US pension fund giant sues NYSE in $1bn fraud claim

The New York Stock Exchange is facing a legal claim that it helped traders defraud investors of more than $1bn (£540m).

A group of fund managers, led by California's giant state pension fund, Calpers, has launched an attempt to hold the NYSE to account for abuses by the traders - known as "specialists" - over a five-year period to 2003.

Until the financial watchdog, the Securities and Exchange Commission (SEC), cracked down, specialists regularly traded for their own profit before they fulfilled buy or sell orders from clients. Calpers claims the NYSE not only knew the trading floor was riddled with such abuses but even encouraged them - and it is demanding damages of hundreds of millions of dollars from the exchange.

The claim comes at a sensitive time for the NYSE, which is planning a cash-and-share deal to merge with the pan-European stock market, Euronext, and is hoping to splash out on further acquisitions.

Last year, the NYSE was censured by the SEC for "failing to enforce compliance with the federal securities laws and NYSE rules which prohibit specialists from 'interpositioning' and 'trading ahead' of customer orders".

In 2004, the SEC fined the seven specialist firms more than $245m. Since then, their profitability has collapsed.

Calpers is a $200bn pension fund and one of the largest single investors in the US. It launched a class action against the seven firms and the NYSE in December 2003, but the NYSE was dismissed from the suit last year. A judge ruled the exchange was immune from being sued over its regulatory decisions. But Calpers' lawyers have filed an appeal. In court papers, they argue: "NYSE officials falsely assured investors that they were operating a fair and orderly market. This simply was not true."

In the past few days, they have also received documents and electronic records from the specialist firms and are beginning to sift through data on millions of trades that might have violated stock exchange rules.

The NYSE said that it does not comment on ongoing litigation.