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Upon moving to Mt. Kisco, petitioner eliminated most of its
back office operation and outsourced most of those functions to
Bear Stearns & Co. Shortly after its move to Mt. Kisco in
December 1992, petitioner had approximately 20 employees. By
1999, the number of petitioner’s employees decreased to 12.
Petitioner produced profits for itself in various ways: (1)
As a market maker, petitioner profited from the spread between
bid and ask prices; (2) as a principal rather than an agent,
petitioner earned income from executing trades on behalf of its
institutional clients and, to a smaller extent, from executing
trades on behalf of other broker-dealers;2 (3) petitioner
profited from short-term opportunities created by imbalances in
convertible bond prices and underlying stock prices; (4)
petitioner earned trading profits from long-term investments that
were entered into after significant analysis and research; (5)
petitioner profited from its hedge portfolio; (6) petitioner
profited on new issues of convertibles, for which it acted as a
primary market maker and influenced the pricing and distribution
of those securities, profiting from redistribution of those
securities from short-term buyers to long-term buyers; and (7)
2 Acting as principal rather than an agent, petitioner was
the counterparty for the sale or purchase by its client (or
another broker-dealer). The transaction was in effect free of
market risk to petitioner if it had contracted an offsetting
purchase or sale. Petitioner assumed a market risk if it had not
done so.
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Last modified: May 25, 2011