The SEC Moves In

To look at the solid building in Manhattan's Trinity Place that houses the American Stock Exchange, it would seem that the old days of the raucous Curb Exchange were far behind. But last week the Securities and Exchange Commission, after closeting itself for a seven-month study, issued a 127-page report excoriating the practices of the nation's second largest stock exchange, and suggesting that too many vestiges of its past still hang on.

The brokers no longer do their trading from the curbstones of Lower Manhattan dressed in zebra-striped hats and bright blazers, but SEC found that several of the stocks they trade in their spacious hall ("a large number of these have been stock of Canadian mining or oil companies") are as risky as they were in the days of the '49 Gold Rush. "While undoubtedly the great majority of issuers of listed stocks are sound business enterprises," noted SEC, "the Exchange has appeared reluctant to suspend or de-list issues whose future prospects have proved dim."

The Four Controllers. Presumably the 32-man Amex Board of Governors is expected to keep a vigilant eye on such matters. But, SEC reported, this body has been tightly controlled for ten years by four of its members. SEC identified them as Board Chairman Joseph F. Reilly, 55, Vice Chairman Charles J. Bocklet, Finance Committee Chairman James R. Dyer, 56, and Floor Transactions Committee Chairman John J. Mann, 54. Under their command, President Edward T. McCormick, 50, who resigned his $75,000-a-year job last month in a welter of criticism (TIME, Dec. 22), had his duties reduced to that of a fulltime salesman primarily concerned with getting new companies to list their stock on the Exchange. In at least ten cases, SEC said, McCormick put himself in a position to profit from new listings by buying stock before it went on the board.

In a striking example of how the four men operated, SEC noted that at the board meeting during which McCormick resigned, "Reilly was in the chair, Dyer moved that the resignation be accepted, and Mann seconded the motion. Reilly then relinquished the chair to Bocklet, Dyer moved that Reilly be appointed president pro tempore, and Mann seconded the motion." Dyer, Bocklet and Mann are all Amex stock specialists, that is, men assigned to trade in certain stocks to keep their price from leaping or sliding abnormally (New York Stock Exchange specialists laid out $100 million in one day to cushion a panic price break after Eisenhower's heart attack). In the case of the American Exchange, said SEC, there was "a concentration of power in the hands of a small self-perpetuating group dominated by specialists," resulting in "manifold and prolonged abuses by specialists and floor traders."

The Manipulators. Most Amex specialists tend to their business, but the fact that a few were using their positions to manipulate stock prices for their own profit came to the SEC's attention last spring, when evidence piled up that Amex Specialists Gerard A. Re and Son Gerard F. had been rigging the market for more than five years, netted themselves a profit estimated at $3,000,000.

Last week's SEC report argued that the Res were not an isolated example. Also cited were Gilligan, Will & Co., who are either the specialists, or finance the specialists, in 13% of the 1,000 stocks the Amex trades. It was characteristic, said SEC, that before a stock in which the firm of Gilligan, Will was to specialize was listed on the exchange, Gilligan, Will would acquire a block at below-market price, then profit after trading started.

Brokers are forbidden to deal in stocks unregistered with SEC. But in one instance, Partner James Gilligan (who retired last April) deposited 4,700 unregistered shares of Guild Films Co. stock out of the block of 63,000 he had purchased into the account of Reilly, then head of the Floor Transactions Committee. "Upon learning of the purchase," SEC said, "Reilly immediately sold the stock at a profit of approximately $2,300." Six months later, Reilly's committee refused to punish Gilligan for dealing in the stock.

"The problem," says SEC, "goes beyond isolated violations, and amounts to a general deficiency of standards and a fundamental failure of controls." Recognizing that some Amex members have been trying to clean their own house, SEC indicated that the real problem is enforcement of existing regulations ("In certain respects the rules of the Exchange are stronger than those of other exchanges..."). "But," warned the investigators, "the [SEC] must be prepared to exercise its supervisory powers if the necessary reform is not forthcoming."

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