By Brett D. Fromson
Washington Post Staff Writer
Saturday, December 20, 1997; Page C2

Thirty-one Wall Street firms are considering paying $900 million to settle a class action lawsuit that alleges the brokerages manipulated prices on the Nasdaq Stock Market, according to Wall Street executives and legal sources familiar with the matter.

The possible class action settlement stems from a lawsuit filed in federal court in New York in 1994 against some of the industry's biggest firms, including Merrill Lynch & Co., Goldman, Sachs & Co., Smith Barney Inc. and Bear Stearns Cos.

The initial report of the likely settlement was published yesterday in the Wall Street Journal.

The basic allegation against the dealers is that from 1989 to 1994 they colluded to keep the gap between the buy and sell price of Nasdaq stocks artificially wide to boost their profits by hundreds of millions of dollars at the expense of investors.

Last year, 24 of the firms settled similar charges with the Justice Department, although they neither admitted nor denied the allegations.

The Securities and Exchange Commission also initiated an investigation into the actions of individual traders whose alleged collusion had been caught on tape-recorded telephone conversations obtained by the government.

The SEC's investigation continues and is expected to result in the filing of civil charges against some traders, according to lawyers familiar with the matter. But so far, the SEC has yet to notify any traders that it is likely to file a complaint against them, the sources said. It could be months before complaints are filed against individuals.

An SEC spokesman declined to comment on the matter.

The National Association of Securities Dealers Inc., which is owned by the firms and oversees the Nasdaq Stock Market, is not a party to the settlement talks.

Nor is the NASD being investigated by the SEC. Last year, the NASD was censured by the SEC for failing to adequately police the Nasdaq market and agreed to spend hundreds of millions of dollars to improve its self-regulation.

One lawyer familiar with the settlement talks said, "The question for the dealers has always been how much. If they lost in court and were found to have violated antitrust laws prohibiting price rigging, they could be forced to pay treble damages."

An executive at one of the firms involved in the lawsuit said that while $900 million is a lot of money, "it will not be material for some of the firms," which have already set aside reserves to pay for the settlement.

"After they settled with the [government], all the firms knew there was a class action to be settled," another Wall Street executive said.

The sources said that each firm's portion of the settlement will depend largely on the volume of Nasdaq trading it did during the period in question. The bigger the volume, the bigger the payment. Merrill Lynch was by far the biggest market maker in these years.

Some firms, including Montgomery Securities and Jefferies Group Inc., have already settled the class action for $100 million.

The firms that have yet to settle continue to meet with plaintiff lawyers in New York. A settlement would require approval from a federal judge in Manhattan.

If the total settlement reaches $1 billion, it would be one of the largest civil antitrust payments in history.