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. Last Updated: 07/27/2016

Nasdaq Traders Face Mass Suit

NEW YORK -- A federal judge has ruled that most investors who traded on the Nasdaq Stock Market in the early 1990s can be represented in a massive anti-trust case here, raising the possibility that up to 7 million people and companies will be included in the case.


U.S. District Judge Robert Sweet granted the class-action status in a lawsuit filed by 30 individual investors and the state of Louisiana against 33 Nasdaq stock-trading firms, including some of the largest names on Wall Street, for allegedly rigging stock prices.


Arthur Kaplan, a Philadelphia-based attorney representing the plaintiffs, called it "a tremendous decision" that could eventually lead to damage awards "in the billions of dollars" if decided for the investors. He said he did not know how many people traded stocks through the major Nasdaq brokerages during the period involved, but had seen estimates ranging from 2 million to 7 million.


Catherine Ludden, one of the attorneys for the defendants, said the judge's decision was "not unexpected."


"It was a procedural and not a substantive decision," she said. "They had to have a class to go through with this case."


The defendants in the class action suit include Merrill Lynch & Co.; Bear, Stearns & Co.; Goldman Sachs & Co.; Donaldson, Lufkin & Jenrette Securities Corp.; and other leading brokerage members of the National Association of Securities Dealers, which operates the Nasdaq.


Sweet and experts on Nasdaq, the Washington-based computerized stock market, indicated that if millions of plaintiffs were awarded damages, individual amounts would be small, and possibly paid out in credits on future trades.


Without paying any fines or admitting any wrongdoing, the major brokerages listed as defendants in the class-action case settled in July a related price-fixing case brought by the Justice Department and the Securities and Exchange Commission.


The government's complaint was that dealers cheated customers by conspiring to rig stock sale-prices on the Nasdaq, where many small and technology companies are listed. The brokers allegedly charged investors a few pennies more on each share investors bought and paid them a few pennies less when they sold.


The Wall Street firms agreed to take measures, including random taping of telephone calls and hiring of compliance officers, to ensure that their traders did not manipulate spreads between the bid and ask prices for Nasdaq stocks.


Spreads are the difference between the price at which a market maker is willing to buy and the price at which it is willing to sell a stock. In May 1994, two university professors, William Christie and Paul Schultz, published an article in the Journal of Finance suggesting that these spreads were being regularly fixed to swell the brokerages' profits. Within a few days the first lawsuits by aggrieved investors were filed.


"Multiple lawsuits would be costly and inefficient," Sweet said in his 94-page opinion dated Tuesday, "and the exclusion of class members who cannot afford separate representation" would not be fair.


The judge said the class can include investors who traded through the 33 defendants from May 1, 1989, to May 24, 1994. No damages have been specified.


In their computer study of Nasdaq trades, Christie of Vanderbilt University and Schultz of Ohio State University showed that some Nasdaq dealers were quoting the price of certain stocks only in quarters of points instead of the usual increments of one-eighth. This allowed them to make an extra 12.5 cents on every share traded.


The practice was sharply curtailed after Nasdaq officials warned their market makers against the practice, but Nasdaq did not take any immediate disciplinary action against the firms.


Ludden said it would take about two years for the case to go to trial, if there is no settlement or summary judgment.