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BRUAN, GORDON, & CO. v. HELLMERS

October 28, 1980

BRUAN, GORDON, & CO., Plaintiff, against KYE HELLMERS, RAYMOND J. ARDEN, PETER BULGER, NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. and DISTRICT NO. 12 OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., Defendants.


The opinion of the court was delivered by: MOTLEY

contd

[EDITOR'S NOTE: The page numbers of this document may appear to be out of sequence; however, this pagination accurately reflects the pagination of the original published document.]

 CONSTANCE BAKER MOTLEY, U.S.D.J.

 Memorandum Opinion

 On August 27, 1980, this court filed a memorandum opinion disposing of various pending motions in this case. Defendants have moved for reconsideration of the portion of the opinion denying defendants' motion to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b) for plaintiff's failure to exhaust administrative remedies. In the alternative, defendants request that this issue be certified for interlocutory appeal pursuant to 28 U.S.C. § 1292(b). These motions were heard on September 26, 1980. At that hearing the Securities and Exchange Commission (SEC) requested leave to appear amicus curiae in support of defendants' motion. Leave was granted, whereupon the SEC addressed the merits and subsequently filed papers. Plaintiff was given leave to file a reply and did so. On reconsideration and for the reasons stated below, defendants' motion is granted, and the complaint is dismissed. Although the pertinent facts were stated previously in this court's decision of August 27, 1980, a brief description of the parties and plaintiff's complaint follows to aid in understanding the court's disposition of the instant motion.

 Plaintiff, Bruan Gordon & Co. (Bruan), is a registered broker-dealer. Prior to the acts complained of, plaintiff was a member in good standing of defendant, the National Association of Securities Dealers, Inc. (NASD).defendant is a self-regulatory organization (SRO) registered with the SEC as a national securities association pursuant to Section 19 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et. seq. (Exchange Act). NASD serves as the SRO for the over-the-counter securities market. The individual defendants, Kye Hellmers, Raymond J. Arden, and Peter Bulger (the individual defendants) are officers of the NASD.

 Plaintiff's complaint contains three causes of action. The first alleges a conspiracy by the individual defendants to "expand the jurisdiction of defendant NASD and District No. 12 over its member constituents beyond that authorized by law" in order to "elevate themselves in esteem and position within the ranks of the NASD and District No. 12." Complaint, P9. Three overt acts are alleged to have taken place in furtherance of this conspiracy. First, it is alleged that plaintiff was "ordered" by letter dated June 28, 1979, and signed by defendant Hellmers, to suspend all of its options business, both over-the-counter and on the American Stock Exchange (AMEX), pending the qualification of a new registered options principal (ROP) pursuant to Article I, Section 2(d), Schedule C of the NASD's rules. Complaint, P10(a). This action allegedly exceeds the NASD's jurisdiction since the NASD's authority is allegedly limited to regulating the over-the-counter market. Second, the complaint alleges that the NASD carried out a "dragnet" audit of plaintiff's books and records in July, 1979, in an effort to interfere with plaintiff's business and to "concoct any possible violation of rules by Bruan." Complaint, P10(b). Finally, NASD's institution of formal disciplinary proceedings against plaintiff for alleged violation of NASD's "free riding" rules is alleged to be improperly selective prosecution resulting from a desire to injure Bruan. Complaint, P10(c). All three overt acts were allegedly conduced "wrongfully, wilfully, intentionally and maliciously."

 Plaintiff's second cause of action constitutes an allegation of tortious interference with business relationships arising out of the same overt acts previously described. The third cause of action alleges fraud in connection with the letter to plaintiff of June 28, 1979, stating that plaintiff was prohibited from conducting all new options trading pending qualification of a new ROP.

 Determination of the instant motion to dismiss must begin by examining the relationship between the exhaustion doctrine and the NASD. The Exhaustion doctrine is a "long settled rule of judicial administration that no one is entitled to judicial relief for a supposed or threatened injury until the prescribed administrative remedy has been exhausted." Myers v. Bethlehem Shipbuilding Corp., 303 U.S. 41, 50-51 (1938). Requiring litigants to exhaust their administrative remedies avoids "premature interruption of the administrative process" and insures that the administrative agency involved has an opportunity to apply its expertise and correct its own errors. McKart v. United States, 395 U.S. 185, 193 (1969); Parisi v. Davidson, 405 U.S. 34, 37 (1972).

 It is not immediately obvious that the exhaustion doctrine applies to NASD, a private corporation. However, at least two Circuits have directly confronted this question and applied the exhaustion doctrine to NASD. See First Jersey Securities, Inc. v. Bergen, 605 F.2d 690, 695 (3d. Cir. 1979) (First Jersey Securities); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. National Association of Securities Dealers, Inc., 616 F.2d 1363, 1369 (5th Cir. 1980) (Merrill Lynch). Each case utilizes a similar analysis in deciding to require exhaustion of administrative remedies in NASD proceedings. Essentially, both courts conclude that NASD's status as a registered national securities association pursuant to specific statutory authorization requires NASD to perform many of the same functions as a public administrative agency. See 15 U.S.C. § 78o-3; First Jersey Securities, Inc. v. Bergen, 605 F.2d at 696; Merrill Lynch, Pierce, Fenner & Smith, Inc. v. National Association of Securities Dealers, Inc., 616 F.2d at 1367. In fact, "[as] a registered securities association, it has been 'delegated governmental power in order to enforce... compliance by members of the industry with both the legal requirements laid down in the Exchange Act and ethical Standards going beyond those requirements.'" Merrill Lynch, Pierce, Fenner & Smith v. National Association of Securities Dealers, 616 F.2d at 1367 (Quoting, S. Rep. No. 94-75, 94th Cong., 1st Sess. 23 (1975), U.S. Code Cong. & Admin. News. 1975, pp. 179, 201). This supervisory responsibility is exercised subject to "a comprehensive review procedure" which provide for appeal of NASD's determinations to the SEC and ultimately to a United States Court of Appeals. First Jersey Securities, Inc. v. Bergen, 605 F.2d at 696. The quasi-official status of NASD therefore fully activates the policies underlying the exhaustion doctrine and requires the doctrine's application to NASD.

 Since exhaustion of administrative remedies does apply in the instant case, this court must determine the formulation of the doctrine accepted in this Circuit. That formulation may be found in a recent decision affirming this Court's dismissal of a complaint against the SEC for failure to exhaust administrative remedies. Touche Ross & Co. v. Securities and Exchange Commission, 609 F.2d 570 (2d Cir. 1979) (Touche Ross). Touche Ross involved an action for declaratory and injunctive relief to stop an ongoing administrative proceeding which had been instituted against Touche Ross & Company by the SEC. Touche Ross contended that the SEC Rule 2(e) which Touche Ross & Company was accused of violating had been promulgated without statutory authority and thus the SEC was acting without jurisdiction. It also was argued that the proceedings before the SEC were "biased" and were not in accordance with due process.609 F.2d at 575.

 In affirming this court's dismissal of the action for failure to exhaust administrative remedies, however, the Second Circuit went further and decided the question whether the SEC had exceeded its authority in enacting Rule 2(e). In so doing, the Second Circuit served notice "that normally we will not tolerate the interruption of the administrative process to hear piecemeal appeals of a litigant's claims on the merits." 609 F.2d at 574. Touche Ross & Company's claim that the SEC proceedings in question were biased was first disposed of in a manner highly relevant to the instant motion. The Court stated:

 If the claim of bias were the only basis for appellants' demand for injunctive relief, it would be unnecessary for us to go further than to hold, with respect to that claim, that exhaustion of administrative remedies is required. As the Court of Appeals for the District of Columbia Circuit has held, allegations of agency bias or prejudgment based on ex parte communications are insufficient for injunctive relief and cannot be reviewed until the agency has made an adverse determination and an appeal has been taken raising these claims on the record as a whole.... We agree. Until the Commission has acted and actual bias has been demonstrated, the orderly administrative procedures of the agency should not be interrupted by judicial intervention. 609 F.2d at 575. (Citations omitted.)

 The argument that agency bias should serve as one of the exceptions to the exhaustion requirement was thus clearly presented to the Second Circuit in Thouche Ross. The passage just quoted must therefore be read as a portion of the holding in that case and is, accordingly, binding on this court. As a result, paragraph 10(c) of plaintiff's complaint alleging agency bias must be dismissed. Paragraph 10(c), as previously mentioned, alleges that a disciplinary proceeding begun against plaintiff by defendants was improperly motivated and constituted an overt act in furtherance of the conspiracy alleged in the complaint. The above quoted passage makes clear that ...


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