By Michael Wursthorn

March 23, 2016 7:02 p.m. ET

LPL Financial Holdings Inc. is being accused of fraudulently favoring one big shareholder over others.

A Michigan pension fund has filed a lawsuit seeking class-action status against the Boston-based brokerage firm, saying it allegedly misled investors to inflate its stock price amid a $250 million share buyback plan that mostly benefited one institutional investor, according to the complaint filed in the U.S. District Court in the Southern District of California.

The Charter Township of Clinton Police and Fire Retirement System, which bought 4,000 shares of LPL earlier this year, says in the suit that LPL Chief Executive Mark Casady and Chief Financial Officer Matthew Audette conducted a “fraudulent scheme to allow” private-equity firm TPG to unload a lot of its LPL shares at an “artificially inflated price.”

An LPL spokesman declined to address any aspect of the suit, saying the company doesn’t comment on pending litigation. TPG also declined to comment.

LPL said in November that it would use $500 million from a debt refinancing to repurchase shares. The buyback announcement came soon after activist investor Marcato Capital Management disclosed it had taken a 6.3% stake in the company to push for the exploration of “strategic alternatives.” Mr. Casady, in a November interview, said he believed it was a “good time” to buy back shares and “take advantage of weaknesses in the stock price.”

A month later, on Dec. 8, Messrs. Casady and Audette spoke at a Goldman Sachs Group Inc. conference and allegedly “made false and misleading statements” regarding LPL’s financial fourth-quarter financial performance, according to the complaint. Among the statements, LPL’s executives described its earnings stream as “quite steady” and said it had been executing its business plans well in the final months of 2015, the complaint says. Besides that, executives said commission revenue would be “more of the same,” compared with the third quarter, the complaint adds.

LPL shares rose the day of the conference, reaching $45.06 a share. Then, two days later, LPL followed through on half of its buyback plan, spending $250 million. Three-quarters of those funds were used to purchase 4.3 million shares of LPL common stock from TPG at $43.27, giving the buyout firm a $187 million profit, the complaint says.

Two months later, on Feb. 11, LPL disclosed fourth-quarter results that were below analyst expectations, causing its shares to fall to $16.50 a day later, erasing a third of their value in a single day. The company’s fourth-quarter profit fell roughly 45% to $48.5 million from the year-earlier period, while revenue dropped 8% to $1.02 billion. Commission-based revenue, specifically sales of certain alternative products, contributed significantly to the decline, LPL said then.

The pension fund says TPG’s sale proceeds would have diminished by about $115 million if the buyback had been initiated after LPL announced its earnings. The retirement plan alleges the buyback was “a wasteful and inefficient use of company capital” that hurt LPL’s other shareholders.

LPL still has to deploy another $225 million toward buying back additional shares, it told analysts in February. Mr. Audette said at the time that the company would be “slow, steady and cautious” in deploying that remaining capital.

The complaint seeks class-action status on behalf of LPL investors who bought shares between Dec. 8 and Feb. 11.

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