Investors’ Suit Against Nasdaq Is Class Action
A federal judge in New York ruled Wednesday that a lawsuit against Nasdaq dealer firms can go forward as a suit on behalf of investors nationwide, greatly increasing chances that Wall Street brokerage firms will have to pay major damages in connection with allegations of conspiring to inflate the cost of trading Nasdaq stocks.
U.S. District Judge Robert W. Sweet in Manhattan ruled that the lawsuit against 33 brokerage firms, including the nation’s largest ones, may go forward as a class action, meaning that as many as 3 million customers who bought or sold Nasdaq stocks from 1989-94 with these firms will be included as plaintiffs.
The private antitrust lawsuit carries the potential of treble damages against the firms.
In a 94-page decision, the judge ruled that there is enough common ground among the claims by the investors for their cases to be dealt with in a single lawsuit.
Arthur M. Kaplan, one of the lead investors’ lawyers in the suit, said the decision “is a major victory for millions of investors.”
But Joseph T. McLaughlin, a lawyer who is the official liaison among the law firms representing the dealers, noted that the decision to certify the class does not include any ruling on the basic issues in the suit, which he said are still to be decided. “This is a beginning point, not an end point,” he said.
He also noted that some parts of the judge’s ruling are favorable to the firms, including the exclusion of institutional investors from the class and of people who didn’t buy or sell stock directly with the 33 dealers.
Legal experts say it’s likely that the case will eventually be settled rather than going to trial because the vast majority of class-action suits are. Sources said there have been preliminary discussions about a settlement but that no accord is imminent.
There is no firm estimate of the amount of damages, but some plaintiffs lawyers said privately that a settlement could be in the hundreds of millions of dollars. McLaughlin declined to comment on any possible settlement.
The suit is based on allegations that Nasdaq dealers conspired to increase the spread, or profit margin, on trades of Nasdaq stocks. Each stock is quoted with two prices, one at which a dealer offers to buy a stock and a higher one at which it offers to sell. The gap is the spread.
The suit is based on a report by two business school professors in 1994, who found that dealers systematically avoided quoting stocks in odd eighths. A stock’s price would be quoted at 20, or 20 1/4 or 20 1/2, for example, but almost never at 20 1/8 or 20 3/8. As a result, the spread on these stocks could never be less than 1/4, or 25 cents. Spreads of 1/8, or 12.5 cents, have long been typical on the New York Stock Exchange.
The Justice Department in July reached a settlement of civil antitrust charges, obtaining an injunction that requires firms to improve practices and monitor telephone conversations for signs of price-fixing. But like all Justice Department civil antitrust settlements, it involved no direct financial penalties against the firms.
The Securities and Exchange Commission in August issued a scathing report about Nasdaq itself and its failure to police its dealers, including for conspiring to inflate spreads.
The judge also helped the investors’ side by ordering the dealer firms to turn over the investors’ lawyers’ transcripts of depositions their employees gave to Justice Department investigators.
