Filed at 6:50 p.m. ET
NEW YORK/SAN FRANCISCO (Reuters) - Calpers, the biggest U.S. public
pension fund, filed a lawsuit on Tuesday against the New York Stock
Exchange and its specialist trading firms, claiming that widespread fraud
and lax oversight cost investors millions of dollars.
The lawsuit, filed in the U.S. District Court, Southern District of New
York, comes three months after Calpers' protests helped push out former
NYSE Chairman Richard Grasso following the disclosure of his $188 million
compensation package.
The pension fund alleged that specialists, in conjunction with the
NYSE, routinely engaged in ``wide-ranging manipulative, self-dealing,
deceptive and misleading conduct'' that hurt public investors seeking to
trade stocks.
This lawsuit detailed three types of improper trades
allegedly conducted by the NYSE specialist firms, including ``freezing''
the display of prices on a given stock so a firm could trade for its own
account before executing investor orders.
It also claimed ``front-running,'' when a firm uses its
knowledge of pending orders to trade ahead of their completion, and
``inter-positioning,'' when a firm fails to match buy and sell orders in
order to get a better price on a stock itself.
Calpers' president Sean Harrigan at the news conference to announce the
lawsuit said that the NYSE had ``looked the other way'' when trading rules
were violated. ``We intend to seek recovery of every single dollar lost,''
he said.
The firms named in the suit include LaBranche & Co. Inc. (LAB.N);
Van
der Moolen (VDM.N) (VDMN.AS); Spear Leeds & Kellogg, which is
owned by Goldman
Sachs Group (GS.N); Fleet Specialist Inc., a division of FleetBoston
Financial Corp. (FBF.N); Bear Wagner Specialists, partly owned by Bear
Stearns & Co. (BSC.N); Susquehanna Specialists Inc. and Susquehanna
International Group LLC; and Performance Specialist Group.
A spokesman for Goldman Sachs had no comment while a spokesman for
Susquehanna said the two companies should not have been named in the
lawsuit.
``We believe that there is no factual basis for our inclusion in this
lawsuit,'' said Todd Silverberg, general counsel for Susquehanna
International Group.
A NYSE spokesman had no comment.
Calpers is one of Wall Street's largest customers, with a $154 billion
portfolio managed on behalf of the state's public work force.
'REAL MONEY'
Calpers, known formally as the California Public Employees' Retirement
System, said it would seek to expand its lawsuit into a class-action case
involving potentially millions of investors who bought or sold shares in
NYSE-listed companies during the past five years.
Calpers is represented by Milberg Weiss Bershad Hynes & Lerach, the
leading U.S. class-action law firm.
``Wherever you see Bill Lerach involved as lead counsel, you're talking
about real money,'' said Patrick McGurn, special counsel for Institutional
Shareholder Services, which advises large institutional investors,
including Calpers, on corporate governance matters.
McGurn noted that many large investors, including mutual fund giant
Fidelity Investments, are dissatisfied with efforts at the NYSE to reform
itself.
``California and some other states feel their concerns are not being
addressed with this reform effort,'' McGurn said. ``A lot of mainstream
investors question the current trading structure at the Big Board.''
A BAD YEAR
In April, the NYSE launched its own investigation into whether at least
two of its specialists may have engaged in trading shares ahead of clients
in a possible abuse of the exchange's trading system.
California State Controller Steve Westly said the exchange needs a
better trading system. ``Our patience has run out,'' Westly said. ``The
NYSE must take responsibility for its failure to govern itself.''
The lawsuit comes at a particularly tricky time for the exchange. On
Wednesday, the Securities and Exchange Commission is slated to vote on new
Chairman John Reed's governance proposals.
While passage of the reforms is expected, the measures have come under
fire for Reed's refusal to specifically ask for the NYSE chairman and CEO
jobs to be split. The SEC had no comment on the Calpers lawsuit.
News of the suit dragged down shares of publicly traded specialist
firms. LaBranche shares fell 7.1 percent to close at $9.32 on the New York
Stock Exchange, and Van der Moolen's NYSE-listed shares closed down 6.7
percent at $8.12.
