December 25, 1997
Brokerage Firms Agree to $900 MillionRelated Article
Prudential Fights to Keep Papers From Some Clients (Aug. 5)
By DAVID BARBOZA
NEW YORK -- Thirty brokerage firms, including some of the
biggest and most trusted names on Wall Street, agreed Wednesday
to pay about $900 million to end a civil suit contending they schemed with
one another for years to fix prices on the Nasdaq stock market.
Lawyers for the plaintiffs in the
class-action lawsuit, which represented
tens of thousands of investors, called it
the biggest settlement of a price-fixing
lawsuit in history.
The settlement, also one of the biggest
ever in the history of U.S. financial
markets, was distinctive because most
investor complaints about Wall Street
cheating historically have focused on
theft and fraud, not collusion among
competing brokers to fix prices of
stocks.
"The size of the settlement indicates that
the allegations made were pretty
serious," said Alan Bromberg, an expert
is securities law at Southern Methodist
University. "This is the first time antitrust
law has been used in the securities area
in a major way."
While the settlement is huge, it is not
expected to seriously affect the earnings
of any of the brokerages. Investors also
need not worry because reforms
instituted in recent years have addressed
the pricing practices on the Nasdaq
market.
None of the defendants in the
settlement, which included Merrill
Lynch, Goldman Sachs and Morgan
Stanley, Dean Witter Discover & Co.,
admitted wrongdoing.
Their payments boosted the total
amount paid by brokerage firms to more
than $1 billion since 1994, when
lawyers representing a group of
investors first brought the suit. That
includes a $98 million settlement paid a
year ago by six other firms facing similar
accusations.
The total amount of the settlement is not
far behind the $1.5 billion paid out by
Prudential Securities for defrauding
hundreds of thousands of investors in
the sale of limited partnerships.
But because the price-fixing settlement
sum was spread among more than 30
brokerages, no single firm's total
approached the Prudential figure.
Merrill Lynch, which will pay the highest
amount because the firm's trading
accounted for the largest share of the
Nasdaq market, will contribute about
$100 million.
The plaintiffs had contended that
between 1989 and 1994 a large portion
of the stock trading done via the
Nasdaq market was manipulated by
brokers, who inflated the spreads, or
the difference between the price stocks
are bought and sold, in order to reap
higher trading profits.
"They did it on the buy side and they did
it on the sell side," said Robert Skirnick,
an attorney for the plaintiffs. "Whether
you were buyer or a seller you were damaged."
For instance, if an investor asked to buy shares at $20.125, a broker
might return with shares bought at $20.25 saying the shares were
unavailable at the cheaper price. The broker would then pocket the
difference. In deals where hundreds of thousands of shares were traded,
that spread of 12.5 cents could be a large sum of money.
The plaintiffs sought to show that brokers priced shares that typically
would give them a 12.5 cent profit on each share traded. If a broker
listed a price too cheaply, Skirnick said, that broker would be pressured
by competitors.
"They would call the other guy and say, 'You stupid market maker, you're
wrecking the market,' " Skirnick said.
A year ago, about 24 Wall Street firms settled similar Nasdaq price-fixing
charges with the Justice Department by agreeing to forbid certain pricing
practices and enhance regulatory oversight.
At about the same time, the Securities and Exchange Commission
sanctioned the National Association of Securities Dealers -- which
operates the Nasdaq market -- for oversight and regulatory lapses. SEC
officials also said they were continuing to investigate practices in Nasdaq.
Since then, a number of reforms have been made.
Concerns first surfaced in the early 1990s about trading practices on
Nasdaq, a national network of brokers linked together via telephone and
computer terminal hookups that has mushroomed in size in recent years to
become the second-largest stock market behind the New York Stock
Exchange.
Once known as the "over the counter" market because many of its stocks
are so small, Nasdaq is now more commonly regarded as home to
celebrity stocks that have become household names in the current bull
market -- names like Microsoft, Intel and MCI. But the mechanics of
how these stocks are bought and sold are not widely understood outside
of the securities industry.
The genesis of the lawsuit came in a study released in May 1994 by two
academics, William Christie at Vanderbilt University and Paul Schultz at
Ohio State, titled, "Why Do Nasdaq Market Makers Avoid Odd-Eighth
Quotes?"
The study found that in 1991, market makers were fixing the trading costs
at higher than competitive levels in some of the largest Nasdaq stocks,
thereby inflating their profits.
The study attracted a flurry of press attention, and eventually led lawyers
to initiate a class-action antitrust suit on behalf of investors who the
lawyers claim were victimized. Federal investigations followed.
If a federal judge agrees to the terms of Wednesday's settlement, the
payments would be placed in an interest bearing escrow account and then
be paid out to investors beginning in 1999, lawyers for the plaintiffs said.
That means almost any investor who bought or sold shares on the
Nasdaq market -- and that figure could be well into the millions -- may be
reimbursed in the future.
But exactly how much an investor might receive would depend on how
much trading the investor did. Lawyers still must devise a formula for
determining investor compensation, and a judge must still determine how
plaintiff lawyers will be paid.
Altogether, more than 1,600 different securities were affected by
price-fixing practices, plaintiff lawyers said.
The settlement document makes clear that the Wall Street firms continue
to deny the accusations of wrongdoing in the lawsuit. Most defendants
declined to comment beyond that. Nasdaq also declined to comment.
But Merrill Lynch issued a statement that read: "Although we believe our
practices were entirely proper, it made no sense to continue litigating the
merits of practices that are no longer followed when the matter could be
resolved on an industry-wide basis."
The settlement amount, while huge, is not expected to put even a minor
dent in the collective profits of Wall Street brokerages, which are
enjoying another banner year from the bull market.
The shares of most Wall Street firms -- among the most bullish stocks
themselves this year -- fell only modestly in a shortened Christmas Eve
trading session Wednesday.
Among the law firms representing the investors in the class action suit
were Fine, Kaplan and Black in Philadelphia; Lovell & Stewart in New
York; Milberg Weiss Bershad Hynes & Lerack in New York, and
Meredith Cohen Greenfogel & Skirnick in New York.
One Wall Street firm, however, refused to join the settlement.
BancAmerica Robertson Stephens, based in San Francisco, said it had
no reason to believe it engaged in price fixing.
Attorneys for the investors said they would press ahead with the case
against BancAmerica Robertson Stephens. |
