By Byron Kaye

SYDNEY (Reuters) -The Australian corporate regulator has sued the country's stock market operator alleging it misled the public about the progress of a troubled software upgrade and accusing the company of undermining financial market integrity and investor confidence.

The Australian Securities and Investments Commission (ASIC) said ASX, responsible for some A$5 billion ($3 billion)of trades a day, broke the law when it flagged in a February 2022 trading update that it was on track to switch to a new blockchain-based clearing and settlement platform the following year.

The lawsuit, which seeks unspecified fines, marks a low point for relations between ASX and its main regulator over a project initially billed as one of the world's most ambitious use cases of blockchain-based technology.

ASIC chair Joe Longo previously described the software upgrade, which was ultimately shelved in November 2022 after years of mandatory consultation with market participants, as an act of hubris. On Wednesday he called it a "collective failure by the ASX board and senior executives at the time".

The company had been told by its software developer for seven months that the sweeping project was falling behind, the lawsuit said. By late 2021, ASX itself had recorded the project status as "red", meaning there were material risks to the delivery time.

"By the misleading conduct, ASX risked damaging perceptions of the integrity of the Australian financial markets and the confidence of investors," the lawsuit said.

The lawsuit said that while the exchange gives out corporate governance recommendations to listed companies, its guidance about the software upgrade "undermined the principles it promotes for itself and other listed entities".

ASX CEO Helen Lofthouse, who took up the role in August 2022, said in a statement the company was reviewing ASIC's allegations, but "we recognise the significance and serious nature of these proceedings".

ASX's shares dropped as much as 4%, underperforming a small gain in the broader market.

LONG DELAYED OVERHAUL

ASX first said it wanted to upgrade its ageing settlement and clearing platform with blockchain-type technology in 2016. Under a new supplier, India's Tata Consultancy Services, it now expects to have the project complete by 2029.

In the lawsuit, ASIC said Digital Asset (DA), ASX's initial software vendor, had told ASX from July 2021 "there was a risk of continued delays to the delivery of code ... and that this would put additional pressure on future milestones". DA was not immediately available for comment.