The U.S. Securities and Exchange Commission today charged a former Merrill Lynch broker and 10 former day traders and managers from broker-dealer A.B. Watley Inc. with front-running institutional orders.

The SEC alleges that the brokers participated in a fraudulent scheme that used Wall Street firms’ internal audio-communication systems, colloquially known as squawk boxes to obtain the confidential institutional customer order flow information from major brokerages, such as Citigroup, Lehman Brothers, and Merrill Lynch. This broadcast information was used by traders to trade ahead of these large institutional orders.

In a separate action in August 2005, the commission charged five individuals as part of this scheme. None of these allegations have been proven.

The commission alleges that the Watley day traders asked retail brokers at Citigroup, Lehman Brothers, and Merrill Lynch to furnish access to their firms’ institutional equities squawk boxes. The brokers then placed their telephone receivers next to the squawk boxes and left open phone connections to the Watley office in place for virtually entire trading days. It claims that the Watley traders listened for indications on the squawk boxes that these firms had received large customer orders and then “traded ahead” in the same securities, with the understanding that the prices of the securities would move in response to the subsequent filling of the customer orders.

The SEC alleges that between approximately June 2002 and January 2004, the Watley day traders traded ahead of customer orders they heard on the Citigroup, Merrill, and Lehman squawk boxes on more than 400 occasions, making gross profits of at least $675,000. In exchange for live audio access to the squawk boxes, it claims that Watley compensated the brokers with commission-generating trades and/or secret cash payments.

The commission’s complaint, which was filed in the United States District Court for the Eastern District of New York in Brooklyn, alleges violations of the Securities Act. The complaint seeks disgorgement of illegal profits, penalties, and an injunction against future violations against the defendants, as well as officer and director bars against certain defendants.

In a separate settled administrative and cease and desist proceeding instituted today, the commission issued an order against Sanjay Singh, a manager of Watley’s day trading desk, who facilitated the trading ahead scheme. This order requires Singh to cease and desist; bars Singh from association with any broker or dealer; and orders Singh to pay disgorgement in the amount of $37,500. Singh consented to the entry of the order without admitting or denying any of the findings.

“This fraud stretched from the biggest firms on Wall Street to a small day-trading shop. The common denominator was a willingness to steal confidential market information for use in illegal trading,” said Linda Chatman Thomsen, director of the SEC’s division of enforcement.