The NASD announced today it has censured and fined Spear, Leeds & Kellogg, L.P. (now known as Goldman Sachs Execution & Clearing, L.P.) US$1 million for creating and implementing an internal system to conceal sales of securities allocated in initial public offerings from the Depository Trust Corporation.

In 1997, DTC – which provides clearance and settlement services to the securities industry – implemented a system approved by the Securities and Exchange Commission to track sales of shares in IPOs to allow underwriters to monitor the flipping of new issues.

Spear Leeds had objected to the IPO Tracking System in a comment letter to the SEC during the approval process for the system. In its comment letter, Spear Leeds raised concerns that the system would prevent anonymity in the securities market and restrict secondary market sales. The SEC rejected those concerns.

The NASD found that around the time the system was implemented, some Spear Leeds customers objected to their sales of IPO shares being identified through the IPO tracking system, citing concerns about preserving the anonymity of their trading activity, and thereby preserving their ability to obtain future IPOs. In response, Spear Leeds developed and implemented a system designed to conceal sales of IPO shares from the IPO Tracking System.

The NASD says that its disciplinary action rests on Spear Leeds’ actions to conceal IPO information from market participants. “For a firm to design a system to deprive underwriters and other market participants of critical information relating to IPO allocations – information that they are entitled to – is deeply troubling, and a serious violation of the high ethical standards required of firms,” said NASD vice chairman Mary Schapiro.

NASD found that Spear Leeds used this system to circumvent DTC’s IPO Tracking System from approximately August 1997 through January 2001. The firm never informed DTC that it had implemented this system. As a result, numerous sales of IPO shares in accounts at Spear Leeds were not reflected in reports generated by the DTC system.

The NASD found that in creating and implementing this system and in failing to disclose its effects to DTC, Spear Leeds violated NASD rules by failing to act in a manner that was consistent with high standards of commercial honour. In settling this matter, Spear Leeds neither admitted nor denied the charges, but consented to the entry of NASD’s findings.

The Goldman Sachs Group acquired Spear Leeds in late 2000. In January 2005, Spear Leeds changed its name to Goldman Sachs Execution & Clearing, L.P.