Fifteen specialists who managed trades on the New York Stock Exchange floor were busted Tuesday for allegedly ripping off investors to the tune of $19 million, in the biggest crackdown on illegal trading in the Big Board's history.

Federal prosecutors unveiled nine indictments charging that the former and current specialists used their inside positions between 1999 and April 2003 to make about $13.5 million in illegal profits for themselves and their firms. Specialists match buyers and sellers' orders on the NYSE (search) floor.

The indictments did not explain the $5.5 million difference in the figures on investors' losses and the specialists' profits.

The specialists were charged with "trading ahead" — selling or buying stock for themselves or their firms before placing their customers' orders. This allowed the specialists to take advantage of price differences in their favor.

They also allegedly "interpositioned" themselves and their firms between public sellers and buyers of stock in other schemes that got them better prices, which NYSE regulators failed to catch.

"We have excised a large tumor from the stock exchange," U.S. Attorney David Kelley said.

The NYSE itself was also ripped by the Securities and Exchange Commission (search) for failing to police its specialists, and will spend $20 million on regulatory audits through 2011 as part of a settlement.

Mark Schonfeld, director of the SEC's New York office, said the specialists "showed a disregard for their legal duty that was both profound and, at times, profane."

In addition, the SEC filed civil charges against 20 specialists, including the 15 indicted, alleging they filled orders for their own accounts before executing trades for customers.

For its part, the NYSE announced securities-fraud charges against 17 of the 20, including the 15 indicted.

The exchange also agreed to implement a pilot program of electronic surveillance of its trading floor for 18 months.

The indictments stem from a two-year federal probe of specialists. Fourteen of the 15 individuals indicted surrendered to authorities yesterday and were arraigned in federal court in Manhattan on multiple securities-fraud charges. They each pleaded not guilty and were released on bail set as high as $5 million.

The 15th was believed to be in the Netherlands and considered "at large," prosecutors said.

If convicted, the suspects each face up five to 20 years in prison and fines of at least $250,000 to $5 million.

A lawyer for David Finnerty, a former trader with Fleet Specialists Inc., (search) said his client had done nothing wrong and "is fully convinced he will be vindicated at trial."

Finnerty, 38, was charged with securities fraud for alleged illegal trading of General Electric (GE), Applera Corp. (ABI) and PE Biosystems stocks from January 1999 to April 2003.

Finnerty, of Weehawken, N.J., engaged in "interpositioning" 25,850 times that funneled $4.36 million in illegal profits to his account, and committed 15,380 violations of "trading ahead" that cost customers $5 million, according to his indictment.

Lawyers for many of the other specialists declined to comment.

The indicted specialists are former or current employees of Spear, Leeds & Kellogg Specialists, a unit of Goldman Sachs Group Inc.(GS); Van der Moolen Specialists USA, part of Netherlands-based Van der Moolen Holding (VDM); Fleet Specialist, a unit of Bank of America Corp. (BAC); Bear Wagner Specialists, a unit of Bear Stearns Cos. (BSC); and LaBranche & Co. (LAB)

They each made between $150,000 and $4.4 million in profits through illegal trading, for a combined total of about $13,467,000, according to the indictments.

Investors lost about $19 million in profits over the four-year period where $43 trillion in stocks were traded.

"Over time, these small thefts accumulate into large profits that translate into higher compensation and bonuses for specialists who execute the trades," Kelley said.

Specialists run the "open outcry" auctions on the floor of the NYSE, matching buy and sell orders for customers of the stocks they oversee.

They also use their firms' money to purchase shares when nobody else wants to buy, and to sell shares from their own inventory to maintain an orderly market.

There are about 400 specialists who work the NYSE floor. Most know each other, and the majority earn low six-figure salaries. But some earn two and three times that.

"To see criminal activity on the floor is really astounding," said Jacob Zamansky, a New York lawyer representing investors in arbitrations against brokers. "This occurred under the watch of the NYSE. It raises questions about whether the NYSE can properly supervise the people there."

Responding to the SEC charges and settlement, NYSE Chief Regulatory Officer Richard Ketchum said the Big Board revamped its enforcement arm starting in late 2003.

"The New York Stock Exchange accepts and acknowledges the SEC's criticisms," Ketchum said. "Our board and entire organization are committed to take whatever additional steps are necessary ... to meet our surveillance and enforcement obligations. Specialist firms have changed, as have we."

Of the seven Van der Moolen employees, five also served as NYSE quasi-cops.

Michael Hayward, Richard Volpe, Michael Stern and Robert Scavone were "floor officers" whose duties included monitoring trading activities of floor brokers. Joseph Bongiorno served as floor governor, an even higher position.

Bongiorno, 50, of Brooklyn, was charged with making profits and stiffing customers on illegal trading of Hewlett-Packard Co. (HPQ) stock from January 1999 to April of 2003. He allegedly engaged in 15,620 instances of "interpositioning," resulting in illegal profits of $1.38 million.

Bongiorno also allegedly "traded ahead" of his customers 8,630 times costing them $1.36 million

Scavone illegally traded in Eli Lilly stock from August 2001 through April of 2003, prosecutors said.

Stern allegedly abused his position to get risk-free profits on Duke Energy Corp. (DUK), Kohl Corp. (KSS) and Eli Lilly (LLY) stock from September 2001 through April of 2003.

Hayward scammed customers on buys and sales of Time Warner (TWX), Apache Corp. (APA) and SPX Co. (SPW) stocks, his indictment says.

He allegedly engaged in more than 5,210 instances of "interpositioning," netting him a cool $690,0000. He also "traded ahead" of customers more than 5,000 times, costing them $1.19 million.

Last year, the NYSE's seven specialist firms paid a total of $247 million to settle the same allegations brought by the SEC. The firms' profits come from fees on each transaction as well as their own stock trading.

Every specialist firm lost money last year.

Critics of the specialist system claim it is an inherent conflict of interest. The NYSE has noted that the specialist firms gained $155 million in illegal profits over five years, a time when the exchange handled $50 trillion in trades.