Judge Says NYSE Has Immunity in CalPERS Lawsuit

December 14, 2005 (PLANSPONSOR.com) - The New York Stock Exchange (NYSE) was dismissed as a defendant in three lawsuits accusing it and seven trading firms of fraud.

The Associated Press reports that US District Judge Robert Sweet, citing another securities case, ruled that the NYSE was entitled to the same immunity enjoyed by the Securities and Exchange Commission (SEC) when it was performing duties assigned by the SEC.

The lawsuits are led by the California Public Employees’ Retirement System (CalPERS) and Empire Programs Inc., a corporation in Saddle River, New Jersey, according to the AP.   The lawsuits were brought on behalf of CalPERS and other public pension funds in nine states.   They allege that the NYSE deliberately failed to supervise and discipline seven specialist firms.

The pension funds claim that the NYSE and the specialists worked together to defraud investors trading on the exchange. They also claimed the NYSE helped specialists engage in improper trading and evade regulatory scrutiny.   In addition, according to the AP, the lawsuits allege the NYSE deliberately failed to oversee its exchange or discipline its members for rules violations. The funds accused the NYSE of tipping off specialists to pending investigations and falsifying trading data it knew to be false.

The plaintiffs also accused the NYSE Division of Market Surveillance with helping the specialists identify incriminating documentation and advising them how to alter data to hide evidence of wrongdoing.

According to the suits, the NYSE’s conduct was motivated by an interest in encouraging higher trading volume and increased trading fee revenue for NYSE to boost the value of NYSE seats, NYSE listings and levels of compensation for NYSE senior executives.

The lawsuits allege that the specialists had engaged in illegal practices, including manipulating stock trades so that they could trade their own accounts at favorable prices and falsifying weekly reports about their own trades.

Sweet said the NYSE as a self-regulatory organization has the authority to regulate its members and to enforce its members’ compliance with securities laws, which give the SEC wide powers to discipline the NYSE should it discover wrongdoing.   According to the AP, he further said the US 2 nd Circuit Court of Appeals in Manhattan had established in earlier cases that the NYSE performs a variety of regulatory functions that otherwise would be performed by the SEC and thus should be given full immunity from lawsuits for money damages.

In March of this year the seven firms settled with the SEC, paying more than $240 million in penalties and disgorgement, on claims of securities rules violated from 1999 to 2003.   In April, a federal grand jury in Manhattan handed down criminal indictments against current and former individual specialists at the stock exchange. Those cases are still pending.

Sweet noted in his ruling that, on April 12, 2005, the NYSE announced it had settled with the SEC, consenting to making changes in its policies and accepting an order of censure by the SEC.

The lawsuits against the specialist firms will proceed.