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“It is vital for firms to carefully supervise trades relating to business strategies pegged to the closing price to protect customers and the market from excess volatility,” said Susan Merrill, chief of enforcement, NYSE Regulation. 

Lehman entered into irrevocable facilitation contracts with certain customers to purchase blocks of a certain stock at a 0.33 cent to two cent premium over the stock’s closing price.   On December 11, 2002, the Firm effected several transactions for the sale of 2,050,191 shares of the stock at or near the close of trading that were disruptive and caused excess market volatility.  The Firm’s final transaction in the stock for the day was a sale of 1.6 million shares, i.e., approximately 78 percent of its position.  The Firm asked for a bid on this block as the closing bell was ringing.  These circumstances did not provide an opportunity for contra side interest to develop and react to its order.  The Firm should have been aware that the price of the stock could decline.  As a result, this transaction had the effect of causing the price of the stock to close down from $59.61 to $59.00 and Lehman’s customers to potentially receive a lower price on the facilitation contracts.  Further, because Lehman sold approximately 22 percent of its position minutes earlier at prices higher than the closing price, the Firm also realized a profit by its conduct.

In violation of NYSE Rule 342, Lehman failed to have reasonable policies and procedures in place to supervise the manner in which trades relating to facilitation contracts for the purchase of stock at prices derived from the closing price were submitted, such as those involving the stock at issue, particularly where there was an economic incentive for the Firm to impact the closing price.   Lehman also failed to have adequate controls in place to evaluate and scrutinize the risks associated with such trading and to prevent such trades from occurring at the close when they could be disruptive or cause excess market volatility.  Thus, Lehman also failed to adhere to principles of good business practices with respect to the trades at issue in violation of NYSE Rule 401.

Member Firms have been on notice since the NYSE issued Information Memo 95-28  in 1995 that a firm positioning itself to facilitate a customer order that leaves a portion of its position to be executed at or near the close must proceed consistent with just and equitable principles of trade and must establish and maintain procedures reasonably designed to review facilitation activities for compliance with Exchange rules and the federal securities laws.

In settling these charges brought by NYSE Regulation, Lehman Brothers neither admitted nor denied the charges. 

About NYSE Regulation

On December 17, 2003, the SEC approved a new governance structure for the NYSE.   Under the new design, the NYSE Board of Directors is comprised solely of independent directors, except for the chief executive officer, who have no affiliation with any regulated member firm.  A new position of chief regulatory officer was created and reports directly to the board of directors through a new Regulatory Oversight Committee.  As a result, NYSE Regulation is insulated from potential influence from NYSE members and member firms, operates separately from the business side and is independent in its decision-making.

NYSE Regulation plays a critical role in monitoring and regulating the activities of its members, member firms and listed companies, as well as enforcing compliance with NYSE rules and federal securities laws.   Nearly 400 of the largest securities firms in America are members of the New York Stock Exchange.  These firms service 98 million customer accounts, or 84 percent of the total public customer accounts handled by broker-dealers, with total assets of over $4 trillion.  They operate from 20,000 branch offices around the world and employ 144,000 registered personnel.  Nearly 700 employees, or more than 40 percent of the Exchange’s staff, work for NYSE Regulation, which consists of four divisions: Market Surveillance, Member Firm Regulation, Enforcement and Listed Company Compliance, as well as a Risk Assessment Unit and Dispute Resolution/Arbitration.