The opinion of the court was delivered by: LASKER
Plaintiff, a former registered representative of Walston & Co., Inc. ("Walston") seeks an order vacating a determination by a disciplinary panel of defendant American Stock Exchange ("Exchange") finding him guilty of several violations of Exchange rules, and suspending him for two years. An earlier motion before us resulted in a temporary restraining order preventing the disciplinary panel from announcing its determination until plaintiff's objections to the Exchange's actions were resolved.
Plaintiff moves for summary judgment, asserting that his hearing, the Exchange's conduct throughout the proceedings against him and the determination rendered by the Exchange panel violated the due process requirements of the Fifth Amendment in that (1) he received inadequate notice of the charges against him; (2) the Exchange improperly refused to issue subpoenas required by plaintiff to present exculpatory evidence; (3) the Exchange disciplinary panel applied an unconstitutionally vague standard and also applied the wrong standard in considering plaintiff's conduct; (4) the panel's determination is contrary to law and the evidence; (5) the Exchange's penalty constitutes a deprivation of property without due process of law and (6) the Exchange's conduct violates § 6 of the Securities Exchange Act of 1934, 15 U.S.C. § 78f, and §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2. Defendant countermoves for summary judgment.
The charges brought against plaintiff arose out of his activities in connection with the common stock of Four Seasons Nursing Home Centers of America, Inc. ("FSN") and his relationships with certain officials of FSN.
The series of events giving rise to the charges began in 1967, when a partnership comprised of officers of Walston, including plaintiff, was organized to furnish initial equity capital ("seed money") to FSN in exchange for a substantial stock interest in the new company. Walston subsequently became FSN's principal underwriter, financial advisor and investment banker, managing the initial public offering of FSN stock at $11 per share in May 1968.
At about the same time plaintiff developed business and social relationships with the three principal officers of FSN, and, just before FSN stock was listed on the Exchange in November, 1968, he arranged for the purchase from these officers of a substantial block of restricted, unregistered FSN common shares at a price considerably below the market price of FSN free shares when the purchase was consummated.
Plaintiff's activities in connection with FSN during the period from mid-1968 through the early part of 1970 also included efforts to interest institutional investors in FSN stock and the execution of a large volume of customer orders in FSN stock.
The price of FSN stock had risen steadily from the time of its initial public offering in May, 1968. By the time it was listed on the Exchange in November, 1968 it was selling at $58. Following a 2-for-1 split in January, 1969, it climbed to an all-time high in October, 1969 of $181.50 ($90.75 after the split).
In the Fall of 1969, the Exchange noted an unusually heavy volume of transactions in FSN emanating from Walston, particularly the branch office managed by plaintiff, and began an investigation. The Exchange interviewed plaintiff in the presence of his counsel on November 25, 1969, and again on January 29, 1970. Plaintiff disclosed the nature of his business and social relationships with Jack Clark, a principal officer of FSN, his efforts to promote investor interest in FSN, and his purchase of a large block of unregistered FSN shares on favorable terms.
The Exchange suspended trading in FSN stock in April, 1970, and in March, 1971, issued a Report of Investigation ("Report") describing possible violations of Exchange rules by Walston and a number of individuals including plaintiff. In November, 1971, the Exchange formally charged plaintiff with four violations of Exchange rules. His hearing, before a disciplinary panel in July, 1973, resulted in a nine month suspension of employment and a two year suspension of supervisory duties.
Plaintiff alleges that the formal charges against him were vague; that the Report, which the charges incorporated by reference, was confusing and factually inaccurate; and that the Exchange refused to respond to interrogatories which he propounded in order to clarify the charges against him.
The three formal charges against plaintiff, covering seven pages, allege conduct "inconsistent with just and equitable principles of trade" and "detrimental to the interest or welfare of the Exchange."
Charge I alleges that plaintiff took an active part in maintaining the "special relationship" between Walston and FSN involving "the activities of Walston as principal investment banker, financial advisor and underwriter for FSN and its affiliates, the access which Walston and its officers had to inside information concerning the operations, policies and plans of FSN, and the substantial financial investment which the firm and its officers . . . had in FSN and its affiliates."
Charge I also refers to plaintiff's "close personal or business relationship with the principal officers of FSN," his service of their brokerage accounts, his assistance in arranging financing for FSN, and states that plaintiff was in a position to obtain inside information concerning FSN. The charge further notes plaintiff's extensive and continuing effort to solicit and promote interest and market activity in the stock of FSN during practically the entire period the stock was traded on the Exchange, his "concerted activities to develop substantial institutional interest in FSN," and his purchase from FSN officers of a "substantial block of FSN stock . . . under agreements providing for extended periods of payment and at unusually low interest rates." The charge alleges that "As a result of these purchase arrangements, plaintiff became and remained heavily indebted to the principal officers of FSN." Charge I concludes that plaintiff's course of conduct "tended to serve and enhance his own personal interest and the special interests of his firm, and was in direct conflict with the duty of fair dealing which he owed to the customers of Walston, to the investing public and to the Exchange."
Charge II plainly asserts that plaintiff made a "misstatement about a material point concerning the extent of his indebtedness" to three officers of FSN; and that he engaged in off-board transactions in FSN stock with these officers, in violation of Exchange rules.
Charge III specifies that plaintiff violated § 220.7(a) of Regulation T, promulgated pursuant to § 7 of the Securities Exchange Act of 1934, in connection with his purchase from FSN officers of unregistered FSN stock, by obtaining credit terms more favorable than those permitted under Regulation T.
We believe these charges were more than sufficiently clear and detailed to permit an effective defense, and that they were framed with adequate specificity to set the framework of relevance necessary to govern the proceeding. Douds v. International Longshoremen's Association, 241 F.2d 278, 283 (2d Cir. 1957).
Plaintiff contends, however, that since the charges incorporated by reference the "pattern of circumstances" detailed in the Report, he was hindered in understanding the allegations against him and in the preparation of his defense. His confusion is claimed to result from certain factual inaccuracies in the Report, as well as certain alleged inconsistencies between the charges and the Report.
The factual inaccuracies, which are conceded by the Exchange, relate to figures reflecting trading activity in FSN; but this problem is remedied by the fact that plaintiff's figures were accepted by stipulation at the hearing. In any event, the figures were not material to the charges.
Nor is there merit to the contention that there are confusing inconsistencies between the Report and the charges. Plaintiff claims that the Report is so vague in its references to him that it is not possible to understand the precise conduct alleged to be wrongful, which acts are attributed to plaintiff, and how much of the information in the ...