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January 1, 2004

Taking the NYSE Specialists to Court

By Gregory Bresiger

The much maligned specialist system, facing investigation by regulators and lawmakers, now has another problem - a federal lawsuit.

Legal powerhouse Milberg Weiss, representing a group of individual investors, is suing five specialist firms that traded for individuals on the American Stock Exchange and the New York Stock Exchange between October 1998 and October 2003. The firms named in the litigation, which include LaBranche & Co. and Goldman Sachs' Spear Leeds & Kellogg Specialists, are facing a potential class-action lawsuit. On top of that, LaBranche is facing several other lawsuits.

The respondents are said to have engaged in misconduct that "involved situations in which specialists improperly traded ahead of customer orders in certain situations," according to the lawsuit, which was filed in the federal district court in Manhattan.

A prominent securities attorney questioned the basis of the lawsuit. "I don't think it will be successful. I don't think it should be successful," attorney Bill Singer told Traders Magazine. Singer, who says he has been a critic of the specialist system, nevertheless argued that specialist practices were designed decades ago to stop market crashes.

"The regulators and lawmakers have had this system in place for years to ensure that there is liquidity and now they say it is wrong. I'm not sure if this is greenmail or blackmail, but it really is more an economic than a legal issue," Singer added. The lawsuit has become an economic issue for LaBranche. It reported its third quarter profits dropped by 90 percent compared to a like period a year ago. Its stock had also recently dropped to its lowest point in four years. LaBranche declined comment.