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Amex Failed to Monitor Options Trading, SEC Says

The exchange violated an agreement to improve oversight, a report says.

September 30, 2003|From Bloomberg News

The American Stock Exchange failed to police options trading, in violation of an order mandating stricter enforcement -- and then lied to regulators to cover up its lack of supervision, according to a report by Securities and Exchange Commission inspectors.

The Amex, the third-biggest U.S. stock exchange, is accused of breaking a September 2000 agreement to improve surveillance with a "deliberate attempt to conceal serious deficiencies" in its oversight procedures, SEC staff examiners alleged in the 32- page report, which was obtained by Bloomberg News.

"The staff is seriously concerned" violations in the Amex's handling of customer options trades "are continuing to go undetected, unreviewed and unsanctioned," SEC compliance director Lori Richards informed Amex Chairman and Chief Executive Salvatore Sodano in a cover letter to the report.

The SEC's allegations surfaced amid a clamor by regulators and institutional investors for changes in the role of exchanges in self-regulation after the New York Stock Exchange's approval of a $139.5-million pay package for former Chairman Richard Grasso caused a furor.

The SEC report was sent June 16 to the Amex -- two weeks after its parent, NASD Inc., announced a preliminary agreement to sell the exchange for about $110 million to GTCR Golder Rauner, a Chicago private equity firm.

Amex spokesman Robert Rendine said that GTCR was aware of the investigation and that it had not affected negotiations. Calls to GTCR's Constantine Mihas, who is negotiating the Amex purchase, weren't returned.

"The exchange has been cooperating fully with the SEC," Rendine said. Amex also hired law firm Davis, Polk & Wardwell to conduct "a comprehensive review" of its surveillance of trading and is carrying out the firm's recommendations, he said.

The probe focuses on allegations that Amex specialists who coordinate stock and options trading ignored orders from professional day traders or filled those orders at prices worse than advertised.

The report criticized Amex and its board in three main areas.

The exchange's surveillance failed to detect "large numbers of potential ... violations" and used "illogical procedures and indefensible rule interpretations" to understate the violations.

When violations were discovered, Amex failed to refer most of the violators for disciplinary action. When referrals were made, "Amex's disciplinary committee routinely took no action against Amex specialists," the SEC letter said.

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