|
|
Get Four
|  | DECEMBER 17, 2003
A "Landmark Lawsuit" Hits the NYSE CalPERS, the largest U.S. pension fund, is out to "recover losses and to right a serious wrong" in its claims of fraud at the Big Board The California Public Employees' Retirement System (CalPERS) has positioned itself as the premier champion of investor rights, regularly singling out bad managers at some of the nation's largest companies in its annual corporate-governance focus lists. And with $153 billion under management, Wall Street tends to listen when CalPERS speaks out. But the country's largest pension fund has never taken on as big a fish as it did Dec. 16, when it filed a class action against the New York Stock Exchange and seven of its member firms. CalPERS' suit charges the NYSE and specialist firms with fraud, alleging that the exchange skirted its regulatory duties and allowed its members to trade stocks at the expense of investors. The NYSE "not only knew about these problems, but it perpetuated them and profited from them," Sean Harrigan, CalPERS board president, said at a press conference announcing the suit. "We're filing a landmark lawsuit to recover losses and to right a serious wrong." A spokesperson for the stock exchange said it had no comment on the suit. The move is a major slap in the face for the NYSE's recently appointed interim Chairman John Reed. The former Citibank chairman and CEO came on board in September after the exchange's longtime head, Richard Grasso, resigned under pressure over public outrage about his excessive compensation. SCAMS AND SWINDLES? Reed has been widely criticized by CalPERS and other institutional investors for not including representatives of investors on the exchange's newly constituted board and not clearly separating the exchange's regulatory function from its day-to day operations. The CalPERS lawsuit is evidence that the investment communities' dissatisfaction hasn't ebbed. "Our hopes were dashed when Mr. Reed didn't perform," says Harrigan. The suit alleges that seven specialist firms profited by abusing and overusing a series of trading tactics. The tactics, which are not currently illegal, include "penny jumping," where a firm positions itself between two orders to capture a piece of the price differential, "front running," which involves trading in advance of customers based on confidential information obtained by their orders, and "freezing" the firm's order book so that the firm can make trades on its own account first. The outfits named in the suit are LaBranche & Co. (LAB ); Bear Wagner Specialists; Spear, Leeds & Kellogg Specialists; Goldman Sachs Group (GS ); Van der Moolen Specialist (VDM ); FleetBoston Financial (FBF ); Performance Specialists Group; and Susquehanna Specialists. The suit claims that these firms are very profitable, earning collective profits of $397 million on revenues of $1.65 billion in 2002. And that was in a down year for the market. So far, they have not commented on the suit. "IGNORING REPEAT VIOLATIONS". Many of the suit's allegations are based on a previously disclosed investigation of the exchange conducted by the Securities & Exchange Commission. According to the suit, the October SEC report found "serious deficiencies in the NYSE's surveillance and investigative procedures, including a habit of ignoring repeat violations by specialist firms." Damages aren't specified in the suit, but CalPERS representatives estimated the losses at greater than $155 million. CalPERS is being represented by Milberg, Weiss, Bershad, Hynes & Lerach, a firm known for class actions that aggressively pursue high-profile companies, such as Enron and Martha Stewart Living Omnimedia (MSO ). The suit highlights the growing frustration that institutional investors have expressed with what they perceive as a system that needs to be revamped -- if not eliminated. According to California State Comptroller Steve Westley, a CalPERS board member who participated in the Dec. 16 press conference, he has repeatedly called on the NYSE to end its use of specialist firms to facilitate trades and move to a system of openly matching of buyers and sellers. BLIND EYE? "There's no reason not to move to a fully automated exchange," Westley says. "Every exchange in the world is using such a system. The time is now for the NYSE to move into the 21st century and remove the cloud that there's self-dealing working against investors." Although former NYSE Chairman Grasso isn't named in the suit, CalPERS representatives cast Grasso, who couldn't be reached for comment, in a particularly harsh light, suggesting that his $187.5 pay package was hush money for allowing alleged trading shenanigans. Said Harrigan: "The specialists loved Dick Grasso, and in exchange for looking the other way he was rewarded handsomely."  By Christopher Palmeri in Los Angeles Edited by Beth Belton
BW MALL
SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Policy |
Printer-Friendly Version
