Mfs Securities Corp. v. S.E.C.
| Decision Date | 16 August 2004 |
| Docket Number | Docket No. 03-4882. |
| Citation | 380 F.3d 611 |
| Parties | MFS SECURITIES CORP., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, New York Stock Exchange, Intervenor. |
| Court | U.S. Court of Appeals — Second Circuit |
Dominic F. Amorosa, New York, NY, for Petitioner.
Mark Pennington, Assistant General Counsel, Securities and Exchange Commission (Giovanni P. Prezioso, General Counsel; Eric Summergrad, Deputy Solicitor; Meyer Eisenberg, Deputy General Counsel, of counsel), Washington, DC, for Respondent.
Jay N. Fastow, Weil, Gotshal & Manges LLP (Jonathan Bloom, of counsel), New York, NY, for Intervenor.
Before: SACK and RAGGI, Circuit Judges, and TRAGER, District Judge.*
Petitioner MFS Securities Corp. ("MFS") seeks review of an order of the Securities and Exchange Commission (the "SEC" or the "Commission") dismissing MFS's application for review of its termination as a member organization by the New York Stock Exchange (the "NYSE" or the "Exchange"). MFS urges that (1) the Commission was, as an institution, biased with respect to MFS and was therefore required to recuse itself and appoint an independent arbitrator to consider the petition; (2) the Exchange was similarly biased and required to recuse itself in the matter; and (3) the Commission erred in dismissing the petitioner's application for review for failure to exhaust administrative remedies.
Many of the facts underlying this petition are set out in our opinion in an earlier, related appeal in MFS Securities Corp. v. NYSE, 277 F.3d 613, 615-17 (2d Cir.2002) ("MFS II"). We rehearse them here only insofar as we think necessary to explain our resolution of the petition.
MFS was an independent floor broker and member organization of the Exchange, a self-regulatory organization ("SRO") subject to Commission oversight pursuant to 15 U.S.C. §§ 78c, 78f, 78s.1 MFS employed Mark Savarese and John Savarese (the "Savarese brothers"), who were both members of the Exchange, as floor brokers.
On February 25, 1998, the Savarese brothers were arrested on charges that they had traded for an account in which they had an interest in violation of Section 11(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78k(a)(1), and SEC Rule 11a-1, 17 C.F.R. § 240.11a-1. On the same day, they were summarily suspended from Exchange membership. As far as we can tell from the record, the Savarese brothers did not challenge their suspensions.
The arrests and suspensions of the Savarese brothers were based on allegations that they had, inter alia, engaged in stock "flipping" or "trading for eighths," a practice whereby a broker effects a purchase or sale of a security for a customer followed by its immediate sale or purchase, respectively, in order to capture the spread between the stock's bid and ask prices. Brokers who engage in "flipping" typically receive either a share of the profits thus earned or a per-trade commission that approximates half of the profits made through the transaction. The practice was viewed by the Exchange at the time of the suspensions as a violation of Section 11(a) and Rule 11a-1 inasmuch as it consisted of trading, contrary to those provisions, for an account in which the broker had an interest.
During much of the 1990s, the Exchange was apparently aware that some of its member-brokers were engaged in "flipping" in the course of their trading activities on the floor of the Exchange. On March 4, 1993, the Exchange's "Quality of Markets Committee" established an ad hoc "Advisory Committee on Intra-Day Trading Practices." Its mission was to
review, and, as appropriate, make recommendations regarding, a trading practice on the Exchange whereby Floor brokers and specialists represent both buy and sell orders in the same stock for a customer, and attempt to execute them in a manner that captures for the customer the spread between the bid and offer prices in that stock on the Exchange, [i.e., "flipping"].
New York Stock Exchange Advisory Comm. on Intra-Day Trading Practices, Report on Intra-Day Trading Practices 1 (1993). "The advisory committee was given the mandate to determine whether [such] intra-day trading interferes with public participation in the agency-auction market and is a practice that is detrimental to the best interests of the Exchange." Id.
The ad hoc committee eventually issued a "Report on Intra-Day Trading Practices," recommending that restrictions be placed on intra-day trading because it gave at least the impression that the intra-day traders associated with Exchange member floor brokers received a competitive advantage over the general investing public. Id. at 10-12. But the report's recommendation was not adopted. MFS alleges that, despite the report, the Exchange encouraged "flipping" in order to augment the fees it collected based on floor brokers' commissions and to increase the daily trading volume of the Exchange, bolstering its apparent liquidity as compared to other stock exchanges. MFS further alleges that the Savarese brothers performed "flipping" transactions on behalf of an MFS customer, the Oakford Corporation, in reliance on the NYSE's permissive view of the practice.
On February 25, 1998, the Savarese brothers were suspended by the Exchange for, inter alia, engaging in "flipping" transactions for Oakford's account. At the time of their suspension, the Savarese brothers were the only officers or employees of MFS who were Exchange members. MFS was therefore no longer then associated with an Exchange member, a requirement for MFS to maintain its status as an Exchange member organization. See NYSE Const. art. I, § 3(i), (k), available at http://www.nyse.com/pdfs/constitution.pdf (last visited Aug. 9, 2004). The Exchange thereupon declared MFS's status as a member organization terminated and disconnected its phone lines on the Exchange floor. The Exchange effected MFS's suspension and termination without first providing notice to MFS or an opportunity for it to be heard.
The propriety of thus terminating MFS is doubtful in light of NYSE Rule 475(a), which proscribes a person's denial of access to services offered by the Exchange "unless the Exchange shall have notified such person in writing of, and shall have given such person, upon not less than 15 days prior written notice, an opportunity to be heard upon, the specific grounds for such prohibition or limitation." NYSE Rule 475(a). But neither the Savarese brothers, nor MFS in its initial, February 26, 1998, communication to the Exchange relating to its termination, complained about the Exchange's possible violation of Rule 475(a). MFS told the Exchange, instead, that MFS was attempting to hire another Exchange member as a broker to enable MFS to maintain its membership in the Exchange. MFS asked the Exchange to permit MFS to maintain its status as a member organization in the interim pursuant to NYSE Rule 312(f), which provides that, upon application, the Exchange "may" grant a member organization whose sole member has died or ceased to be a member to continue as a member organization for up to 90 days, "provided such action is consistent with the protection of investors and the public interest." NYSE Rule 312(f).
On March 2, 1998, the NYSE's Member Firm Regulation Division (the "Division") denied MFS's request for a Rule 312(f) extension. On the same day, MFS informed the Division that MFS had indeed hired an Exchange member. MFS requested that, on that basis, MFS be permitted to continue as a member organization. On March 4, 1998, the Division nonetheless notified MFS that, its new member-employee notwithstanding, it was no longer an Exchange member organization.
Two days later, on March 6, 1998, MFS protested its termination to the NYSE Board of Directors (the "Board"), requesting review of its treatment by the Division. MFS then, for the first time, argued that its termination without notice and an opportunity to be heard violated NYSE Rule 475(a) and 15 U.S.C. § 78f(d)(2). In response, on April 2, 1998, the Board remanded MFS's complaint to the Division. According to the Board, the remand was for the purpose of
promptly affording [MFS] a reasonable opportunity to present additional facts. Appropriate written notice shall be given by the Division and an appropriate record shall be made. The present status of [MFS] remains the same until the Division renders a decision, which decision shall be rendered as promptly as practicable.
MFS Sec. Corp., NYSE Board Order (Apr. 2, 1998).
But MFS chose not to make further submissions to the Division. Instead, on July 27, 2000, MFS brought suit against the Exchange in the United States District Court for the Southern District of New York alleging that the Exchange's termination of MFS constituted an unlawful group boycott in violation of the Sherman Act, 15 U.S.C. § 1, and a breach of contract. The district court (Jed S. Rakoff, Judge) granted the Exchange's motion under Federal Rule of Procedure 12(b)(6) to dismiss MFS's complaint as to both claims on the merits. MFS Sec. v. NYSE, No. 00 Civ. 5600, 2001 WL 55736, at *1, 2001 U.S. Dist. LEXIS 420, at *2 (S.D.N.Y. Jan. 23, 2001) ("MFS I").
MFS appealed to this Court. By opinion dated January 24, 2002, we affirmed the district court's dismissal of MFS's breach of contract claim against the Exchange, concluding that it was barred under the doctrine of quasi-governmental immunity. MFS II, 277 F.3d at 617. As for the Sherman Act claim, however, we vacated the district court's dismissal. Recognizing that the SEC had "jurisdiction to consider many of the questions embedded in MFS's complaint and believ[ing] that administrative review w[ould] be of material aid to the district court in resolving the claim brought by MFS," id. at 620 (internal quotation marks omitted), we remanded the action to the district court with directions...
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