|Wednesday, November 5, 2003
Nancy A. Condon
NASD Charges Peter Kellogg with Fraudulent Wash and Matched Trades
Washington, DC – NASD announced today that it filed a disciplinary action against Peter Kellogg, senior partner of Spear, Leeds & Kellogg, L. P., alleging that Kellogg directed fraudulent wash trades and matched trades between four accounts he controlled.
The NASD complaint charged that between Aug. 1, 2001, and Aug. 13, 2001, Kellogg placed matched orders to buy and sell millions of shares of Thoratec Corp. common stock for four accounts he controlled, and in which he and his family had ownership interests. These trades resulted in minimal change of ownership in the shares of Thoratec, were executed at prices unrelated to market supply and demand, and created the false appearance of market activity in the stock. Kellogg indicated to NASD he directed these trades to recognize non-taxed capital gains in Thoratec stock held by I.A.T. Reinsurance Syndicate, Ltd., a Bermuda corporation owned by Kellogg's children, and Equity Holding, Inc., whose parent company, MCM, Inc., was owned in part by IAT. Kellogg also indicated that the trades were directed between accounts he controlled so that IAT and EH could recognize non-taxed gains while the accounts Kellogg controlled retained ownershipof the Thoratec stock.
On Aug. 1, 2001, Kellogg directed Equity Holding to sell 700,000 shares of Thoratec to IAT. Six days later, Kellogg directed IAT to sell 1 million, shares of Thoratec back to Equity Holding. On August 9, Kellogg directed IAT to sell 1 million shares of Thoratec, in two 500,000-share trades, to Kellogg's personal account and to MMK Reinsurance, a company owned by IAT. Four days later, Kellogg reversed those trades by directing the sale of the 1 million shares back to IAT.
As a result of these series of wash and matched trades, IAT recognized tax-exempt gains on sales of 2 million shares of Thoratec, while its holdings decreased by only 300,000 shares. Equity Holding recognized gains on the sale of the 700,000 shares of Thoratec while its holdings increased from 700,000 shares to 1 million. The accounts of Kellogg and MMK, which were used as the conduits for IAT's wash and matched trades on August 9 and August 13, did not have any change in their ownership of Thoratec.
Wash sales are trades of securities without a real change in ownership of the securities traded. Matched orders are orders to buy or sell securities that are entered with knowledge that a matching order on the opposite side has been or will be entered.
The complaint alleges that Kellogg, through these series of wash and matched trades, violated the antifraud provisions of the NASD rules and federal securities laws, and the NASD rule prohibiting the publication of reports of non-bona fide securities transactions. As a result of Kellogg's fraudulent trades, the companies owned by Kellogg's children recognized a greater profit than they would have received in the open market, and the trading public was deceived about the volume of trading in Thoratec stock and the prices at which that stock traded.
Under NASD rules, a firm or individual named in a complaint can file a response and request a hearing before an NASD disciplinary panel. Possible sanctions include a fine, censure, suspension, or bar from the securities industry, disgorgement of gains associated with the violations, and payment of restitution.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999 or by sending an e-mail through NASD's Web site at www.nasd.com.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web site at www.nasd.com.