Investors settle with brokerage firms over improper trades

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Case in Point

December 4, 2012

Investors settle with brokerage firms over improper trades 

The class alleged seven brokerage firms and their parent companies violated the Securities Exchange Act of 1934 by manipulating the market, making false statements, and concealing material facts to defraud investors. The defendants agreed to pay $18.5 million. In re NYSE Specialists Secs. Litig.

Seven specialist firms conduct all trading on the New York Stock Exchange (NYSE), including Bank of America, Goldman Sachs, Bear Stearns, and FleetBoston. When an investor wants to buy or sell stock, specialists are supposed to try to execute orders against each other, so that open orders to buy are filled by open orders to sell. In that way, the specialist serves as an agent that receives no compensation. When there are no matching buy/sell orders, specialists may conduct “proprietary trading” by selling stock in their firm’s inventory or buying stock to hold in the firm’s inventory until they receive a sell order.

The NYSE prohibits specialists from proprietary trading when they know there are open orders that could be executed at matching prices. Trades must be made in the order in which they are requested by the investor so that the investor gets the best deal.

In 2004, the Securities and Exchange Commission (SEC) announced that it had issued cease-and-desist letters to all seven firms for interpositioning violations—where one broker agrees to fill a buy order by purchasing stock from another broker, who will buy it from the market and then sell it to the first broker at a marked-up price. The first broker then marks it up again when selling it to the customer. This results in customers paying more for stocks the specialist could have bought directly. The specialists were also selling their firm’s stock instead of stock from a matching seller and not executing orders that were limited to a maximum buy or sell amount. All of the firms paid the SEC penalties and disgorgement.

The California Public Employees’ Retirement System (CalPERS) filed a class action against the seven firms, their parent companies, and the NYSE on behalf of all people who bought or sold shares on the NYSE between Oct. 17, 1998, and Oct. 15, 2003. The class alleged the defendants violated the Securities Exchange Act of 1934 by manipulating the market, making false statements, and concealing material facts to defraud investors.

The plaintiff dismissed the NYSE in 2010 after the exchange agreed to release documents and testimony in the suit against the specialist firms.

The defendants agreed to pay $18.5 million. The court has preliminarily approved the settlement.

Citation: In re NYSE Specialists Secs. Litig., No. 1:03-cv-08264 (S.D.N.Y. Nov. 20, 2012).

Plaintiff counsel: AAJ member Darren J. Robbins, and William S. Lerach, Mark Solomon, Michael J. Dowd, William J. Doyle II, Leonard B. Simon, and Byron S. Georgiou, all of San Diego.


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