NASD investigating Sylvan stock spurt Spokesman says probe isn't a result of its involvement in matter

7/8 TC The National Association of Securities Dealers said yesterday that it has begun an investigation into a sudden jump in the price of Sylvan Learning Systems' stock price before an announcement that Sylvan had won a high-profile contract with the NASD.

Stephan Beauchesne, a spokesman for NASD, said the inquiry into Tuesday morning's trading was "regular procedure" and was not prompted by the organization's involvement in the matter.


Stock in the Columbia-based company surged $2.625, or 8 percent, on NASD's Nasdaq stock market in an 18-minute period less than two hours before trading was halted for the announcement.

Meanwhile, Sylvan President Douglas Becker expressed regret that the news of "something that we're very excited about" had been overshadowed by questions about the unusual trading pattern.


He expressed confidence that nobody at his company or the NASD had leaked news of the contract, under which Sylvan will provide computerized testing services for the securities brokers organization through about 280 of its learning centers throughout the United States.

"I'm certainly grateful that no one is intimating that we did anything wrong," Mr. Becker said.

Mr. Becker said yesterday that Sylvan has been working for years to build the confidence level that led to NASD entrusting the company with the administration of its brokers' exams. The company is the nation's largest provider of computerized testing services, serving such clients as the Educational Testing Service, Microsoft Corp., Novell Corp. and IBM Corp.

The Sylvan president said the significance of the NASD contract to the company goes far beyond the $5 million to $6 million a year it will bring in.

"It's just an important bellwether customer," he said.

In yesterday's trading, Sylvan stock continued to soar, reaching a 52-week high of $39.25 before settling back to $36.75, a 25-cent gain on the day.

For NASD, the Sylvan matter raises questions about whether it can impartially investigate a case in which its own executives and board were among those with inside knowledge of a pending announcement.

Lynn Nellius, director of market surveillance at NASD, expressed confidence that his arm of the organization can do the job without "the slightest concern that this is a conflict of interest."


Mr. Nellius emphasized that all of his organization's investigations are overseen by the Securities and Exchange Commission.

"We will probably be more stringent in this particular case because the NASD is involved," he said.

Larry Soderquist, a law professor at Vanderbilt University in Nashville, Tenn., said the case does have the "aura of conflict," but he agreed with Mr. Nellius that it probably won't be necessary to bring in a special counsel.

"The NASD and the stock exchanges always have the SEC looking over their shoulder," he said.

"In this case, one would expect the scrutiny to be heightened."

Market professionals said Tuesday's trading pattern in Sylvan was characteristic of a legal but ethically questionable technique under which small brokerage firms called "activists" use the Nasdaq's Small Order Execution System (SOES) to suddenly and anonymously drive up targeted stocks.


As a market maker in Sylvan's stock, Alex. Brown & Sons was among the companies that lost money in Tuesday's trading flurry, said Sandy Daignault, managing director of the Baltimore firm's equity transactions group.

"We got 'SOESed.' I don't know the dimensions," he said.

Mr. Becker said yesterday that Sylvan stock had been caught in SOES raids before, recalling a similar incident in December.

"Knowing who knew on our side and who knew on their side, I'd say it's unlikely there was a leak, but you never know," he said.

Michael Moe, an analyst who follows Sylvan for Lehman Brothers, said that even if the announcement had been leaked it wouldn't necessarily have involved the company or NASD.

"There's all sorts of parties that actually get involved," he said, citing accountants and lawyers who might have been aware of the deal.