Mandelbaum v. New York Mercantile Exchange

• Decision Date: 01 August 1995
• Docket Number: No. 93 Civ. 8302 (AGS).,93 Civ. 8302 (AGS).
• Citation: 894 F. Supp. 676
• Parties: Edward MANDELBAUM and Cooperative Trading Services, Incorporated, Plaintiffs, v. NEW YORK MERCANTILE EXCHANGE, R. Patrick Thompson, Ronald G. Oppenheimer, James Morrissey, Stuart Smith, and Does 1 Through 10 Inclusive, Defendants.
• Court: U.S. District Court — Southern District of New York

894 F. Supp. 676

Edward MANDELBAUM and Cooperative Trading Services, Incorporated, Plaintiffs, v. NEW YORK MERCANTILE EXCHANGE, R. Patrick Thompson, Ronald G. Oppenheimer, James Morrissey, Stuart Smith, and Does 1 Through 10 Inclusive, Defendants.

No. 93 Civ. 8302 (AGS).

United States District Court, S.D. New York.

August 1, 1995.

Scott M. Brenner, New York City, for plaintiffs.

Pollack & Kaminsky by Martin I. Kaminsky, Edward T. McDermott and Justin Y.K. Chu, New York City, for defendants.

Opinion & Order

SCHWARTZ, District Judge.

BACKGROUND

Plaintiff Edward Mandelbaum is a former member of the New York Mercantile Exchange ("NYMEX"). Complaint, ¶¶ 3, 14 and 85. He sold his NYMEX seat in April 1993. Complaint ¶ 85. Mandelbaum is also the owner of co-plaintiff Cooperative Trading Services, Incorporated ("CTS"), Complaint ¶¶ 4 and 5, which was a floor brokerage company engaged in trading on NYMEX until early 1993.

NYMEX is the largest commodities exchange in New York and the third largest in the United States, providing a contract market for energy and metals futures and options. Complaint, ¶¶ 6 and 7. NYMEX is the principal forum on which petroleum products are traded in the world. Defendants Thompson, Oppenheimer, Morrissey and Smith are officers and employees of NYMEX, and are actively involved in its day-to-day operations ¶¶ 9-12.

NYMEX and the individual defendants have a quasi-governmental role in the regulation of trading on NYMEX. As such, they conduct investigations, and they institute and prosecute disciplinary proceedings to punish wrongdoing by NYMEX members, pursuant to a regulatory structure created by Congress in the Commodity Exchange Act and overseen by the Commodity Futures Trading Commission Complaint ¶ 7, see also § 8c of the Commodity Exchange Act ("CEA"). Under that structure, Congress delegated disciplinary responsibilities to NYMEX as a self-regulatory organization, and to its officials (such as the individual defendants) who perform those duties on behalf of NYMEX. Id.

Plaintiffs contend that NYMEX and the individual defendants abused their regulatory authority in furtherance of an alleged conspiracy to coerce Mandelbaum to sell his NYMEX seat. Complaint, ¶¶ 21, 178, 187. More precisely plaintiffs allege that defendants initiated an improper disciplinary proceeding against Mandelbaum, harassed and threatened Mandelbaum with other disciplinary proceedings, and instituted an allegedly baseless disciplinary proceeding against CTS' "main executing broker", Peter Walshak. Complaint, ¶ 21.

Plaintiffs claim that NYMEX improperly imposed a summary $5,000 fine upon Mandelbaum to discipline him for conduct in the crude oil trading ring on October 21, 1998 Complaint, ¶¶ 22, 23, 26 and 31-34. Mandelbaum successfully appealed that fine to the CFTC, which vacated the fine in 1992. Complaint, ¶¶ 65, 66, 76. Thus, plaintiffs acknowledge in the Complaint that:

Mandelbaum was finally afforded due process and as a result of same, he was exonerated on all the fabricated and serious allegations against him.

During the Mandelbaum disciplinary proceeding, plaintiffs contend, Mr. Smith allegedly signed false affidavits, Complaint ¶¶ 49, 63, which he and Mr. Oppenheimer allegedly mailed to the CFTC, Complaint ¶¶ 46, 63. In addition, Mr. Morrissey (who is the Director of the Trade Practices Unit in NYMEX's Compliance Department) supposedly harassed Mandelbaum with interviews and threats of other disciplinary actions with respect to Mandelbaum's trading activities, Complaint ¶ 100; and Mr. Thompson (NYMEX's President) is alleged to have threatened to "bury Mandelbaum with legal costs" and to appeal the CFTC decision to the United States Court of Appeals for the Second Circuit. Complaint ¶ 99. As noted, however, the CFTC exonerated Mandelbaum, Complaint ¶¶ 65, 66, 76; no further disciplinary proceedings were brought against plaintiff, Complaint ¶ 100;, and NYMEX did not seek a further appeal.

Plaintiffs contend that NYMEX further brought its disciplinary machinery to bear against them by instituting and prosecuting a disciplinary proceeding against Walshak in 1991 and 1992 with respect to Walshak's trading in the crude oil ring on September 17, 1991, Complaint, ¶¶ 122 et seq.¹ The Walshak disciplinary proceeding resulted in a conviction of Walshak, after a full hearing before his peers, for "engaging in an act of bad faith" and "conduct inconsistent with just and equitable principle sic of trade." Complaint ¶¶ 148-49.

Plaintiffs' other factual allegations and claims arise out of or are corollaries to the disciplinary proceedings against Mandelbaum and Walshak.

Plaintiffs claim that Mandelbaum was harmed by the foregoing conduct, inasmuch as it allegedly compelled him to sell his NYMEX seat in April 1993. Complaint, ¶¶ 21, 150 and 184. In addition, plaintiffs contend that CTS was forced to close down its trading operation ¶ 175. As a result, plaintiffs seek $20 million (trebled to $60 million) in damages pp. 80-84.

Procedural History of this Action

Plaintiffs filed the Complaint in this action on December 3, 1993, alleging that NYMEX and the four NYMEX staff official, and certain other unnamed NYMEX staff members, engaged in wrongdoing in connection with the disciplinary actions prosecuted against plaintiffs. The Complaint asserts claims under RICO, the Commodity Exchange Act, and common law. Defendants move to dismiss the complaint on various grounds, including that defendants are absolutely immune from liability for their roles in initiating, prosecuting, and adjudicating the disciplinary proceedings relating to plaintiffs. Plaintiff moves to amend the Complaint, seeking inter alia to add factual allegations based upon the convictions, by the CFTC, of defendant McGoldrick and others for major NYMEX regulatory violations. See Affidavit of Edward Mandelbaum, ¶ 19; Plaintiff's Mem. of Law in Support of Motion to Amend the Complaint, at 3-4.

For the reasons set forth below, defendants' motion to dismiss the Complaint is granted, and plaintiff's motion to amend the Complaint is denied.

DISCUSSION

As noted, defendants premise their motion to dismiss in part on the doctrine of absolute immunity.² In analyzing whether actions of government officials should be placed within the common-law tradition of absolute immunity, the Supreme Court has developed a "functional approach." Buckley v. Fitzsimmons, ___ U.S. ___, ___, 113 S.Ct. 2606, 2612, 125 L.Ed.2d 209 (1993). This inquiry is centered on "the nature of the function performed, not the identity of the actor who performed it,"³ and, significantly for this action, "focuses on the conduct for which immunity is claimed, not on the harm that the conduct may have caused or the question whether it was lawful." Buckley, ___ U.S. at ___, 113 S.Ct. at 2615; see also, Dorman v. Higgins, 821 F.2d 133, 136 (2d Cir.1987) ("The entitlement of a government official to absolute immunity, protecting him from liability from suit and from any scrutiny of the motive for and reasonableness of his official actions, depends on the function he performs.")

Upon examining constitutional, congressional, and historical guidance on the issue, courts have extended absolute immunity to persons who are or are "functionally comparable" to judges, prosecutors, witnesses and other "participants in the judicial process." Johnson v. Kegans, 870 F.2d 992, 995-96 (5th Cir.1989); see also Stump v. Sparkman, 435 U.S. 349, 98 S.Ct. 1099, 55 L.Ed.2d 331 (1978); Imbler v. Pachtman, 424 U.S. 409, 96 S.Ct. 984, 47 L.Ed.2d 128 (1976). In Butz v. Economou, 438 U.S. 478, 510-513, 98 S.Ct. 2894, 2913-14, 57 L.Ed.2d 895 (1978), the Supreme Court articulated the three part test to be used in determining need to afford absolute immunity to a government official, namely, that official's conduct qualifies for protection if:

a) the official's functions share the characteristics of the judicial process;

b) the official's activities are likely to result in recriminatory lawsuits by disappointed participants; and

c) sufficient safeguards exist in the regulatory framework to control unconstitutional conduct.

Under the facts confronting the Court in Butz, absolute immunity was extended to Department of Agriculture officials who were found to perform the function of judges and prosecutors. Specifically, the Court found that hearing examiners, administrative law judges, and agency prosecuting officers satisfied the foregoing criteria inasmuch as they: (1) acted as judges and prosecutors albeit in an administrative rather than judicial forum; (2) would likely be the targets of recriminatory lawsuits by targets of prosecution; and (3) the governing statutes and regulations, including the Administrative Procedure Act, provided adequate safeguards to control unconstitutional conduct, so that an abuse of office was unlikely to go uncorrected.

In Austin Municipal Securities, Inc. v. National Association of Securities Dealers, Inc., 757 F.2d 676 (5th Cir.1985), absolute immunity was extended to private individuals and organizations who work in quasi-governmental capacities. More precisely, the Fifth Circuit found that:

Although the NASD possesses no sovereign power, we conclude that, under the rationale of Butz, it requires absolute immunity from civil liability for its actions connected with the disciplining of its members.

Id., at 692. Further, inasmuch as NASD disciplinary committee members "acted as prosecutors or adjudicators when disciplining plaintiff" by undertaking to "decide which charges would be brought against plaintiff, a traditional prosecutorial function, and then adjudicated plaintiffs guilt, which clearly is functionally equivalent to a judge," they were entitled to "absolute immunity from civil liability for their actions taken within the outer scope of their disciplinary duties." Id., at 689, 691. Finally, the court noted that:

For any actions the NASD staff has taken in a prosecutorial

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