NEW YORK – The New York Stock Exchange (search) fined Lehman Brothers Holdings Inc. $500,000 for failing to supervise a trading strategy pegged to the closing price of a stock in 2002 that gave it a profit while potentially harming its customers.
The case stemmed from Lehman's agreement to buy 2.05 million shares of Quest Diagnostics Inc. (search) from 13 customers on the afternoon of Dec. 11, 2002. Customers expected the stock to rise because Quest was moving into the S&P 500 Index from the S&P 400 Index on that day, and Lehman guaranteed to buy shares at a price of 0.33 cent to 2 cents over the closing price.
In an apparent move to hedge its guarantee, Lehman also sold more than 2 million Quest shares — with 78 percent sold in the last minute of trading. Quest Diagnostic shares promptly slid to $59 from $59.61.
Because Lehman sold the rest of its position earlier at higher prices, it realized a profit while its customers whose trades were tied to the closing price may have been detrimentally affected, the NYSE said. The trades, in any case, disrupted the market and caused "excessive volatility," the regulator said.
Lehman settled without admitting or denying the charges, the NYSE said. A Lehman spokeswoman declined to comment.
The firm's profit at the expense of its institutional customers may have been inadvertent, NYSE officials said.
The NYSE panel said Lehman analysts incorrectly forecast that there would be heavy buying of Quest shares at the close to offset the firm's last-minute rush of selling. Nevertheless, the NYSE censured Lehman and required it to complete an internal review of customer-facilitation trading practices, in addition to levying the half-million-dollar fine.