The NYSE has announced its monthly disciplinary actions for September, censuring and fining member firms for books and records violations, and operational and supervisory deficiencies, among other things.

The NYSE levied the heftiest fines against three firms that were careless in managing their electronic communications. It fined Wachovia Capital Markets, Wachovia Securities, and First Clearing $2,250,000 each. The firms consented to the fines and censures without admitting or denying guilt of the NYSE’s findings.

NYSE hearing panels found that the three firms failed to adequately back-up emails on the computer servers that controlled their communications systems. As a result, the firms couldn’t ensure that certain records could be retrieved. The firms also failed to review their email and instant messaging systems. The regulator said that supervisory deficiencies were at the heart of their failures.

In addition to fines and censures, the NYSE required the firms to bring their policies, procedures, and practices into compliance with NYSE Rules and federal securities laws, and to prevent a recurrence of these violations. The regulator also offered to waive $1,650,000 of each of the fines if the firms are already paying that amount in regulatory settlements concluded under the auspices of the NASAA relating to email communications.

The next largest fine went to Citigroup Global Markets, which the NYSE censured and fined $500,000 for supervisory, control, and books and records violations. The problems concerned the firm’s proprietary trading of precious metals, and related futures, forwards, and futures options. Citi consented to the penalty without admitting or denying guilt.

An NYSE hearing officer found that from January 2002 through January 2003, Gail Edmonds, the firm’s sole precious metals trader, engaged in proprietary trading in excess of her authorized limits, which resulted in unrealized losses for the firm. Edmonds concealed her unauthorized trading and losses from Citigroup by concealing some of her forward positions, mis-marking the value of her precious metals positions, which caused the net exposure resulting from her futures options positions to be miscalculated.

When a 2000 Citigroup internal audit and risk review report identified certain control weaknesses with respect to the firm’s precious metals trading desk, the procedures implemented by management were insufficient. As a result no one performed periodic independent price verifications and Edmonds’ misconduct went unnoticed for another year.

In July, the NYSE censured and barred Edmonds for four years for her misconduct.

NYSE Regulation also censured and fined J.P. Morgan Securities $400,000 for operational deficiencies concerning regulation SHO, violating NYSE order rules, and books and records and supervisory violations.

According to the NYSE, a number of programming and other systems errors caused Morgan to incorrectly designate transactions and improperly enter orders. This led to a failure to adhere to NYSE’s “up tick” rule on numerous occasions over a nearly five-year period. The errors also resulted in inconsistencies regarding the computation of positions arising out of various aggregation units. Furthermore, the firm failed to report trades as short sales after January 3, 2005, the date of compliance with the SEC’s Regulation SHO, which established uniform “locate” and “close-out” requirements in order to address problems associated with failures to deliver.

Technological deficiencies and trader errors also led Morgan to violate NYSE requirements governing entry and cancellation of Market "At-The-Close" and Limit "At-The-Close" orders. Morgan also failed to submit complete and accurate program trading data on the firm’s Daily Program Trade Report.

Morgan cooperated with the Division of Enforcement's investigation, the NYSE said, and self-reported nearly all of the initial violations, going so far as to hire an outside consulting firm to audit the trade reporting systems and procedures used by their equity desks. Furthermore, Morgan changed its systems and procedures and created a new compliance technology department.

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