FOR THE SOUTHERN DISTRICT OF NEW YORK...

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

MATTHEW LABUL, Individually and On Behalf of All Others Similarly Situated,

Plaintiff,

vs.

LABRANCHE & CO. INC., GEORGE M.L. LABRANCHE IV, HARVEY TRAISON and ROBERT MURPHY,

Defendants.

) ) ) ) ) ) ) ) ) ) ) ) )

CASE NO.

CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS

JURY TRIAL DEMANDED

Plaintiff has alleged the following based upon the investigation of Plaintiff’s counsel,

which included a review of United States Securities and Exchange Commission (“SEC”) filings

by LaBranche & Co. Inc. (“LaBranche” or the “Company”), as well as regulatory filings and

reports, securities analysts reports and advisories about the Company, press releases and other

public statements issued by the Company, and media reports about the Company, and plaintiff

believes that substantial additional evidentiary support will exist for the allegations set forth

herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION AND SUMMARY OF ALLEGATIONS

1. This is a federal class action on behalf of persons who purchased the securities of

LaBranche between April 26, 2000 and October 15, 2003, inclusive (the “Class Period”), who

have suffered damages thereby, seeking to pursue remedies under the Securities Exchange Act of

1934 (the “Exchange Act”).

2. LaBranche is a holding company whose main assets include LaBranche & Co.

LLC, one of the oldest and largest “specialist” firms on the New York Stock Exchange

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(“NYSE”). LaBranche is also a specialist on the American Stock Exchange and owns an

execution and clearing business. Specialist operations account for the vast majority of

LaBranche’s business, comprising 89% of the Company’s 2002 revenues.

3. The role of a specialist is to maintain fair, competitive, orderly and efficient

trading by executing, or facilitating the execution, of trades. Trading on the NYSE operates on

an auction system and the specialists are, essentially, auctioneers. The NYSE assigns each

specialist firm certain issuers whose stock is traded solely by that specialist firm. The specialist

firms in turn assign issuers to their individual specialists, with each individual receiving a

number of issuers, depending on the volume trading in each particular issue. When executing

market orders, specialists earn the difference, or “spread”, between the bid and ask price as

income.

4. Specialists employ a variety of tools to maintain orderly trading, including trading

as principal, i.e., purchasing and selling securities for their own accounts. When trading for its

own account, the specialist accumulates shares and trades out of its inventory to maintain

liquidity and smooth trading when there are supply and demand imbalances in the market.

LaBranche traded as principal in 32% of the trades it executed in 2002.

5. Specialists are regularly privy to market moving information that can easily be

exploited. For that reason, specialists are subject to numerous NYSE and SEC regulations

intended to detect and prevent self-dealing and manipulation. A basic restriction is the

specialist’s “negative obligation,” which is the duty to stand aside when buy and sell orders can

be executed directly against each other without the specialist’s intervention. The Company, in its

Form 10-K for the year 2002, describes the negative obligation as follows:

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If a public buyer wants to buy at a particular price and a seller wants to sell at the same price, the buyer and seller trade directly with each other, and the specialist should not interfere in the transaction.

6. Throughout the Class Period, LaBranche issued quarterly press releases and filed

quarterly statements with the SEC reporting its results for the respective quarter, purportedly

warning of risk factors facing the Company and its investors, listing regula tory requirements

affecting its business and representing that its disclosure controls were effective. As detailed

below, the Company’s Class Period statements were materially false and misleading when made

because they failed to disclose that LaBranche derived a material portion of its revenues by

stepping in to complete trades even when the orders could have been executed against each other

without LaBranche’s intervention, pocketing a bigger spread that it would have been entitled to

had it followed the rules; LaBranche was profiting by systematically violating its negative

obligation. This undisclosed practice was prohibited by the NYSE and constituted a material, but

undisclosed, risk facing the Company. In addition, unbeknownst to members of the Class, the

practice constituted an improper, material and unsustainable income stream. Indeed, with the

material decline in the collapse of the stock market beginning in early 2000, LaBranche became

highly motivated to, and did, regularly rely on this improper tactic to boost its results.

7. On April 16, 2003, the price of LaBranche common stock declined on leaked

reports that the NYSE was investigating certain firms, including LaBranche, for a prohibited

practice known as “front running.” Front running typically involves the purchase of shares by a

specialist as principal ahead of a client purchase order that is expected to drive the price of the

stock up, followed by a sale by the specialist as principal at the inflated price for a profit. In

reaction to these rumors, LaBranche common stock fell from $19.14 per share on April 15, 2003

to $17.90 at the close of trading on April 16, on unusually heavy trading volume. A Wall Street

Journal article explaining why LaBranche stock dropped was published on April 17, 2003. In

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reaction to this disclosure, which disseminated the previous day’s events to the market at large,

the price of LaBranche common stock fell to $16.49 per share by the close of trading on April

17, 2003, representing a decline of 13.8% from the stock’s closing price on April 15, 2002, the

last trading day unaffected by news of the investigation.

8. The full truth concerning the Company’s improper practices, however, was not

publicly known, or priced into the Company’s stock price, until October 16, 2003, because the

Company had, since news of the NYSE’s investigation was first announced in April 2003,

falsely represented that it believed that it had not violated any rules and maintained that its

disclosure controls were effective. On October 16, 2003, the NYSE issued a press release

announcing that it had informed certain specialists firms, including LaBranche, that the exchange

would take disciplinary action for the firms’ “failure to comply with fundamental Exchange

auction market rules and policies and applicable securities regulations during a three-year period

from Jan. 1, 2000 through Dec. 31, 2002.”

9. In reaction to this announcement, the price of LaBranche common stock fell from

$12.31 per share on October 15, 2003 to $10.72 per share on October 16, 2003, a one day drop of

12.9%, on unusually large trading volume.

JURISDICTION AND VENUE

10. The claims asserted herein arise under and pursuant Sections 10(b) and 20(a) of

the Exchange Act [15 U.S.C. ‘§ 78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder by

the SEC [17 C.F.R. ‘ 240.10b-5].

11. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §1331 and §1337, and Section 27 of the Exchange Act.

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12. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28

U.S.C. §1391(b). Many of the acts charged herein, including the preparation and dissemination

of materially false and misleading information, occurred in substantial part in this District and

LaBranche maintains its headquarters in this District.

13. In connection with the acts alleged in this complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not

limited to, the mails, interstate telephone communications and the facilities of the national

securities markets.

PARTIES

14. Plaintiff, Matthew Labul, as set forth in the accompanying certification,

incorporated by reference herein, purchased common stock of LaBranche at artificially inflated

prices during the Class Period and has been damaged thereby.

15. Defendant LaBranche is a corporation organized under the laws of Delaware with

its principal executive offices located at One Exchange Plaza, New York, New York, 10006.

16. Defendant George M.L. LaBranche, IV (“Michael LaBranche”) was LaBranche’s

Chief Executive Officer, President and Chairman of the Board throughout the Class Period.

17. Defendant Harvey Traison was LaBranche’s Chief Financial Officer and a Senior

Vice President throughout the Class Period.

18. Defendant Robert Murphy was the Chief Executive Officer of LaBranche & Co.

LLC, the Company’s NYSE-specialist business, and a director of the Company, throughout the

Class Period. Murphy was also a director of the NYSE.

19. Defendants LaBranche, Traison and Murphy are referred to herein as the

“Individual Defendants.”

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20. During the Class Period, the Individual Defendants, as senior executive officers

and/or directors of LaBranche were privy to confidential and proprietary information concerning

LaBranche, its operations, finances, financial condition, present and future business prospects.

The Individual Defendants also had access to material adverse non-public information

concerning LaBranche, as discussed in detail below. Because of their positions with LaBranche,

the Individual Defendants had access to non-public information about its business, finances,

products, markets and present and future business prospects via access to internal corporate

documents, conversations and connections with other corporate officers and employees,

attendance at management and board of directors meetings and committees thereof and via

reports and other information provided to them in connection therewith. Because of their

possession of such information, the Individual Defendants knew or recklessly disregarded the

fact that adverse facts specified herein had not been disclosed to, and were being concealed from,

the investing public.

21. The Individual Defendants are liable as direct participants in, and a co-conspirator

with respect to the wrongs complained of herein. In addition, the Individual Defendants, by

reason of their status as senior executive officers and/or directors were “controlling persons”

within the meaning of Section 20 of the Exchange Act and had the power and influence to cause

the Company to engage in the unlawful conduct complained of herein. Because of their

positions of control, the Individual Defendants were able to and did, directly or indirectly,

control the conduct of LaBranche’s business.

22. The Individual Defendants, because of their positions with the Company,

controlled and/or possessed the authority to control the contents of its reports, press releases and

presentations to securities analysts and through them, to the investing public. The Individual

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Defendants were provided with copies of the Company’s reports and press releases alleged

herein to be misleading, prior to or shortly after their issuance and had the ability and

opportunity to prevent their issuance or cause them to be corrected. Thus, the Individual

Defendants had the opportunity to commit the fraudulent acts alleged herein.

23. As senior executive officers and/or directors and as controlling persons of a

publicly-traded company whose stock was, and is, registered with the SEC pursuant to the

Exchange Act, and was traded on the New York Stock Exchange (“NYSE”) and governed by the

federal securities laws, the Individual Defendants had a duty to disseminate promptly accurate

and truthful information with respect to LaBranche’s financial condition and performance,

growth, operations, financial statements, business, products, markets, management, earnings and

present and future business prospects, to correct any previously issued statements that had

become materially misleading or untrue, so that the market price of LaBranche’s securities

would be based upon truthful and accurate information. The Individual Defendants

misrepresentations and omissions during the Class Period violated these specific requirements

and obligations.

24. The Individual Defendants are liable as a participant in a fraudulent scheme and

course of conduct that operated as a fraud or deceit on purchasers of LaBranche’s securities by

disseminating materially false and misleading statements and/or concealing materially adverse

facts. The scheme deceived the investing public regarding LaBranche’s business, operations and

management and the intrinsic value of LaBranche’s securities, and caused Plaintiff and members

of the Class to purchase LaBranche’s securities at artificially inflated prices.

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PLAINTIFF’S CLASS ACTION ALLEGATIONS

25. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased the

securities of LaBranche between April 26, 2000 and October 15, 2003, inclusive (the “Class

Period”) and who were damaged thereby. Excluded from the Class are Defendants, the officers

and/or directors of the Company, at all relevant times, members of their immediate families and

their legal representatives, heirs, successors or assigns and any entity in which Defendants have

or had a controlling interest.

26. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, there were approximately 59 million shares of

LaBranche common stock actively traded on the NYSE. While the exact number of Class

members is unknown to Plaintiff at this time and can only be ascertained through appropriate

discovery, Plaintiff believes that there are hundreds or thousands of members in the proposed

Class. Record owners and other members of the Class may be identified from records

maintained by LaBranche or its transfer agent and may be notified of the pendency of this action

by mail, using the form of notice similar to that customarily used in securities class actions.

27. Plaintiff’s claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by Defendants’ wrongful conduct in violation of

federal law that is complained of herein.

28. Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class and securities litigation.

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29. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

i) whether the federal securities laws were violated by Defendants’ acts as

alleged herein;

ii) whether statements made by Defendants to the investing public during the

Class Period misrepresented material facts about the business and operations of LaBranche; and

iii) to what extent the members of the Class have sustained damages and the

proper measure of damages.

30. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as

a class action.

SUBSTANTIVE ALLEGATIONS

Materially False and Misleading Statements Disseminated During the Class Period

31. The Class Period begins on April 26, 2000. On that date, LaBranche announced

its results for the first quarter of 2000, reporting a 65% increase in revenues from the year-ago

period, to $78.7 million, and net income of $20.6 million, or $0.44 per share. Defendant Michael

LaBranche commented as follows on the “record financial results”:

Michael LaBranche, Chairman and Chief Executive Officer, commented, "We are pleased with our better than expected results for the first quarter. For the most part, these record financial results were internally driven as our recent acquisitions did not close until late in the quarter. By identifying opportunities to act as

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principal in our Specialist stocks, together with heavier volume on the NYSE, revenues increased by 65%."

***

Mr. LaBranche added, "As a result of our two recent acquisitions, LaBranche has positioned itself as a leader in its industry and stands to benefit from growing volumes in the equity market. As the Specialist in more than 410 stocks, the volume in our listed stocks accounted for 21% of the total shares traded compared to 14% in 1999, and 23% of the dollar volume traded compared to 15% last year."

32. On May 15, 2000, LaBranche filed its quarterly report for the first quarter of 2000

with the SEC on Form 10-Q, which reiterated the results announced in the Company’s April 26,

2000 press release. The Form 10-Q was signed by defendant Michael LaBranche in his capacity

as the Company’s CEO and President. The Form 10-Q purported to warn investors of risks

facing the Company which could negatively impact its business and stock price, as follows:

LABRANCHE'S QUARTERLY AND ANNUAL OPERATING RESULTS ARE AFFECTED BY A WIDE VARIETY OF FACTORS THAT COULD MATERIALLY AND ADVERSELY AFFECT ACTUAL RESULTS, INCLUDING: A DECREASE IN TRADING VOLUME ON THE NEW YORK STOCK EXCHANGE, VOLATILITY IN THE EQUITY SECURITIES MARKET AND CHANGES IN THE VALUE OF OUR SECURITIES POSITIONS. AS A RESULT OF THESE AND OTHER FACTORS, LABRANCHE MAY EXPERIENCE MATERIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS ON A QUARTERLY OR ANNUAL BASIS, WHICH COULD MATERIALLY AND ADVERSELY AFFECT ITS BUSINESS, FINANCIAL CONDITION, OPERATING RESULTS, AND STOCK PRICE. AN INVESTMENT IN LABRANCHE INVOLVES VARIOUS RISKS, INCLUDING THOSE MENTIONED ABOVE AND THOSE THAT ARE DETAILED FROM TIME TO TIME IN LABRANCHE'S SEC FILINGS.

The Company also offered the following additional purported risk disclosure concerning its

specialist operations:

A majority of our specialist related revenues are derived from trading as principal. [. . .] These activities involve primarily the purchase, sale or short sale of securities for our own account. These activities are subject to a number of risks, including risks of price fluctuations and rapid changes in the liquidity of markets.

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33. On July 24, 2000, LaBranche issued a press release announcing “record second

quarter revenues of $88 million,” and net income of $20 million, or $0.41 per share. Defendant

Michael LaBranche attributed the results to the Company’s growing competitive position and

quality of services provided:

Michael LaBranche, Chairman and Chief Executive Officer, commented, "Our second quarter results reflect the strength of LaBranche's growing volumes and marketplace position. Our company offers the highest quality service at low execution cost to benefit investors and the industry."

34. On August 14, 2000 LaBranche filed its quarterly report for the second quarter of

2000 with the SEC on Form 10-Q, which reiterated the results announced in the Company’s July

24, 2000 press release. The Form 10-Q was signed by defendant Traison in his in his capacity as

the Company’s CFO. The Form 10-Q purported to warn investors of risks facing the Company

which could negatively impact its business and stock price, as follows:

LABRANCHE'S QUARTERLY AND ANNUAL OPERATING RESULTS ARE AFFECTED BY A WIDE VARIETY OF FACTORS THAT COULD MATERIALLY AND ADVERSELY AFFECT ACTUAL RESULTS, INCLUDING: A DECREASE IN TRADING VOLUME ON THE NEW YORK STOCK EXCHANGE, VOLATILITY IN THE EQUITY SECURITIES MARKET AND CHANGES IN THE VALUE OF OUR SECURITIES POSITIONS. AS A RESULT OF THESE AND OTHER FACTORS, LABRANCHE MAY EXPERIENCE MATERIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS ON A QUARTERLY OR ANNUAL BASIS, WHICH COULD MATERIALLY AND ADVERSELY AFFECT ITS BUSINESS, FINANCIAL CONDITION, OPERATING RESULTS, AND STOCK PRICE. AN INVESTMENT IN LABRANCHE INVOLVES VARIOUS RISKS, INCLUDING THOSE MENTIONED ABOVE AND THOSE THAT ARE DETAILED FROM TIME TO TIME IN LABRANCHE'S SEC FILINGS.




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35. On October 23, 2000, LaBranche announced “Significant Increases in Third

Quarter Revenues and Earnings.” According to the Company’s press release, “Revenues for the

third quarter of $81 million were up 95% from $42 million in the same quarter last year. Net

income of $19 million compares to $7 million in the comparable quarter last year. Earnings per

diluted share were $0.38.” Defendant Michael LaBranche commented on the results as follows:

Commenting on the results, Michael LaBranche, Chairman and Chief Executive Officer, stated, "We are pleased to report solid year-over-year increases in revenues and earnings. The results reflect our position as a leading market maker in a growing marketplace. The proposed acquisition of Robb Peck McCooey Financial Services, Inc. will further solidify our position and add 137 names to our listed companies. Our strategy is to grow our market share as market structure changes lead to higher volume and an increased role for the Specialist."

36. On November 14, 2000, LaBranche filed its quarterly report for the third quarter

of 2000 with the SEC on Form 10-Q, which reiterated the results announced in the Company’s

October 23, 2000 press release. The Form 10-Q was signed by defendant Traison in his in his

capacity as the Company’s CFO. The Form 10-Q purported to warn investors of risks facing the

Company which could negatively impact its business and stock price, as follows:

LABRANCHE'S QUARTERLY AND ANNUAL OPERATING RESULTS ARE AFFECTED BY A WIDE VARIETY OF FACTORS THAT COULD MATERIALLY AND ADVERSELY AFFECT ACTUAL RESULTS, INCLUDING: A DECREASE IN TRADING VOLUME ON THE NEW YORK STOCK EXCHANGE, VOLATILITY IN THE EQUITY SECURITIES MARKET AND CHANGES IN THE VALUE OF OUR SECURITIES POSITIONS. AS A RESULT OF THESE AND OTHER FACTORS, LABRANCHE MAY EXPERIENCE MATERIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS ON A QUARTERLY OR ANNUAL BASIS, WHICH COULD MATERIALLY AND ADVERSELY AFFECT ITS BUSINESS, FINANCIAL CONDITION, OPERATING RESULTS AND STOCK PRICE. AN INVESTMENT IN LABRANCHE INVOLVES VARIOUS RISKS, INCLUDING THOSE MENTIONED ABOVE AND THOSE THAT ARE DETAILED FROM TIME TO TIME IN LABRANCHE'S SEC FILINGS.



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37. On January 22, 2001, LaBranche issued a press release announcing “Significant

Increases in Revenue and Earnings for the Fourth Quarter and Year” 2000, reporting the

following results:

Revenues for the year ended December 31, 2000 were $345 million, a 72% increase from the $201 million reported in 1999. Net income grew substantially to $82 million compared to $29 million last year. Earnings per diluted share were $1.69, significantly above the $0.72 earned last year. Cash earnings reached $102 million, which represents earnings per diluted share of $2.10.

Defendant Michael LaBranche represented that the year 2000 results was a result of company-

specific initiatives that led to increased market share and other successes:

Mr. LaBranche stated, "This past year was one of significant achievement for LaBranche. Through the successful execution of our strategy in a consolidating industry, we have substantially increased our size and market share with the acquisitions of Henderson Brothers and Webco Securities. Also, with the addition of Robb Peck McCooey, LaBranche will act as Specialist for 520 companies on the NYSE and increase our market share of dollar and share volume to approximately 27%. LaBranche also began trading options on the American Stock Exchange during the fourth quarter. This represents an additional growth opportunity consistent with our strategy."

38. On March 30, 2001, LaBranche filed its annual report for 2000 with the SEC on

Form 10-K, which reiterated the results reported by the Company in the January 22, 2001 press

release. The Form 10-K was signed by defendants Michael LaBranche, Traison and Murphy in

their capacities as officers and/or directors of the Company. In a section of the Form 10-K titled

“NYSE Rules Governing Our Specialist Activities,” the Company highlighted some important

rules and trading restrictions affecting its business, including the duty to satisfy a customer’s buy

order ahead of its own, as follows:

Under NYSE and AMEX rules, a specialist has a duty to maintain, as far as practicable, a fair and orderly market in its specialist stocks. In order to fulfill its

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obligations, the specialist must at times trade for its own account, even when it may adversely affect the specialist’s profitability. In addition, under some circumstances, the specialist is prohibited from making trades as principal in its specialist stocks. The specialist’s obligations are briefly described below.

Requirement to Trade as Principal. A specialist must buy and sell securities as principal when necessary to minimize an actual or reasonably anticipated short-term imbalance between supply and demand in the auction market. The specialist must effect these transactions when their absence could result in an unreasonable lack of continuity and/or depth in its specialist stocks. The specialist is not expected to act as a barrier in a rising market or a support in a falling market, but must use its own judgment to try to keep such price increases and declines equitable and consistent with market conditions.

A specialist must make firm and continuous two-sided quotations that are timely and that accurately reflect market conditions. In making these quotations, the specialist’s transactions are calculated to contribute to the maintenance of price continuity with reasonable depth.

Trading Restrictions. In trading fo r its own account, the specialist must avoid initiating a market-destabilizing transaction. All purchases and sales must be reasonably necessary to permit the specialist to maintain, as far as practicable, a fair and orderly market in its specialist stocks. In addition, the specialist must comply with the following trading requirements:

o A specialist must first satisfy a customer’s market buy order (an order to buy at the prevailing market price) before buying any stock for its own account. Similarly, a specialist must first satisfy a customer’s market sell order (an order to sell at the prevailing market price) before selling any stock for its own account;

o A specialist must first satisfy a customer’s limit order held by it before buying or selling at the same price for its own account. A limit order is an order either to buy only at or below a specified price, or to sell only at or above a specified price. A specialist may not have priority over any customer’s limit order. A specialist, however, may buy or sell at the same price as a customer limit order as long as that limit order is executed first;

o If a public buyer wants to buy at a particular price and a seller wants to sell at the same price, the buyer and seller trade directly with each other, and the specialist should not interfere in the transaction;

o The specialist does not charge commissions for trades in which it acts as a principal;

o Except in some circumstances in less active markets, the specialist may not, without permission from an exchange official, initiate destabilizing trades for its own account which cause the stock price to rise or fall; and

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o Any transactions by the specialist for its own account must be effected in a reasonable and orderly manner in relation to the condition of the general market, the market in the particular stock and the adequacy of the specialist’s position to the immediate and reasonably anticipated needs of the market. [Emphasis added].

39. The statements referenced in ¶¶ 31-38, above, were each materially false and

misleading when made because they failed to disclose and misrepresented the following material

adverse facts, among others:

a. during the Class Period LaBranche had systematically violated its

“negative obligation,” by stepping in even when buy and sell orders could have been matched

without its intervention;

b. the Company’s purported risk warnings failed to disclose the

material risk that the Company was, in fact, actively engaging in improper trading practices and

could face severe regulatory penalties that could have a material and negative impact on its

operations;

c. contrary to statements in its press releases, the Company’s reported

results were not attributable solely to the supposed strength of its business, rather, a material

portion of its results were attributable to its practice of failing to stay out of the way of orders

that could, and under applicable NYSE rules should have been, executed without its interference;

d. the Company’s reported results did not accurately portray the

Company’s operations because a material portion of those results were attributable to prohibited

practices; and

e. the Company’s purported risk warnings failed to disclose the

material risk that the Company’s profitability would suffer if it was no longer able to engage in

the prohibited, and inherently unsustainable, practices complained of herein.

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40. On April 23, 2001, LaBranche issued a press release announcing strong revenue

growth in the first quarter of 2001, as follows:

Revenues for the first quarter were $98 million, a 24% increase compared to $79 million for the first quarter last year. Net income increased slightly to $21 million. Fully diluted earnings per share were $0.40 compared to $0.44 in the same quarter of 2000 on five million additional shares outstanding. Cash earnings grew 19% to $28 million from $24 million in the comparable period last year. Cash earnings per diluted share were $0.55, an 8% increase from the $0.51 reported in the first quarter of 2000.

Defendant Michael LaBranche touted the Company’s favorable performance in a difficult

market, as follows:

Michael LaBranche, Chairman and CEO stated, "Our financial performance was respectable given the difficult market environment. We had a solid quarter despite the challenges presented by the full implementation of trading in decimals and the substantial decline in the market. We achieved these results while maintaining the highest possible market quality for our listed companies. Our cash earnings of $28 million, or $0.55 per share, were our second highest ever."



2001 press release. The Form 10-Q was signed by defendant Traison in his capacity as the

Company’s CFO. The Form 10-Q purported to warn investors of risks facing the Company



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42. On July 23, 2001, LaBranche reported strong revenue and cash growth for its

second quarter of 2001. According to its press release, LaBranche’s revenue grew 29% to $113

million. Net income for the quarter was reportedly $19 million, or $0.29 per share, representing a

decline from the prior year’s second quarter, though cash earnings of $28 million grew 13% from

the year ago period.

43. On August 14, 2001, LaBranche filed its quarterly report for the second quarter of

2001 with the SEC on Form 10-Q, which reiterated the results announced in the Company’s July

23, 2001 press release. The Form 10-Q was signed by defendant Traison in his in his capacity as

the Company’s CFO. The Form 10-Q purported to warn investors of risks facing the Company





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44. On October 22, 2001, LaBranche reported a 10% increase in revenue and a

decrease in net income for the third quarter of 2001, as follows:

Revenues for the third quarter were $89 million, a 10% increase from the $81 million reported in last year's third quarter. Net income was $11 million compared to $19 million in the same quarter in 2000. Earnings per diluted share were $0.15 on approximately nine million additional shares outstanding versus $0.38 in last year's third quarter. Cash earnings for the 2001 third quarter were $19 million compared to $24 million in the same quarter last year. Cash earnings per diluted share were $0.32 versus $0.48 in the comparable quarter last year. 45. On November 9, 2001, LaBranche filed its quarterly report for the third quarter of

2001 with the SEC on Form 10-Q, which reiterated the results announced in the Company’s

October 22, 2001 press release. The Form 10-Q was signed by defendant Traison in his capacity

as the Company’s CFO. The Form 10-Q purported to warn investors of risks facing the

Company which could negatively impact its business and stock price, as follows:




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46. On January 18, 2002, LaBranche issued a press release announcing double digit

revenue growth for the year 2001, and modest gains in reported cash earnings, as follows:

For the year ended December 31, 2001, revenues increased 23% to $424 million from $345 million in 2000. Cash earnings grew to $105 million from $102 million last year. Cash earnings per diluted share were $1.85 versus $2.10 in 2000 on approximately eight million additional shares outstanding. Net income available to common shareholders was $64 million, or $1.13 per diluted share, compared to $82 million, or $1.69 per diluted share, in the same period last year.

Defendant Michael LaBranche highlighted that the Company had done well during 2001,

especially given the negative market environment, stating as follows in relevant part:

Michael LaBranche, Chairman and Chief Executive Officer, commented, "These earnings reflect the progress we are making coming off a very difficult period. We were able to successfully execute our business plan despite the difficulties experienced in 2001. While we are cautious about near-term market conditions affecting our business, we believe that LaBranche is well positioned to grow in a technologically changing marketplace."




their capacities as officers and/or directors of the Company. In a section of the Form 10-K titled

“NYSE Rules Governing Our Specialist Activities,” the Company highlighted some important

rules and trading restrictions affecting its business, including the duty to satisfy a customer’s buy

order ahead of its own, as follows:

Under NYSE and AMEX rules, a specialist has a duty to maintain, as far as practicable, a fair and orderly market in its specialist stocks. In order to fulfill its obligations, the specialist must at times trade for its own account, even when it may adversely affect the specialist’s profitability. In addition, under some circumstances, the specialist is prohibited from making trades as principal in its specialist stocks. The specialist’s obligations are briefly described below.

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Trading Restrictions. In trading for its own account, the specialist must avoid initiating a market-destabilizing transaction. All purchases and sales must be reasonably necessary to permit the specialist to maintain, as far as practicable, a fair and orderly market in its specialist stocks. In addition, the specialist must comply with the following trading requirements:






o Any transactions by the specialist for its own account must be effected in a reasonable and orderly manner in relation to the condition of the general market, the market in the particular stock and the adequacy of the specialist’s position to the immediate and reasonably anticipated needs of the market. [Emphasis added].

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material risk that the Company was, in fact, actively engaging in improper trading practices and

could face severe regulatory penalties that could have a material and negative impact on its

operations;







practices; and



the prohibited, and inherently unsustainable, practices complained of herein.

49. On April 19, 2002, LaBranche issued a press release reporting strong results for

its first quarter of 2002, with revenues and net income each up 25% over the first quarter of 2001

and a 6% increase in earnings per share over the same time period. Commenting on the results,

22

defendant Michael LaBranche attributed the results to its business model and a recently acquired,

“technologically advanced” trading system, stating as follows in relevant part:

Michael LaBranche, Chairman and Chief Executive Officer, commented, “LaBranche continues to demonstrate the strength of its business model as technology and market structure changes move the equity trading business to scale. In addition, LaBranche’s early investment in Lava Trading and other technologically advanced trading platforms illustrates a strategic commitment to remain at the forefront of equity trading as new systems evolve.”



2002 press release. The Form 10-Q was signed by defendant Traison in his capacity as the

Company’s CFO. The Form 10-Q purported to warn investors of risks facing the Company


LABRANCHE’S QUARTERLY AND ANNUAL OPERATING RESULTS ARE AFFECTED BY A WIDE VARIETY OF FACTORS THAT COULD MATERIALLY AND ADVERSELY AFFECT ACTUAL RESULTS, INCLUDING: A DECREASE IN TRADING VOLUME ON THE NEW YORK STOCK EXCHANGE, EXCESSIVE VOLATILITY IN THE EQUITY SECURITIES MARKET AND CHANGES IN THE VALUE OF OUR SECURITIES POSITIONS. AS A RESULT OF THESE AND OTHER FACTORS, LABRANCHE MAY EXPERIENCE MATERIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS ON A QUARTERLY OR ANNUAL BASIS, WHICH COULD MATERIALLY AND ADVERSELY AFFECT ITS BUSINESS, FINANCIAL CONDITION, OPERATING RESULTS, AND STOCK PRICE. AN INVESTMENT IN LABRANCHE INVOLVES VARIOUS RISKS, INCLUDING THOSE MENTIONED ABOVE AND THOSE THAT ARE DETAILED FROM TIME TO TIME IN LABRANCHE’S SEC FILINGS.




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51. On July 19, 2002, LaBranche reported its results for the second quarter of 2002,

as follows:

LaBranche & Co Inc. (NYSE: LAB), parent of one of the leading Specialist firms on the New York Stock Exchange, today reported that its second quarter 2002 revenues were $98 million compared to $113 million in last year’s second quarter. Net income available to common shareholders was $13 million compared to $17 million in the second quarter of 2001, and earnings per diluted share for the 2002 second quarter were $0.22 with 1.6 million additional shares outstanding, compared to $0.29 in the prior year period.

Defendant Michael LaBranche attributed the decline in the Company’s results to continued

weakness in the equity markets, stating as follows:

Michael LaBranche, Chairman and Chief Executive Officer, commented, “Our results are consistent with the guidance we provided on June 20th and reflect the continued difficult environment for equities. Despite the challenging market conditions, our strong capital base and financial flexibility enabled us to move forward with our business plan and generate capital. While near term market conditions remain uncertain, we believe the continued successful execution of our strategy will be beneficial for our listed companies and shareholders.” 52. On August 14, 2002, LaBranche filed its quarterly report for the second quarter of

2002 on Form 10-Q which reiterated the results announced in the Company’s July 19, 2002 press

release. The Form 10-Q was signed by defendant Traison in his capacity as the Company’s

CFO. In a section of the Form 10-Q purporting to warn of risks facing the Company, LaBranche

stated as follows:

We have included in this Form 10-Q filing, and from time to time our management may make, statements which may constitute “forward- looking statements” within the meaning of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. The Company’s quarterly and annual operating results are affected by a wide variety of factors that could materially and adversely affect actual results, including: a decrease in trading volume on the New York Stock Exchange or the American Stock Exchange, excessive volatility in the equity securities market and changes in the value of its securities positions. As a result of these and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect its business, financial condition, operating results, and stock price. An investment in the Company involves various risks, including

24

those mentioned above and those that are detailed from time to time in the Company’s SEC filings.

The Form 10-Q also contained the following purported warnings concerning LaBranche’s

specialist business:

A majority of our specialist related revenues are derived from trading as principal. [. . .] These activities involve primarily the purchase, sale and short sale of securities for our own account. These activities are subject to a number of risks, including risks of price fluctuations and rapid changes in the liquidity of markets. In any period, we may incur trading losses in our specialist stocks for a variety of reasons, including price fluctuations of our specialist stocks, lack of trading volume in our specialist stocks and the performance of our specialist obligations...

53. On October 18, 2002, LaBranche issued a press release announcing seemingly

impressive results for the third quarter of 2002. Revenues increased by 33% over the

comparable 2001 quarter, while net income and earnings per sha re more than doubled:

LaBranche & Co Inc. (NYSE: LAB), parent of one of the leading Specialist firms on the New York Stock Exchange, today reported that its third quarter 2002 revenues increased 33% to $118 million compared to $89 million in last year’s third quarter. Net income available to common shareholders grew to $20 million compared to $9 million in the third quarter of 2001, and earnings per diluted share for the 2002 third quarter were $0.33 compared to $0.15 in the prior year period.

Defendant Michael LaBranche attributed the favorable results to the “strength” of the

Company’s business, as follows:

Michael LaBranche, Chairman and Chief Executive Officer, commented, “These results demonstrate the strength of LaBranche’s position as our business continues to move to scale.”

54. On November 14, 2002, the Company filed its quarterly report for the third

quarter of 2002 with the SEC, which reiterated the results announced in the October 18, 2002

press release. The Form 10-Q was signed by defendant Traison in his capacity as the Company’s

CFO. In a section of the Form 10-Q purporting to warn of risk factors facing the Company,

LaBranche stated as follows:

25

The Company’s quarterly and annual operating results are affected by a wide variety of factors that could materially and adversely affect actual results, including: a decrease in trading volume on the NYSE or the AMEX, excessive volatility in the equity securities market and changes in the value of our securities positions. As a result of these and other factors, we may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect our business, financial condition, operating results, and stock price. An investment in the Company involves various risks, including those mentioned above and those that are detailed from time to time in our SEC filings.

The third quarter Form 10-Q contained the following additional purported risk factors:

A majority of our specialist related revenues are derived from trading as principal.

*** In any period, we may incur trading losses in our specialist stocks for a variety of reasons, including price fluctuations of our specialist stocks, lack of trading volume in our specialist stocks and the performance of our specialist obligations. We may have large position concentrations in securities of a single issuer or issuers engaged in a specific industry. In general, because our inventory of securities is marked to market on a daily basis, any significant price movement in these securities could result in a reduction of our revenues and operating profits.

55. In addition, the third quarter 2002 Form 10-Q represented that LaBranche, under

the supervision and control of defendants Michael LaBranche and Traison, comprehensively

reviewed the Company’s “disclosure controls and procedures” and concluded that such processes

were “effective.” The Form 10-Q stated as follows in this regard:

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures, within the 90-day period prior to filing this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

26








material risk that the Company was actively engaging in improper trading practices and could

face severe regulatory penalties that could have a material and negative impact on its operations;







and unsustainable practices that did not accurately reflect its business;



the prohibited, and inherently unsustainable, practices complained of herein;

f. the Company’s “Controls and Procedures” were inadequate and

failed to detect or address LaBranche’s violations of its negative obligation, rendering false and

misleading the representation that its disclosure controls and procedures were “effective,” and

such representations provided false assurances to the market.

27

57. On January 17, 2003, LaBranche announced strong results for the fourth quarter

and year 2002. Revenues for the fourth quarter were reportedly $114 million compared to $124

million for the fourth quarter of 2001, net income grew to $22 million from $18 million in 4Q01,

and earnings per diluted share for the 2002 fourth quarter were $0.36 compared to $0.30 in the

prior year period. The Company’s results for 2002 reflected growth over 2001, as follows:

For the twelve months ended December 31, 2002, revenues grew to $453 million from $424 million in the prior year. Net income available to common shareholders increased to $80 million from $64 million in 2001. Earnings per diluted share were $1.34 compared to $1.13 in the prior year. Had SFAS No. 142 been effective for 2001, LaBranche’s net income available to common shareholders would have been $93 million or $1.62 per diluted share.

Defendant Michael LaBranche touted the Company’s business model, highlighting that the

results were especially impressive in light of the tough economic environment and declining

equity values in which they were achieved, stating as follows:

Michael LaBranche, Chairman and Chief Executive Officer, commented, “LaBranche’s record of delivering sound financial results reflects the strength of our business model. In these challenging market conditions, we have generated capital and built our franchise to benefit our shareholders and listed companies.”




their capacity as officers and/or directors of the Company. A section of the Form 10-K titled

“NYSE and AMEX Rules Governing Our Specialist Activities,” highlighted some of the

important rules and trading restrictions affecting LaBranche’s business, inc luding the duty to

satisfy a customer’s buy order ahead of its own, as follows:

Under NYSE and AMEX rules, a specialist has a duty to maintain, as far as practicable, a fair and orderly market in its specialist stocks. In order to fulfill its obligations, the specialist must at times trade for its own account, even when it may adversely affect the specialist’s profitability. In addition, under some circumstances, the specialist is prohibited from making trades as principal in its

28

specialist stocks. The specialist’s obligations are briefly described below.



Trading Restrictions. In trading for its own account, the specialist must avoid initiating a market-destabilizing transaction. All purchases and sales must be reasonably necessary to permit the specialist to maintain, as far as practicable, a fair and orderly market in its specialist stocks. In addition, the specialist must comply with the following trading requirements:






o Any transactions by the specialist for its own account must be effected in a reasonable and orderly manner in relation to the condition of the general market,

29

the market in the particular stock and the adequacy of the specialist’s position to the immediate and reasonably anticipated needs of the market. [Emphasis added].




a. the Company failed to disclose that it had systematically violated

its “negative obligation,” requiring that “if a public buyer wants to buy at a particular price and a

seller wants to sell at the same price, the buyer and seller trade directly with each other, and the

specialist should not interfere in the transaction.”

b. the reported annual 2002 results did not reflect solely “the strength

of [LaBranche’s] business model, ” rather, such results included material revenues from

prohibited practices; and

c. the Company’s Form 10-K failed to disclose certain material risks

to its business, namely, the risk that its ongoing, improper trading activities could lead to

negative regulatory consequences and that its business would suffer if it was no longer able to

engage in the inherently unsustainable practices alleged herein.

60. On April 15, 2003, LaBranche reported the following results for its first quarter of

2003:

Revenues for the first quarter were $77 million compared to $123 million for last year's first quarter. Net income available to common shareholders was $4.4 million, or $0.07 per diluted share, compared to $25.6 million, or $0.43 per diluted share, for the 2002 first quarter. First quarter, 2003 earnings include an after-tax charge of $0.9 million, or $0.02 per diluted share related to LaBranche's repurchase of a portion of its outstanding shares of preferred stock. As previously reported, first quarter 2002 net income included an after-tax gain of $5 million, or $0.08 per diluted share, related to the revaluation of a LaBranche investment, and an after-tax charge of $1 million, or $0.02 per diluted share, related to LaBranche's repurchase of a portion of its outstanding shares of preferred stock. Excluding these items, 2002 first quarter net income would have been $22 million, or $0.37 per diluted share.

30

61. On April 16, 2003, the price of LaBranche common stock declined on leaked

reports of a NYSE investigation concerning NYSE specialist firms for a prohibited practice

known as “front running.” Front running typically involves the purchase of shares by a specialist

as principal ahead of a client purchase order that would drive the price of the stock up, followed

by a sale by the specialist as principal at the inflated price for a profit. LaBranche common stock

fell from $19.14 per share on April 15, 2003 to $17.90 at the close of trading on April 16.

62. On April 17, 2003, the WSJ reported that “The [NYSE], in a probe of possible

abuses of a central part of its trading system, is examining whether at least two of the largest

floor-trading firms may have engaged in ‘front running, ’ or trading ahead of clients, according to

people familiar with the matter” According to the article, LaBranche, along with at least one

other specialist firm, are being investigated for front running, a prohibited practice “can make the

client order more expensive to fill — taking money out of the customer’s pocket — and it

unfairly enriches the [specialist].” Subsequent news reports indicated that five of the seven

NYSE specialist firms were subject to the investigation.

63. In reaction to this disclosure, the price of LaBranche common stock fell to $16.49

per share by the close of trading on April 17, 2003, representing a decline of 13.8% from April

15, 2002.

64. On April 18, 2003, CNN Money reported that the SEC has commenced a parallel

investigation into potential wrongdoing at LaBranche and, in addition, is investigating whether

the NYSE has adequate controls and surveillance. The article stated as follows regarding the

matter:

The U.S. Securities and Exchange Commission is investigating alleged abuses by New York Stock Exchange specialists and probing whether the exchange has adequate surveillance and controls in place, according to a person familiar with the matter Friday.

31

65. On April 22, 2003, the NYSE issued a press release announcing that it was

investigating potential breaches of the specialist’s “negative obligation,” which is the obligation

not to intervene when orders can be executed without the specialist’s participation, rather than

front running. The NYSE stated as follows in relevant part:

The current investigation does not focus on front-running, contrary to what has been reported numerous times in the Journal, in the Journal’s reports on CNBC, and elsewhere. In fact, the investigation focuses on possible violations of the specialist’s “negative obligation.” This is the requirement to provide an opportunity for public orders to be executed against each other within the current market and without undue dealer intervention. In other words, the specialist must “stand out of the way” when a natural match can occur between buyer and seller. Front-running is trading for one’s own account with knowledge of an order or orders that will materially impact the price of a stock. The activity under investigation by the NYSE is not front-running.

***

To cite a hypothetical example of the practice being examined: In very liquid stocks, market orders typically begin queuing for a period of seconds while a specialist is electronically reporting completed trades to the tape. If market orders are received on both sides of the market during this period, the specialist is required to pair these orders. If the stock is bid for $25.00 and offered at $25.01, the specialist is obligated to pair market orders at $25.00 or $25.01. If, instead, the specialist executes all of the orders that could have been paired at the quoted prices — buying from the sellers at $25.00, and then selling to buyers at $25.01 — he or she is in violation of NYSE rules. While this is a standard practice in dealer markets, it is prohibited in the NYSE auction market. [Emphasis added].

66. Subsequent media accounts, quoting market experts, disputed whether the

NYSE’s distinction between front running and violation of a specialist’s negative obligation is a

meaningful one, with some concluding that it is a distinction without a difference. On April 24,

2003, the WSJ reported as follows concerning the matter:

Some market experts questioned the lengths to which the NYSE went to distinguish between negative obligation and front-running. They said not fulfilling a negative obligation is essentially front-running on the specialist’s part.

When a specialist violates his or her negative obligation, “it is tantamount to front-running,” said David E. Robbins, a New York securities attorney at

32

Kaufman, Feiner, Yamin, Gildin & Robbins LLP and a former chief of compliance for the American Stock Exchange.

It walks like it, talks like it, squawks like it, and it is it. They can call it whatever they want. It’s still benefitting the specialist based on material nonpublic information to the detriment of customers. And if it wasn’t, [NYSE regulators] wouldn’t be doing the investigation.”

67. The full truth regarding the Company’s improper practices were not yet fully

disclosed to the market because the Company represented, in its quarterly report for the first

quarter of 2003, that the Company believes it had not committed any regulatory violations and

that it maintained adequate internal controls. The quarterly report was filed May 15, 2003, signed

by defendant Traison and reiterated the financial results announced in the Company’s April 15,

2003 press release. In a section titled “Legal Proceedings,” the Company represented as follows

concerning the NYSE’s probe:

On April 22, 2003, the NYSE announced that it was reviewing the trading practices of several specialist firms, including our subsidiary specialist firm, LaBranche & Co. LLC. The investigation presently focuses on the trading requirement that NYSE specialist firms not intervene in a natural match between a buyer and a seller. While we believe that our subsidiary has operated in accordance with all applicable requirements, the investigation is in an early stage and there can be no assurance as to the outcome of the investigation or its effects, if any, on our financial condition. [Emphasis added].

68. In addition, the 1Q03 report contained a “Certification” by defendant Michael

LaBranche, representing, among other things, that the report did not contain any misleading

statements, fairly presented the Company’s financial results and condition, and that the Company

had effective disclosure controls and procedures, stating as follows:

CERTIFICATION I, George M.L. LaBranche, IV, Chairman, Chief Executive Officer and President of LaBranche & Co Inc. (the "Registrant"), hereby certify that: 1. I have reviewed the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report").

33

2. Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report. 3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in the Report. 4. Harvey S. Traison, the Registrant's Chief Financial Officer, and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended) for the Registrant, and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, has been made known to us by others within those entities, particularly during the period in which the Report has been prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of the Report (the "Evaluation Date"); and (c) presented in the Report our conclusions about the effectiveness of the disclosure controls and procedures based on our eva luation as of the Evaluation Date. 5. Harvey S. Traison, the Registrant's Chief Financial Officer, and I have disclosed, based on our most recent evaluation, to the Registrant's independent auditors and the audit committee of the Registrant's board of directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's independent aud itors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls. 6. Harvey S. Traison, the Registrant's Chief Financial Officer, and I have indicated in the Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

34

69. The representations contained in 1Q03 certification and statement regarding the

regulatory probe, detailed above in ¶¶ 60 and 67-68 were intended as damage control, aimed at

minimizing negative market reaction to the announcement of the NYSE investigation. Such

representations were materially false and misleading because when made because they failed to

disclose and misrepresented the following material adverse facts, among others:




b. the Company’s reported results did not “fairly present in all

material respects” its results of operations because a material portion of those results were

attributable to prohibited and unsustainable practices; and

c. the Company’s “disclosure controls and procedures” were

ineffective and failed to detect or address LaBranche’s violations of its negative obligation,

which contributed a material portion of LaBranche’s reported results.

The Truth Begins to Emerge

70. The full extent of the Company’s wrongful conduct was not publicly known until

October 16, 2003. On that date, the NYSE issued a press release announcing that it intends to

bring disciplinary actions against LaBranche, among others, for the Company’s “failure to

comply with fundamental Exchange auction market rules and policies and applicable securities

regulations during a three-year period from Jan. 1, 2000 through Dec. 31, 2002.” The press

release stated as follows:

New York, Oct. 16, 2003 -- The New York Stock Exchange Enforcement Division has informed five specialist firms that it has determined to bring disciplinary action against them. The actions will allege failure to comply with fundamental Exchange auction market rules and policies and applicable securities

35

regulations during a three-year period from Jan. 1, 2000 through Dec. 31, 2002. The Exchange 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.

Additionally, the Exchange announced that it is implementing systems software at the point-of-sale to deter similar conduct in the future and to further enhance the Exchange’s market surveillance efforts.

The alleged misconduct involved situations in which specialists improperly traded ahead of customer orders in certain situations. In some situations the specialist had customer buy and sell orders on the electronic order book that should have been crossed and executed with or against each other, but instead the specialist traded for the firm account with each order to the disadvantage of the customers. In other situations, the electronic order book contained a customer order that could have been executed against a second order, but instead the specialist traded for the firm account with the second order, to the disadvantage of the customer order already on the book.

“We have notified the specialist firms and the Securities and Exchange Commission of the actions that we are prepared to take,” said Edward A. Kwalwasser, Group Executive Vice President, Regulation. “While our investigation in coordination with the SEC is not yet complete, our Market Surveillance and Enforcement Divisions are working to bring this matter to a responsible and expeditious close.”

71. In reaction to this announcement, the price of LaBranche common stock fell from

$12.31 per share on October 15, 2003 to $10.72 per share on October 16, 2003, a one day drop of

12.9%, on unusually large trading volume.

ADDITIONAL SCIENTER ALLEGATIONS

72. As alleged herein, defendants acted with scienter in that defendants knew that the

public statements or documents issued or disseminated in the name of the Company were

materially false and misleading; knew that such statements or documents would be issued or

disseminated to the investing public; and knowingly and substantially participated or acquiesced

in the issuance or dissemination of such statements or documents as primary violations of the

federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their

36

receipt of information reflecting the true facts regarding LaBranche, their control over, and/or

receipt and/or modification of the Company’s allegedly materially misleading misstatements

and/or their associations with the Company which made them privy to confidential proprietary

information concerning LaBranche, participated in the fraudulent scheme alleged herein.

Undisclosed Adverse Information

73. The market for LaBranche’s common stock was open, well-developed and

efficient at all relevant times. As a result of these materially false and misleading statements and

failures to disclose, LaBranche common stock traded at artificially inflated prices during the

Class Period. The artificial inflation continued until October 15, 2003. Plaintiff and other

members of the Class purchased or otherwise acquired LaBranche’s common stock relying upon

the integrity of the market price of the Company’s common stock and market information

relating to LaBranche, and have been damaged thereby.

74. During the Class Period, defendants materially misled the investing public,

thereby inflating the price of LaBranche common stock, by publicly issuing false and misleading

statements and omitting to disclose material facts necessary to make defendants’ statements, as

set forth herein not false and misleading. Said statements and omissions were materially false

and misleading in that they failed to disclose material adverse information and misrepresented

the truth about the Company, its business and operations, as detailed herein.

75. At all relevant times, the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by plaintiff and other members of the Class. As described herein, during the

Class Period, defendants made or caused to be made a series of materially false or misleading

statements about LaBranche’s earnings. These material misstatements and omissions created in

37

the market an unrealistically positive assessment of LaBranche and its prospects and operations,

thus causing the Company’s common stock to be overvalued and artificially inflated at all

relevant times. Defendants’ materially false and misleading statements during the Class Period

resulted in plaintiff and other members of the Class purchasing the Company’s common stock at

artificially inflated prices, thus leading to their losses when the illusion was revealed, and the

market was able to accurately value the Company.

Applicability Of Presumption Of Reliance: Fraud-On-The-Market Doctrine

76. At all relevant times, the market for LaBranche’s securities was an efficient

market for the following reasons, among others:

i) stock met the requirements for listing, and was listed and actively traded

on the NYSE, a highly efficient and automated market;

ii) As a regulated issuer, LaBranche filed periodic public reports with the

SEC and the NYSE;

iii) LaBranche regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations of press releases

on the national circuits of major newswire services and through other wide-ranging public

disclosures, such as communications with the financial press and other similar reporting services;

and

iv) LaBranche was followed by several securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain

customers of their respective brokerage firms. Each of these reports was publicly available and

entered the public marketplace.

38

77. As a result of the foregoing, the market for LaBranche’s securities promptly

digested current information regarding LaBranche from all publicly available sources and

reflected such information in LaBranche’s stock price. Under these circumstances, all purchasers

of LaBranche’s securities during the Class Period suffered similar injury through their purchase

of LaBranche’s securities at artificially inflated prices and a presumption of reliance applies.

NO SAFE HARBOR

78. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not identified as “forward- looking

statements” when made. To the extent there were any forward- looking statements, there were no

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the purportedly forward-looking statements. Alternatively, to the

extent that the statutory safe harbor does apply to any forward- looking statements pleaded

herein, defendants are liable for those false forward- looking statements because at the time each

of those forward- looking statements was made, the particular speaker knew that the particular

forward-looking statement was false, and/or the forward- looking statement was authorized

and/or approved by an executive officer of LaBranche who knew that those statements were false

when made.

FIRST CLAIM

Violation Of Section 10(b) Of The Exchange Act And Rule 10b-5

Promulgated Thereunder Against All Defendants

79. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.

39

80. During the Class Period, LaBranche and the Individual Defendants, and each of

them, carried out a plan, scheme and course of conduct which was intended to and, throughout

the Class Period, did: (i) deceive the investing public, including Plaintiff and other Class

members, as alleged herein; (ii) artificially inflate and maintain the market price of LaBranche’s

securities; and (iii) cause Plaintiff and other members of the Class to purchase LaBranche’s

securities at artificially inflated prices. In furtherance of this unlawful scheme, plan and course

of conduct, defendants, and each of them, took the actions set forth herein.

81. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (c) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to

maintain artificially high market prices for LaBranche’s securities in violation of Section 10(b)

of the Exchange Act and Rule 10b-5. All defendants are sued either as primary participants in

the wrongful and illegal conduct charged herein or as controlling persons as alleged below.

82. LaBranche and the Individual Defendants, individually and in concert, directly

and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails,

engaged and participated in a continuous course of conduct to conceal adverse material

information about the business, operations and future prospects of LaBranche as specified herein.

83. These defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a

course of conduct as alleged herein in an effort to assure investors of LaBranche’s value and

performance and continued substantial growth, which included the making of, or the

participation in the making of, untrue statements of material facts and omitting to state material

40

facts necessary in order to make the statements made about LaBranche and its business

operations and future prospects in the light of the circumstances under which they were made,

not misleading, as set forth more particularly herein, and engaged in transactions, practices and a

course of business which operated as a fraud and deceit upon the purchasers of LaBranche’s

securities during the Class Period.

84. The Individual Defendants’ primary liability, and controlling person liability,

arises from the following facts: (i) the Individual Defendants were high- level executives and/or

directors at the Company during the Class Period; (ii) the Individual Defendants were privy to

and participated in the creation, development and reporting of the Company’s internal budgets,

plans, projections and/or reports; and (iii) the Individual Defendants were aware of the

Company’s dissemination of information to the investing public which they knew or recklessly

disregarded was materially false and misleading.

85. The defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Such

defendants’ material misrepresentations and/or omissions were done knowingly or recklessly and

for the purpose and effect of concealing LaBranche ’s operating condition and future business

prospects from the investing public and supporting the artificially inflated price of its securities.

As demonstrated by defendants’ overstatements and misstatements of the Company’s business,

operations and earnings throughout the Class Period, defendants, if they did not have actual

knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain

such knowledge by deliberately refraining from taking those steps necessary to discover whether

those statements were false or misleading.

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86. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of LaBranche’s

securities was artificially inflated during the Class Period. In ignorance of the fact that market

prices of LaBranche’s publicly- traded securities were artificially inflated, and relying directly or

indirectly on the false and misleading statements made by defendants, or upon the integrity of the

market in which the securities trade, and/or on the absence of material adverse information that

was known to or recklessly disregarded by defendants but not disclosed in public statements by

defendants during the Class Period, Plaintiff and the other members of the Class acquired

LaBranche securities during the Class Period at artificially high prices and were damaged

thereby.

87. At the time of said misrepresentations and omissions, Plaintiff and other members

of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff and the

other members of the Class and the marketplace known of the true financial condition and

business prospects of LaBranche, which were not disclosed by defendants, Plaintiff and other

members of the Class would not have purchased or otherwise acquired their LaBranche

securities, or, if they had acquired such securities during the Class Period, they would not have

done so at the artificially inflated prices which they paid.

88. By virtue of the foregoing, defendants have violated Section 10(b) of the

Exchange Act, and Rule 10b-5 promulgated thereunder.

89. As a direct and proximate result of defendants’ wrongful conduct, Plaintiff and

the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company’s securities during the Class Period.

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SECOND CLAIM

Violation Of Section 20(a) Of The Exchange Act Against the Individual Defendants

90. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.

91. Each of the Individual Defendants acted as a controlling person of LaBranche

within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their

high- level positions, and their ownership and contractual rights, participation in and/or

awareness of the Company’s operations and/or intimate knowledge of the statements filed by the

Company with the SEC and disseminated to the investing public, the Individual Defendants had

the power to influence and control and did influence and control, directly or indirectly, the

decision-making of the Company, including the content and dissemination of the various

statements which Plaintiff contends are false and misleading. The Individual Defendants were

provided with or had unlimited access to copies of the Company’s reports, press releases, public

filings and other statements alleged by Plaintiff to be misleading prior to and/or shortly after

these statements were issued and had the ability to prevent the issuance of the statements or

cause the statements to be corrected.

92. In particular, the Individual Defendants had direct and supervisory involvement in

the day-to-day operations of the Company and, therefore, are presumed to have had the power to

control or influence the particular transactions giving rise to the securities violations as alleged

herein, and exercised the same.

93. As set forth above, LaBranche and the Individual Defendants each violated

Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue

of their position as a controlling person, the Individual Defendants are liable pursuant to Section

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20(a) of the Exchange Act. As a direct and proximate result of LaBranche’s and the Individual

Defendants’ wrongful conduct, Plaintiff and other members of the Class suffered damages in

connection with their purchases of the Company’s securities during the Class Period.

WHEREFORE, plaintiff prays fo r relief and judgment, as follows:

A. Determining that this action is a proper class action, designating Plaintiff

as Lead Plaintiff and certifying Plaintiff as a class representative under Rule 23 of the Federal

Rules of Civil Procedure and plaintiff’s counsel as Lead Counsel;

B. Awarding compensatory damages in favor of plaintiff and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result of

defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

C. Awarding plaintiff and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; and

D. Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

Dated: October 22, 2003

MILBERG WEISS BERSHAD HYNES & LERACH LLP

By:_________________________ Steven G. Schulman (SS-2561) Andrei V. Rado (AR-3724) One Penn Plaza, 49th Floor New York, New York 10119 Tel: (212) 594-5300 Fax: (212) 868-1229

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LAW OFFICE OF MARC S. HENZEL Marc S. Henzel 237 Montgomery Ave, Suite 202 Bala Cynwyd, PA 19004 Tel: (610) 660-8000 Fax: (610) 660-8080

Attorneys for Plaintiff

FOR THE SOUTHERN DISTRICT OF NEW YORK...

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