(Updated with additional quotes and context.)

By Sarah N. Lynch and Kerry E. Grace

Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)-The Securities and Exchange Commission settled administrative and civil actions Wednesday against 14 specialist firms, including units of Goldman Sachs (GS) and E*Trade (ETFC), for proprietary trading violations.

Collectively, the firms all agreed to pay about $70 million in fines and disgorgement.

The SEC said between 1999 and 2005, the 14 firms violated their obligation to serve public customer orders ahead of their own interests by trading ahead of customer orders and trading ahead of canceled or unexecuted orders. In some cases, instead of matching up buyers and sellers with orders for the same amounts, the firms bought from one entity, sold to the other entity at a different price and pocketed the difference. That is known as " interpositioning."

"These firms violated the public trust by abusing the privileged position they had as specialists on the various exchanges," said James Clarkson, acting director of the SEC's New York regional office.

The SEC said it filed and settled administrative and cease-and-desist proceedings against eight firms: Botta Capital Management LLC, Equitec Proprietary Markets LLC, Group One Trading LP, Knight Financial Products LLC, Goldman Sachs Execution & Clearing LP, SLK-Hull Derivatives LLC, Susquehanna Investment Group and TD Options LLC. According to the commission, the companies engaged in proprietary trading on the American Stock Exchange, the Chicago Board Options Exchange and the Philadelphia Stock Exchange.

Collectively, they agreed to pay $22.7 million in disgorgement and more than $ 4.3 million in penalties.

It also filed civil injunctions against six firms: Automated Trading Desk Specialists LLC, E*Trade Capital Markets LLC, Melvin Securities LLC, Melvin & Co., Sydan LP and TradeLink LLC, saying they improperly traded on the Chicago Stock Exchange. Those companies collectively will pay $35.7 million in disgorgement and $6.7 million in penalties.

"This is something that goes to the heart of the integrity of the markets," said David Rosenfeld, the associate director for the SEC's New York regional office.

Wednesday's case is similar to one filed against New York Stock Exchange specialist firms in 2004. In that case, the five firms agreed to pay $240 million in penalties.

-By Kerry E. Grace and Sarah N. Lynch, Dow Jones Newswires; 201-938-5089; kerry.grace@dowjones.com and 202-862-6634; sarah.lynch@dowjones.com

  (END) Dow Jones Newswires
  03-04-09 1505ET
  Copyright (c) 2009 Dow Jones & Company, Inc.