High court clears way for state suits against brokers

January 17, 2001|By Lyle Denniston | Lyle Denniston,SUN NATIONAL STAFF

WASHINGTON - Brokers' dealings with investors are closely monitored by federal laws and rules, but the Supreme Court cleared the way yesterday for another form of consumer protection: the right to sue their brokers under state laws.

In a brief order, the justices turned down an appeal by Morgan Stanley Dean Witter & Co. that claimed it would be unconstitutional to permit such state court lawsuits to go forward.

State court claims, Morgan Stanley contended, would disrupt federal oversight of brokers' dealings with their customers. The Securities and Exchange Commission and self-regulating market entities must be left free to police brokers' trading practices, the firm argued.

The justices gave no explanation for their refusal to hear that case. Their action was not a ruling, but it did open the way for the trial of a class action lawsuit filed against Morgan Stanley by a group of investors in San Francisco County Superior Court.

The lead investor in that case, James Roskind, sued the broker for having sold stock in Nasdaq trading in Netscape Communications Corp. from the broker's own account, before carrying out Roskind's sell order of 14,000 Netscape shares he owned.

Roskind had told the firm to sell his shares for at least $65 a share. The broker did not sell the stock at the opening of trading, when Netscape shares were trading at $68. Rather, it sold his shares 77 minutes later, when the price had dropped to an average of $65.50.

Before selling Roskind's shares, Morgan Stanley sold a block of Netscape from its own account for $66 a share. This is called "trading ahead," a practice that is closely regulated by the National Association of Securities Dealers.

Roskind contended that he lost $34,000 because of the delay in trading his shares. His complaint, investigated by NASD, led to a settlement in which Morgan Stanley paid Roskind and two other customers the difference between Nasdaq's price at the opening and at the time it executed their sell orders. Nevertheless, Roskind sued, claiming that Morgan Stanley violated state consumer protection laws by "trading ahead" and by failing to get the best price for his sell order.

Morgan Stanley's effort to dismiss that case - on grounds that state law has been displaced by federal law and regulations - failed in California courts. Yesterday, the Supreme Court refused to interfere with the coming trial.

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