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ROBERT W. STARK, JR., INC. v. NEW YORK STOCK EXCH.

July 20, 1972

Robert W. Stark, Jr., Inc., Robert W. Stark, Jr., and Kansas City Securities Corp.
v.
New York Stock Exchange, Inc., Robert W. Haack, Richard B. Howland, Robert M. Bishop, David D. Huntoon, Ralph D. DeNunzio, Stephen M. Peck, Roger Hull, Cornelius W. Owens, Frederick P. Barnes, Benjamin E. Billings, Joseph H. Brown, M. Ronald Brukenfeld, Don A. Buchholz, William H. Claflin, III, Thomas A. Coleman, Willard G. DeGroot, Frederick L. Ehrman, Robert J. Fraiman, John J. Gallagher, Jr., F. Barton Harvey, Harry A. Jacobs, Jr., Solomon Litt, Henry W. Meers, Boynton D. Murch, William J. Nammack, Phil E. Pearce, John J. Phelan, Jr., Harry C. Piper, Jr., Felix G. Rohatyn, William R. Salomon, Ralph S. Saul, Robert L. Stott, Jr., Maurice F. Summers, Macrae Sykes and Albert B. Tompane


Brieant, District Judge.


The opinion of the court was delivered by: BRIEANT

BRIEANT, District Judge.

This cause, which has not yet been assigned to a Judge of this Court for all purposes, pursuant to Rule 4(A) of the new Calendar Rules, effective July 1, 1972, is before me pursuant to Calendar Rule 6(B) as a civil emergency matter. Plaintiffs seek a preliminary injunction pending trial of this action, enjoining defendant New York Stock Exchange, Inc. ("NYSE") from enforcing an order of expulsion after a hearing, which will become effective at the close of business on July 21, 1972, but for the intervention of this Court, and which will withdraw approval of plaintiff Robert W. Stark, Jr. ("Mr. Stark") and Robert W. Stark, Jr., Inc. ("Stark, Inc.") as a member and member corporation, respectively, of NYSE.

 The complaint contains causes of action pleaded as arising under the anti-trust laws (The Sherman Act -- 15 U.S.C. §§ 1 and 2). It seeks treble damages and a permanent injunction against continuing violation of the anti-trust laws. Jurisdiction is based on the Clayton Act, and particularly 15 U.S.C. §§ 15, 22 and 26.

 The Securities and Exchange Commission ("SEC") has appeared by its General Counsel and has been heard by the Court as amicus curiae. The SEC opposes any preliminary injunctive relief, and suggests to the Court that "the exchanges should be allowed to enforce their rules."

 Plaintiff Kansas City Securities Corporation ("Kansas City") is a Missouri corporation with its principal office at Kansas City, Mo. Stark, Inc. is an Iowa corporation having its principal office in this District.

 Defendant NYSE is a "registered national securities exchange" as defined by § 6(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78f(d), and is a New York not-for-profit corporation having its principal office at 11 Wall Street in the City of New York. The individual defendants are officers and members of NYSE. *fn1"

 The complaint, which charges an antitrust conspiracy to keep plaintiffs and institutional investors generally from access to the market, includes in addition as co-conspirators, other members and affiliates of NYSE, not known to the plaintiffs.

 The first cause of action is asserted solely by Kansas City. As Kansas City is not a movant in the instant application, that portion of the complaint will not be summarized, except to note that it does allege a justiciable controversy within the jurisdiction of this Court, and asserts damages in excess of a million dollars, as well as threatened continued damages in excess of one million dollars per annum. Plaintiffs also claim that Kansas City is "entitled to recover threefold its damages", together with reasonable attorneys' fees (P 42 of the Complaint).

 All of the plaintiffs assert the second cause of action based upon occurrences consequent on the unauthorized recapitalization of Stark, Inc. with Kansas City as its source of new capital. This recapitalization agreement, dated January 3, 1972, was submitted promptly to NYSE for prior approval as required by the NYSE Rules. It is alleged that between January 3, 1972 and May 22, 1972 (when Stark, Inc. took unauthorized unilateral action with respect to its capital structure), defendants refused to reject or approve the proposed recapitalization pursuant to the January 3, 1972 agreement, and that such refusal was malicious, wilful and unlawful, and had as its purpose effectuation of the alleged unlawful anti-trust conspiracy, and specifically, the exclusion of plaintiffs from access to NYSE facilities and advantages.

 Failing receipt since January 3rd of a definitive ruling with respect to its proposed agreement of recapitalization with Kansas City, Stark, Inc. on May 22, 1972 implemented the recapitalization unilaterally. At this time, Mr. Stark, who prior to May 22nd controlled Stark, Inc., reasonably believed, on the advice of eminent counsel, that defendants were attempting, wilfully, to impede implementation of a proposed recapitalization plan which plaintiffs and their counsel believed was lawful in all respects. Plaintiffs at that time knew, or had reason to know, that the proposed plan violated Rule 318 of the Board of Governors of the NYSE, but they believed Rule 318 to be void and ultra vires. They believed in good faith and still believe, that in the ultimate litigation of their rights, the position they take, namely, that Rule 318 is void and its enforcement unlawful, will be sustained.

 In full faith of the justice of their cause, they plunged in intentionally, and in order to test their rights in this Court. In so doing, they knowingly violated Rule 318 and also the ancillary rules prohibiting changes in the Certificate of Incorporation or the capitalization of the member corporation without prior approval.

 On May 26, 1972, pursuant to the Constitution of NYSE, separate written charges, annexed as exhibits to the complaint, were preferred against Mr. Stark and Stark, Inc. Charge I thereof has been dismissed. Under Charge II Mr. Stark was charged with "conduct inconsistent with just and equitable principles of trade" in that he caused the violation of Rule 318 of the Board of Governors because he, by the recapitalization of Stark, Inc. permitted Kansas City, "a corporation whose primary purpose is not the transaction of business as a broker or dealer in securities" to become a "parent" of Stark, Inc.

 Mr. Stark was also charged on the same facts (Charge III) with misconduct in that he caused the violation of Rule 318 of the Board of Governors by permitting a corporation that has not been for the last two years registered with the SEC as a broker dealer in securities to become a parent of Stark, Inc.

 Charge IV asserts a violation of Rule 320(e)(2) of the Board of Governors in that Mr. Stark had caused or permitted Stark, Inc. to issue securities (to Kansas City) without the prior written approval of the NYSE.

 Charge V accuses Mr. Stark of a violation of Rule 313(b) of the Board of Governors, by causing or permitting the recapitalization agreement of Stark, Inc. to be consummated, and the related amendment to the Certificate of Incorporation of Stark, Inc. to become effective, in the absence of prior approval by NYSE.

 Charges against Stark, Inc., five in number, are in pari materia. Charge I was dismissed. The remaining charges assert that Stark, Inc. is in violation of the Constitution of the NYSE, in that it has a parent whose primary purpose is not the transaction of business as a broker or dealer in securities; breach of Rule 318 (non-broker-dealer parent); breach of Rule 320(e)(2)(issuance of securities without prior written approval of the NYSE); and breach of Rule 313(b)(consummation of the recapitalization agreement and amendment of its Certificate of Incorporation without prior approval).

 The Board of Governors, after a joint hearing, apparently conducted in all respects in accordance with the rules and customs of the NYSE, and generally in compliance with the requirements of procedural due process, voted to sustain all remaining charges and to expel Mr. Stark and Stark, Inc. from membership, and withdraw approval of them as Member and Member Corporation of NYSE, respectively.

 A hearing has been held on this application, and the essential facts are not in dispute and are as herein stated. The parties appearing before me express no desire to offer additional testimony or evidence, except that each side of the litigation has proffered expert testimony of broker-dealers and economists on the question of whether Rule 318 of the Board of Governors of NYSE is an unreasonable restraint on competition, and plaintiffs have offered to show that no such rule is applied in various other exchanges, including the American Stock Exchange, the Pacific Coast Stock Exchange, the Philadelphia-Baltimore-Washington Stock Exchange, the Midwest Stock Exchange and the Boston Stock Exchange, that those exchanges function successfully without the benefits of Rule 318 of the Board of Governors, and no mischief results thereby.

 The Court does not believe that this difficult issue may be or need be resolved in connection with determination of this motion for preliminary relief pending trial. That controversy goes to the essence of this lawsuit. Thill Sec. Corp. v. New York Stock Exchange, 433 F.2d 264 (7th Cir. 1970). It is an issue upon which the SEC has not had the opportunity to apply its administrative expertise. Under the circumstances, the interests of justice do not require me to take evidence on those complicated questions for purposes of this application, and indeed it would be premature for any such judicial determination to be made at this time with respect to these great economic and legal issues without giving the parties the opportunity for preparation and pre-trial discovery. Suffice it to say that the issues raised present "fair ground for litigation and thus for more deliberate investigation", Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738, 740 (2d Cir. 1963); Thill Securities Corp. v. New York Stock Exchange, supra ; Cowen v. NYSE, 371 F.2d 661 (2d Cir. 1967).

 Rule 318 of the Board of Governors as it presently exists, together with those relevant interpretative rulings made by that Board, are as follows:

 "RULE 318. Other Connections of Members and Allied Members

 The primary purpose of every member organization, and any parent of any member corporation, shall be the transaction of business as a broker or dealer in securities. With the prior approval of the Exchange, member organizations may engage in any activities kindred to the securities business.

 No member corporation shall have as a parent any party (other than a member or allied member of such member corporation) unless, for a period of not less than two years, the primary purpose of such party has been and continues to be the transaction of business as a broker or dealer in securities, and such party is and continues to be registered with the Securities and Exchange Commission as a broker or dealer in securities under the Securities Exchange Act of 1934 and promptly files with the Exchange a copy of its registration statement under said Act and of each amendment thereto.

 Unless otherwise permitted by the Exchange every individual member must be actively engaged in the securities business and devote the major portion of his time thereto, and every member and allied member in a member organization must be actively engaged in the business of his organization and devote the major portion of his time thereto.

 Without prior approval of the Exchange, no individual member and no member or allied member in a member organization shall become:

 
(1) A partner in any non-member business organization;
 
(2) an officer or employee of any non-member business corporation, firm or association;
 
(3) an employee of any firm or individual engaged in business; or
 
(4) associated with any outside securities, financial or kindred business.
 
* * *

 . . . Supplementary Material:

 The Board of Governors has determined upon the following permissible exceptions:

 
(1) Director of corporation not in the securities business;
 
(2) chairman of a board of directors of a corporation not in the securities business;
 
(3) officer of personal holding company not publicly owned;
 
(4) officer of operating company not in the securities business, if duties are ...

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