United States District Court, S.D. New York
May 3, 2004.
DL CAPITAL GROUP LLC, Plaintiff, -against- NASDAQ STOCK MARKET INC. and, ROBERT GREIFELD, 90054 Defendants
The opinion of the court was delivered by: CHARLES HAIGHT, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff DL Capital Group LLC ("DL Capital") is an institutional
investor which brought this purported class action against Nasdaq Stock
Market, Inc. ("Nasdaq") and its President, Robert Greifeld, for monetary
losses as a result of defendants' allegedly fraudulent conduct. Nasdaq is
a subsidiary of the National Association of Securities Dealers, Inc.
("NASD"). Plaintiff claims that Nasdaq committed fraud in violation of
Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934,
15 U.S.C. § 778j(b), 78t(a) ("Exchange Act") and Rule 10b-5 promulgated
thereunder by the Securities and Exchange Commission ("SEC"). Pursuant to
Rule 12(b)(6) of the Federal Rules of Civil Procedure, defendants move
this Court to dismiss the complaint with prejudice for failure to state a
claim upon which relief can be granted.
The captioned action is one of three similar purported class suits
before this Court challenging Nasdaq's regulatory actions in the
suspension of trading and the cancellation of certain trades in the
shares of Corinthian Colleges, Inc. ("COCO") on December 5, 2003. See
also Krishnaiah v. Nasdaq Stock Market, Inc., No. 03 Civ. 10008;
Fulkerson v. Nasdaq Stock Market, Inc., No. 03 Civ. 10168. Each
of the three plaintiffs purports to sue on behalf of all persons or
entities who traded the common stock of COCO on the Nasdaq market
"between 10:46 a.m. on December 5, 2003 and the time Nasdaq announced the
cancellation of all trades in COCO between 10:46 a.m. and 10:58:08 a.m.,
which was approximately 12:30 p.m., on December 5, 2003, inclusive (the
`Class Period') . . ." Complaint in the captioned action, at ¶ 1.
The three plaintiffs each filed separate motions to consolidate the
actions and to be appointed as lead plaintiffs. However, plaintiff
Krishnaiah, No. 03 Civ. 10008, has subsequently withdrawn his motion for
appointment as lead plaintiff. The motions filed by DL Capital and
Fulkerson remain pending. No class has as yet been certified.
For purposes of this motion, Plaintiff's well-pleaded allegations of
fact will be taken as true, in accordance with the standard of review for
a motion to dismiss. See Papasan v. Allain, 478 U.S. 265, 283
Nasdaq is a subsidiary of the NASD, a self-regulatory organization
("SRO") registered with the SEC as a national securities association,
pursuant to the Maloney Act, 15 U.S.C. § 780-3 et seq., in
which Congress delegated power to SROs, such as the NASD, to enforce
compliance by members of its industry of "the legal requirements laid
down in the Exchange Act and the ethical standards going beyond those
requirements." Austin Mun. Sec., Inc. v. National Ass'n of Sec.
Dealers, Inc., 757 F.2d 676, 680 (5th Cir. 1985) (citations
omitted). However, Congress also granted the SEC broad supervisory
responsibilities over SROs, such that they are subject to extensive
oversight, supervision and control by the SEC on an ongoing basis.
15 U.S.C. § 78s(a)(3)(B). Every SRO, as well as its members and persons
associated with its members, must comply with the multitude provisions of
the Exchange Act, as well as its own rules, and the rules of both the SEC
and Municipal Securities Rulemaking Board (MSRB). 15 U.S.C. § 78s(g)(1), (h). Should an SRO fail to comply, the SEC has the authority to suspend or
revoke the registration of the SRO, or censure or restrict the activities,
functions, and operations of the organization, as well as execute further
sanctions. Austin, 757 F.2d at 680. The SEC may also initiate judicial
proceedings to enjoin any activity that would violate the Exchange Act or
the NASD's rules and may seek civil penalties against violators.
15 U.S.C. § 78u(d)(1), (d)(3)(a).
The NASD has delegated to Nasdaq regulatory responsibilities for
developing, operating, and maintaining systems and services for the
Nasdaq Stock Market, an electronic, screen-based market system. The NASD
has also delegated to Nasdaq responsibility for forming regulatory
policies and listing criteria for the stock market, subject to its and
the SEC's approval. Pursuant to its delegated authority, Nasdaq oversees
the trading of thousands of shares of stock each day on Nasdaq systems.
B. Plaintiff's trades in Corinthian Colleges,
COCO is a company that operates 79 for-profit colleges throughout the
United States. Its common stock is traded on the Nasdaq Stock Market.
Beginning on 10:46 a.m. on December 5, 2003, the market price of COCO's
shares unexpectedly fell from $57.45 per share to a low of $38.97 per
share in a matter of 12 minutes. At 10:55 a.m. Nasdaq received word that
the price decline was due to a computer malfunction in a NASD member's
order routing system which caused thousands of sell orders to be
erroneously flooded into the market. By 10:58 a.m. Nasdaq halted trading
in COCO, stating that the price drop was due to the "misuse or
malfunction" of an electronic trading system.
After receiving assurances from NASD members that the problem would not
arise again, at 11:50 a.m. Nasdaq disseminated a "pop-up message" to
appear on all Nasdaq subscriber screens that read, "NASDAQ IS CURRENTLY REVIEWING ALL TRANSACTIONS
IN SYMBOL COCO FROM APPROXIMATELY 10:46 TO 10:58." Five minutes later, at
11:55 a.m., Nasdaq officially resumed trading in COCO. By that point, the
price of the COCO stock had recovered from its lows between 10:46 and
At 11:57 a.m., after trading had resumed, Nasdaq issued a system status
message that stated, "TRADING IN COCO RESUMED FOR QUOTES AT 11:50, TRADES
AT 11:55. NASDAQ IS CURRENTLY REVIEWING ALL TRANSACTIONS IN COCO FROM
APPROXIMATELY 10:46 TO 10:58:08."*fn1 By 12:03 p.m., Nasdaq made the
decision to cancel all trades made between 10:46 and 10:58:08 a.m. At
this point, however, the decision had not been announced to traders.
At 12:27 p.m., Nasdaq issued another system status message announcing
the cancellation of COCO trades. The message read, in part, as follows:
Nasdaq, on its own motion, has determined that all
trades reported to Nasdaq in COCO (Corinthian
Colleges Inc.) that were executed today, 12/5/03,
from 10:46:00 Eastern Time to 10:58:08 will be
canceled, pursuant to UPC Rule 11890.
Plaintiff alleges that between 11:55 a.m., when Nasdaq resumed trading
of COCO shares to 12:27 p.m., when Nasdaq announced its decision to
cancel certain COCO trades, plaintiff made trading decisions that
resulted in losses. Plaintiff further alleges that Nasdaq's delay in
notifying its traders of its decision to cancel COCO trades constituted
fraud and bad faith concealment of material information from the market to the
detriment of plaintiff and the purported class.
Defendants move to dismiss the complaint on three grounds. First, they
contend that Nasdaq and its officers stand in the shoes of the SEC in
regulating the securities market and are therefore absolutely immune from
private, monetary damage claims based on their regulatory determinations.
Second, defendants argue that plaintiff and the purported class have
failed to exhaust their administrative remedies. Third, they argue that
plaintiff and the purported class do not have a private right of action
against Nasdaq for alleged violations of the Exchange Act.
A. Standard of Review
On a motion to dismiss a complaint under Rule 12(b)(6) for failure to
state a claim upon which relief can be granted, the trial court's
function "is merely to assess the legal feasibility of the complaint, not
to assay the weight of the evidence which might be offered in support
thereof." Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir.
1980); see Ricciuti v. N.Y.C. Transit Authority, 941 F.2d 119,
124 (2d Cir. 1991). "[T]he issue is not whether a plaintiff will
ultimately prevail but whether the claimant is entitled to offer evidence
to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236
(1974). The district court should grant a Rule 12(b)(6) motion "only if
it is clear that no relief could be granted under any set of facts that
could be proved consistent with the allegations." Hishon v. King
& Spalding, 467 U.S. 69, 73 (1984) (citing Conley v.
Gibson, 355 U.S. 41, 45-46 (1957)). In the case at bar, the motion
to dismiss for failure to state a claim must be judged in accordance with
the substantive law of civil suits based on violations of § 10(b) of
the Exchange Act, and Rule 10b-5, promulgated thereunder. Except in certain circumstances, consideration of a motion to
dismiss the complaint must focus on the allegations contained on the face
of the complaint. See Cortec Industries, Inc. v. Sum Holdings,
L.P., 949 F.2d 42, 47 (2d Cir. 1991), cert. denied,
112 S.Ct. 1561 (1992); Kramer v. Time Warner, Inc., 937 F.2d 767,
773 (2d Cir. 1991). On a motion to dismiss, a district court must accept
plaintiff's well-pleaded factual allegations as true, Papasan,
478 U.S. at 283, and the allegations must be "construed favorably to the
plaintiff." LaBounty v. Adler, 933 F.2d 121, 123 (2d Cir. 1991).
"[A] Rule 12(b)(6) motion to dismiss need not be granted nor denied in
toto but may be granted as to part of a complaint and denied as to the
remainder." Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 115
(2d Cir. 1982).
B. Analysis of Defendants' Absolute Immunity Claim
Defendants' first argument in support of their motion to dismiss is
that as officers standing in the shoes of the SEC in regulating the
securities market, they are absolutely immune from private, monetary
damage claims based on their regulatory determinations.
1. Evolution of the Absolute Immunity Doctrine as It
Applies to SROs.
Absolute immunity has long been extended to the official conduct of
judges, see Pierson v. Ray, 386 U.S. 547
, 553-54 (1967);
Fields v. Soloff, 920 F.2d 1114
, 1119 (2d Cir. 1990),
administrative law judges, see Butz v. Economou, 438 U.S. 478
513-14 (1978), prosecutors, see Imbler v. Pachtman,
424 U.S. 409
, 422-24 (1976); Fields, 920 F.2d at 1119, and Presidents of
the United States, see Nixon v. Fitzgerald, 457 U.S. 731
The policy underlying absolute immunity with respect to government
officials is clear. As articulated by Justice O'Connor in Forrester
v. White, 484 U.S. 219, 223, 108 S.Ct. 538, 542, 98 L.Ed.2d 555
Special problems arise . . . when government
officials are exposed to liability for damages. To
the extent that the threat of liability encourages
these officials to carry out their duties in a lawful and appropriate
manner, and to pay their victims when they do not,
it accomplishes exactly what it should. By its
nature, however, the threat of liability can
create perverse incentives that operate to
inhibit officials in the proper
performance of their duties. . . . When officials
are threatened with personal liability for acts
taken pursuant to their official duties, they may
well be induced to act with an excess of caution
or otherwise to skew their decisions in ways that
result in less than full fidelity to the objective
and independent criteria that ought to guide their
Recognizing the "undeniable tension" between the granting of immunity
and the "ideal of the rule of law," courts have been "cautious" in
recognizing immunity claims and have placed the burden for establishing
the justification for immunity squarely on the shoulders of those who
seek its safe harbor. Id. at 223-24.
In Austin, 757 F.2d 676, the Fifth Circuit, in a case of first
impression, held that SROs, such as the NASD, also enjoy the protection
of absolute immunity. In that case, eleven members of the District
Business Conduct Committees ("DBCC"), who acted as disciplinary officers
of the NASD, were alleged to have violated the confidentiality of NASD
disciplinary proceedings by leaking sensitive information to third
parties regarding plaintiff, a municipal securities firm.*fn2
Id. at 682. DBCC members were also alleged to have defamed
plaintiffs and spread false reports that plaintiffs would soon be out of
business. Plaintiffs sued for monetary damages for economic loss,
humiliation, and injury to their reputations. Id. at 682, 684.
Reiterating the public policy considerations that led to the grant of
absolute immunity for government officials, the Austin court
used a three-part test first developed in Butz v. Economou,
438 U.S. 478 (1978), to determine whether absolute immunity should be
extended to SROs. In Butz, the Supreme Court granted absolute
immunity to administrative officials in the Department of Agriculture,
who performed functions similar to those of judges and prosecutors. Under
the test, a person's official conduct is absolutely immune from civil
liability if: 1. The official's functions share the
characteristics of the judicial process;
2. The official's activities are likely to result
in recriminatory lawsuits by disappointed parties;
3. Sufficient safeguards exist in the regulatory
framework to control unconstitutional conduct.
Austin, 757 F.2d at 688 (citing Butz, 438 U.S. at
510-13, 102 S.Ct. at 2913-14).
The Austin court found that the actions of the DBCC
disciplinary officers met all three criteria, and therefore held those
officers, who serve as "surrogates for the SEC, . . . should receive the
same immunity their principles possess." Id. at 691.
The Second Circuit first adopted the Austin court holding in
Barbara v. New York Stock Exchange, Inc., 99 F.3d 49 (2d Cir.
1996). In that case, the Court found the reasoning in Austin
"persuasive," and held that "the Exchange is absolutely immune from
damages claims arising out of the performance of its federally-mandated
conduct of disciplinary proceedings." Id. at 58.
Five years later, D'Alessio v. New York Stock Exchange, Inc.,
258 F.2d 93 (2d Cir. 2001) established the principle that absolute
immunity is not limited to disciplinary proceedings. Rather,
"Barbara [stands] for the broader proposition that a SRO . . .
may be entitled to immunity from suit for conduct falling within the
scope of the SRO's regulatory and general oversight functions."
Id. at 105. Therefore, while it is recognized that not conduct
of government officials and SROs is immune from private suits, the
question in the case at bar is whether defendants' actions fall within
the scope of quasi-governmental powers delegated to them pursuant to the
Exchange Act, so that absolute immunity precludes plaintiffs from
recovering money damages in connection with their claims. See
id. at 106.
2. Application of Absolute Immunity to Defendants
Plaintiffs do not challenge Nasdaq's decisions to suspend trading in
COCO at 10:58 a.m., resume trading at 11:55 a.m., or even to cancel all
COCO trades made between 10:46 to 10:58 a.m. Plaintiffs concede that these actions are part of defendants'
adjudicatory and prosecutorial functions that are immune from civil money
damage claims. Instead, plaintiffs allege that defendants "fraudulently
concealed" their decision to cancel these trades for a period of
approximately thirty minutes. According to plaintiffs' recitation of
facts, which I take as true for purposes of this motion, at precisely
12:03 p.m. defendants first made the decision to cancel all COCO trades
that had been made between 10:46 and 10:58 a.m. However, it was not until
12:27:40 p.m., approximately one-half hour later, that NASDAQ issued a
system status message announcing the cancellation of the trades.*fn3
Plaintiffs allege that this delay in announcing its decision demonstrates
fraudulent and bad faith concealment of material information from the
market to the detriment of all plaintiffs and the purported class.
Simply characterizing an act or omission as "fraudulent" is not enough
to deprive defendants of immunity from suit. Courts have granted immunity
to government officials and SRO officers whose actions can be fairly
characterized, if not as fraudulent, then at least as bad faith. Such
actions include defaming the personal and professional reputation of
associates (Austin), de-listing a stock and suspending trading
on an initial public offering without any explanation (Sparta),
providing false, misleading, and inaccurate information about a litigant
to the United States Attorney's Office (D'Alessio), or even
ordering the discharge of an air force employee in retaliation for
truthful, if embarrassing, sworn testimony before a congressional
subcommittee (Nixon). All of these actions, arguably fraudulent
in nature, were held to be within the outer limits of the adjudicatory,
prosecutorial, or regulatory function of a government or quasi-government
official. In keeping with the line of cases cited supra, I conclude
that the defendants are entitled to absolute immunity from private suits
for damages allegedly suffered by investors trading in COCO shares during
the relevant period of time.
In an effort to avoid this virtually unbroken line of authority,
plaintiff at bar stresses the defendants' ability to make announcements
with respect to their decisions to suspend and cancel trades of certain
shares bought and sold within the stock market they regulated.
Specifically, plaintiff alleges that
Nasdaq's statement in which it permitted trading
in COCO to resume at 11:55 a.m. was materially
false and misleading because Nasdaq omitted the
material fact that it had determined the cause of
the extraordinary market activity in COCO and all
trades between 10:46 a.m. and 10:58:08 a.m. would
be cancelled. DL Capital and the Class relied to
their detriment on Nasdaq's statement in which it
permitted trading to resume.
But this distinction does not persuade. Since defendants' decision to
cancel the COCO trades is protected by absolute immunity, there is no
principled reason why defendants' decision to announce such
cancellations, or the timing thereof, should not also be immune.
Announcing the suspension or cancellation of trades is as much a part of
defendants' regulatory duties as is the actual suspension or cancellation
of trades. Without the capacity to make announcements, defendants would
be stripped of a critical and necessary part of their regulatory powers.
It follows that defendants' decision to delay announcing cancellation of
COCO trades, whether intentional or unintentional, fraudulent or in good
faith, falls squarely within the ambit of their duties and official
Nor does the fact that plaintiffs' claims arise under § 10(b) and
20(a) of the Exchange Act and Rule 10b-5 serve to destroy immunity. SRO's
are immune from any private right of action for damages for actions
falling within the scope of their regulatory conduct. The grant of absolute immunity arose after an intentional calculus
in which it was recognized that the victim of an abuse of office might
receive no recompense for injury done. See Austin, 757 F.2d at
687. It is important to remember, however, that absolute immunity is
granted only when there are sufficient safeguards in the regulatory
framework to control unconstitutional conduct. Id. at 688. Our
forum does not hold a monopoly on justice. Nor is a private right of
action the only channel for redress.
C. Nasdaq and Greifeld's Other Grounds for
Because the defendants are absolutely immune from claims brought by
plaintiff in this case, I need not and do not consider defendants' other
grounds for dismissal.
D. DL Capital and Irishnaiah's Motions Denied
Finally, because I hold today that defendants are absolutely immune
from claims brought by plaintiff, I further hold that DL Capital's and
Krishnaiah's other Motions to Consolidate the Actions and Be Appointed as
Lead Plaintiffs are denied as moot.
For the foregoing reasons, I hold that NASDAQ and Greifeld are entitled
to absolute immunity against the claims brought by plaintiffs.
Defendants' motion to dismiss is granted. The Clerk of the Court is
directed to dismiss the action with prejudice.
It is SO ORDERED.