Nasdaq's troubles unpleasant burden for Joe Hardiman Investigators arrived during 'his watch' as NASD president; The man from Alex. Brown; One defender notes stellar preparation for surge in volume; Securities industry

THE BALTIMORE SUN

The National Association of Securities Dealers Inc. couldn't have done better when it landed Joseph R. Hardiman as president nine years ago.

He was a hot shot at Alex. Brown Inc., the No. 2 man at the venerable Baltimore-based brokerage firm, a driven worker with a reputation as an excellent manager and team builder.

And he did nothing to disappoint his backers after he was named president and chief executive of NASD in June 1987.

At NASD, the umbrella organization that oversees the activities of more than 5,400 securities firms, 500,000 brokers and the Nasdaq stock market, Hardiman led the overhaul of the stock market's computer systems. He spent millions polishing Nasdaq's reputation, billing Nasdaq as the "stock market for the next 100 years." And he oversaw the exchange's explosive growth, making it the world's second largest exchange with annual dollar volume of $2.4 trillion in 1995.

"He was a major player," said Ian B. Davidson, chairman and chief executive of D. A. Davidson & Co., a large regional brokerage firm based in Great Falls, Mont. "He is very bright and very sharp. He is a very strong person. He runs the show."

But it was on Hardiman's watch that Nasdaq's image, so carefully varnished under him, may have suffered the most as sweeping investigations by the Justice Department and the Securities and Exchange Commission looked into whether brokers were cheating investors.

In a scathing report released 10 days ago, the SEC found that NASD officials had been sleeping while "market makers," firms that buy and sell Nasdaq stocks:

* Cheated investors by colluding with one another to keep the spread -- the difference between what a stock is offered at and actually sold for -- on stocks intentionally wide.

* Harassed brokers who didn't maintain those spreads.

* Failed to honor price quotations to customers.

* Manipulated stocks by reporting trades late so investors couldn't get accurate prices.

"Nasdaq market makers have engaged in a variety of abusive practices to suppress competition and mislead customers," the SEC's report issued on Aug. 8 stated. "To move forward the NASD must transform its attitudes and conduct and renew its commitment to the interest of investors and the public."

Hardiman declined numerous requests by The Sun to be interviewed.

NASD officials neither admitted nor denied the allegations in the SEC's 42-page report, and Hardiman's name never appears in the document, which is customary.

Yet, the investigations raise the question: How could such serious problems have occurred when a sophisticated executive with an impeccable reputation, was at the helm?

"This was all on his watch," said Jeffrey Citron, chief executive of New York-based brokerage firm Christian, Kline and Cogburn. "He should have stepped down from the NASD. They did so many things wrong."

But Gordon Macklin, president of the NASD from 1970 to 1987, disagrees.

"I think Joe has plenty to be proud of, bottom line," he said. "He has done a superb job of positioning the NASD for the future. You've got greatly improved markets, you've got outstanding people in places. We've never been better off."

Ironically, it was the SEC that gave birth to the Nasdaq Stock Market. In a 1963 study, it determined that the over-the-counter stock market could benefit from advances in technology and improved regulation. Over-the-counter stocks were quoted either over the telephone or on pink sheets, which listed each stock alphabetically with the name of the firm making a market in the stock and its phone number. The problem with the pink sheets was that by the time the investor got the price, it was stale information.

In the coming years, Nasdaq's technology exploded and market makers, who were linked by computer, could buy and sell stocks in seconds.

Hardiman became president of the NASD after serving as its chairman, a position that is rotated annually.

A native of Salisbury, Md., Hardiman holds a bachelor's degree and a law degree from the University of Maryland. When he arrived at Alex. Brown in 1975, he had spent time practicing law with Miles & Stockbridge and working in the securities business with Robert Garrett & Sons. At Alex. Brown, he became chief operating officer responsible for administration, accounting, human resources and information services.

At the NASD, one of Hardiman's biggest tasks was to improve the surveillance of brokers. The NASD was overseeing 459,000 brokers and 6,722 brokerage firms when he took over in September 1987. But Hardiman was soon thrown into solving glitches that occurred when the stock market crashed.

He also undertook projects to protect investors from penny stock scams through stricter enforcement, and led an effort to develop a new trading system to get investors the best possible prices available for their orders.

Davidson credits Hardiman for making a quick decision in early 1995 to launch a major overhaul of Nasdaq's computer system so it could handle 1 billion trades a day.

"Where the heck would we be with the volumes we experienced in 1996 had we not made the adjustment?" Davidson said.

By 1994, the total market value of the companies traded on Nasdaq had more than doubled to $786.5 billion. Average daily volume reached 295.1 million, up from 149.8 million, and the annual dollar volume soared to $1.4 trillion, up from $499.9 million.

But there were ample signs of problems.

In the spring of 1994, Vanderbilt professor William G. Christie and Paul H. Schultz, a professor at Ohio State University, wrote a research paper saying there was strong evidence that Nasdaq market makers were colluding to maintain wide spreads. This way they could reduce competition between themselves and make more money on each trade.

The professors found that in many of Nasdaq's largest companies, the spreads were typically "even eights" -- 25 cents, 50 cents, 75 cents or $1 -- instead of "odd eights," or 12.5 cents, 37.5 cents, 62.5 cents and 87.5 cents, making it more expensive for investors to buy Nasdaq stocks.

Such differences may seem insignificant, and indeed they can be on a single transaction. But the cumulative cost to investors, Christie pointed out, was staggering.

"It is certainly hundreds of millions if not billions," Christie said. "You are talking about a large universe of stocks over decades. The problem was that the individuals who were supposed to oversee the market were captured by the market."

Christie said he twice sent the paper to Nasdaq officials before it was published.

Hardiman "was certainly a strong endorser of the status quo," Christie said. "The attitude throughout the organization was: 'Let's tread very gently here.' They certainly mishandled this thing from day one. It is really a lesson in mismanagement."

NASD officials went on the offensive to discredit the study and one top executive called it "slanderous."

In October 1994, the Los Angeles Times published a series of stories providing examples of Nasdaq market makers colluding on spreads, as well as disclosing evidence that some market makers would post a stock at a given price, but wouldn't honor it, forcing the buyer to pay a higher price, or buy the stock from another market maker.

NASD's response? Hardiman wrote a blistering letter to the newspapers complaining that the articles "projected an incredibly distorted and biased view of our market," and questioning the credibility of the sources used in the articles.

That same month, the Justice Department launched an investigation into whether a group of large market-making firms colluded to fix prices. The investigation was settled last month with the firms not admitting to wrongdoing, but increasing the money they spend on surveillance of brokers.

That November, Business Week magazine published a story that focused on the allegations made by Christie and Schultz, and pointing out flaws in Nasdaq's trading system.

NASD responded by publishing a full-page ad in the Wall Street Journal featuring a letter from Hardiman defending Nasdaq's performance.

Meantime, the SEC began its own investigation. NASD responded by beginning a thorough overhaul of the organization. It created a seven-member committee to reassess the organization.

Its own committee found that the NASD's structure was outdated and sweeping changes were necessary. It recommended that the NASD's various boards should have more members who are outside the industry and recommended creating a separate subsidiary headed by its own president to oversee regulation and hiring a president who would be in charge of the stock market. Both jobs were headed by Hardiman.

Last May, Alfred R. Berkeley III, a former senior investment banker with Alex. Brown, was named the first president to head Nasdaq, and Hardiman said he will retire in 1997. Even his associates say Hardiman's achievements at NASD can't erase the problems. "The captain of the ship remains the captain of the ship even if he is in the cabin when it runs into a rock," said William R. Rothe, managing director with Alex. Brown, and chairman of the Security Traders Association.

Pub Date: 8/18/96

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