Karsner v. Lothian

• Decision Date: 15 July 2008
• Docket Number: No. 07-7080.,07-7080.
• Citation: 532 F.3d 876
• Parties: Joseph R. KARSNER, IV, Appellee v. Pamela LOTHIAN and The National Association of Securities Dealers, Inc., Appellees. Melanie Senter Lubin, Maryland Securities Commissioner, Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

532 F.3d 876

Joseph R. KARSNER, IV, Appellee v. Pamela LOTHIAN and The National Association of Securities Dealers, Inc., Appellees Melanie Senter Lubin, Maryland Securities Commissioner, Appellant.

No. 07-7080.

United States Court of Appeals, District of Columbia Circuit.

Argued February 22, 2008.

Decided July 15, 2008.

Appeal from the United States District Court for the District of Columbia (No. 07cv00334).

John B. Howard, Jr., Deputy Attorney General, Office of the Attorney General for the State of Maryland, argued the cause for the appellant. Douglas F. Gansler, Attorney General for the State of Maryland, and Kelvin M. Blake, Assistant Attorney General, were on brief.

Charles T. Mason, III was on brief for amicus curiae Public Investors Arbitration Bar Association.

Rex A. Staples was on brief for amicus curiae North American Securities Administrators Association, Inc. Terri L. Reicher entered an appearance.

George S. Mahaffey, Jr. argued the cause for appellee Joseph R. Karsner, IV. Richard J. Magid was on brief.

Before: HENDERSON, Circuit Judge, and EDWARDS and WILLIAMS, Senior Circuit Judges.

Opinion for the court filed by Circuit Judge HENDERSON.

KAREN LeCRAFT HENDERSON, Circuit Judge.

Melanie Lubin, the Maryland Securities Commissioner (Commissioner), appeals the district court's denial of her motion to intervene as of right in an arbitration confirmation proceeding. See Karsner v. Lothian, No. 07cv334 (D.D.C. Apr. 9, 2007) (minute order). In the underlying arbitration, the panel had recommended — pursuant to a settlement agreement—that a customer complaint and the ensuing arbitration be expunged from the disciplinary record of a securities broker — dealer who was licensed in Maryland. See Pet. to Confirm Arbitration Award, Ex. 1 (Feb. 12, 2007). The Commissioner contends that the district court erred in denying intervention because she has a substantial interest in ensuring the integrity of her records. We agree and reverse and remand for the reasons set forth below.

I.

Pamela Lothian (Lothian) was a customer of Joseph R. Karsner, IV (Karsner), a securities broker-dealer registered both with the Financial Industry Regulatory Authority (FINRA) and with the State of Maryland.¹ This case arises out of a FINRA arbitration that settled the complaint Lothian lodged against Karsner.

A. Regulatory Background

The Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et seq. (Exchange Act), "provides a comprehensive system of federal regulation of the securities industry." Austin Mun. Sec., Inc. v. Nat'l Ass'n of Sec. Dealers, Inc., 757 F.2d 676, 680 (5th Cir.1985). The Maloney Act, Pub.L. No. 75-719, 52 Stat. 1070 (1938) (amending the Exchange Act, 15 U.S.C. §§ 78o et seq.), "established extensive guidelines for the formation and oversight of self-regulatory organizations, such as the NASD, and the registered stock exchanges, including the New York Stock Exchange (N.Y.S.E.) and the American Stock Exchange." Austin Mun. Sec., 757 F.2d at 680. Pursuant to the Maloney Act, any association of securities broker-dealers seeking to register as a "national securities association" must "fil[e] with the [SEC] an application for registration ... containing the rules of the association." 15 U.S.C. §§ 78o-3(a). An association must "comply with the [Exchange Act] and its own rules," id. § 78s(g)(1)(A), "enforce compliance ... by its members and persons associated with its members," id., and maintain registration and disciplinary data of its members, id. § 78o-3(i). Further, although a national securities association is a self-regulatory entity, it remains subject to the SEC's oversight and control. Id. § 78s(b). For example, any proposed change in the association's rules must be filed with the SEC and "[n]o proposed rule change shall take effect unless approved by the [SEC]." Id. § 78s(b)(1). The SEC may "abrogate, add to, and delete from ... the rules of a self-regulatory organization ... as the [SEC] deems necessary or appropriate to insure the fair administration of the self-regulatory organization [or] to conform its rules to requirements of this chapter." Id. § 78s(c).

FINRA, as NASD's successor, is "the only officially registered `national securities association' under [the Exchange Act]." Nat'l Ass'n of Sec. Dealers, Inc. v. SEC, 431 F.3d 803, 804 (D.C.Cir.2005). "By virtue of its statutory authority, [FINRA] wears two institutional hats: it serves as a professional association, promoting the interests of it[s] members ... and it serves as a quasi-governmental agency, with express statutory authority to adjudicate actions against members who are accused of illegal securities practices and to sanction members found to have violated the Exchange Act or Securities and Exchange Commission ... regulations issued pursuant thereto." Id. (citing 15 U.S.C. § 78o-3(b)(7)).

FINRA requires a broker-dealer member to arbitrate a dispute with a customer if "[r]equired by a written agreement" or "[r]equested by the customer" and "[t]he dispute arises in connection with the business activities of the member." NASD Manual § 12200. Any customer dispute resulting in arbitration is included in the member's Central Registration Depository (CRD)² record and a member "seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief." Id. § 2130(a). According to Rule 2130(b), a broker-dealer member of FINRA "petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief must name [FINRA] as an additional party and serve [FINRA] with all appropriate documents." Id. § 2130(b).

A broker-dealer doing business in Maryland must also register with the Maryland Securities Division. See Md.Code Ann., Corps. & Ass'ns § 11-401 (2007 Repl.Vol.). To register, the broker-dealer must agree to, inter alia, the inclusion of relevant information (such as customer complaints and arbitrations) in the CRD. Id. § 11-405; Md.Code Regs. 02.02.02.01. The North American Securities Administrators Association, Inc. (NASAA) maintains and administers the CRD database pursuant to an agreement with FINRA. See CRD Agreement Amendment, ¶ 3(e) (Dec. 13, 1996).

B. Karsner

Karsner, a mutual fund broker-dealer registered with FINRA and the Maryland Securities Division, was employed by Legacy Financial Services, Inc. (Legacy) in Gambrills, Maryland.³ On October 19, 2004, Pamela Lothian, one of Karsner's mutual fund customers, began a FINRA arbitration proceeding against Karsner and Legacy by complaining that Karsner had induced her to invest in unsuitable investments and had negligently managed her account resulting in losses of approximately $104,638. Before the arbitration hearing, Lothian settled her claims against Karsner and Legacy. Pursuant to the settlement agreement, Lothian received $47,000 in exchange for abandoning her claims and stipulating to the expungement of all references to the dispute from Karsner's CRD record. On February 14, 2006, the arbitration panel approved the stipulated award, dismissed with prejudice Lothian's claims against Karsner and Legacy and "recommend[ed] the expungement of all reference to the ... arbitration from Respondent Karsner's registration record maintained by the NASD Central Registration Depository." Pet. to Confirm Arbitration Award, Ex. 1.

Karsner filed a petition to confirm the Stipulated Award in the district court on February 12, 2007, naming Lothian and NASD as respondents. Id. ¶ 14. NASD notified NASAA of the filing and NASAA in turn notified Commissioner Lubin. On March 20, 2007, the Commissioner moved to intervene pursuant to Federal Rule of Civil Procedure 24(a)(2) in order to oppose the expungement of Karsner's CRD record.⁴ The district court denied the motion to intervene by minute order on April 9, 2007. Two days later, the district court granted Karsner's petition to confirm the Stipulated Award. Karsner v. Lothian, No. 07cv334 (D.D.C. Apr. 11, 2007).

The Commissioner then filed a motion to reconsider the district court's denial of intervention, which was denied by minute order on April 27, 2007. Karsner v. Lothian, No. 07cv334, 2007 WL 4459698 (D.D.C. Apr. 27, 2007). On May 3, 2007, the Commissioner filed a timely notice of appeal of the denial of intervention and simultaneously moved to stay the expungement of Karsner's CRD record pending the appeal. The Commissioner did not, however, appeal the confirmation order. Although the district court initially denied the Commissioner's motion to stay, Karsner v. Lothian, No. 07cv334 (D.D.C. May 30, 2007), it subsequently—again by minute order— stayed this case and eleven others in which Karsner seeks confirmation of arbitration awards recommending expungement. Karsner v. Lothian, No. 07cv344 (June 13, 2007).

II.

Before addressing the merits, we must resolve the threshold issues of the district court's subject matter jurisdiction and mootness.

A. Subject Matter Jurisdiction

The Commissioner argues that the district court lacked subject matter jurisdiction over Karsner's petition and that the Court should therefore vacate the district court's order. Appellant's Br. 13.

Although the Federal Arbitration Act (FAA) constitutes federal law, "the Supreme Court has interpreted the statute as not itself bestowing jurisdiction on the federal district courts." Kasap v. Folger Nolan Fleming & Douglas, Inc., 166 F.3d 1243, 1245-46 (D.C.Cir.1999) (citing Southland Corp. v. Keating, 465 U.S. 1, 16 n. 9, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984) (FAA "creates federal substantive law requiring the parties to honor arbitration agreements, [but] ... does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 (1976) or otherwise"); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n. 32, 103 S.Ct....