FDIC v. NAT. ASS'N OF SECURITIES DEALERS

• Decision Date: 14 February 1984
• Docket Number: Civ. No. 83-334-B.
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, v. NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., Defendant.
• Court: U.S. District Court — Southern District of Iowa

582 F. Supp. 72

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, v. NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., Defendant.

Civ. No. 83-334-B.

United States District Court, S.D. Iowa, Central Division.

February 14, 1984.

Frank W. Davis, Jr., R. Jeffrey Lewis, Gamble, Riepe, Burt, Webster & Davis, Des Moines, Iowa, and Thomas A. Brooks, Gen. Counsel, Daniel W. Persinger, Deputy Gen. Counsel, Mark F. Pretzat, Attorney, Federal Deposit Ins. Corp., Washington, D.C., for plaintiff.

Stephen M. Morain, Gale E. Juhl, Morain, Burlingame & Pugh, West Des Moines, Iowa, Frank Wilson, Andrew McR. Barnes, T. Grant Callery, Washington, D.C., Clifford M. Greene, Stephen M. Morain, West Des Moines, Iowa, Popham, Haik, Schnobrich, Kaufman & Doty Ltd., Minneapolis, Minn., for defendant.

RULING AND ORDER OF DISMISSAL

VIETOR, District Judge.

Defendant's motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) and (6) is before the court.

The action stems from the collapse of the First National Bank of Humboldt, Iowa. Between March 1981 and March 1982, the bank transferred substantial funds and securities to the Lewellyn Company,¹ a brokerage company. Gary Lewellyn, the president and principal of the Lewellyn Company, converted the bank's funds and securities to his own personal use and the use of the Lewellyn Company.² As a result of those actions, the bank was declared insolvent by the Comptroller of the Currency on April 2, 1982, and the Federal Deposit Insurance Corporation (FDIC) was appointed as the receiver of the bank. On April 6, 1982, the FDIC, in its capacity as receiver, sold to the FDIC in its corporate capacity certain assets of the bank, including all causes of action that the bank had against any individual or entity arising out of the loss or theft of securities. The FDIC now brings this action in its corporate capacity against the defendant National Association of Securities Dealers (NASD).

The NASD is a nonprofit Delaware corporation registered with the Securities & Exchange Commission as a national securities association pursuant to the Maloney Act, 15 U.S.C. § 78o -3. It is a self-regulatory organization as defined in 15 U.S.C. § 78c(a)(26), and as such it is statutorily authorized to regulate the over-the-counter securities industry. The NASD has over 4,160 broker/dealer members and operates through 13 geographically-defined administrative districts throughout the United States. The Maloney Act requires a national securities association's rules to make express provision for the discipline of members who violate its rules and authorizes the imposition of penalties such as expulsion from membership, suspension, fine, censure, or other appropriate penalty after determination of violation. 15 U.S.C. § 78o -3(b)(7). On February 2, 1981, the Lewellyn Company made application to the NASD for membership, and on July 23, 1981, it was granted membership.

The FDIC's complaint consists of three counts. In Count I it is alleged that the NASD was negligent in its dealing with the Lewellyn Company's application for membership in the NASD and its pre-membership interview. In Count II the FDIC alleges that the NASD was negligent in connection with its review and analysis of the reports and documents filed with it and its enforcement and administration of the Closer-Than-Normal Review Program, the CORE Surveillance Program, and the Financial and Operational Analysis Program with respect to the Lewellyn Company. In Count III the FDIC alleges that the NASD was negligent in its conduct of the financial and operational examination of the Lewellyn Company. The FDIC alleges that the NASD's negligence was a proximate cause of the financial losses sustained by the bank.

The FDIC stated several times in its briefs and during oral argument that its complaint is not based on the federal securities laws, but on "garden variety" common law negligence. Jurisdiction is based solely on 12 U.S.C. § 1819 Fourth and 28 U.S.C. § 1345.

Defendant NASD has moved to dismiss the complaint or in the alternative to stay this proceeding pending administrative resolution of plaintiff's claim. NASD contends that the federal securities laws that created its self-regulatory scheme do not provide for causes of action against self-regulatory bodies for failing to prevent misconduct; that no implied cause of action exists under the statutes; and that no cause of action exists based on common law negligence. Because the FDIC has repeatedly indicated that its complaint is founded solely on common law negligence, the court will address only the NASD's argument that no cause of action exists based on common law negligence.

The crux of the NASD's argument is that plaintiff FDIC has not established a preexisting common law cause of action. The FDIC argues that the NASD has a duty to the investing public under 15 U.S.C. § 78o -3, that the NASD engaged in certain activities with respect to the Lewellyn Company, and negligently performed those activities. The FDIC then relies on Fabricius v. Montgomery Elevator Co., 254 Iowa 1319, 121 N.W.2d 361 (1963), to argue that the negligent performance of an act undertaken, even gratuitously, is a proper basis for a common law negligence action. Fabricius involved a negligent inspection by an insurer and was based on a preexisting common law cause of action. That case does not establish a general principle that anyone who undertakes a gratuitous task is liable at common law for negligence.

Although the Maloney Act sets forth a statutory standard of care with which the NASD must comply in the regulation of its members, the Act does not create a common law cause of action. The distinction is significant, as the Iowa Supreme Court has clearly articulated:

Negligence is a common-law tort that is generally defined as conduct that "falls below the standard established by law for the protection of others against unreasonable risk of harm." Restatement (Second) of Torts § 282 (1965). An element of negligence is a duty or standard of care owed by the actor to the victim. * * * Statutory enactment is one of the means by which such duty or standard of

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