Gordon v. New York Stock Exchange, Inc., 71 Civ. 1496.

• Decision Date: 03 December 1973
• Docket Number: No. 71 Civ. 1496.,71 Civ. 1496.
• Citation: 366 F. Supp. 1261
• Parties: Richard A. GORDON, Individually and as President of Independent Investors Protective League, an unincorporated association, and in behalf of the membership thereof and in behalf of all persons similarly circumstanced, Plaintiff, v. NEW YORK STOCK EXCHANGE, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

366 F. Supp. 1261

Richard A. GORDON, Individually and as President of Independent Investors Protective League, an unincorporated association, and in behalf of the membership thereof and in behalf of all persons similarly circumstanced, Plaintiff, v. NEW YORK STOCK EXCHANGE, INC., et al., Defendants.

No. 71 Civ. 1496.

United States District Court, S. D. New York.

December 3, 1973.

Bader & Bader, New York City, for plaintiff.

Milbank, Tweed, Hadley & McCloy, New York City, for defendants New York Stock Exchange, Inc. and Bache & Co., Inc.

Lord, Day & Lord, New York City, for defendant American Stock Exchange, Inc.

Brown, Wood, Fuller, Caldwell & Ivey, New York City, for defendant Merrill Lynch, Pierce, Fenner & Smith, Inc.

MEMORANDUM

LASKER, District Judge.

In this action, brought by Richard A. Gordon, individually and as President of Independent Investors Protective League, against the New York Stock Exchange, the American Stock Exchange ("the Exchanges") and their member firms, plaintiff alleges several violations of the Robinson-Patman Act and the Sherman Act, to the detriment of "small investors" (those ineligible for either "volume discounts" on trades of over 1,000 shares, or negotiated rates on trades above the $500,000 now $300,000 "break-point").

Specifically, plaintiff attacks the Exchanges' practices of making their facilities available only to members and of limiting the number of memberships; he also alleges that members have conspired with the Exchanges to fix rates for small investors at an unreasonably high level in view of the actual cost of executing a trade; that negotiated rates and volume discounts are set at unreasonably low levels in view of the actual costs of execution; and that this scheme unlawfully discriminates against small investors. In short, plaintiff makes a number of related claims, the essence of which is a broadside attack on the present commission structure of the Exchanges.

Defendants have moved for an order dismissing the action and granting summary judgment on the grounds that the practices complained of are within the exclusive jurisdiction of the Securities and Exchange Commission, that the SEC, acting pursuant to § 19(b) of the Exchange Act of 1934, 15 U.S.C. § 78s(b), has been actively regulating these practices, and that, consequently, the practices are exempt from the provisions of the antitrust law so that the court is without subject matter jurisdiction.

I.

We deal first with plaintiff's related claims regarding the Exchanges' practices of limiting the number of memberships, and denying the use of their facilities to non-members unless they pay the same rate of commission charged the general public (Complaint, Paragraph 17).

As to the first claim, plaintiff lacks standing to sue since he has not met the threshold requirement of § 4 of the Clayton Act: "Any person who shall be injured in his business or property by reason of any thing forbidden in the antitrust laws may sue therefor . . ." (15 U.S.C. § 15). Since it is undisputed that plaintiff has never made application for membership in either defendant Exchange, he cannot be heard to complain that memberships are arbitrarily limited. See Billy Baxter, Inc. v. Coca-Cola Company, 431 F.2d 183, 187 (2d Cir. 1970), cert. denied, 401 U.S. 923, 91 S.Ct. 877, 27 L.Ed.2d 826 (1971); Data Digests, Inc. v. Standard & Poor's Corporation, 43 F.R.D. 386, 387-388 (S.D.N.Y.1967).

Plaintiff's second claim must also fail in view of the clear language of the Exchange Act of 1934 to the effect that non-members' access to Exchange facilities is limited. Section 3(a)(3) states:

"The term `member' when used with respect to an exchange means any person who is permitted either to effect transactions on the exchange without the services of another person acting as broker, or to make use of the facilities of an exchange for transactions thereon without payment of a fee or with the payment of a commission or fee which is less than that charged the general public, and includes any firm transacting a business as broker or dealer of which a member is a partner, and any partner of any such firm." (emphasis added)

The fact that the limited membership characteristic of the Exchanges inheres in their very nature has been recognized by the Supreme Court, Silver v. New York Stock Exchange, 373 U.S. 341, 350-351, 83 S.Ct. 1246, 10 L.Ed.2d 389 (1963) and this Circuit, Robert W. Stark, Jr., Inc. v. New York Stock Exchange, Inc., 346 F.Supp. 217, 228 (S.D. N.Y.1972), aff'd per curiam, 466 F.2d 743 (2d Cir. 1972) CCH Sec.L.Rep. ¶ 93,607.

II.

Plaintiff's claims of price discrimination predicated upon the Robinson-Patman Act, 15 U.S.C. § 13(a), are without merit. The Act requires that the alleged price discrimination be in connection with "commodities of like grade and quality". The authorities are clear that services and intangibles (such as stock trade executions) are not "commodities" within the meaning of the Act. Columbia Broadcasting System v. Amana Refrigeration, 295 F.2d 375 (7th Cir. 1961); Baum v. Investors Diversified Services, Inc., 409 F.2d 872, 875 (7th Cir. 1969), and cases cited therein.

III.

Plaintiff's remaining claims relating to the commission rate structure of the Exchanges pose the question whether the Exchanges, subject to SEC supervision, can fix commission rates without incurring Sherman Act liability. It is, of course, conceded by defendants that any such immunity must be provided, if at all, by the Securities & Exchange Act of 1934.

The question of the extent to which the 1934 Act exempts the Exchanges from the anti-trust laws has not been considered in this Circuit since Silver v. New York Stock Exchange, 373 U.S. 341, 83 S.Ct. 1246, 10 L.Ed.2d 389 (1963). That case involved a non-member broker who had secured private wire connections with certain New York Stock Exchange firms. The Exchange had approved Silver's connections on a temporary basis, but subsequently ordered them disconnected without notice or hearing. After observing that the Exchange's actions absent justification from the Exchange Act, would have constituted a per se violation of the Sherman Act, the Silver court sought to reconcile the "antitrust aim of eliminating restraints on competition with the effective operation of a public policy contemplating that securities exchanges will engage in self-regulation which may well have anti-competitive effects in general and in specific applications." (Silver, 373 U.S. at 349, 83 S.Ct. at 1252.)

Noting that the Exchange Act does not give the commission jurisdiction to review particular instances of enforcement of Exchange rules, the Court stated that consequently the question of antitrust exemption did "not involve any problem of conflict or coextensiveness of coverage with the agency's regulatory power," and that court review of the circumstances there presented "is therefore not at all incompatible with the fulfillment of the aims of the Act". (Silver at 359, 83 S.Ct. at 1258.) The court concluded that the severance of the private wires occurred under "totally unjustifiable circumstances" (Silver at 361, 83 S.Ct. 1246) and that no policy of the Exchange Act was served by denial of notice and opportunity for hearing.

In so holding, however, Silver did not specify the circumstances in which a federal district court must decline jurisdiction to avoid a possible conflict with the commission, and specifically reserved decision on the possible anti-trust immunity of exchanges where "review of exchange self-regulation is provided through a vehicle other than the anti-trust laws. . . ." (p. 360, 83 S.Ct. p. 1258).

We hold that this court lacks jurisdiction to entertain an anti-trust attack on the commission structure of the Exchanges, since the fixing of commissions falls squarely within the congressional policy of exchange self-regulation embodied in the 1934 Act. Since the Act expressly directs the SEC to supervise the "fixing of reasonable rates of commission" (§ 19(b)(9)), we believe this is the "different case," on which Silver reserved decision, where review of exchange self-regulation is available "through a vehicle other than the anti-trust laws" (Silver, p. 360, 83 S.Ct. p. 1258).

In so holding, we are in disagreement with the Seventh Circuit. See Thill Securities Corp. v. New York Stock Exchange, 433 F.2d 264 (7th Cir. 1970), cert. denied, 401 U.S. 994, 91 S.Ct. 1232, 28 L.Ed.2d 532 (1971), a decision to which we return later on.

We believe that while Silver quite properly punctured the umbrella of anti-trust immunity claimed by the Exchange, it did not intend Congress' unique self-regulatory scheme to be totally dampened by the continuous interference of an anti-trust court. We read Silver as holding that certain limited areas of Exchange regulation—such as potentially anti-competitive and arbitrary conduct directed at non-members —are properly interfered with by a reviewing court since the Act purports to regulate only the conduct of registered exchanges (and their members) with regard to the public, rather than the entire securities business. But Silver also contemplates a certain zone of anti-trust immunity in the regulatory process where there is little threat of such arbitrary and discriminatory activity.

Without venturing to describe the full contours of this immunity, we believe that the Exchange Act, as construed by Silver, left the power to fix commission rates within the exclusive jurisdiction of the Exchange, subject to commission supervision.

This construction finds ample support in the language of Silver. The court describes the Exchanges as "by their nature bodies with a limited number of members" (373 U.S. p. 350, 83 S.Ct. p. 1253) with a "federally mandated duty of self-policing" (p. 352, 83 S.Ct. p. 1254).

"The pattern of governmental entry . . . was by no means one of total displacement of the exchanges' traditional process of self-regulation . . . Thus the Senate

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