UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 34-40927 / January 11, 1999 ADMINISTRATIVE PROCEEDING File No. 3-9803 ___________________________________ : In the Matter of : ORDER MAKING FINDINGS : AND IMPOSING CERTAIN MARKET MAKING : SANCTIONS AS TO ACTIVITIES ON NASDAQ : SPEAR LEEDS & : KELLOGG, L.P., : MICHAEL J. LING, : JAMES P. MORRIS, JOHN : J. QUIGLEY, AND ERIC J. : SCHERZER ___________________________________: I. In the accompanying Orders Instituting Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 and Findings of the Commission ("Order Instituting Proceedings"), the Securities and Exchange Commission ("Commission") instituted these public administrative proceedings against Spear Leeds & Kellogg, L.P., Michael J. Ling, James P. Morris, John J. Quigley, and Eric J. Scherzer, and other firms and individuals. Contemporaneously, Spear Leeds & Kellogg, L.P., Michael J. Ling, James P. Morris, John J. Quigley, and Eric J. Scherzer ("Respondents") have submitted Offers of Settlement ("Offers") in anticipation of the institution of these proceedings, which the Commission has determined to accept. In their Offers, Respondents, solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, prior to a hearing pursuant to the Commission’s Rules of Practice, and without admitting or denying the findings herein, except for the findings of Section II.A., which are admitted, have consented to the entry of the Order Instituting Proceedings and this Order Making Findings and Imposing Sanctions as to Spear Leeds & Kellogg, L.P., Michael J. Ling, James P. Morris, John J. Quigley, and Eric J. Scherzer (which are hereinafter referred to as the "Orders"). The Commission has determined that it is appropriate and in the public interest to accept the Respondents’ Offers and accordingly is issuing this Order. II. On the basis of the Orders and Respondents’ Offers, the Commission finds[1] the following: A. Respondents Spear Leeds & Kellogg, L.P., a New York limited partnership, is registered with the Commission as a broker- dealer pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act"). At all relevant times, Spear Leeds & Kellogg, L.P. , through its Troster Singer division, made markets in a number of securities traded in the Nasdaq market. Spear Leeds & Kellogg, L.P.'s principal place of business during the relevant time period was Jersey City, New Jersey. Spear Leeds & Kellogg, L.P. traded Nasdaq stocks mainly for its own accounts and for the accounts of non-market maker broker-dealers and large institutional investors. At all times relevant herein, Spear Leeds & Kellogg, L.P. was a member of the National Association of Securities Dealers, Inc. ("NASD"), a national securities association registered with the Commission under Section 15A of the Exchange Act. Michael J. Ling, age 34, resides in Floram Paris, New Jersey and, at all relevant times, was a Nasdaq trader at Spear Leeds & Kellogg, L.P. As a Nasdaq trader, Michael J. Ling was responsible for making markets in certain securities traded on the Nasdaq Stock Market. James P. Morris, age 33, resides in Ridgewood, New Jersey and, at all relevant times, was a Nasdaq trader at Spear Leeds & Kellogg, L.P. As a Nasdaq trader, James P. Morris was responsible for making markets in certain securities traded on the Nasdaq Stock Market. John J. Quigley, age 30, resides in Hoboken, New Jersey and, at all relevant times, was an assistant Nasdaq trader at Spear Leeds & Kellogg, L.P. As an assistant Nasdaq trader, John J. Quigley was responsible for assisting in making markets in certain securities traded on the Nasdaq Stock Market. Eric J. Scherzer, age 37, resides in Glen Ridge, New Jersey and, at all relevant times, was a Nasdaq trader at Spear Leeds & Kellogg, L.P. As a Nasdaq trader, Eric J. Scherzer was responsible for making markets in certain securities traded on the Nasdaq Stock Market. B. Factual Summary In connection with its activities as a Nasdaq market maker, Spear Leeds & Kellogg, L.P., Michael J. Ling, James P. Morris, John J. Quigley, and Eric J. Scherzer engaged in the following activities, as more fully described in the applicable sections of the accompanying Order Instituting Proceedings, in the following securities and on the following dates. 1. The Fraudulent Coordination of Quote Movements Spear Leeds & Kellogg, L.P., engaged in, or caused, the coordinated entry of quotations on Nasdaq in violation of Sections 15(c)(1) and (2) of the Exchange Act and Rules 15c1-2 and 15c2-7 thereunder, in one or more of the respects described in Section II.C.1. of the Order Instituting Proceedings in a market making transaction or a related series of market making transactions in: a. the stock of Pyxis Corp. ("PYXS") on April 7, 1994; b. the stock of Exide Electronics Group, Inc. ("XUPS") on May 26, 1994, aided and abetted by its trader James P. Morris; c. the stock of Microchip Technology Inc. ("MCHP") on June 2, 1994, aided and abetted by its trader James P. Morris; d. the stock of Chiron Corp. ("CHIR") on June 9, 1994, aided and abetted by its assistant trader John J. Quigley; e. the stock of Snapple Beverage Corp. ("SNPL") on June 10, 1994; f. the stock of Scimed Life Systems, Inc. ("SMLS") on June 15, 1994, aided and abetted by its assistant trader John J. Quigley; g. the stock of E A Engineering Science Technology ("EACO") on September 21, 1994; and h. the stock of Tellabs, Inc. ("TLAB") on September 21, 1994, aided and abetted by its trader Michael J. Ling. 2. Undisclosed Arrangements to Coordinate Quotations Spear Leeds & Kellogg, L.P. entered, or caused to be entered, in the Nasdaq market fictitious quotations in one or more respects described in Section II.C.2. of the Order Instituting Proceedings in violation of Section 15(c)(2) of the Exchange Act and Rule 15c2-7 thereunder, in a market making transaction or related series of market making transactions in: a. the stock of Quickturn Design Systems, Inc. ("QKTN") on May 25, 1994, aided and abetted by its trader James P. Morris; b. the stock of Genzyme Corp. ("GENZ") in two violations on May 25, 1994, aided and abetted by its trader James P. Morris; c. the stock of Microchip Technology Corp. ("MCHP") on June 1, 1994, aided and abetted by its trader James P. Morris; d. the stock of Summit Technology Corp. ("BEAM") on June 1, 1994, aided and abetted by its trader Eric J. Scherzer; e. the stock of Atlantic Coast Airlines, Inc. ("ACAI") on June 9, 1994, aided and abetted by its trader Eric J. Scherzer; f. the stock of Atlantic Coast Airlines, Inc. ("ACAI") on June 10, 1994, aided and abetted by its trader Eric J. Scherzer; g. the stock of Parametric Technology Corp. ("PMTC") on June 10, 1994, aided and abetted by its assistant trader John J. Quigley; h. the stock of Summit Technology Corp. ("BEAM") on September 22, 1994, aided and abetted by its trader Eric J. Scherzer; and i. the stock of Mitek Surgical Products, Inc. ("MYTK") on October 25, 1994. 3. Intentional Delaying of Trade Reports Spear Leeds & Kellogg, L.P. engaged in, or caused, a manipulation by delaying trade reporting in one or more of the respects described in Section II.C.3. of the Order Instituting Proceedings in violation of Section 15(c)(1) of the Exchange Act and Rule 15c1-2 thereunder, in a market making transaction or related series of market making transactions in: a. the stock of Vitalink Pharmacy Services, Inc. ("VTLK") on May 31, 1994, aided and abetted by its trader Michael J. Ling; and b. the stock of Ericsson (L M) Telephone Co. - ADR ("ERICY") on June 10, 1994. 4. Failure to Honor Quotations Spear Leeds & Kellogg, L.P. failed to honor its quotations in one or more of the respects described in Section II.C.6. of the Order Instituting Proceedings in violation of Section 11A(c) of the Exchange Act and Rule 11Ac1-1 thereunder, in a market making transaction or related series of market making transactions in: a. the stock of Sodak Gaming Inc. ("SODK") on October 28, 1994, aided and abetted by its trader Michael J. Ling. 5. Failure to Keep Accurate Books and Records Spear Leeds & Kellogg, L.P. failed to keep and maintain accurate books and records in one or more of the respects described in Section II.C.7. of the Order Instituting Proceedings in violation of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder, in a market making transaction or related series of market making transactions in: a. at least fifty customer orders in Nasdaq stocks on May 26, 1994; b. the stock of Vitalink Pharmacy Services, Inc. ("VTLK") in two violations on May 26, 1994; c. the stock of Coastal Healthcare Group ("CGRP") on May 26, 1994; d. the stock of Gupta Corp. ("GPTA") on May 26, 1994; e. the stock of Vitalink Pharmacy Services, Inc. ("VTLK") on May 31, 1994; f. the stock of Datascope Corp. ("DSCP") on June 9, 1994; g. the stock of Ericsson (L M) Telephone Co. - ADR ("ERICY") on June 10, 1994; h. the stock of Parametric Technology Corp. ("PMTC") in two violations on June 10, 1994; i. the stock of Mylex Corp. ("MYLX") on June 14, 1994; j. the stock of Scimed Life Systems ("SMLS") on June 15, 1994; k. the stock of Sodak Gaming Inc. ("SODK") on October 28, 1994; and l. the stock of Oshap Technologies, Ltd. ("OSHSF") on October 28, 1994. 6. Failure to Reasonably Supervise Nasdaq Trading Spear Leeds & Kellogg, L.P. failed reasonably to supervise its Nasdaq market making activities with a view to preventing future violations within the meaning of Section 15(b)(4)(E) of the Exchange Act, in one or more of the respects described in Section II.C.8.a. and b. of the Order Instituting Proceedings, and in the other following respects: a. In 1994, Respondent Spear, Leeds & Kellogg, L.P. failed to enforce its policies to prevent violations of the rules and regulations governing the accurate and timely reporting of transactions. Spear, Leeds & Kellogg, L.P. had written policies that implemented the order ticket requirements, such as time stamping, set forth in Rule 17a-3 of the Exchange Act. However, the enforcement of these requirements was inadequate. Spear, Leeds & Kellogg, L.P. did not have adequate procedures to monitor for compliance with the trade reporting and recordkeeping rules. Spear, Leeds & Kellogg, L.P. did not adequately review trading records, such as order tickets and trade ledgers, to detect possible trade reporting problems. Moreover, clear warnings of potential trade reporting violations were ignored by the firm’s supervisors. A final contributing factor to the firm's supervisory failures was the inadequacy of the resources devoted to compliance. 7. Unlawful Profits and Other Gains While engaged in certain of the improper activities described above, Spear Leeds & Kellogg, L.P. obtained unlawful profits and gains, which, together with interest, total $13,439. III. By reason of the foregoing, Spear Leeds & Kellogg, L.P. willfully violated Sections 11A(c), 15(c)(1) and (2), and 17(a) of the Exchange Act, and Rules 11Ac1-1, 15c1-2, 15c2- 7, and 17a-3 thereunder, and failed reasonably to supervise its Nasdaq trading personnel within the meaning of Section 15(b)(4)(E) of the Exchange Act. Michael J. Ling willfully aided and abetted and caused violations of Sections 11A(c), 15(c)(1) and (2) of the Exchange Act, and Rules 11Ac1-1, 15c1-2, and 15c2-7 thereunder. James P. Morris and John J. Quigley willfully aided and abetted and caused violations of Sections 15(c)(1) and (2) of the Exchange Act, and Rules 15c1-2 and 15c2-7 thereunder. Eric J. Scherzer willfully aided and abetted and caused violations of Section 15(c)(2) of the Exchange Act, and Rule 15c2-7 thereunder. IV. In view of the foregoing and Respondents’ Offers, IT IS HEREBY ORDERED, pursuant to Sections 15(b) and 21C of the Exchange Act, that: 1. Spear Leeds & Kellogg, L.P. shall cease and desist from committing or causing any violation of, and committing or causing any future violation of Sections 11A(c), 15(c)(1) and (2), and 17(a) of the Exchange Act, and Rules 11Ac1-1, 15c1-2, 15c2- 7, and 17a-3 thereunder; 2. Spear Leeds & Kellogg, L.P. shall, within 10 business days of the entry of this Order, pay a civil penalty in the amount of $800,000 by wire transfer in accordance with instructions furnished by the Commission staff, or by U.S. Postal money order, certified check, bank cashier’s check, or bank money order, made payable to the Securities and Exchange Commission, which shall be hand- delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Mail Stop O-3, Alexandria, VA 22312, under cover of a letter that identifies Spear Leeds & Kellogg, L.P. as a Respondent in these proceedings and provides the caption and file number for these proceedings; with (a) written confirmation of payment by such wire transfer, or (b) a copy of such cover letter and money order or check, to be sent to Leonard W. Wang, Division of Enforcement, Securities and Exchange Commission, 450 5th Street, N.W., Mail Stop 7-1, Washington, D.C. 20549; 3. Spear Leeds & Kellogg, L.P. shall, within 10 business days of written notice from the Commission staff or the Independent Consultant (as defined below), pay disgorgement in the amount of $13,439 pursuant to Section 21C(e) of the Exchange Act; 4. Spear Leeds & Kellogg, L.P. shall, within 90 days of the date of the entry of this Order, provide to the independent consultant appointed by the Commission in connection with these proceedings (the "Independent Consultant") a description of its policies, procedures and practices relating to prevention or detection of the types of improper conduct involving Spear Leeds & Kellogg, L.P. described in Section II of this Order. Within such time as the Commission directs, the Independent Consultant shall review such policies, procedures and practices with a view to determining if they would reasonably be expected to prevent and detect, insofar as practicable, any of the types of improper conduct involving Spear Leeds & Kellogg, L.P. described in Section II of this Order. Spear Leeds & Kellogg, L.P. shall cooperate with the Independent Consultant’s review of Spear Leeds & Kellogg, L.P.’s policies, procedures and practices, and shall, among other things, provide such further information as the Independent Consultant reasonably requests or that Spear Leeds & Kellogg, L.P. deems relevant to the Independent Consultant’s review, provided, however, that Spear Leeds & Kellogg, L.P. need not provide any information to which it asserts a valid claim of the attorney-client privilege. The Independent Consultant shall maintain the confidentiality of all materials provided by Spear Leeds & Kellogg, L.P. and shall not provide the materials to any person, provided, however, that such materials may be provided to the Commission or its staff. If the Independent Consultant concludes that Spear Leeds & Kellogg, L.P.’s policies, procedures and practices, as presented, would reasonably be expected to prevent and detect, insofar as practicable, any of the types of improper conduct involving Spear Leeds & Kellogg, L.P. described in Section II of this Order, the Independent Consultant shall inform Spear Leeds & Kellogg, L.P. of this conclusion in writing, and his or her responsibilities with respect to Spear Leeds & Kellogg, L.P. shall conclude. If the Independent Consultant cannot conclude that Spear Leeds & Kellogg, L.P.’s policies, procedures and practices meet the aforesaid standard, he or she may recommend changes in or additions to Spear Leeds & Kellogg, L.P.’s policies, procedures or practices for the purpose of improving their ability to meet the aforesaid standard. Spear Leeds & Kellogg, L.P. shall implement all such recommended changes or additions in a timely manner, but in any event no later than three months after receiving the recommendations of the Independent Consultant or such other reasonable time as determined by the Independent Consultant; provided, however, if Spear Leeds & Kellogg, L.P. believes that a change or addition to its policies, procedures and practices recommended by the Independent Consultant is unduly burdensome or unreasonable, it may: (a) propose an equally effective alternative to the Independent Consultant, and, with the Independent Consultant’s approval, implement that alternative in lieu of the Independent Consultant’s recommended change or addition; or (b) petition the Commission, with notice to the Independent Consultant and the Division of Enforcement, for relief from the recommendation of the Independent Consultant. Within three months of receiving recommendations of the Independent Consultant for changes in or additions to its policies, procedures and practices, Spear Leeds & Kellogg, L.P. shall report in writing to the Independent Consultant with respect to the implementation of the recommendations and/or any equally effective alternatives approved by the Independent Consultant. If Spear Leeds & Kellogg, L.P.’s report on implementation is without qualification and states that said recommendations and/or alternatives have been fully and effectively implemented, the Independent Consultant’s responsibilities with respect to Spear Leeds & Kellogg, L.P. shall conclude. If Spear Leeds & Kellogg, L.P.’s report on implementation is qualified, or in any respect indicates that implementation is not full and effective, Spear Leeds & Kellogg, L.P. shall cooperate with all further efforts of the Independent Consultant to ensure that said recommendations and/or alternatives are fully and effectively implemented. When the Independent Consultant concludes that Spear Leeds & Kellogg, L.P. has fully and effectively implemented said recommendations and/or alternatives, he or she shall inform Spear Leeds & Kellogg, L.P. in writing of this conclusion and his or her responsibilities with respect to Spear Leeds & Kellogg, L.P. shall conclude. The fees and expenses of the Independent Consultant arising from his or her review of the policies, procedures and practices of Spear Leeds & Kellogg, L.P. and the other respondent firms subject to the Independent Consultant’s review shall be prorated evenly among such firms, and in such prorated amounts, be paid by each such firm, provided however, that if the Independent Consultant recommends changes or additions to Spear Leeds & Kellogg, L.P.’s policies, procedures or practices, the fees and expenses of the Independent Consultant relating to the making and implementation of those recommendations and/or any alternatives approved by the Independent Consultant, and any disagreements relating thereto, shall be paid by Spear Leeds & Kellogg, L.P.; 5. Michael J. Ling shall cease and desist from committing or causing any violation of, and committing or causing any future violation of Sections 11A(c) and 15(c)(1) and (2) of the Exchange Act, and Rules 11Ac1-1, 15c1-2, and 15c2- 7 thereunder; 6. Michael J. Ling shall, within 10 business days of the entry of this Order, pay a civil penalty in the amount of $25,000 by wire transfer in accordance with instructions furnished by the Commission staff, or by U.S. Postal money order, certified check, bank cashier’s check, or bank money order, made payable to the Securities and Exchange Commission, which shall be hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Mail Stop O-3, Alexandria, VA 22312, under cover of a letter that identifies Michael J. Ling as a Respondent in these proceedings and provides the caption and file number for these proceedings; with (a) written confirmation of payment by such wire transfer, or (b) a copy of such cover letter and money order or check to be sent to Leonard W. Wang, Division of Enforcement, Securities and Exchange Commission, 450 5th Street, N.W., Mail Stop 7-1, Washington, D.C. 20549; 7. Michael J. Ling be, and hereby is, suspended from association with any broker, dealer, municipal securities dealer, investment adviser or investment company, for a period of seven weeks, effective one day after the date of this Order. Michael J. Ling shall provide to the Commission, within 10 days after the end of the seven week suspension described above, an affidavit that he has complied fully with the sanctions described in this Section; 8. James P. Morris shall cease and desist from committing or causing any violation of, and committing or causing any future violation of Sections 15(c)(1) and (2) of the Exchange Act, and Rules 15c1-2 and 15c2-7 thereunder; 9. James P. Morris shall, within 10 business days of the entry of this Order, pay a civil penalty in the amount of $40,000 by wire transfer in accordance with instructions furnished by the Commission staff, or by U.S. Postal money order, certified check, bank cashier’s check, or bank money order, made payable to the Securities and Exchange Commission, which shall be hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Mail Stop O-3, Alexandria, VA 22312, under cover of a letter that identifies James P. Morris as a Respondent in these proceedings and provides the caption and file number for these proceedings; with (a) written confirmation of payment by such wire transfer, or (b) a copy of such cover letter and money order or check to be sent to Leonard W. Wang, Division of Enforcement, Securities and Exchange Commission, 450 5th Street, N.W., Mail Stop 7-1, Washington, D.C. 20549; 10. James P. Morris be, and hereby is, suspended from association with any broker, dealer, municipal securities dealer, investment adviser or investment company, for a period of ten weeks, effective one day after the date of this Order. James P. Morris shall provide to the Commission, within 10 days after the end of the ten week suspension described above, an affidavit that he has complied fully with the sanctions described in this Section; 11. John J. Quigley shall cease and desist from committing or causing any violation of, and committing or causing any future violation of Sections 15(c)(1) and (2) of the Exchange Act, and Rules 15c1-2 and 15c2-7 thereunder; 12. John J. Quigley shall, within 10 business days of the entry of this Order, pay a civil penalty in the amount of $25,000 by wire transfer in accordance with instructions furnished by the Commission staff, or by U.S. Postal money order, certified check, bank cashier’s check, or bank money order, made payable to the Securities and Exchange Commission, which shall be hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Mail Stop O-3, Alexandria, VA 22312, under cover of a letter that identifies John J. Quigley as a Respondent in these proceedings and provides the caption and file number for these proceedings; with (a) written confirmation of payment by such wire transfer, or (b) a copy of such cover letter and money order or check to be sent to Leonard W. Wang, Division of Enforcement, Securities and Exchange Commission, 450 5th Street, N.W., Mail Stop 7-1, Washington, D.C. 20549; 13. John J. Quigley be, and hereby is, suspended from association with any broker, dealer, municipal securities dealer, investment adviser or investment company, for a period of seven weeks, effective one day after the date of this Order. John J. Quigley shall provide to the Commission, within 10 days after the end of the seven week suspension described above, an affidavit that he has complied fully with the sanctions described in this Section; 14. Eric J. Scherzer shall cease and desist from committing or causing any violation of, and committing or causing any future violation of Section 15(c)(2) of the Exchange Act, and Rule 15c2-7 thereunder; 15. Eric J. Scherzer shall, within 10 business days of the entry of this Order, pay a civil penalty in the amount of $20,000 by wire transfer in accordance with instructions furnished by the Commission staff, or by U.S. Postal money order, certified check, bank cashier’s check, or bank money order, made payable to the Securities and Exchange Commission, which shall be hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Mail Stop O-3, Alexandria, VA 22312, under cover of a letter that identifies Eric J. Scherzer as a Respondent in these proceedings and provides the caption and file number for these proceedings; with (a) written confirmation of payment by such wire transfer, or (b) a copy of such cover letter and money order or check to be sent to Leonard W. Wang, Division of Enforcement, Securities and Exchange Commission, 450 5th Street, N.W., Mail Stop 7-1, Washington, D.C. 20549; and 16. Eric J. Scherzer be, and hereby is, suspended from association with any broker, dealer, municipal securities dealer, investment adviser or investment company, for a period of five weeks, effective one day after the date of this Order. Eric J. Scherzer shall provide to the Commission, within 10 days after the end of the five week suspension described above, an affidavit that he has complied fully with the sanctions described in this Section. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]: The findings herein are solely for the purpose of these proceedings, and are not binding on any person not a respondent in these proceedings.