California pension fund sues NYSE
By Jim Wasserman
Associated Press
SACRAMENTO, Calif. — The nation's largest public pension fund announced yesterday it is filing a class-action lawsuit against the New York Stock Exchange, alleging that fraudulent practices have cost it millions of dollars in recent years.
The $154 billion California Public Employees Retirement System, representing an estimated 1.4 million members, will seek to recover pension fund investment money it lost because of "illegal trading practices on the New York Stock Exchange," said Sean Harrigan, president of CalPERS.
The lawsuit names the stock exchange and seven specialist trading firms.
"We're convinced, and we will seek to prove in court, that the New York Stock Exchange not only knew of these rampant problems, and knew they existed, but also perpetuated them," Harrigan said.
CalPERS is seeking an unspecified amount of money, but officials of the pension fund said it could add up to hundreds of millions of dollars if other private and institutional investors join the suit. CalPERS has $60 billion invested on Wall Street.
Officials said they decided to sue, rather than rely on the U.S. Securities and Exchange Commission, which is conducting its own investigation into floor-trading, because they believe that the SEC has not done its job.
The NYSE and SEC declined to comment on the filing.
John Coffee, director of Columbia University's Center on Corporate Governance, believes that criticism of the NYSE is merited, but doubts that CalPERS would be able to convince a court of the exchange's culpability. He said it's not clear whether the specialists or the exchange are more at fault.
He also said the filing was timed to capitalize on the SEC's expected vote today on the NYSE's corporate governance overhaul.
The NYSE proposed a series of changes, including a smaller, more independent board of directors, to its corporate governance practices after its chairman and chief executive, Richard Grasso, was forced to step down because of a lavish pay package. CalPERS was among Grasso's most vocal critics.
"I think CalPERS wanted to make it very clear to the SEC that they would be coming in for criticism if they approve modest reforms for the institution," he said.
The seven specialist trading firms named in the suit are LaBranche and Co.; Bear Wagner Specialists; Spear, Leeds & Kellogg Specialists; Van Der Mollen Specialists USA; Fleetboston Financial Corp.; Performance Specialist Group; and Susquehanna Specialists Inc.
The job of specialist firms is to make a market in stocks assigned to them by matching buyers and sellers on the NYSE trading floor. The CalPERS suit contends that the specialist firms used their position to make stocks sales and purchases to their benefit, and that the NYSE failed to stop them.
Specifically, the firms are accused of failing to fill outstanding buy-and-sell orders at the best prices and routinely and unnecessarily intervening in trades, earning fees for themselves and the exchange at the expense of investors.
CalPERS officials maintain that stock exchange officials hid the extent of the practices from investors.
"Not only to the knowledge of, but with the active participation of, the NYSE, the Specialist Firms for years have engaged in wide-ranging manipulative, self-dealing, deceptive and misleading conduct," the filing alleged.
LaBranche declined to comment on the suit. The other specialist firms were not immediately reached for comment.
Five of the seven firms sued yesterday were also identified in October by the NYSE as targets of an investigation into improper floor trading.
At the time, the NYSE said it would discipline and seek tens of millions in fines against the firms — LaBranche; Bear Wagner; Spear, Leeds & Kellogg; Van Der Mollen; and Fleetboston — for ignoring their primary duty to directly match buy and sell orders when possible and, instead, intervening from their own account for a profit.
