Dl Capital Group v. Nasdaq Stock Market

• Decision Date: 26 May 2005
• Docket Number: Docket No. 04-3027-CV.
• Citation: 409 F.3d 93
• Parties: DL CAPITAL GROUP, LLC, on behalf of itself and all others similarly situated, Plaintiff-Appellant, v. NASDAQ STOCK MARKET, INC. and Robert Greifeld, Defendants-Appellees, Jay Krishnaiah, Kwok Yau-Tong, Anthony Fulkerson, Adam Baruchowitz, Anselm Lin, Craig Allen, Craig Conway and Colonial Fund, LLC, Movants.
• Court: U.S. Court of Appeals — Second Circuit

409 F.3d 93

DL CAPITAL GROUP, LLC, on behalf of itself and all others similarly situated, Plaintiff-Appellant, v. NASDAQ STOCK MARKET, INC. and Robert Greifeld, Defendants-Appellees, Jay Krishnaiah, Kwok Yau-Tong, Anthony Fulkerson, Adam Baruchowitz, Anselm Lin, Craig Allen, Craig Conway and Colonial Fund, LLC, Movants.

Docket No. 04-3027-CV.

United States Court of Appeals, Second Circuit.

Argued: May 19, 2005.

Decided: May 26, 2005.

Appearing for Plaintiff-Appellant: Robert I. Harwood (Matthew M. Houston and Joshua D. Glatter, on the brief), Wechsler Harwood LLP, New York, N.Y. and Sherrie R. Savett, Barbara A. Podell, Douglas M. Risen, Berger & Montague, P.C., Philadelphia, PA, of counsel.

Appearing for Defendants-Appellees: Douglas R. Cox (F. Joseph Warin and Michael J. Edney, on the brief), Gibson, Dunn & Crutcher LLP, Washington, D.C.

Before: WINTER, KATZMANN, Circuit Judges. and MURTHA, District Judge.^*

KATZMANN, Circuit Judge.

In this case, we are asked to circumscribe the scope of the absolute immunity we have previously extended to so-called self-regulatory organizations ("SROs") when they engage in conduct consistent with the quasi-governmental powers delegated to them pursuant to the Securities Exchange Act of 1934 and the regulations and rules promulgated thereunder. However, because we believe that—at least in the circumstances just described—absolute immunity must be absolute, we reject the calls, inter alia, to carve out a fraud exception to the absolute immunity doctrine or to distinguish between suits brought by public investors and suits brought by others such as SRO members. Accordingly, we affirm the judgment of the district court.

I. BACKGROUND

Defendant Nasdaq Stock Market, Inc. ("Nasdaq") is a for-profit subsidiary of the National Association of Securities Dealers, Inc. ("NASD"), a so-called self-regulatory organization ("SRO") registered with the SEC as a national securities association pursuant to the 1938 Maloney Act amendments to the Securities Exchange Act of 1934. See 15 U.S.C. § 78o-3 et seq.

As an SRO, the NASD is, like other SROs such as the New York Stock Exchange ("NYSE"), authorized by Congress to "promulgate and enforce rules governing the conduct of its members." Barbara v. New York Stock Exch. Inc., 99 F.3d 49, 51 (2d Cir.1996). In this and other respects, the NASD serves as a critical aid to the SEC in implementing and effectuating compliance with the securities laws. Indeed, this Court has previously stated that SROs effectively "stand[ ] in the shoes of the SEC" because they perform regulatory functions that would otherwise be performed by the SEC, D'Alessio v. New York Stock Exchange, Inc., 258 F.3d 93, 105 (2d Cir.2001) and that SROs are, as a result, rightly considered "quasi-governmental" authorities. Id. That is not to say, of course, that the SEC, itself, is uninvolved with the affairs of the SROs that assist them in the regulation of the securities markets. On the contrary, the SEC has extensive involvement with, and broad oversight of, SROs, including the responsibility to approve or reject any rule, practice, policy, or interpretation proposed by an SRO. See 15 U.S.C. § 78s. Moreover, if an SRO has violated, or is unable to comply with, inter alia, the provisions of the Exchange Act, its own rules, or the rules of the SEC, the SEC is authorized to suspend or even revoke an SRO's registration, as well as to impose lesser sanctions. See 15 U.S.C. § 78s(g).

The NASD has delegated some of its regulatory powers and responsibilities as an SRO to Nasdaq. Generally speaking, the NASD has authorized Nasdaq to develop, operate, and maintain the Nasdaq Stock Market, to formulate regulatory policies and listing criteria for the Nasdaq Stock Market, and to enforce those policies and rules, subject to the approval of the NASD and ultimately the SEC. More specifically, we note for the purposes of this appeal that the NASD has in Rule 11890, a rule approved by the SEC,¹ authorized Nasdaq to cancel any Nasdaq Stock Market transaction where such a transaction is "clearly erroneous" or cancellation is "necessary for the maintenance of a fair and orderly market or [for] the protection of investors and the public interest." NASD MANUAL (CCH), Rule 11890(b) (2003). Under the terms of Rule 11890, a transaction is considered to be clearly erroneous "when there is an obvious error in any term, such as price, number of shares or other unit of trading, or identification of the security." Id. at 11890(a)(1).

The instant lawsuit arises out of Nasdaq's decision, pursuant to NASD Rule 11890, to cancel certain trades of Corinthian Colleges, Inc. ("COCO") stock on December 5, 2003. The pertinent facts, as alleged in the Complaint, are as follows: Between approximately 10:46 a.m. and 10:58 a.m., the market price of COCO fell precipitously from $57.45 to as low as $38.97. COCO had not issued any statements that would explain the sudden price drop. Nasdaq determined, however, that the extraordinary market activity resulted from multiple orders being routed to multiple market centers and electronic communications networks by a single customer; thus, multiple sell orders had been placed erroneously for COCO. At 10:58 a.m., Nasdaq halted trading in COCO, stating that the plunge was caused by "misuse or malfunction" of an electronic trading system. (Id.)

Nasdaq permitted trading to resume approximately one hour later, at 11:55 a.m. (Id.) Approximately 45 minutes later—at approximately 12:30 p.m—Nasdaq announced that it would cancel all trades made between 10:46 a.m. and 10:58:08 a.m. The cancellation did not extend to transactions in other stock markets unless done through Nasdaq's Super Montage system. Id. Approximately 12 million shares of COCO were traded on December 5, 2003, far above its average daily volume of less than 1 million shares.

Plaintiff DL Capital Group alleges that it purchased shares of COCO long between 10:46 a.m. and 10:58 a.m. and that—once trading on COCO had resumed but before Nasdaq made its cancellation announcement—it sold its shares of COCO at a profit. Because Nasdaq ultimately canceled DL Capital's purchase of COCO shares (which occurred between 10:46 a.m. and 10:58 a.m.), but failed to cancel DL Capital's sale of COCO shares (because they occurred outside the 10:46-10:58 a.m. window, namely at some point between 11:55 a.m. and approximately 12:30 p.m.), DL Capital alleges that Nasdaq effectively forced DL Capital into "an uncovered short sale," whereby DL Capital was "forced to purchase shares of COCO at a price higher than the sale price in order to cover the short sale which Nasdaq forced upon it." DL Capital alleges it was thus "injured by having to cover the forced short sale at a loss." (Id.)

In December 2003, the plaintiff filed the instant action, bringing two claims, one against Nasdaq and one against Robert Greifeld, Nasdaq's president and chief executive officer at all times relevant to plaintiff's suit. The first claim alleges, in effect, that Nasdaq made materially misleading statements or omissions—that is, committed fraud—by failing to disclose sooner its intention, or final decision, to cancel COCO trades that occurred between 10:46 a.m. and 10:58:08 a.m. The second claim alleges that Greifeld, as a "controlling person" of Nasdaq, violated Section 20(a) of the Exchange Act (the section that establishes controlling person liability) in connection with Nasdaq's general fraud.

Defendants moved to dismiss the Complaint on three grounds: (1) Nasdaq is absolutely immune from suits related to its SRO activities; (2) the plaintiff did not exhaust its remedies before the SEC which, defendants contended, were prerequisites to judicial action; and (3) the Exchange Act does not provide a right of action for money damages against SROs.

On May 3, 2004, the district court granted the defendants' motion on the first of these grounds and accordingly did not reach the others. See DL Capital Group LLC v. Nasdaq Stock Market, Inc., 2004 WL 993109, at *7 (May 5, 2004) [hereinafter "District Court Opinion"].² This appeal then followed.

II. DISCUSSION

There is no question that an SRO and its officers are entitled to absolute immunity when they are, in effect, "acting under the aegis" of their regulatory duties. Sparta Surgical Corp. v. Nat'l Ass'n of Sec. Dealers, Inc., 159 F.3d 1209, 1214 (9th Cir.1998). This Court has—twice before— effectively held as such. First, in Barbara v. New York Stock Exchange, Inc., we upheld a district court's decision to accord absolute immunity to the NYSE for claims "arising out of the performance of its federally-mandated conduct of disciplinary proceedings." 99 F.3d 49, 58 (2d Cir.1996). We held that although immunity should be decided on a case-by-case basis, it was appropriate to extend absolute immunity to the NYSE because of the "unique context of the self-regulation of the national securities exchanges." Id. at 59. We reasoned that because the NYSE "performs a variety of regulatory functions that would, in other circumstances, be performed by [the SEC]"—an agency which is accorded sovereign immunity from all suits for money damages—the NYSE should, in light of its "special status and connection to the SEC," out of fairness be accorded full immunity from suits for money damages, as well. Id.

More recently, in D'Alessio v. New York Stock Exchange Inc., the Court considered a suit in which plaintiffs alleged claims predicated on the "NYSE's improper performance of its interpretive, enforcement and referral claims," namely, claims alleging that: the "NYSE incorrectly interpreted and applied section 11(a) of the Exchange Act and regulations and rules thereto (interpretive function); the NYSE failed to monitor D'Alessio's compliance with the Exchange Act and various rules of the NYSE, and advise him that the commissions he earned in connection with `flip' trades violated those laws (enforcement function); and the NYSE...