Suit Against 3 Brokerages Is Dismissed

A federal judge has dismissed a class-action lawsuit that accused three of Wall Street’s biggest brokerage firms of failing to give their customers the best available prices for Nasdaq stocks.

U.S. District Judge Dickinson R. Debevoise in New Jersey threw out the suit, which had sought millions of dollars in damages, saying the Securities and Exchange Commission had never spelled out what brokerage firms’ duties are in executing customer orders on Nasdaq. The suit, filed by a group of investors, was against Merrill Lynch, PaineWebber and Dean Witter Reynolds.

The judge handed down his decision Dec. 15, but it went unnoticed until it was obtained by The Times on Tuesday.

The case, based on claims that the three firms violated SEC regulations requiring “best execution” of customer orders, was one of two big private class-action suits pending against Nasdaq dealers.

The other, a much bigger case involving 33 Nasdaq dealers--including Merrill Lynch, PaineWebber and Dean Witter--is going forward in federal court in New York. The New York case is based on a separate legal claim accusing the dealers of violating antitrust laws.

The case Debevoise dismissed contained allegations central to the recent intense controversy about Nasdaq trading: that brokerage firms typically give individual investors the best publicly quoted price for Nasdaq stocks but often trade for themselves at better prices usually denied ordinary investors.

The suit charged that the three firms often traded for themselves on private computerized trading systems such as Reuters’ Instinet. Instinet is heavily used by brokerage firms and institutional investors. But the firms allegedly did not give individual investors access to the better prices offered on Instinet.

The suit also contended that the firms ignored opportunities to match up their own customers’ buy and sell orders, eliminating the chance that the customers could trade with each other at prices more favorable to them than what the firms were quoting.

In his ruling, Debevoise said the SEC, despite many opportunities, had never spelled out what “best execution” meant in regard to Nasdaq trading. He also noted that the SEC in September proposed drastic rule changes for Nasdaq that would eliminate much of the problem. Among other things, the rules would require firms that post prices on Instinet or other trading systems to make those prices part of their publicly displayed quotes.

He also noted that the National Assn. of Securities Dealers, Nasdaq’s parent, has proposed a trading system it says will increase small investors’ chances for obtaining better prices.

The issues that the investors raise “have been and are being specifically addressed by the SEC and the NASD,” the judge said, adding that the investors who filed suit are in effect “asking the court to retroactively second-guess the SEC.”

Karen Morris, one of the lawyers representing the investors, said they were considering whether to file an appeal.