Lank v. New York Stock Exchange

• Decision Date: 20 January 1977
• Docket Number: No. 259,D,259
• Citation: 548 F.2d 61
• Parties: Fed. Sec. L. Rep. P 95,841 Aubrey B. LANK, as Receiver of Pickard & Company, Incorporated, Plaintiff-Appellee, v. The NEW YORK STOCK EXCHANGE, Defendant-Appellant. ocket 76-7243.
• Court: U.S. Court of Appeals — Second Circuit

Page 61

548 F.2d 61

Fed. Sec. L. Rep. P 95,841

Aubrey B. LANK, as Receiver of Pickard & Company Incorporated, Plaintiff-Appellee, v. The NEW YORK STOCK EXCHANGE, Defendant-Appellant.

No. 259, Docket 76-7243.

United States Court of Appeals Second Circuit.

Argued Dec. 8, 1976.

Decided Jan. 20, 1977.

William F. Tueting, New York City (Robert S. Carlson, Gregory Katz, Robert D. Marafioti and Spengler, Carlson, Gubar, Churchill & Brodsky, New York City, on the brief), for plaintiff-appellee.

Russell E. Brooks, New York City (Martha G. Bannerman and Milbank, Tweed, Hadley & McCloy, New York City, on the brief), for defendant-appellant.

Before MEDINA, OAKES and GURFEIN, Circuit Judges.

MEDINA, Circuit Judge:

The New York Stock Exchange appeals from a judgment of the United States District Court for the Southern District of New York, on questions certified by Judge Morris E. Lasker, pursuant to 28 U.S.C. Section 1292(b). The opinion below is reported, 405 F.Supp. 1031 (S.D.N.Y.1975). The principal issue before us is whether a member of a national securities exchange has a cause of action against the exchange for damages suffered as a result of the exchange's failure to force the member to comply with the exchange's rules. We hold that it does not.

I

In December 1971 appellee Aubrey Lank commenced this suit against the New York Stock Exchange for violations of Section 6 of the Securities Exchange Act of 1934. ¹ Lank is the receiver of Pickard & Company, Incorporated, a defunct brokerage firm which, until it ceased business and began liquidation in February 1968, was a member organization of the Exchange. Pickard, a Delaware corporation, had registered with the Securities and Exchange Commission as a broker-dealer in 1962 and as an investment advisor in 1964. The Exchange is a not-for-profit corporation incorporated under the laws of New York and registered with the SEC as a national securities exchange pursuant to the Exchange Act. At all times relevant to this suit, the Exchange was an unincorporated association existing under the laws of New York.

As a result of an annual unannounced audit begun in September 1967 by an independent public accountant, as required by Exchange Rule 418, the Exchange learned in January 1968 of substantial deficiencies and inaccuracies in Pickard's books and records. The Exchange imposed restrictions on Pickard beginning in February 1968. The firm was liquidated shortly thereafter when attempts by the Exchange to put Pickard's records in order proved unsuccessful. ² In May 1968 the Exchange's chief examiner was appointed liquidator to take control of Pickard and wind up its business. Serious wrongdoing by certain of Pickard's officers and employees, including its president and vice-president, was discovered. They were found to have violated numerous securities laws and rules, as well as several Exchange regulations.

In March 1969 the Exchange successfully petitioned in Delaware (where Pickard was incorporated) for the appointment of a receiver. At that time the Exchange claimed it was the only remaining general creditor of Pickard, although in the instant suit Lank has asserted that there are approximately thirty other unpaid general creditors, with claims in excess of $100,000. The other claimants of Pickard's assets are subordinated lenders and stockholders.

Lank was appointed receiver in April 1969, and commenced this action on December 17, 1971. With the permission of the Delaware Chancery Court, he had earlier sought to present the same claims as a counterclaim against the Exchange in the Delaware receivership proceeding in 1971, but the Delaware court, upon the Exchange's motion, dismissed the counterclaim on the ground that exclusive jurisdiction for a claim under the Exchange Act lay in the federal courts. New York Stock Exchange v. Pickard & Co., Inc., 282 A.2d 651, 652 (Del.Ch.1971). In the District Court the Exchange counterclaimed against Lank for the same amount it had sought in the receivership proceeding. This counterclaim is not before us.

The essence of Lank's complaint is that as a result of the Exchange's violations of Section 6 of the Exchange Act, Pickard's customers, subordinated lenders, stockholders, and creditors who advanced money to Pickard after October 1966 suffered substantial losses. He alleges that as early as October 1966 the Exchange knew or should have known that Pickard was in violation of various Exchange rules, and had the Exchange fulfilled its Section 6 duties to enforce compliance with those rules by suspending Pickard from membership, the losses suffered by Pickard's customers, subordinated lenders, stockholders, and creditors would have been prevented.

The Exchange sought dismissal of the complaint and summary judgment, both for "lack of capacity" of the receiver to raise these claims on behalf of Pickard against the Exchange, and because the action was barred by the applicable statute of limitations. The District Court granted the motion to dismiss "for lack of capacity" only those claims Lank sought to assert on behalf of third parties Pickard's creditors, subordinated lenders and stockholders. In all other respects the motion was denied.

Recognizing that the questions of whether Lank could sue the Exchange and of the time within which such a suit could be commenced were novel and "involve * * * controlling question(s) of law as to which there is substantial ground for difference of opinion," Judge Lasker, upon the Exchange's motion, certified two questions for immediate review by this Court, pursuant to 28 U.S.C. Section 1292(b): ³

(1) Whether the receiver of a former member corporation of the (New York Stock) Exchange has standing (or alternatively capacity) to assert a claim against the Exchange under Section 6 of the Securities Exchange Act of 1934 on behalf of the member corporation, and

(2) Whether a three-year or six-year statute of limitations is applicable to the receiver's claim under Section 6.

The District Court held that the receiver "has standing" to assert a Section 6 claim against the Exchange both because the corporation itself could have done so and because "the ultimate beneficiaries of any recovery by (him) are third parties who share no culpability for Pickard's wrongdoing and ultimate demise" (id. at 1039). It further held that New York's six-year statute of limitations for actions upon a contract applies in a suit for violations of Section 6, since the plaintiff sues as a third party beneficiary of the agreement the Exchange was required to file when it registered with the SEC.

We note that in the hurly-burly and rush of litigants to make their way into the already overcrowded courts it is not surprising that not only the niceties but also the very fundamentals of rules of practice and procedure are pushed aside. Indeed, there are many who consider these rules to be "technicalities" to be disregarded whenever possible in the interest of speedy and inexpensive justice. We protest against this trend and would remind those who choose to listen that without rules of procedure all litigation degenerates into chaos. Rules of procedure are intended: to give orderliness and stability to court proceedings; to achieve certainty and to prevent confused reasoning, that great enemy of justice everywhere. At the heart of this case is Section 6 of the Exchange Act. We must decide whether or not appellee has stated a cause of action or "claim for relief" against the Stock Exchange, and this depends upon the way we interpret Section 6. Capacity to sue has nothing to do with this problem. Moreover, we are at a loss to understand what is meant here by the reference to appellee's "standing." Fuzzy thinking is apt to follow the inaccurate use of procedural phrases with clear and precise historical meanings. These phrases are part and parcel of procedure itself. But there is plenty of precedent for the somewhat indiscriminate use of these words in various contexts in recent years and they cause no confusion in this case.

II

The primary purpose of the Exchange Act was to protect customers of the stock exchanges that is, public investors. One method of effectuating this was to impose on the exchanges a statutory duty "to protect investors by regulating (the exchanges') members." Note, Exchange Liability for Net Capital Enforcement, 73 Col.L.Rev. 1262, 1264 (1973).

At all times relevant to this action, Section 6(a) of the Exchange Act required an exchange to agree, as a prerequisite to its registration with the SEC as a national securities exchange, "to comply, and to enforce so far as within its powers compliance by its members, with the provisions of" the Exchange Act and SEC and exchange rules and regulations; ⁴ Section 6(b) requires an exchange to formulate and enforce rules for disciplining and suspending members; and Section 6(d) states in terms that the purpose of these requirements is "to insure fair dealing and to protect investors." In Baird v. Franklin, 141 F.2d 238 (2d Cir.), cert. denied, 323 U.S. 737, 65 S.Ct. 38, 89 L.Ed. 591 (1944), this court held that when an exchange breaches the duty prescribed by Section 6 to enforce its rules, a private right of action arises in favor of public investors. Judge Clark, whose opinion, though dissenting on the element of burden of proof, set forth the rationale of the court, characterized the implication of such a private right of action as necessary to effectuate the Congressional purpose of protecting public investors, the class Congress intended the statute to protect.

One of the primary purposes of Congress in enacting the Securities Exchange Act of 1934 was to protect the general investing public. * * * (I)f the investing public is to be completely and effectively protected, § 6(b) must be construed as granting to injured investors individual causes of action to enforce the statutory duties imposed upon the exchanges.

141 F.2d at 244-245.

Judge Clark...