Commentary

Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

Traders Poll

Do you think it's a good idea to conduct an access fee pilot to assess the pricing models used by many trading venues?

Yes

67%

No

0%

Should have had a pilot program a long time ago.

33%

Free Site Registration

February 1, 2001

Dealers Pay Up In Price-Fixing Scam: Doubts Linger Over Billion Dollar Penalty

By Sanford Wexler

Also in this article

  • Dealers Pay Up In Price-Fixing Scam: Doubts Linger Over Billion Dollar Penalty

The victims of the so-called Nasdaq price-fixing scandal are finally receiving their settlements.

About five years after several major dealers agreed to settle the anti-trust lawsuit, and pay out some $1 billion in damages, the checks are going out to over one million investors.

The billion-dollar settlement process is a massive undertaking. According to settlement attorneys, approximately 1,635,952 claims have been filed. The attorneys have created a web site, www.nasdlitigation.com, and have also set up a toll free number, 800-933-6363, to provide further information for claimants.

In order to be compensated, investors must have traded one of 1,659 Nasdaq stocks between the period of 1989 and 1996. According to an estimate by The Wall Street Journal, investors lost about two cents on each share traded due to the alleged scam.

The highly-publicized case dates back to 1994 when two university professors, William Christie of Vanderbilt University, and Paul Schultz of Ohio State University, released a study that purported to demonstrate that Nasdaq market makers were artificially inflating the spreads on customers buy and sell orders.

The professors, citing collusion among market makers, highlighted how a selection of stocks on Nasdaq, compared with a comparable selection of listed stocks, were predominantly quoted in increments of even eighths, or 25 cents, rather than in odd eighths, or 12 1/2 cents.

The analysis helped trigger investigations of Nasdaq stock trading by the Securities and Exchange Commission and separately by the U.S. Department of Justice, and ultimately culminated in civil lawsuits against several top Wall Street firms.

Some of Wall Street's biggest names were charged with securities law violations, including Bear Stearns, CS First Boston, Goldman Sachs, J.P. Morgan, Merrill Lynch, Morgan Stanley Dean Witter, PaineWebber, Prudential Securities, and Salomon Smith Barney. These firms, among others, were also sued by investors in a class-action lawsuit.

The firms agreed to settle the case with the government and with investors in 1996. Lawyers for the plaintiffs reportedly received $144 million. The landmark case also led to the order handling rules as well as to the SEC censuring the National Association of Securities Dealers for failing to properly oversee the Nasdaq Stock Market.

Although the NASD neither admitted nor denied any misconduct, it agreed to spend $100 million over a five-year period to improve its market surveillance operations.

"Nasdaq had nothing to do with the settlement," a Nasdaq spokesman said. "The settlement was with our member firms."

Risk of Recovery

The billion-dollar settlement was approved by the United States District Court in 1998. In light of the risk of little or no recovery, the United States District Court found that the $1,027,000,000 "recovery in this case is exemplary."

Indeed, the court noted that the settlement was a suitable conclusion to a class-action lawsuit that might have led to a difficult and costly year-long trial. "Given the number of defendants and the factors [previously] noted, any verdict, two or three years from now, would be subject to appeal and possible reversal or retrial," the court added.

The size of the payment checks range from a minimum of $25, to several million dollars awarded some major institutional investors, such as pension funds and mutual funds that traded very large numbers of shares. The largest single recovery is $11 million by an unidentified institution.