D'Alessio Securities v. NY Stock Exchange

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Citation258 F.3d 93
Docket NumberNo. 00-9320,00-9320
Parties(2nd Cir. 2001) JOHN R. D'ALESSIO, D'ALESSIO SECURITIES, INC., Plaintiffs-Appellants, v. NEW YORK STOCK EXCHANGE, INC., RICHARD A. GRASSO, EDWARD A. KWALWASSER, and ROBERT J. McSWEENEY, Defendant-Appellees. Argued:
Decision Date02 May 2001

DOMINIC F. AMOROSA, New York City, for Appellants.

DEBRA M. TORRES, New York City (Harvey L. Pitt, Daniel E. Loeb, Fried, Frank, Harris, Shriver & Jacobson, New York City, of counsel), for Appellees.

Before: MESKILL and KEARSE, Circuit Judges, and SQUATRITO,* District Judge.

MESKILL, Circuit Judge:

Plaintiffs-appellants John R. D'Alessio and his wholly owned company D'Alessio Securities, Inc. (collectively "D'Alessio") appeal from the September 29, 2000 judgment of the United States District Court for the Southern District of New York, Rakoff, J., dismissing the complaint against defendants-appellees the New York Stock Exchange, Inc., Richard A. Grasso, Edward A. Kwalwasser and Robert J. McSweeney (collectively the "NYSE")1 on the ground that the NYSE enjoyed absolute immunity from a suit seeking monetary damages arising from the NYSE's allegedly improper exercise of the regulatory and adjudicatory functions delegated to it under the Securities Exchange Act of 1934, as amended (Exchange Act). Because we conclude that the district court had jurisdiction over the present action and that the NYSE is entitled to immunity from suits for damages that arise out of its conduct as alleged in the complaint, we affirm the judgment of the district court in its entirety.


The district court set forth in detail the facts relevant to this dispute in its opinion and order, see D'Alessio v. N.Y. Stock Exch., 125 F.Supp.2d 656, 657-58 (S.D.N.Y. 2000), familiarity with which is assumed. We restate here only those facts relevant to the appellate arguments or otherwise necessary for context.

In Barbara v. New York Stock Exch., 99 F.3d 49 (2d Cir. 1996), we detailed the role the NYSE plays vis-a-vis the Securities and Exchange Commission (SEC) in the regulation of securities transactions executed on the floor of the NYSE and the initiation of disciplinary proceedings in cases where a member person or firm fails to comply with the Exchange Act and the rules and regulations promulgated thereunder:

The [NYSE] is a nonprofit New York corporation registered with the [SEC] as a national securities exchange pursuant to section 6 of the [Exchange Act], 15 U.S.C. §78f. As an association of securities dealers, the [NYSE] authorizes its members to effectuate securities transactions on its auction market, known as the [NYSE] floor. Under the [Exchange] Act, the [NYSE] is a "self regulatory organization [(SRO)]," see 15 U.S.C. §78c(a)(26), which means that it has a duty to promulgate and enforce rules governing the conduct of its members, see id. §§78f(b), 78s(g). These rules are subject to SEC approval. See 15 U.S.C. §78s(b). In accordance with the statutory scheme, the [NYSE] conducts disciplinary proceedings when a member, or a person associated with a member, is suspected of violating federal securities laws or internal [NYSE] rules or regulations. See Id. §78f(d). The [Exchange] Act requires that these disciplinary proceedings be conducted in compliance both with the [Exchange] Act and with the [NYSE's] rules and regulations. See Id. §78s(g)(1). Notice of any final disciplinary sanction imposed by the [NYSE] must be provided to the SEC, see id. §78s(d)(1), and the imposition of a sanction is subject to review by the SEC on its own motion or at the instance of an aggrieved party, see id. §78s(d)(2).

Id. at 51 (internal citation omitted); see also Sparta Surgical Corp. v. Nat'l Ass'n of Sec. Dealers, 159 F.3d 1209, 1212 (9th Cir. 1998) ("The Exchange Act requires self regulatory organizations to comply not only with the Exchange Act, but also with the association's own rules."). The failure of an SRO to comply with these requirements carries serious repercussions: the SRO risks being subject to the SEC's broad sanctioning power that includes suspension or revocation of the SRO's registration, or a "censure or... limitation[] upon the activities, functions, and operations of [the SRO]." 15 U.S.C. § 78s(h)(1).

The instant appeal arises out of investigations conducted by the SEC and the United States Attorney's Office targeting groups of independent floor brokers, commonly referred to as "$2.00 brokers," who regularly execute trades on the NYSE floor. The government suspected some of these brokers of violating section 11(a) of the Exchange Act and SEC Rule 11a-1 promulgated thereunder, as well as various rules of the NYSE,2 "by engaging in illegal

schemes of trading on the NYSE floor while sharing in the profits or losses generated from those trades." In re N.Y. Stock Exch., Exchange Act Release No. 34-41574, 1999 WL 430863, at *2 (June 29, 1999). As part of its investigation, the government examined the trading activities of D'Alessio, who functioned as a floor broker at the NYSE during this time. The investigations focused specifically on D'Alessio's profit-sharing arrangement with The Oakford Corporation (Oakford), a former broker dealer member of the National Association of Securities Dealers and the American Stock Exchange.

The mechanics of the trading scheme were not complicated: D'Alessio would purchase a particular security on behalf of a customer and thereafter sell that same security at a higher price, resulting in a net gain for the customer. D'Alessio received as a commission a percentage of the profits generated on these "flip" trades based on the spread between the bid and ask prices for the securities, typically one-eighth of a point on each share of stock. D'Alessio's exact share was determined by the individual agreements that he maintained with his customers. While there was no guarantee that these "flip" trades would result in a profit, as a floor broker, D'Alessio enjoyed a distinct advantage over other market participants because he had access to information regarding the performance of a particular security and the direction of its share price.

As a result of these activities, in February 1998, the United States Attorney's Office indicted D'Alessio for willfully violating various statutes and regulations that prohibited a floor broker from trading for his own account or for an account in which he exercised investment discretion. The SEC and the NYSE brought parallel charges against D'Alessio arising out of the same conduct. Specifically, the government charged D'Alessio with illegally sharing in the profits generated by trades he executed on the floor of the NYSE on behalf of Oakford.3 See D'Alessio, 125 F.Supp.2d at 657. Although the criminal charges ultimately were dismissed pursuant to a deferred prosecution agreement, the NYSE charges ultimately led to D'Alessio's suspension from the floor of the NYSE, resulting in economic losses to D'Alessio.

In December 1999, D'Alessio, personally, and his company, D'Alessio Securities, Inc., commenced an action against the NYSE in the Supreme Court of New York, New York County, alleging that the NYSE and various senior officials employed by the NYSE conspired to violate applicable statutory and regulatory prohibitions governing unlawful trading, to wit, section 11(a), Rule 11a-1 and various rules of the NYSE, by "concoct[ing] a phoney interpretation" of these provisions and knowingly disseminating that incorrect interpretation to the detriment of D'Alessio and other floor brokers. D'Alessio contends that he relied on the NYSE's interpretation at the time he engaged in trading practices that were later determined to be illegal. D'Alessio alleges that the NYSE, in an effort to keep its activities secret and curry favor with law enforcement authorities, assisted the United

States Attorney's Office and the SEC in their investigation and prosecution of D'Alessio by providing them with "false, misleading and inaccurate information about... D'Alessio." D'Alessio further alleges that the NYSE failed to disclose to these authorities that it had "approved and encouraged the practice of flipping," the specific type of unlawful trading for which D'Alessio had been charged. D'Alessio attributes the NYSE's inaction to the substantial fees earned by the NYSE and clearing members on the high volume of "flipped" trades and "a desire to increase the daily volume of trading activity on the NYSE." D'Alessio contends that, as a result of the NYSE's alleged misconduct, he has incurred legal difficulties and has been unable to work as a floor broker on the NYSE.

Based on these and related allegations, D'Alessio brought numerous tort claims against the NYSE and its various officers for injurious falsehood and concealment, fraudulent deceit and concealment, negligent misrepresentation and concealment, and, as to the NYSE only, breach of contract. In connection with these claims, D'Alessio sought compensatory and punitive damages.

On January 13, 2000, the NYSE filed a notice of removal of the action to the United States District Court for the Southern District of New York pursuant to 28 U.S.C. §1441. Notably, D'Alessio did not challenge removal of the action to federal court at that time or otherwise challenge the district court's jurisdiction over the action. Indeed, the issue of federal jurisdiction was not raised until the district court raised it sua sponte in a related case also before the district court.4 See Frayler v. N.Y. Stock Exch., 118 F.Supp.2d 448 (S.D.N.Y. 2000). Thereafter, the NYSE moved for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c). Relying on our decision in Barbara, the district court granted the NYSE's motion and dismissed the complaint with prejudice on the ground that the NYSE and its senior officials enjoyed absolute immunity in the performance of regulatory functions...

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