Circuit Judge Sonia Sotomayor said the NYSE shouldn’t get the immunity afforded to it in a previous holding by U.S. District Judge Robert Sweet of the U.S. District Court for the Southern District of New York.

Sweet’s ruling said the exchange gets the same immunity enjoyed by the Securities and Exchange Commission (SEC) when it is performing duties assigned by the SEC, meaning NYSE would get absolute immunity from claims that it failed to regulate and provide a fair and orderly market.

The original lawsuit filed by the California Public Employees’ Retirement System (CalPERS) and other public pension funds in nine states also claims that the NYSE’s evasion of regulatory scrutiny and deliberate failure to supervise and discipline the firms accessing inside information led to a misrepresentation of market prices.

The complaint followed revelations in 2003 that several specialists were accessing inside information and making millions of dollars trading stocks they supervised.

Investors claimed that NYSE’s repeated public statements about the operation of its specialist firms and its oversight of their daily functions deliberately created the false impression that the exchange was “overseeing and operating its auction market in accordance with laws, rules and regulations that l[ed] investors to believe that the NYSE was an honest and fair market,” and that they relied on these statements in trading stocks. They say those misrepresentations affected market prices of securities.

However, Sotomayor remanded the case to Sweet for further proceedings, declining to make a decision on whether investors’ claims of misrepresentation on the part of the exchange were adequate to state a claim. However, Sotomayor said that the remaining claims “do not appear to be of the nature where the fraud-on-the-market theory would apply, where the misrepresentation itself affects the market price of the security purchased.”

The 2nd Circuit decision is here.