Justices let lawsuit stand against Nasdaq brokers Fraud alleged in failing to secure best prices

Supreme Court

October 06, 1998|By Lyle Denniston | Lyle Denniston,SUN NATIONAL STAFF

WASHINGTON -- The Supreme Court cleared the way yesterday for investors to sue brokers who fail to obtain the best price available when they buy and sell stocks for their customers on the Nasdaq.

In a brief order with no explanation, the court declined to review a federal appeals court ruling that allowed a securities-fraud lawsuit to go forward against three brokerage firms. The case potentially involves millions of small transactions worth billions of dollars.

The three brokers -- Merrill Lynch & Co., PaineWebber and

Morgan Stanley Dean Witter -- unsuccessfully asked the Supreme Court to overturn the lower court and block such lawsuits.

The case, they argued, exposes brokers to widespread legal challenges even though the brokers made no false statements to their customers, obeyed all laws in their dealings and followed industry practice in seeking the best price for trades.

The Supreme Court gave no reason for turning aside the appeal. It may be that the justices wanted to await the outcome of a coming trial before facing the brokers' liability issue. Thus, the case might return to the justices.

In their trades on the Nasdaq market, the brokerage firms said, they have usually relied on the customary best-offer quote in that market -- the National Best Bid and Offer. That is the highest bid and the lowest offer quoted by firms acting as "market makers."

But in the lawsuit against the brokers, the investors contended that the firms could have obtained better quotes for their customers by turning not to the NBBO, but to online quotes through such pricing databases as Instinet or SelectNet.

Three investors filed a class action lawsuit on behalf of all retail customers who bought or sold Nasdaq-listed stocks between November 1992 and November 1994. They contended that the brokers had a legal duty, under federal securities fraud law, to seek out the best price available.

The brokers sought to have the case dismissed, contending that they met their obligations to their customers by automatically executing trades at the NBBO quote level. The 3rd U.S. Circuit Court of Appeals, however, ruled in January that the firms could be liable for fraud if they had not explicitly warned their customers that they had no plans to seek a better price than the NBBO quote. The case can now go to trial.

In a second case, the court refused to hear an appeal by State Farm Mutual Automobile Insurance that sought to head off a class action lawsuit in Illinois courts.

The lawsuit challenges State Farm's policy of requiring repair shops to use parts other than the original manufacturer's to fix a car insured by State Farm.

A group of Illinois policyholders, suing on behalf of 5 million people insured by State Farm, claimed that it is consumer fraud to dictate the use of inferior parts in making repairs.

Pub Date: 10/06/98

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