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Investors’ Claims Against New York Stock Exchange Revived

September 19, 2007

A U.S. appeals court recently issued an opinion in the In re NYSE Specialists Securities Litigation, reviving investors’ claims against the New York Stock Exchange arising from statements it made regarding the integrity of the market it operated when the Exchange was, in fact, failing to enforce rules prohibiting improper trading by its specialists and engaging in conduct designed to cover up the fraud.

The court ruled that the Exchange enjoyed absolute immunity with respect based directly on its alleged failure to execute its regulatory functions as required by law. However, it vacated, or overruled, a district court’s ruling that investors who purchased securities on the Exchange could not sue the Exchange for making false statements about the integrity of the market it operated.

In so doing, the court limited the precedential effect of its prior decision in the Nortel Networks case, which had been misinterpreted as holding that only issuers of securities may be liable for making false statements. “We recognize that Nortel Networks contains language that could be read to suggest that a purchaser of a security may bring a fraud action under Rule 10b-5 only against the issuer of the security purchased,” the court acknowledged, holding that Nortel Networks does not in fact stand for this proposition, which “would place beyond the reach of Rule 10b-5 false statements made by underwriters, brokers, bankers, and non-issuer sellers.”

“In short,” the appeals court concluded, “the district court incorrectly read Nortel Networks to mean that an action under Rule 10b-5 for false statements about a security purchased by the plaintiff lies only against the issuer of the security, or that only statements about a security issuer are actionable. Accordingly, we vacate the district court’s decision with respect to statutory standing.”

The U.S. Court of Appeals for the Second Circuit remanded the case for further proceedings on the claims based on the NYSE’s allegedly false statements. The opinion was issued on September 18.

In re NYSE Specialists Sec. Litig., No. 06-1038-cv, Opinion (2d Cir. Sept. 18, 2007).

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