A federal judge in Manhattan is set to decide by the end of July whether the

New York Stock Exchange

should continue to have immunity from lawsuits when it acts as a securities regulator, while at the same time enjoying the privileges of a privately held corporation.

The issue, which lawyers debated before

U.S. District Court

Judge Jed Rakoff in a hearing last week, is central to a lawsuit a former broker has filed against the NYSE over a scandal involving illegal floor trading at the exchange.

The ruling also could have significant, broader consequences for the NYSE, particularly if the decision supports the broker's contention that the exchange cannot claim immunity for its own involvement in the floor-trading scandal.

Lawyers for the broker, John D'Alessio, want the NYSE's immunity claim stricken so they can question top officials of the exchange -- including Chairman

Richard Grasso

-- under oath. Those stakes are apparently high enough for the exchange to roll out top-gun attorney and former

Securities and Exchange Commission

general counsel Harvey Pitt, of the firm

Fried Frank Harris Shriver & Jacobson

, to argue its side of the case.

Rakoff gave no clear indication of his decision during last week's hearing. He did, however, ask pointed questions about what he said were seemingly irreconcilable legal decisions supporting both the exchange's public and private roles.

"It's very, very hard for me to see how those two lines of cases can be rectified," Rakoff said at the hearing.

The Big Board and the

National Association of Securities Dealers

, which operates the

Nasdaq Stock Market

, both are privately held.

But both have claimed immunity from some civil lawsuits because of their self-regulatory organization status. They police their own members, brokers and dealers with authority from

Congress

under the guidance of the SEC. The SEC has the exclusive authority to sanction the NYSE for regulatory failures, the exchange argues.

Government agencies such as U.S. attorney offices have similar immunity, primarily from civil lawsuits stemming from their regulatory and prosecutorial activities. But the exchanges are unique in that they are neither entirely government organizations, nor entirely private, under the law.

The NYSE has asserted the immunity claim in the floor-trading case that former broker D'Alessio filed against it. In that suit, now before Rakoff, D'Alessio claims the NYSE knew of and endorsed years of illegal self-trading by brokers on the floor of the exchange, and lied about it to federal prosecutors.

D'Alessio is seeking $22.5 million from the exchange to cover his legal fees, lost income and the cost of his exchange seat, which he was forced to sell in 1998 after he was implicated with nine others in the floor-trading scandal.

During last week's hearing in the D'Alessio case, Rakoff questioned whether the NYSE was necessarily entitled to immunity.

He asked how the exchange could claim governmental immunity on the one hand while also saying it doesn't have to provide individuals it disciplines with certain due process protections -- such as the right to invoke Fifth Amendment privileges against self-incrimination -- on the other.

NYSE attorney Pitt told Rakoff the exchange was asserting that it had legal immunity only for its actions as a self-regulator.

"The exchange seeks no greater immunity that that which would apply to the SEC or the U.S. attorney," Pitt said. "It is not assuming all of the functions of government."

Were Rakoff to decide in Alessio's favor on the immunity question, it would be an important legal departure for the courts.

There's no question about the significance of a ruling against the exchange on the immunity issue in this case, said Dominic Amorosa, one of D'Alessio's lawyers. "This is going to be a watershed decision."

"There is historically a very broad tradition of immunity" for the exchange's regulatory functions, said John Coffee, a law professor at

Columbia University

.

Without that, the exchange's ability to regulate its members would be hampered, he said. "You wouldn't have an effective regulation."

The question is, if the Big Board is immune from some civil suits now, asks securities attorney and former NASD staffer Morgan Bentley, would it also be immune from investor litigation once its own stock was bought and sold by the public? (The NYSE has delayed plans to become a publicly traded organization.)

Pitt said the implications of the immunity issue extend beyond the exchange.

A decision against immunity for the NYSE could be a back door for someone such as D'Alessio to also sue other governmental agencies that now enjoy similar immunity.

While the floor-trading defendants pleaded guilty, the criminal charges against D'Alessio were dropped.

Along with his suit against the NYSE, D'Alessio is fighting charges the SEC filed against him in April that allege he violated securities laws by illegally trading stocks on the exchange floor.

Amorosa has brought in the NYSE as a third-party defendant in that SEC case, claiming the exchange and its top officials should be held accountable for the illegal activity the SEC has charged D'Alessio with.

The NYSE has asked Rakoff to remove it as a defendant from that SEC case, again citing its claim of immunity.

"The law is clear," the Big Board argued in a brief to Rakoff. "The NYSE is absolutely immune from damage suits by members based on the allegedly improper exercise of the regulatory authority delegated to it by Congress."