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February 27, 2002


The opinion of the court was delivered by: Lewis A. Kaplan, United States District Judge.


The complaint in this case alleges that plaintiff, an experienced stock broker, applied to defendant Charles Schwab & Co., Inc. ("Schwab") for a job and that he would be hired subject to checking his registration status with the National Association of Securities Dealers, Inc. (the "NASD"). Schwab then inquired of the NASD and checked into plaintiff's background through its own investigator. From one source or the other, Schwab learned that plaintiff had been arrested in June 1999 and then declined to hire plaintiff, expressing concern that plaintiff had not disclosed the arrest or the basis for it on his employment application. Plaintiff claims that the arrest record had been sealed and that the arrest had been terminated in his favor.


The defamation claim alleges that the defendants defamed him by disclosing the fact of his arrest to third parties.*fn1 Defamation by definition involves the publication of a false statement. As plaintiff concedes that he in fact was arrested, the defamation claim is patently insufficient. Tortious Interference by the NASD

In order to state a legally sufficient claim for tortious interference with prospective economic advantage, the plaintiff must allege:

"(1) business relations between the plaintiff and a third party; (2) the defendant's interference with those business relations; (3) the defendant acted with the sole purpose of harming the plaintiff, or used dishonest, unfair or improper means; and (4) injury to the business relationship."*fn2

"Wrongful means include physical violence, fraud, misrepresentation, civil suits, criminal prosecutions, and some degree of economic pressure."*fn3

Plaintiff claims that the NASD improperly interfered with his proposed employment contract "by unlawfully investigating and disclosing the fact of" his arrest to Schwab.*fn4 He does not here allege that the NASD acted with the sole purpose of harming him. The more difficult question, assuming that the NASD somehow obtained and disclosed a sealed arrest record, is whether its action in having done so involved wrongful means.

At this stage of the litigation, it is impossible to say. Surely if the NASD ran some routine query, perhaps based on a fingerprint check, and obtained the information without learning that the record had been sealed, there would be no basis for so concluding. On the other hand, however, the complaint alleges that the NASD "unlawfully" investigated him. The word doubtless could include a broad range of conduct, all or at least some of which might be wrongful. Given that the complaint may not be dismissed unless it is clear that plaintiff could prove no facts under it that would give rise to liability, the Court cannot now dismiss the tortious interference claim for legal insufficiency. The NASD nevertheless argues that the claim against it should be dismissed on three alternative grounds — failure to exhaust administrative remedies, the absence of any implied private right of action against it for actions taken in its statutory role, and absolute immunity.

To take these in reverse order, it is well established that the NASD is absolutely immune from state law liability for actions taken in a regulatory or adjudicatory context pursuant to responsibilities imposed upon it by the Securities Exchange Act of 1934 (the "Exchange Act").*fn5 But the action taken here surely did not occur in an adjudicatory context. And while there is no question but that the NASD is required by SEC Rule 17a-3(a)(12)(i)(g) to inquire of registered representatives concerning arrest records*fn6 and by Rule 17f-2 to submit their fingerprint records to the FBI for processing and to maintain information received from the FBI*fn7 it is far from clear at this stage of these proceedings whether the NASD obtained the arrest record from the FBI.*fn8 In consequence, the NASD has failed to establish that the action complained of by plaintiff took place pursuant to the NASD's regulatory mandate. While it may well do so at a later stage of this action, the same principle that requires denial of the motion to dismiss the tortious interference claim on the merits requires denial for the moment of its absolute immunity claim.

The NASD's contention that there is no private cause of action against it for performance of its statutory role, which is correct, is beside the point. The cases upon which it relies all stand for the proposition that there is no implied private right of action under federal law.*fn9 But plaintiff does not claim that there is. Rather, he sues the NASD on a common law tort theory. The absence of an implied federal cause of action therefore is immaterial.

Finally, the NASD correctly points out that plaintiff has not exhausted his administrative remedies before the Securities and Exchange Commission, which is empowered to take action against self-regulatory organizations including the NASD to ensure that they comply with their own rules and the Exchange Act.*fn10 But plaintiff does not here claim that the NASD violated its own rules or the Exchange Act. Moreover, he seeks damages, a remedy not available to him ...

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