LaBranche & Co., Inc. is a specialty firm (broker-dealer) on the New York Stock Exchange ("NYSE"). As a specialist on the NYSE, LaBranche is required to uphold the rules and requirements of the NYSE. Rather than uphold its duties, LaBranche, during the class period, repeatedly violated its duties by engaging in an illegal scheme to drive up the Company's financial results. The Complaint charges LaBranche, G. Michael LaBranche, Robert Murphy, Alfred O. Haywood, Jr., William J. Burke, III, and Harvey S. Traison with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
More specifically, the Complaint alleges that the Company's statements concerning its financial results during the class period were materially false and misleading because they failed to disclose and misrepresented the following adverse facts, among others: (1) that LaBranche engaged in the illegal practice of "front-running" trades at the NYSE, which allowed LaBranche to act on nonpublic information to trade ahead of customers lacking that knowledge and pocket a profit on each trade; (2) that LaBranche illegally "traded ahead" of customer orders by causing or allowing its traders to put LaBranche's own interest ahead of investors by ignoring one investor order while in the process of interacting with another investor, thereby creating more illegal profits for the Company; (3) that LaBranche, throughout the Class Period, improperly recognized revenue from its illegal scheme in violation of Generally Accepted Accounting Principles ("GAAP"); and (4) as a result of this illegal scheme, LaBranche materially overstated and artificially inflated its earnings, net income, and earnings per share.
Specifically, the Complaint alleges that on April 17, 2003, the NYSE issued a statement wherein it disclosed that it had begun an investigation of the specialist firms of the NYSE. On news of this, shares of LaBranche fell 7.8% or $1.41 per share to close at $16.49 per share. On April 18, 2003, The Wall Street Journal reported that LaBranche and others were the subject of an investigation by the NYSE into illegal trading practices on the floor of the NYSE. Additionally, on April 18, 2003, Bloomberg reported that the SEC had also begun an investigation into illegal trading practices by specialist firms, such as LaBranche. On news of this, shares of LaBranche fell another 1.21% or $.20 per share to close at $16.29 per share on April 21, 2003. On September 22, 2003, The Wall Street Journal reported that the SEC had intensified its inquiry into the NYSE specialist firms, like LaBranche. On news of this, shares of LaBranche fell 9.8% or $1.76 per share, on extremely high volume, to close at $16.05 per share.
The Complaint further alleges that on October 16, 2003, the NYSE announced that the NYSE Enforcement Division had decided to bring disciplinary action against LaBranche and the other specialist firms. The actions allege that the specialist firms (LaBranche) failed to comply with fundamental Exchange auction market rules and policies and applicable securities regulations during a three-year period from January 1, 2000 through December 31, 2002. Additionally, the NYSE stated that it will also seek substantial fines and improvements in the self- monitoring and compliance practices of specialist firms, as well as reimbursement of potential investor losses. News of the disciplinary action being taken against LaBranche by the NYSE shocked the market. Shares of LaBranche fell 10.3% or $1.29 per share on extremely heavy trading volume to close at $11.26 on October 16, 2003.
According to a press release dated February 18, 2004, LaBranche agreed with financial regulators to settle investigations into possible floor trading abuses. Under an agreement in principle, LaBranche said it would pay a total of $63.5 million in restitution to customers and civil penalties for some trades that occurred from 1999 to 2003.
According to the Company’s FORM 10-K for the fiscal year ended December 31, 2005, on or about October 16, 2003 through December 16, 2003, nine purported class action lawsuits were filed by purchasers of the Company’s common stock in the United States District Court for the Southern District of New York. On March 22, 2004, the court consolidated these lawsuits under the caption In re LaBranche Securities Litigation, No. 03 CV 8201. The court named the following lead Plaintiffs: Anthony Johnson, Clyde Farmer, Edwin Walthall, Donald Stahl and City of Harper Woods Retirement System. On June 7, 2004, Plaintiffs filed a Consolidated Class Action Complaint. On July 12, 2004, Plaintiffs filed a Corrected Consolidated Class Action Complaint. Plaintiffs allege that they represent a class consisting of persons and entities that purchased or otherwise acquired our common stock during the period beginning on August 19, 1999 and concluding on October 15, 2003. Plaintiffs allege that the Company, LaBranche, and certain of its and/or LaBranche’s past or present officers and/or directors, including George M.L. LaBranche, IV, William J. Burke, III, James G. Gallagher, Alfred O. Hayward, Jr., Robert M. Murphy and Harvey S. Traison, violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act by failing to disclose improper specialist trading. Plaintiffs also allege that Mr. Gallagher violated Section 20A of the Exchange Act and two other of our past or present officers and/or directors, S. Lawrence Prendergast and George E. Robb, Jr., also violated Section 20(a) of the Exchange Act. Plaintiffs seek unspecified money damages, attorneys’ fees and reimbursement of expenses.
As disclosed by the same SEC filing, on December 12, 2005, motions to dismiss were granted in part and denied in part. The court dismissed the Section 10(b) claims in their entirety against Messrs. Burke, Gallagher and Traison, dismissed the Section 10(b) claims for the period August 19, 1999 through December 30, 2001 against Messrs. LaBranche, Murphy and Hayward, and dismissed the Section 20A claim against Mr. Gallagher.
On July 20, 2006, the Plaintiffs filed a motion for an order pursuant to F.R.C.P. 23(c) to Certify Class, which was granted April 7, 2007.
As a result of the Supreme Court's ruling in the Tellabs case, Defendants filed a renewed motion for dismissal against all claims on July 26, 2007. The court declared that oral arguments would not be heard and a decision not made on the renewed motion until word was given from both parties that settlement mediation was not successful.
On February 8, 2008, LaBranche and its officers and directors entered into an agreement in principle to settle the action for $13 million. On September 19, 2008 the parties brought the agreement to the court, which the judge preliminarily approved three days later. A hearing on final approval and award of attorneys' fees and expenses was scheduled for January 28, 2009.
The court entered a Final Judgment and Order of Dismissal on January 22, 2009, finalizing the settlement and ending the suit. Attorneys' were awarded 30% of the $13 million settlement, and reimbursement of expenses in the amount of $145,612.93.
