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A floor broker barred from the New York Stock Exchange for making illegal stock trades has lost in his effort to show that exchange officials tolerated the practice. The broker, John R. D’Alessio, claimed that former NYSE Chairman Richard Grasso and other top officials sanctioned the placement of stock trades for favored customers ahead of large, market-moving trades. But he lost his civil suit against the exchange and the U.S. Securities and Exchange Commission before the 2nd U.S. Circuit Court of Appeals. In D’Alessio v. Securities and Exchange Commission, 03-4883, written by Judge Robert D. Sack, the circuit refused to accept an argument by D’Alessio that he and his firm, D’Alessio Securities Inc., were selectively prosecuted and given unduly harsh sanctions. D’Alessio was suspended by the NYSE in February 1998 for front-running or “trading ahead” by slipping small orders in securities on behalf of the Oakford Corp. ahead of large orders made by institutional clients. The effect was to give his small transactions the benefit of the larger transactions’ effect on the price of the stocks. D’Alessio’s firm received 70 percent of the profits earned by Oakford and was responsible for 70 percent of the losses. In 1998 he was suspended from his NYSE membership and arrested, and a civil suit was filed against him by the SEC. Several co-defendants pleaded guilty in the Oakford scandal. Criminal charges against D’Alessio were dismissed pursuant to a deferred prosecution agreement with federal prosecutors. Armed with an SEC report stating that the NYSE had allowed independent floor brokers to ignore the securities laws and the exchange’s own rules, D’Alessio and his firm sued the exchange and its top officials in December 1999, seeking $25 million in damages. He claimed the supposedly unlawful trading was the fault of the NYSE and officers who intentionally circulated an incorrect interpretation of the laws and rules. Two weeks after filing the complaint, D’Alessio and his firm were formally charged by the NYSE. It set up a hearing before a panel consisting of one hearing officer employed by the exchange and two exchange members. Alleging partiality, D’Alessio tried in vain to have the matter referred to an outside arbitrator. The panel found in November 2000 that D’Alessio had violated the law by having an interest in the Oakford account, by giving that account preferential treatment and by engaging in discretionary trading on behalf of Oakford. He and his firm were censured, and he was declared “permanently barred from membership and/or employment on the floor of the Exchange in any capacity.” The NYSE Board of Directors affirmed the hearing panel’s decision after rejecting a request by D’Alessio to disqualify itself. On April 3, 2003, the Board of Directors’ decision was affirmed by the SEC, which also rejected a motion by D’Alessio to disqualify itself. The SEC rejected his claim that the NYSE tacitly encouraged the kind of relationship his firm had with Oakford. APPEAL TO CIRCUIT D’Alessio appealed to the 2nd Circuit, where Judge Sack addressed his argument that NYSE employees, including the hearing officer, were biased against him, in part because he had previously filed suit against the exchange. “We conclude that the argument is ill conceived and that the Exchange was not in error in concluding that such alleged partiality on the part of the hearing officer did not render the Exchange disciplinary proceedings against D’Alessio and his firm unfair or invalid,” Sack wrote. While acknowledging that “impartial adjudicators are required” for self-regulating organizations such as the NYSE, Sack said the hearing officer’s participation “did not render the proceeding unfair” because D’Alessio made no showing that the “interests of the hearing officer himself were directly adverse to the petitioners or amounted to a personal stake in the outcome of the civil suit.” Sack also wrote that the acceptance of D’Alessio’s theory “would give rise to a perverse incentive for Exchange members” who, when facing possible disciplinary proceedings, might be tempted to “strike preemptively in the courtroom against the Exchange.” The circuit was also unpersuaded by D’Alessio’s claim that the SEC could not be impartial in reviewing the decision of the NYSE. Sack said the circuit rejected a “virtually identical” claim in the case of MFS Securities v. SEC, 03-4882. Finally, the court disagreed with D’Alessio’s claim that the sanctions imposed by the hearing panel were disproportionately severe. Judge Reena Raggi and Eastern District Judge David G. Trager, sitting by designation, joined in the opinion. Dominic F. Amorosa represented D’Alessio and D’Alessio Securities. Michael A. Conley, Giovanni P. Prezioso, Eric Summergrad, Mark Pennington and Meyer Eisenberg of the SEC represented the agency.

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