution of limit orders. Such practices resulted in customer disadvantage of $41,646,440. Of this total, $8,689,574 of customer disadvantage was the result of interpositioning, $30,969,236 was the result of trading ahead, and $1,987,630 was the result of non-execution of limit orders.

  The SEC and NYSE determined that some 41% of LaBranche LLC's customer disadvantage from interpositioning occurred in just six stocks — Nokia, Lucent Technologies Inc., Morgan Stanley, Tyco International Ltd., Compaq Computer Corp., and Merck & Co. Inc. Furthermore, it was determined that the interpositioning violations with respect to certain transactions in these stocks were done by certain LaBranche LLC specialists with scienter.

  The SEC and NYSE determined that certain senior executives at LaBranche LLC knew about the illicit trading because certain of the LaBranche LLC specialists who were engaged in such interpositioning in these six stocks were senior executives at LaBranche LLC, including managing directors, post managers, and a floor captain, some of whom had supervisory responsibility for LaBranche LLC's trading activities on the NYSE floor.

  The SEC and NYSE observed that between January 2000 and July 2003, the NYSE issued five separate fines to LaBranche LLC or certain of its specialists for instances of trading ahead. Furthermore, the NYSE issued an 2001 examination report to LaBranche LLC that noted a "multitude" of instances in which a LaBranche LLC specialist had traded ahead of customer orders. In February 2003, the NYSE issued LaBranche LLC an admonition letter for excessive freezing of the Display Book in late 2002.

  Based on these determinations (which were neither admitted nor denied), LaBranche LLC agreed to pay $41,646,440 in disgorgement and $21,872,320 in civil penalties.

  2. Spear Leeds LLC

  The SEC and NYSE determined that from January 1999 through 2003, Spear Leeds LLC engaged in interpositioning, trading ahead and intentional non-execution of limit orders and that such practices resulted in customer disadvantage of $28,776,072. Of this total, $8,309,962 of customer disadvantage was the result of interpositioning, $19,430,004 was the result of trading ahead, and $1,036,106 was the result of non-execution of limit orders.

  The SEC and NYSE determined that some 76% of Spear Leeds LLC's customer disadvantage from interpositioning occurred in just six stocks — AOL Time Warner, International Business Machines Corporation, Micron Technology, Inc., American International Group, Inc., Teradyne, Inc., and Verizon Communications Inc. The interpositioning violations with respect to certain transactions in these six stocks were done by certain Spear Leeds LLC specialists with scienter.

  The SEC and NYSE determined that certain Spear Leeds LLC senior executives knew about the illicit trading because certain of the specialists who were engaged in some of the most egregious cases of improper conduct were among the most senior executives at Spear Leeds LLC, including managing directors and team captains.

  In June 2002, the NYSE issued a $1,000 fine to a Spear Leeds LLC predecessor because five of its specialists had specialists traded ahead.

  The SEC and NYSE determined that between 1999 and 2003, trading ahead of unexecuted limit orders by Spear Leeds LLC caused $1,036,106 in customer disadvantage.

  Based on these determinations (which were neither admitted nor denied), Spear Leeds LLC paid $28,776,072 in disgorgement and $16,496,406 in civil penalties.

  3. VDM Specialists

  The SEC and NYSE determined that from January 1999 through 2003, VDM Specialists engaged in interpositioning, trading ahead, and intentional non-execution of limit orders and that such conduct resulted in $34,926,613 of customer disadvantage. Of this total, $14,629,743 of customer disadvantage was caused by interpositioning, $19,209,087 was the result of trading ahead, and $1,087,783 was the result of nonexecution of limit orders.

  The SEC and NYSE determined that some 80% of VDM Specialists' customer disadvantage from interpositioning occurred in just six stocks — Nortel Networks Corporation, Pfizer Inc., Hewlett-Packard Company, Time Warner Inc., The Walt Disney Company, and Eli Lilly & Co. Interpositioning in Nortel Networks alone accounted for some 29% of this disadvantage. The SEC and NYSE determined that the interpositioning in these six stocks was done with scienter. The SEC and NYSE determined that certain members of VDM Specialists' management committee engaged in interpositioning in one or more of the six stocks listed above, and these members of the management committee had the supervisory responsibility for the firm's trading operations on the NYSE floor, including supervising a floor captain who himself engaged in such interpositioning in one or more of the six stocks.

  The NYSE and SEC observed that in 2001, the NYSE had provided VDM Specialists with an examination report showing that the firm had traded ahead and disadvantaged customer orders. In 2002, the NYSE provided VDM Specialists with an examination report that identified additional instances of trading ahead. Senior management at VDMS received these reports and reviewed them with NYSE staff.

  Based on these determinations (which were neither admitted nor denied), VDM Specialists agreed to pay $34,926,613 in disgorgement and $22,748,491 in civil penalties.

  4. Fleet Specialist

  The SEC and NYSE determined that from January 1999 through 2003, Fleet Specialist engaged in interpositioning, trading ahead and intentional non-execution of limit orders, and that such practices resulted in $38,013,594 of customer disadvantage. Of this total, $9,797,398 of customer disadvantage was caused by interpositioning, $26,969,830 was caused by trading ahead, and $1,246,366 was caused by non-execution of limit orders.

  Some 80% of Fleet Specialist' customer disadvantage from interpositioning occurred in just six stocks — General Electric Company, Goldman Sachs Group Inc., Applera-Celera Genomics, JP Morgan Chase & Co., Charles Schwab Corp., and Johnson & Johnson. General Electric Company alone accounted for more than 61% of this customer disadvantage. The SEC and NYSE determined that these interpositioning transactions were done with scienter.

  The SEC and NYSE determined that in 2001 and 2002, senior managers at Fleet Specialist received internal reports of specific instances of improper conduct by certain specialists.

  The SEC and NYSE observed that in February 2002, the NYSE had issued an admonition letter to Fleet Specialist noting that between October 2000 and April 2001, certain of its specialists had effected transactions for Fleet Specialist' dealer account while in possession of previously entered agency orders on the same side of the market, resulting in inferior price executions of such agency orders.

  Based on these determinations (which were neither admitted nor denied), Fleet Specialist agreed to pay $38,013,594 in disgorgement and $21,083,875 in civil penalties.

  5. Bear Wagner LLC

  The SEC and NYSE determined that from January 1999 through 2003, Bear Wagner LLC engaged in interpositioning, trading ahead, and intentional non-execution of limit orders and that such conduct resulted in $10,724,903 of customer disadvantage. Of this total, $2,074,303 of customer disadvantage was caused by interpositioning, $8,085,348 was caused by trading ahead, and $565,252 was caused by the non-execution of limit orders.

  Some 68% of Bear Wagner LLC's customer disadvantage from interpositioning occurred in just six stocks — Texas Instruments Inc., Motorola Inc., Merrill Lynch & Co. Inc., Citigroup Inc., EMC Corp./Massachusetts, and Corning Inc. The SEC and NYSE determined that these interpositioning transactions were done with scienter.

  The SEC and NYSE noted that a February 2002 examination by the NYSE identified several instances where a Bear Wagner LLC specialist appeared to have traded ahead of an executable customer order. A December 2002 examination by the NYSE identified 33 additional instances where Bear Wagner LLC specialists appeared to have traded ahead of executable customer orders.

  Based on these determinations (which were neither admitted nor denied), Bear Wagner LLC agreed to pay $10,724,903 in disgorgement and $5,534,543 in civil penalties.

  6. SIG Specialists

  The SEC and NYSE determined that from January 1999 through 2003, SIG Specialists engaged in interpositioning, trading ahead, and the non-execution of limit orders and that such conduct resulted in $2,045,571 of customer disadvantage. Of this total, $282,983 of customer disadvantage was caused by interpositioning, $1,684,525 was caused by trading ahead, and $78,063 was caused by the non-execution of limit orders.

  Some 86% of SIG Specialists' customer disadvantage from interpositioning occurred in just six stocks — Analog Devices, Inc. ("ADI"), Solectron Corp., Ensco International Inc., Lexmark International, Inc., Calpine Corp., and L-3 Communications Holdings, Inc. ADI alone accounted for more than 32% of SSI's overall customer disadvantage from interpositioning. The SEC and NYSE determined that certain of these interpositioning transactions were done with scienter. Based on these determinations (which were neither admitted nor denied), SIG Specialists agreed to pay $2,045,571 in disgorgement and $988,018 in civil penalties.

  7. Performance Specialist

  The SEC and NYSE determined that from January 1999 through 2003, Performance Specialist engaged in interpositioning and trading ahead that resulted in $1,491,171 of customer disadvantage. Of this total, $140,488 of customer disadvantage was caused by interpositioning, $1,283,098 was caused by trading ahead, and $67,585 was caused by non-execution of limit orders.

  Some 78% of Performance Specialist overall customer disadvantage from interpositioning occurred in just six stocks — Sony Corp. ("SNE"), Safeguard Scientifics, Inc., CBS Corp., Illinois Tool Works, Infinity Broadcasting Corp., and GTE Corp. SNE alone accounted for more than 34% of this customer disadvantage from interpositioning. The SEC and NYSE determined that these interpositioning transactions were done with scienter.

  The SEC and NYSE noted that certain of the specialists who were engaged in such interpositioning in these six stocks were also senior executives with supervisory responsibilities for PSG's trading activities on the NYSE floor. Based on these determinations (which were neither admitted nor denied), SIG Specialists agreed to pay $1,491,171 in disgorgement and $680,761 in civil penalties.

  B. Allegations Contained In The April 2005 Indictments

  In April 2005, a grand jury in this district handed down criminal indictments against certain current and former individual specialists at the NYSE alleging violations of 15 U.S.C. §§ 78j(b) and 78ff and 17 C.F.R. § 240.10b-5. Since the information contained in these indictments can be judicially noticed by this Court, see Ives Labs., Inc. v. Darby Drug Co., 638 F.2d 538, 544 n. 8 (2d Cir. 1981), these materials will be considered in connection with this motion. See Kramer v. Time Warner Inc., 937 F.2d 767, 773 (2d Cir. 1991).

  1. LaBranche LLC (United States v. Deboer (05 Crim. 396))

  The above-referenced indictment alleges that from March 2000 through April 2003, LaBranche LLC specialist Freddy DeBoer ("DeBoer") caused 7,710 instances of interpositioning, which resulted in profits of $770,000. During this same period, DeBoer is alleged to have engaged in 11,620 instances of trading ahead, which resulted in $3,280,000 in customer harm. Such conduct is alleged to have included trades that involved shares of Nokia Corporation, Lehman Brothers Holdings, Inc., and Celestica Inc.

  2. Spear Leeds LLC (United States v. Johnson (05 Crim. 392))

  The above-referenced indictment alleges that from October 2000 through April 2003, Spear Leeds specialist Robert A. Johnson, Jr. ("Johnson") caused over 6,390 instances of interpositioning, which resulted in illegal profits of $350,000. During this same period, Johnson is alleged to have engaged in 4,740 instances of trading ahead, which resulted in more than $380,000 in customer harm. Such conduct is ...


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