Calpers sues New York Stock Exchange and seven specialist firms

Calpers, the biggest US public pension fund, fired a historic shot at the 200-year-old New York Stock Exchange yesterday, filing a lawsuit against the NYSE and seven of its specialist trading firms, alleging widespread abuses abetted by a lack of oversight on the part of the exchange.

The legal offensive from Calpers - one of Wall Street's largest customers due to its massive $150bn portfolio managed on behalf of California's public sector workforce - comes three months after the system vocally protested over former NYSE chairman Richard Grasso's $188m compensation package.

The Calpers lawsuit alleges that specialists - who make markets in shares traded on the floor of the exchange - employed "artifices to defraud" and argues "that NYSE orders were not being filled at the best available prices" and "financially advantaged" the specialists.

The specialists, whose function is similar to jobbers' at the London Stock Exchange before Big Bang, match buyers and sellers on the NYSE and are required to maintain an orderly market in groups of stocks assigned to each firm. As such, they are in the unique position of knowing the wide spectrum of supply, demand and pricing for any given stock at any given time during the trading day.

Exchange rules bar specialists from trading on their own account for profit if there are unexecuted orders for the shares at the same price outstanding.

The firms named in the suit include LaBranche; Van der Moolen; Goldman Sachs' Spear Leeds & Kellogg; FleetBoston's Fleet Specialist; and Bear Wagner Specialists, which is partly owned by Bear Stearns.

The NYSE launched its own investigation earlier this year into whether at least two of its specialists may have engaged in trading shares ahead of clients in a possible abuse of the exchange's trading system.

"We are filing today a landmark lawsuit to recover losses and to right a serious wrong that exists at the New York Stock Exchange. That wrong involves the specialist trading system," said Sean Harrigan at Calpers.

"The lawsuit alleges that the exchange looked the other way most of the time when these [trading] rules were violated. We intend to seek recovery of every single dollar lost."

The NYSE and the Securities and Exchange Commission, which regulates Wall Street, declined to comment on the lawsuit.