On January 16, 2008, the California Public Employees’ Retirement System (CalPERS) filed a petition for writ of certiorari requesting Supreme Court review of a decision to dismiss fraud claims against the New York Stock Exchange (NYSE) based on governmental immunity. The Second Circuit’s Judge Sotomayor held that the NYSE is entitled to absolute immunity even when it abandons its quasi-governmental role as a regulator. In re: NYSE Specialists Securities Litigation (California Public Employees’ Retirement System v. New York Stock Exchange, Inc.), 503 F.3d 89 (2d Cir. 2007).

Because of the NYSE’s status as a self-regulatory organization (SRO) under the Securities Exchange Act of 1934, the SEC delegates significant authority to the NYSE to enforce trading rules and regulations. When the NYSE stands in the shoes of the SEC, the absolute immunity that shields the government entity from liability also extends to the exchange.

In the lower courts, CalPERS’ class action lawsuit contended that the exchange effectively abandoned its regulatory role when the NYSE and the specialist firms that managed trading for its listed companies acted to defraud public investors from October 17, 1998 until October 15, 2003.  Specifically, CalPERS alleged that the NYSE falsified trading records, tipped off the specialist firms to pending investigations, and worked with the specialists to hide evidence from the SEC during the class period. Petition for Writ of Certiorari at 4, California Public Employees’ Retirement System v. New York Stock Exchange, Inc., No. 07-946 (U.S. Jan. 16, 2008).

The recently filed petition asks the Supreme Court to consider whether the NYSE should be entitled to absolute immunity even when it fails to perform the regulatory function delegated to it by the SEC. CalPERS exhorts the Court to resolve what it views as the Second Circuit’s inconsistent holdings: 1) SROs are private, non-governmental actors beyond the reach of constitutional limits on governmental power; and 2) SROs are entitled to absolute immunity even when failing to perform their delegated regulatory duties.

The primary materials discussed in this post may be found at the DU Corporate Governance website.  Please see earlier posts for more on SROs.