Lang v. French
| Decision Date | 04 September 1998 |
| Docket Number | No. 97-31118,97-31118 |
| Citation | 154 F.3d 217 |
| Parties | Fed. Sec. L. Rep. P 90,282 Kenneth M. LANG, Plaintiff-Appellant, v. Charles E. FRENCH, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Brett John Prendergast, New Orleans, LA, for Plaintiff-Appellant.
Malcolm B. Robinson, Jr., Metairie, LA, for Defendant-Appellee.
Appeal from the United States District Court for the Eastern District of Louisiana.
Before WIENER, BARKSDALE and DeMOSS Circuit Judges.
Plaintiff-Appellant Kenneth M. Lang appeals the district court's grant of summary judgment in favor of Defendant-Appellee Charles E. French. Lang brought suit in district court seeking to enforce a restitution order issued by the National Association of Security Dealers ("NASD") and affirmed by order of the Securities Exchange Commission ("SEC"), disciplining French--Lang's former investment advisor--for violating the NASD's Rules of Fair Practice. The court dismissed Lang's suit on the ground that it was without jurisdiction to enforce a restitution order entered pursuant to the NASD's self-regulatory disciplinary process. Despite concluding that the Securities and Exchange Act of 1934 ("the Exchange Act") explicitly contemplates such enforcement authority, we nonetheless affirm, raising the issue of standing sua sponte and determining that Lang's suit is jurisdictionally defective for his lack of standing.
The facts are not in dispute. French, an NASD-registered securities representative, operated a Metairie, Louisiana satellite office of LaSalle St., a Chicago-based broker-dealer. Lang opened a LaSalle St. account through French in 1989. Two years later, French advised Lang to invest in First Care Medical Corporation ("First Care") by purchasing an interest in the company from a doctor who was purportedly "getting out." Lang paid the doctor $50,000, in exchange for which he received, inter alia, a promissory note from First Care and First Care stock certificates as collateral. First Care filed for bankruptcy protection in April 1993.
In July 1993, Lang requested an investigation by the NASD into French's conduct in recommending the First Care investment. Following an investigation, the NASD issued a formal complaint charging, inter alia, that French induced Lang to purchase the First Care promissory note by making misrepresentations The NASD initiated disciplinary proceedings against French for violations of the association's Rules of Fair Practice. Specifically, Lang was charged with violating Article III, Sections 1 and 18 of the Rules. Section 1 provides: "A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade." 1 Section 18 provides: "No member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance." 2
of material fact and by failing to provide disclosure adequate for Lang to make a fully informed investment decision.
Following a hearing in which French was represented by counsel, the NASD's District Business Conduct Committee found, inter alia, that French had engaged in a scheme to defraud Lang, in violation of the Rules of Fair Practice. The district committee censured French, fined him $15,000, and barred him from associating in any capacity with any member of the NASD. The committee also ordered French to pay restitution to Lang in the amount of $50,000, plus simple interest at the rate of 9% per annum from September 3, 1991 through the date of full payment.
French appealed to the National Business Conduct Committee, which affirmed the district committee. He then appealed the national committee's affirmance to the SEC, which, after an independent review of the record and the briefs filed, issued an opinion and order sustaining the action taken by the NASD. French did not appeal the SEC order to either the Fifth or D.C. Circuit Court of Appeals, as authorized under the Exchange Act. 3
In November 1996, Lang brought an action in district court seeking judicial enforcement of the restitution facet of the disciplinary action taken by the NASD and affirmed by the SEC. Specifically, Lang's complaint prayed for a "judgment in his favor enforcing the orders of the NASD and the SEC and ordering [French] to pay [Lang the amount mandated by the NASD pursuant to its restitution order]." Following French's failure to respond to Lang's Request for Admissions, Lang filed a motion for summary judgment. The district court denied the motion, holding that it lacked jurisdiction to enforce SEC orders affirming NASD disciplinary actions. Armed with the court's ruling, French filed a motion to dismiss, which the court treated as a summary judgment motion and granted. Lang timely appealed.
We review grants of summary judgment de novo, applying the same standards as the district court. 4 When, however, "this Court finds 'an adequate, independent basis' for the imposition of summary judgment, the district court's judgment may be affirmed 'regardless of the correctness of the district court's rulings.' " 5
Lang's claim raises novel issues on appeal, the resolution of which must begin with an understanding of the NASD disciplinary process and federal regulation of the over-the-counter ("OTC") securities markets. The NASD, a private nonprofit corporation organized under the laws of Delaware, is registered with the SEC as a national securities association. As a prerequisite to its registration under the Exchange Act, the NASD was required to promulgate association rules "designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade ... and, in general Beyond the adoption of professional rules, the Exchange Act requires the NASD to enforce compliance with those rules and, more broadly, with the "provisions of [the Exchange Act], the rules and regulations thereunder, [and] the rules of the Municipal Securities Regulation Board." 7 As mandated by the Exchange Act, the NASD has implemented a "fair procedure for the disciplining of members and persons associated with members" 8 suspected of violating the act's legal or ethical precepts. The Rules of Fair Practice, together with a Code of Procedure, set forth the disciplinary framework within which complaints are handled and members are disciplined.
to protect investors and the public interest." 6 To this end, the NASD adopted the Rules of Fair Practice, which govern the conduct of its members and associates of its members
The Exchange Act also requires the NASD's rules to provide for the imposition of sanctions when violations are found. NASD sanctions may include, "expulsion, suspension, limitation of activities, functions, and operations, fine, censure, being suspended or barred from being associated with a member, or any other fitting sanction." 9 Through its sanctioning authority, the NASD has been "delegated governmental power ... to enforce, at (its) own initiative, compliance by members of the [securities] industry with both the legal requirements laid down in the Exchange Act and ethical standards going beyond those requirements." 10
Several tiers of administrative review are available to persons aggrieved in the disciplinary process, 11 and disciplinary orders are reviewable by the SEC after administrative remedies within the NASD are exhausted. 12 Following a de novo determination of the facts and the law and an independent decision on the violation and the penalty, 13 the SEC is authorized to affirm, modify, or set aside any sanction, and, if necessary, remand to the NASD for further proceedings. 14 Final SEC orders are appealable to the United States Court of Appeals. 15 On appeal from an SEC order, "the court [of appeals] has jurisdiction ... to affirm or modify and enforce or to set aside the order in whole or in part." 16
Aside from its role as an adjudicator in the NASD's disciplinary process, the SEC may "take direct action against the NASD to ensure that the association enforces its own rules and the statutory provisions regarding disciplinary proceedings." 17 Section 21(e) of the Exchange Act was specifically amended in 1975 to authorize the SEC to "institute injunctive actions to enjoin a violation of the rules of a self-regulatory organization." 18 Significantly, section 21(e) contains a provision explicitly vesting district courts with jurisdiction, on application of the SEC, to issue "orders commanding ... any person to comply with [the Exchange Act], [and] the rules, regulations, and orders thereunder[.]"
19 Thus, the SEC is authorized not only to enjoin violations of the Rules of Fair Practice but also to enforce compliance with SEC disciplinary orders based on violations of those rules. And, we are aware of nothing that would except restitution orders from this authorization.
The joint roles taken by the NASD and the SEC in the regulation of OTC securities transactions reflects a congressional intent "to establish a 'cooperative regulation' where [securities] associations would regulate themselves under the supervision of the SEC." 20 The Fourth Circuit recently offered the following observations on the cooperative regulatory scheme governing the OTC markets:
The NASD's proceedings are intended to provide front-line, less formal enforcement of rules governing day-to-day operations of [OTC] securities markets. On the other hand, the SEC administrative proceedings cover all markets and organizations and are designed to prevent and punish more serious securities laws violations which, as the SEC determines, must be redressed in the public interest....
Congress' decision to give both the NASD and the SEC overlapping disciplinary authority reflects a considered decision to bring two separate vantage points to enforcement...
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