NEW YORK, May 2 (Reuters) - Executives at now-defunct day trading firm A.B. Watley Inc. did not willfully participate in an illegal scheme to front-run trades from brokerage “squawk boxes,” but were tricked by their firm’s one-time chief executive, their lawyers argued on Wednesday.
“Squawk boxes” are desktop loudspeakers that traders use to announce institutional orders to buy and sell large blocks of securities, so that their firms’ brokers can locate another client who wants to take the other side of the trade.
Prosecutors accuse former stock brokers at Merrill Lynch MER.N, Citigroup (C.N) and Lehman Brothers Holdings Inc. LEH.N of taking bribes in exchange for allowing day traders at A.B. Watley to listen to their firm’s squawk boxes through open telephone lines.
They charge that the Watley day traders generated at least $650,000 from 2002 to 2004 in illegal trading profits by buying or selling ahead of the large orders they heard about on the boxes — an illegal practice known as “front-running.”
But in closing arguments at U.S. district court in Brooklyn on Wednesday lawyers told a jury Watley’s former chief executive, John Amore, masterminded the entire scheme and tricked the other executives he worked with.
Amore pleaded guilty to securities fraud charges in 2004 and is cooperating with the government in exchange for leniency.
“He (Amore) told them, ‘I can help you out, I can help you save your business,’” said Roland Riopelle, an attorney representing former A.B. Watley President Robert Malin. “They didn’t know they were committing a fraud and he used them, used them like pawns.”
Amore testified last month that he had told people at A.B. Watley that their use of the boxes was a “gray area” of the law. The Watley executives believed him, their lawyers said.
“Amore would give them the song and dance. My client didn’t believe it was a song and dance,” said Thomas Dunn, an attorney for Keevin Leonard, who supervised Watley’s traders
But also in his testimony last month, Amore revealed a checkered past. He said at one time he had been involved in a front-running scheme with a New York Stock Exchange clerk, and had lied to investors in a hedge fund he ran about his education and the fund’s performance.
In their closing arguments, defense lawyers characterized his testimony as just another story Amore was trying to tell the jury.
“The government chose to believe its own version of the truth, Amore’s version of the truth,” said Peter Quijano, a lawyer representing Watley’s former compliance officer, Linus Nwaigwe. “They were seduced, conned by Amore, like he had conned and lied to so many of them before.”
Defense attorneys also attempted to poke holes in the government’s case by pointing out that Nwaigwe, who had once worked for the National Association of Securities Dealers (NASD), had voluntarily told government regulators he had concerns Amore was embezzling from A.B. Watley.
“If Linus was any part of this conspiracy, if senior management was any part of this conspiracy he never would have self reported,” Quijano said. “He would have known he would be starting them on a trail that would lead them back to themselves.”
Prosecutors contend former Watley executives had self reported to cover up and throw off regulators.
In the government’s rebuttal, Prosecutor Michael Asaro said the government’s case rests on their belief that the brokers and traders knew about the front-running.
Each defendant could get a maximum of 25 years in jail and fines of $250,000 on each of the conspiracy and securities fraud charges they face.
The jury, which will also evaluate the the three former brokers accused in the case, is expected to begin deliberations on Thursday.