NYSE firm fined for illegal broker payments

NEW YORK – Van der Moolen Specialists USA, LLC ("VDM"), an NYSE member firm, has been fined $3.5 million for illegally compensating unregistered brokers or finders, NYSE Regulation has said.

The firm's stock loan department has since been closed for the supervisory deficiencies and books and records violations that led to the misconduct. NYSE Regulation alleges that the firm's stock loan department engaged in numerous transactions at away-from-market rebate rates, and made payments to finders who performed no legitimate business function.

VDM completely lacked supervision of its stock loan business resulting in millions of dollars in fees being improperly channelled to finders who did nothing to earn them, according to Susan L. Merrill, chief of enforcement at NYSE Regulation. "Firms must ensure that services are being engaged for bona fide business purposes, and must have independent controls to verify that services paid for have actually been performed," she said.

NYSE Regulation charges that from January through December 2004, the employees of VDM's stock loan department borrowed securities from complicit counterparties at rebate rates significantly below the prevailing market rebate rates for those securities, and then loaned those securities to third parties at higher rebate rates including market rates.

The difference between the below-market rates at which the securities were borrowed and the higher rates at which the securities were loaned represented the firm's gross revenues on these transactions. These actions violate Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3 and 17a-4 thereunder, and NYSE Rules 342, 440 and 476(a)(6).