By Pam Martens and Russ Martens: May 30, 2019 ~
Financial media is buzzing this week that a Federal District Court Judge for the Southern District of New York, Jesse Furman, has ruled that the City of Providence, Rhode Island, the Plumbers and Pipefitters National Pension Fund, along with other plaintiffs, can move forward with their class action lawsuit against seven stock exchanges, including the New York Stock Exchange and Nasdaq, for allegations that they effectively rigged the market against the small investor.
That sounds like a great David versus Goliath court case is moving right along toward a triumph for justice – until one looks at the gritty details of the case.
The lawsuit was launched five years ago following the publication of the book, Flash Boys, by bestselling author and Wall Street veteran, Michael Lewis. The book mapped out, with eyewitness accounts and extensive detail, how the stock market had been rigged through multiple arrangements between the nation’s stock exchanges and high frequency trading (HFT) firms.
The subsequent lawsuit explained in specific detail how the stock exchanges were allowing the HFT firms to move their computers close to the stock exchanges’ own computers (co-location) to get more rapid execution of their trades than the general public; to obtain a faster price data feed than the one that is available to the public; and to use special order types to enhance the trading manipulation. To further create an unlevel playing field that benefited the high frequency trading firms, the stock exchanges charged enormous sums of money for the co-location and faster data feeds which prevented the public from gaining access. This effectively meant that the high frequency traders could front-run (trade ahead of) the public’s stock orders with advance knowledge of where the prices were headed.
The Securities and Exchange Commission (SEC) had been effectively aiding and abetting the manipulation by rubber-stamping the rule changes as they were submitted by the various exchanges. As we previously reported, in December 2013, the SEC filed this rule change in the Federal Register, which announced that the New York Stock Exchange (NYSE) was changing its pricing for some of its co-location services and computer cabinets for outside users. The NYSE said it would charge “a one-time Cabinet Upgrade fee of $9,200 when a User requests additional power allocation for its dedicated cabinet such that the Exchange must upgrade the dedicated cabinet’s capacity. A Cabinet Upgrade would be required when power allocation demands exceed 11 kWs. However, in order to incentivize Users to upgrade their dedicated cabinets, the Exchange proposes that the Cabinet Upgrade fee would be $4,600 for a User that submits a written order for a Cabinet Upgrade by January 31, 2014…”
The Federal Register notice also provided pricing comparisons between what the NYSE was then offering high frequency traders versus the Nasdaq stock market, writing: “The Exchange also believes that the Cabinet Upgrade fee is reasonable because it would function similar to the NASDAQ charges for comparable services. In particular, NASDAQ charges a premium initial installation fee of $7,000 for a ‘Super High Density Cabinet’ (between 10 kWs and 17.3 kWs) compared to $3,500 for other types of cabinets with less power. The Exchange charges only one flat rate for its initial cabinet fees ($5,000), regardless of the amount of power allocation.”
Despite the heavily-detailed recitation of the market-rigging activity in the lawsuit filed by the plaintiffs, on August 26, 2015, Judge Furman dismissed the case, ruling that “the Court concludes that the Exchanges are absolutely immune from suit based on their creation of complex order types and provision of proprietary data feeds, both of which fall within the scope of the quasi-governmental powers delegated to the Exchanges.” Even more preposterously, Judge Furman ruled that the plaintiffs’ case was being dismissed “for failure to state a claim.”
What Judge Furman did was to simply write a decision based on what the lawyers for the defendant exchanges had cynically argued.
The plaintiffs appealed to the Second Circuit court of appeals. That took more time because that court asked the SEC to provide an Amicus Brief on the issue of whether the stock exchanges “have absolute immunity from suit arising from the challenged conduct.” The SEC filed its brief with the court on November 28, 2016, writing that “…the defendant exchanges are not entitled to absolute immunity from suit for the challenged conduct. The Commission believes that absolute immunity is properly afforded to the exchanges when they are engaged in their traditional self regulatory functions—in other words, when the exchanges are acting as regulators of their members.”
More than a year then passed before the Second Circuit ruled. On December 19, 2017, the Second Circuit reversed Judge Furman’s decision, finding that the stock exchanges did not have absolute immunity and that the plaintiffs had, indeed, stated sufficient claims for the case to move forward. The court said “We think that such allegations sufficiently plead that the exchanges misled investors by providing products and services that artificially affected market activity….”
That appellate ruling came a year and a half ago. Unfortunately, the case was remanded back to the same Judge Furman who had grossly misinterpreted the law and relevant case law in the matter.
It’s now five years since the case first started. The stock exchanges have continued on their merry way during the past five years giving perks to high frequency traders that allow them to front-run the trades of ordinary investors. Those trading firms have made hundreds of millions, if not billions, of dollars in profits from this manipulation – all under the nose of the SEC and Department of Justice.
What did the big Wall Street law firms do when the case was remanded back to Judge Furman. They filed new motions to dismiss. And Judge Furman’s decision this past Tuesday did not exactly sound like he has seen the light. He seemed to grudgingly write that the plaintiffs have “nudged themselves across the line from conceivable to plausible” and, thus, the case should not be dismissed.
When the New York Stock Exchange is advertising exorbitant fees so that high frequency traders can co-locate their computers — fees that the average American cannot afford — then the plaintiffs’ charges are not just “plausible,” they are factual and supported by substantive evidence.
There used to be a concept in our nation’s courts that justice delayed is justice denied. That no longer has meaning when one attempts to sue Wall Street. It uses the loot it has fleeced from the public to keep the largest law firms on retainer to bury the courts under motions and stall tactics.
And when it comes to judges in the Southern District of New York, all too frequently Wall Street’s lawyers find a sympathetic ear.