The opinion of the court was delivered by: LASKER
In these two related actions plaintiffs Eucker, Villani and Sloan move for preliminary injunctions to restrain the New York Stock Exchange ("Exchange") from proceeding with disciplinary hearings against them for alleged violations of certain rules and regulations of the Exchange and the federal securities laws.
The facts underlying the contentions of both sets of plaintiffs are substantially similar. However, while both sets advance common grounds for the preliminary injunctions, each presses grounds peculiar to it. In both actions, plaintiffs seek injunctions prohibiting defendants from holding alleged unfair and impartial hearings, as required by the Rules of the Exchange, the Securities Exchange Act of 1934 ("the Act") and the due process clause of the Fifth Amendment
on the grounds that 1) under the Exchange rules they will not be permitted to be represented by legal counsel at the hearings; and 2) since the Exchange has instituted a separate civil action in this court against them and the other former partners of Orvis Bros. & Co. ("Orvis") based on the same charges as those brought in the disciplinary proceeding, it cannot render an impartial judgment as to those charges. Furthermore, Sloan contends that the procedures are unfair because the Exchange refuses to allow him to inspect all documents relating to his case in the Exchange's possession.
Eucker and Villani further ask for an order enjoining the Exchange 1) from failing to approve their applications to take responsible managerial positions with other member firms; and 2) from failing to permit Orvis' assets to be used to pay attorney's fees for the defense of the former partners.
Until 1970 Villani, Eucker and Sloan were partners in Orvis, a member firm of the Exchange. Beginning in 1969 Orvis began to suffer severe financial losses so that in June of 1970 the Exchange, by virtue of its authority under the Act, ordered the firm's liquidation.
After determining that Orvis was running a deficit of five million dollars, the Exchange, pursuant to a liquidation agreement signed by the partners of Orvis, including plaintiffs, paid out that sum to the public customers of Orvis from its Special Trust Fund.
The Exchange then began an investigation into the Orvis collapse, which culminated in charges being brought by the Exchange against the partners of Orvis. The plaintiffs formally answered the charges, denying any wrongdoing, and requested a formal hearing, permission to be represented by counsel, and the opportunity to inspect all documents in the Exchange's possession relating to their cases.
The Exchange advised the plaintiffs that they would be permitted to have counsel present in the hearing room but that pursuant to Section 1(d) of Article 5 of its constitution, counsel would not be allowed to address the hearing panel or examine witnesses. The Exchange refused to open its files to plaintiffs, but consented to make available specifically identified documents. According to Sloan's counsel a representative of the Exchange stated that the Exchange would use against Sloan only those documents of which it had sent him copies.
October 5th, 1971, a week after the charges were brought against the plaintiffs, the Exchange instituted a civil action in this court, New York Stock Exchange v. Sloan et al., 71 Civ. 2913, to recover from all the Orvis partners, as well as its accounting firm, the five million dollars that the Exchange had paid out from the Special Trust Fund. The claims in the civil suit are substantially identical to the charges specified in the disciplinary actions. Various partners of Orvis, including Sloan, have asserted counterclaims in the civil suit, contending that it was the Exchange, and not the partners, which actually caused the damages complained of.
After leaving Orvis, Villani and Sloan were employed as registered representatives with other member firms. The Exchange approved their applications "conditionally" pending the resolution of the disciplinary charges. On its own accord, one of the firms determined to terminate Sloan's employment while the charges were pending. Neither Sloan nor Eucker is presently employed by a member firm.
Since the filing of these motions, on May 18th, 1972, counsel for the Exchange, Milbank, Tweed, Hadley & McCloy, has informed the court by letter that the Board of Governors of the Exchange approved various recommendations to change the hearing procedures in disciplinary proceedings conducted by the Exchange. On September 5th, 1972, counsel for the Exchange further informed the court that the membership of the Exchange as well as the SEC had approved the proposals.
Section 23, Article XIV of the constitutional amendment, which abolishes the so-called "no-counsel rule," reads:
"A person, firm or corporation shall have the right to be represented by legal or other counsel in any hearing and review thereof held pursuant to the provisions of this Article and in any investigation before any committee, officer or ...