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NASD suspends vocal critic for one year

January 18, 1997

WASHINGTON (AP) _ Sheldon Maschler, an outspoken critic of the Nasdaq Stock Market and one of its most controversial traders, has been suspended one year and ordered to pay $675,000 to settle charges of abusing a computerized trading system designed for small investors.

The suspension Friday is the latest in a long battle between Maschler and the National Association of Securities Dealers Inc., parent company of Nasdaq.

Maschler is a leader among a dissident band of traders known for their aggressive dealings on Nasdaq’s Small Order Execution System, or SOES, a computerized system designed to automatically execute small customer orders. Using sophisticated computer technology, SOES traders managed to profit when large Wall Street dealers didn’t quickly update their stock quotes in a fast-moving market.

The SOES system is highly controversial on Nasdaq, the nation’s second-largest stock market. Large Nasdaq dealers, such as Merrill Lynch & Co. and Charles Schwab’s trading arm, Mayer & Schweitzer, complain they’ve lost millions to the small firms, which some call ``SOES bandits.″

But some prominent academics defend the SOES traders as brilliant inventors of computerized trading systems that profit handsomely from inefficiencies in the market.

The SOES system is significant to individual investors. It was created in the aftermath of the 1987 stock market crash, when small investors couldn’t get through on telephones to their Nasdaq dealers.

Maschler and his firm, Datek Securities Inc., agreed to settle a long-standing investigation of his trading practices, without admitting or denying wrongdoing, said Martin Russo of Kasowitz, Benson, Torres and Friedman LLP, New York, an attorney who negotiated his settlement. Also settling to lesser charges were traders Jeffrey A. Citron and Aaron Elbogen.

The NASD accused Maschler of violating SOES trading rules by dividing up large customer orders into smaller pieces and processing them through the small order computer network. From Nov. 25 to Dec. 23 in 1991, the defendants were charged with entering 690 orders through the SOES system that violated the maximum order size, which generally is 1,000 shares per trade.

Similar charges were filed concerning trading on two other occasions in 1992 and 1993.

In the settlement, Maschler agreed to dismiss a $24.6 million federal lawsuit he had filed against the NASD in the New York City borough of Brooklyn. The lawsuit accused the NASD of bringing the SOES-system violation charges as part of a conspiracy to restrict trading. Maschler also agreed to dismiss complaints against a number of prominent Wall Street firms, including Alex. Brown & Sons, PaineWebber Inc. and Morgan Stanley & Co., as well as senior NASD executives.

Another Maschler lawsuit filed in Manhattan federal court _ details of which weren’t immediately available _ also will be dismissed, Russo said.

And the NASD agreed not to bring charges against Maschler and the other defendants for breaking SOES trading rules prior to the Dec. 31, 1996 settlement.

In addition, the NASD agreed to defer enforcement of sanctions against any of the defendants, except for an expulsion, for any future wrongdoing until the Securities and Exchange Commission has had a chance to review the case, Russo said.

``We’re very happy with the result,″ Russo said. Attempts to reach Maschler after the close of business Friday weren’t immediately successful.

Elbogen was charged with failing to have a proper supervisory systems in place to prevent order-splitting into SOES and with failing to supervise Maschler and Citron. He was censured and fined $25,000.

Citron, also charged with SOES violations, was suspended for 20 days from the NASD and fined $20,000.

Tales of Maschler’s battles with Nasdaq were legendary. In 1995, Maschler interrupted a Nasdaq press conference in New York to complain about new trading rules, and got into a heated argument with NASD president and chief executive Joseph Hardiman.

``You’re an embarrassment to my organization that I pay $120,000 a month for,″ Maschler shouted at Hardiman while waving a large cigar.

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