In 2002 and 2003, t

he day traders at Watley Group seemed to have an uncanny knack at predicting the movements of institutional investors. Whenever a large order to buy or sell a stock came in from institutional investors, Watley day traders would already be there to profit from the fluctuations that follow when an elephant gets in or out of a pool.

The prescience of the Watley traders eventually caught the attention of the Securities and Exchange Commission (SEC). As it turned out, a day trader named John J. Amore was paying brokers at Merril Lynch (NYSE:MER), Citigroup (NYSE:C), and Lehman Brothers (NYSE:LEH) to keep an open phone line next to the squawk boxes in their respective brokerages. The Wately traders sat next to these phones all day and traded ahead of the institutional investors. This is called front running when brokers do it, but the traders were using illegal material insider information, so in this case, it was just plain securities fraud.

In return for giving up their professional ethics, the brokers were given kickbacks in the form of cash and commissions on trades from the Watley traders. Over a period of two years, the Watley traders traded ahead of institutional investors at least 400 times, making more than $500,000 in the process. By August 15, 2005, the SEC had enough evidence to press charges, and the squawk box scheme was shut down.

To read about more fraud cases, see The Ghouls And Monsters On Wall Street.

This question was answered by Andrew Beattie.

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