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April 30, 2000

Firms' Legal Steps to Block Nasdaq SaleDissidents Attack NASD for Silence As Hi

By William Hoffman

Also in this article

  • Firms' Legal Steps to Block Nasdaq SaleDissidents Attack NASD for Silence As Hi
  • Page 2

A group of angry market makers and brokerage firms is considering legal action to block the demutualization of the Nasdaq stock market, informed sources told Traders Magazine.

The demutualization plan, approved by an overwhelming majority of NASD member firms on April 14, would see Nasdaq convert from a membership-run group to a private organization. All told, 3,423 members voted in favor of the plan, while 652 voted against it.

Approach by Critics

Bill Singer, regulatory partner at the New York law firm of Singer Frumento, said he had been approached by two separate groups about filing a lawsuit to stop the vote on demutualization. Singer, former general counsel for the Independent Broker Dealer Association (IBDA), said the groups represent market makers and broker dealers.

After he declined, Singer said both groups approached him again about suing to "unwind," or reverse, the demutualization if NASD member firms voted to approve it.

The level of support for legal action is not clear. (In the 2000 Market Maker Survey by Traders Magazine, 54 percent of the respondents said they oppose demutualization.) The National Association of Securities Dealers, however, was so convinced of its case that it issued a press release, prior to the vote, quoting executives at several trading firms supporting the demutualization plan. That release followed an unsuccessful effort by the Independent Broker Dealers Association and Zeus Securities in Jericho, N.Y., to block the membership vote on April 14. Zeus is run by Alan Davidson, president of the IBDA.

Strong Case

Nonetheless, the case against Nasdaq proceeding with demutualization is still very strong, according to Kenneth A. Gatz, associate general counsel for On-Line Services, a small NASD member firm in Jersey City.

Gatz said On-Line Investment considers legal action an option. But he emphasized, "We haven't made a decision either way."

NASD member firms complain about unanswered questions, Gatz said. These include the impact of spinning off the organization's self-regulatory function, as well as the valuation of the demutualized exchange. Some market makers are said to be dissatisfied with their share allocations under the NASD's private placement plan.

On-Line Services slammed the demutualization plan in an advertisement in the New York Times before the April 14 approval. "I've seen demutualizations unwound before," Gatz said.

The NASD did not respond to repeated calls for comment.

The NASD's plan to de-couple Nasdaq from the NASD membership organization, and to spin-off the exchange's self-regulatory function, came under fire earlier this year. The IBDA said it was unfair to smaller brokerage firms.

In mid-April, advertisements paid for by demutualization opponents appeared in several publications, including the Wall Street Journal and Investors Business Daily. The advertisements called on NASD member firms to reject the proposal.

Gatz and Singer both refused to name individuals or firms that might be contemplating legal action against demutualization. Both said they had been approached by a variety of industry participants. "I would not be surprised if someone does" file suit for injunctive relief, Gatz said.

Industry sources said some market makers and brokerages are weighing whether to file a lawsuit. That action would be separate from the earlier lawsuit by the IBDA to block demutualization.