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August 15, 2005 3:52 p.m. EDT
Four Brokers Indicted
In 'Squawk Box' Case

By AARON LUCCHETTI
Staff Reporter of THE WALL STREET JOURNAL
August 15, 2005 3:52 p.m.

A federal grand jury has indicted four Wall Street brokers in the case involving abuse of Wall Street's internal communications, or squawk box, system.

Kenneth E. Mahaffy, Jr. and Timothy J. O'Connell, formerly of Merrill Lynch & Co.; Ralph D. Casbarro, formerly of Citigroup Inc.'s Salomon Smith Barney unit, and David G. Ghysels Jr., formerly of Lehman Brothers Holdings Inc., were indicted in U.S. District Court in the Eastern District of New York on Thursday.

The indictments were unsealed this morning. The primary charges were securities fraud and commercial bribery, a prosecutor's official said.

A lawyer for Mr. Ghysels said his client would plead not guilty at an arraignment later today. Lawyers for Messrs. Mahaffy and O'Connell couldn't be reached for comment. A lawyer for Mr. Casbarro had no immediate comment.

Federal prosecutors have been investigating1 whether the internal communication systems that broadcast confidential market information at several Wall Street brokerages were compromised for quick profit.

The Securities and Exchange Commission also brought civil charges against the four brokers and a day trader, John J. Amore, who was charged with paying the brokers in return for live access to the brokerage firms' squawk boxes.

According to the SEC, Mr. Amore directed traders working for him to listen to the squawk-box information, which included tidbits about what the brokerage firms' large institutional clients wanted to buy and sell. By purchasing and selling stock ahead of such large institutional orders, Mr. Amore's traders were able to profit at the expense of those large customers' orders.

The day traders, operating out of the firm where Mr. Amore worked as an executive, A.B. Watley Inc., traded ahead of orders they heard on the squawk boxes of Citigroup, Merrill Lynch and Lehman more than 400 times, making gross profits of more than $650,000, the SEC alleged.

Prosecutors and the SEC alleged that in exchange for the lucrative access, the day traders paid the brokers through trades that had no purpose except for generating commissions. Two of the brokers, Messrs. Casbarro and Mahaffy, also were paid secret cash payments, the SEC said, adding that the total gross commissions collected by the four brokers were $290,000.

"The defendants put their own interests ahead of their firms' and their firms' clients by stealing valuable, confidential information and selling it to unscrupulous day traders," said Rosylnn R. Mauskopf, U.S. attorney for the Eastern District of New York, in a statement.

Each broker was criminally charged with multiple counts of securities fraud. Each count carries a maximum sentence of 25 years' imprisonment, five years supervised release and a fine of $250,000 or twice the gain or loss as a result of the offense.

Write to Aaron Lucchetti at aaron.lucchetti@wsj.com

-- posted by SteveT