United States District Court, Southern District of New York
September 29, 2000
JOHN R. D'ALESSIO AND D'ALESSIO SECURITIES, INC., PLAINTIFFS,
NEW YORK STOCK EXCHANGE, INC., RICHARD A. GRASSO, EDWARD A. KWALWASSER, AND ROBERT J. MCSWEENEY, DEFENDANTS.
The opinion of the court was delivered by: Rakoff, District Judge.
OPINION AND ORDER
The basic question presented by defendants' pending motion to
dismiss is whether employees of the New York Stock Exchange who,
pursuant to statutory delegation, perform regulatory functions
that would otherwise be performed by the Securities and Exchange
Commission are entitled to the same immunities from suit to which
comparable Commission employees would be entitled. The short
answer is yes.
The pertinent facts are as follows. Plaintiff John R.
D'Alessio, formerly a "floor broker" on the New York Stock
Exchange (the "Exchange"), was indicted in 1998 for willfully
violating various statutory prohibitions on a floor broker's
trading for his own account or for an account in which he
exercises investment discretion, see 15 U.S.C. § 78k & 78ff;
see also United States v. Oakford Corp., No. 98 Cr. 144, 1999
WL 1201725 (S.D.N.Y. Dec. 13, 1999). Parallel charges were
brought against D'Alessio and his company, D'Alessio Securities
Inc., by the United States Securities and Exchange Commission
(the "Commission") and also by the Exchange. While the criminal
charges were ultimately dismissed pursuant to a deferred
prosecution agreement, and while the Commission charges remain
unresolved, the Exchange charges ultimately led to D'Alessio's
being barred from the floor of the Exchange, with consequent
economic loss to D'Alessio and his company. See Complaint ¶ 82.
Plaintiffs then commenced the instant action against the
Exchange and various officials thereof, alleging that the
unlawful trading that led to D'Alessio's indictment, disbarment,
and other legal troubles was itself the unwitting result of the
defendants' dissemination of a knowingly incorrect interpretation
of the applicable statutory and regulatory prohibitions and of
the defendants' knowing but secret encouragement of the very kind
of unlawful trading for which plaintiffs were disciplined.
Plaintiffs further complained that the defendants fraudulently
concealed these facts from the Commission and the United States
Attorney's Office, while actively conniving in plaintiffs' being
charged. Based on these and related allegations, plaintiffs
brought claims of injurious falsehood, fraudulent deceit and
concealment, negligent misrepresentation, and, as to the
Exchange, breach of contract.
Defendants then moved for judgment on the pleadings on several
grounds, only one of which the Court need now reach: defendants'
claim of immunity from suit. The issue is largely determined by
the Second Circuit's decision in Barbara v. New York Stock
Exchange, 99 F.3d 49 (2d Cir. 1996), which accorded absolute
immunity to the Exchange from a suit for damages
arising from the allegedly unlawful conduct of an Exchange
disciplinary proceeding. Among other rationales, Barbara relied
on the fact that, under the federal securities laws, the Exchange
"performs a variety of regulatory functions that would, in other
circumstances, be performed by a government agency," namely, the
Commission. Barbara, 99 F.3d at 59. Mutatis mutandis, the
Exchange and its employees, in performing these functions, should
be accorded the same absolute immunity that would be afforded the
Commission and its employees in parallel circumstances. See
Austin Mun. Securities, Inc. v. National Ass'n of Sec. Dealers,
757 F.2d 676, 688 (5th Cir. 1985) (extending absolute immunity to
another national securities exchange and its employees). This is
a matter not simply of logic but of intense practicality, since,
in the absence of such immunity, the Exchange's exercise of its
quasi-governmental functions would be unduly hampered by
disruptive and recriminatory lawsuits. See Barbara, 99 F.3d at
59; Austin, 757 F.2d at 688.
Plaintiffs seek to distinguish Barbara from the instant
lawsuit in several respects. First, they note that while
Barbara involved misconduct in connection with disciplinary
proceedings, the misconduct alleged in the instant lawsuit also
includes improper interpretations of federal securities laws and
allegedly duplicitous conduct in connection with providing
information about plaintiffs to the Commission and the U.S.
Attorney's Office. But the interpretive and referral functions of
the Exchange are just as quasi-governmental as its disciplinary
functions, and hence the same immunities attach. See, e.g.,
Sparta Surgical Corp. v. National Ass'n of Securities Dealers,
Inc., 159 F.3d 1209, 1214-15 (9th Cir. 1998).
Second, they argue that even if the Exchange itself is entitled
to absolute immunity, its officers are entitled only to qualified
immunity, the bounds of which were here exceeded. But "certain
public functions require a greater degree of protection than
qualified immunity can provide," Barbara, 99 F.3d at 58, and
this is equally as true of the Exchange officials' interpretive
and referral functions as of their disciplinary functions. To
prevent the placing of endless obstacles in path of the effective
fulfillment of such functions, Exchange employees are therefore
entitled to absolute immunity for any actions that are within the
"outer perimeter" of the performance of such functions. McManus
v. McCarthy, 586 F. Supp. 302, 304 (S.D.N.Y. 1984), quoting Barr
v. Matteo, 360 U.S. 564, 575, 79 S.Ct. 1335, 3 L.Ed.2d 1434
(1959); see Austin, 757 F.2d at 689; Mandelbaum v. New York
Mercantile Exchange, 894 F. Supp. 676, 679-80 (S.D.N.Y. 1995);
Friedman v. Young, 702 F. Supp. 433, 435 (S.D.N.Y. 1988).
Nor may a litigant avoid the bar of this immunity simply by
making allegations of bad faith, conspiracy, or malice. See,
e.g., In re Olick, No. 99-cv-5128, 2000 WL 354191 (E.D.Pa.
Apr.4, 2000); Partnership Exchange Securities Co. v. National
Ass'n of Securities Dealers, Inc., No. C-96-2792, 1997 WL
448164, at *5 (N.D.Cal. July 3, 1997); Gugliaro v. New York
Coffee, Sugar, & Cocoa Exch., Inc., No. 96 Civ. 4942, 1997 WL
109442, at *3 (S.D.N.Y. Mar. 11, 1997). The doctrine that acts
outside the scope of an official's authority are ineligible for
absolute immunity is reserved for those acts that fall outside
the official's authority categorically rather than by the
specifics of their performance. See, e.g., Burns v. Reed,
500 U.S. 478, 492-96, 111 S.Ct. 1934, 114 L.Ed.2d 547 (1991). The
allegations at issue here, however, relate to the defendants'
development and promulgation of interpretations of statutory and
regulatory requirements, the dissemination and implementation of
these interpretations, and the provision of information to
government agencies, all of which are categories of action well
within the perimeter of the defendants' quasi-governmental
Finally, plaintiffs argue that Barbara should be narrowly
construed because it is
in tension with the Second Circuit's decision in United States
v. Solomon, 509 F.2d 863 (2d Cir. 1975), in which the Court of
Appeals held the Fifth Amendment privilege against
self-incrimination inapplicable to the Exchange's questioning of
representatives of a member firm who were under investigation for
violating certain record-keeping requirements that were
separately mandated by both Commission regulations and Exchange
rules. In Solomon, Judge Friendly, in a typically erudite
opinion, recounted the Exchange's long history of "private"
self-regulation antedating the enactment of the federal
securities laws, and held that the Fifth Amendment — most of the
provisions of which "are incapable of violation by anyone except
government in the narrowest sense," id. at 867 — did not apply
to disciplinary activities designed to protect the Exchange's own
private regulatory interests, even if the conduct under
investigation also violated federal law. See id. at 869.
Thus, while some of the broader dicta in Solomon are not
easily reconciled with some of the statements in Barbara, what
Solomon sought to emphasize was the distinction between the
Exchange's quasi-governmental duties and its private functions.
The distinction is easily seen, for example, in the recent case
of Desiderio v. National Ass'n of Securities Dealers, Inc.,
191 F.3d 198, 206 (2d Cir. 1999), where the Court of Appeals, citing
Solomon, found that there was no "state action" in the
enforcement by a national securities exchange of its internal
requirement that brokers sign a mandatory arbitration clause.
Other cases may present closer calls, but this case is not one of
them: for even though plaintiffs allege that the motivation for
the alleged misconduct arose from the Exchange's private
interests, the misconduct itself related to the exercise,
properly or improperly, of the Exchange's public functions.
Accordingly, it is Barbara, not Solomon, that is relevant
For the foregoing reasons, defendants' motion for judgment on
the pleadings is granted, and the Complaint is dismissed with
prejudice. Clerk to enter judgment.
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