CalPERS, the biggest U.S. public pension fund, fired a historic shot at the 200-year-old New York Stock Exchange on Tuesday, filing a lawsuit against the NYSE and its specialist trading firms alleging widespread abuses abetted by a lack of NYSE oversight.
The legal offensive from CalPERS -- one of Wall Street’s largest customers due to its massive portfolio managed on behalf of the state’s public workforce -- comes three months after the system vocally protested former NYSE Chairman Richard Grasso’s $188 million compensation package.
That criticism helped push Grasso out after 35 years at the Big Board, the last eight at the top.
At the end of October CalPERS managed about $154 billion, about two-thirds of that in equities.
The CalPERS lawsuit alleges specialists employed “artifices to defraud” and argues “that NYSE orders were not being filled at the best available prices” and “financially advantaged” the specialists.
The firms named in the suit include LaBranche & Co. Inc.; Van der Moolen; Spear Leeds & Kellogg, which is owned by Goldman Sachs Group; Fleet Specialist Inc., a division of FleetBoston Financial Corp.; Bear Wagner Specialists, partly owned by Bear Stearns & Co.; Susquehanna Specialists; and Performance Specialist Group.
A bad year
In April, the exchange 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.
The exchange was examining whether the specialists had offered inferior prices to investors who send orders to buy and sell shares through the exchange’s main trading system.
“We are filing today a landmark lawsuit to recover losses and to right a serious wrong that exists at the New York Stock Exchange. That wrong involves the specialist trading system,” said Sean Harrigan, president of the CalPERS board of administration.
“The lawsuit alleges that the exchange looked the other way most of the time when these (trading) rules were violated. We intend to seek recovery of every single dollar lost,” he said during a press briefing in Sacramento to announce the suit.
“As a matter of policy, we don’t comment on litigation,” NYSE spokesman Ray Pellecchia told Reuters on Tuesday.
The lawsuit comes at a particularly tricky time for the NYSE. 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.
The specialist firms are required to maintain an orderly market in groups of stocks assigned to each firm. As such, they are in the unique position of knowing the wide spectrum of supply, demand and pricing for any given stock at any given time during the trading day.
The number of specialist firms has fallen sharply in recent years through mergers and acquisitions .
News of the suit dragged down the shares of publicly traded specialist firms. LaBranche shares fell nearly $1, or 9.3 percent, to $9.11, and Van der Moolen’s NYSE-listed shares fell about 8 percent, or 70 cents, to $8.00.