The $154 billion California Public Employees Retirement System, representing an estimated 1.4 million members filed the action. The lawsuit names the stock exchange and seven specialist trading firms: LaBranche and Company, Bear Wagner Specialists, Spear, Leeds & Kellogg Specialists; Van Der Mollen Specialists USA; Fleetboston Financial Corporation, Performance Specialist Group and Susquehanna Specialists, Inc. The action states the firms handled 3 billion trades for the pension fund across the last five years.

The action alleges that the NYSE not only knew of the illegal trades, but actually played a pivotal role in their creation. The job of specialist firms is to make a market in stocks assigned to them by matching buyers and sellers on the NYSE trading floor. The action contends the specialist firms used their position to make stocks sales and purchases to their benefit, and that the NYSE failed to stop them.

Specifically, the firms are accused of failing to fill outstanding buy-and-sell orders at the best prices and routinely and unnecessarily intervening in trades, earning fees for themselves and the exchange at the expense of investors. Stock exchange officials allegedly hid the extent of the practices from investors.

Five of the seven firms sued Tuesday were also identified in October by the NYSE as targets of an investigation into improper floor trading. At the time, the NYSE said it would discipline and seek tens of millions in fines against the firms - LaBranche, Bear Wagner, Spear, Leeds & Kellogg, Van Der Mollen and Fleetboston - for ignoring their primary duty to directly match buy and sell orders when possible and instead, intervened from their own account for a profit.

California pension officials have stated that they are seeking other private and institutional investors to join them in the lawsuit, which could potentially include all investors who traded at the New York Stock Exchange for the last five years.