MFS Securities v. NY Stock Exchange, PLAINTIFFS-APPELLANTS

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Citation277 F.3d 613
Decision Date05 September 2001

Appeal from a judgment of the United States District Court for the Southern District of New York (Jed S. Rakoff, Judge), granting defendant's motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) and dismissing the complaint in a suit arising from the termination of plaintiff MFS Securities Corp.'s membership on the New York Stock Exchange.

Affirmed in part, vacated and remanded in part, with directions.

Dominic F. Amorosa, Esq., Law Office of Dominic F. Amorosa, Esq., New York, Ny, for Plaintiffs-Appellants.

Jay N. Fastow, Weil, Gotshal & Manges Llp, New York, NY (Marcia Y. Williams and James D. Lawrence, of counsel, on the brief), for Defendant-Appellee.

Before: Newman, Calabresi, and Sack, Circuit Judges.

Calabresi, Circuit Judge

Plaintiffs MFS Securities Corp. and Marco Savarese (collectively, "MFS" or "appellants") appeal from a judgment of the United States District Court for the Southern District of New York (Jed S. Rakoff, Judge) dismissing MFS's suit, which alleged (1) that defendant New York Stock Exchange (the "NYSE" or the "Exchange") had participated in a group boycott in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, and (2) that the NYSE had breached its membership contract with MFS. The district court granted defendant's motion to dismiss under Fed. R. Civ. P. 12(b)(6). We affirm in part, and vacate and remand in part, with directions.


In the 1990s, floor brokers on the NYSE participated in a trading practice known as stock "flipping." Flipping stocks, also known as "trading for eights," involves the purchase or sale of a security for a customer followed by the sale or purchase of the same security for a profit of one-eighth of a point, the then-spread between the bid and ask prices. Through this practice, the floor broker for the transaction not only received a commission for the trade but also obtained profits, which were typically shared with the customer. In 1993, two MFS Securities Corp. floor brokers, Mark Savarese and John Savarese, sons of plaintiff Marco Savarese, began flipping stocks.

According to MFS, the NYSE was aware, as early as 1991, that floor brokers participated in flipping stocks and were sharing in the resulting profits gained by their customers. MFS alleged that the NYSE supported and encouraged this activity, both because it increased daily trading volume on the NYSE, which in turn augmented the allure of the Exchange, and because it created higher profits for the NYSE, which collected fees from brokers based on total commissions.

Under Section 11(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78k(a)(1), and Securities Exchange Commission ("SEC" or "Commission") Rule 11a-1, 17 C.F.R. § 240.11a-1, however, it is illegal for floor brokers to trade on the NYSE for their own accounts or for accounts in which they have an interest. Accordingly, because the stock-flipping floor brokers shared in the profits, the practice violated Section 11(a) and Rule 11a-1.

The Exchange Act delegates substantial authority to the securities exchanges to regulate their own conduct and that of their members. See 15 U.S.C. §§ 78o-3(b), -3(h), 78s(g). MFS contended that the NYSE was able to permit stock flipping by interpreting Rule 11a-1 in an obviously incorrect manner, namely by excluding profit sharing arrangements from the definition of "interest in an account." MFS also maintained that the NYSE's support for flipping was surreptitious; thus the Exchange took various steps, such as declining to issue official statements on its policy with respect to stock flipping, in order to avoid attention and ultimate responsibility for the persistence of the practice.

In late 1997, the SEC and the United States Attorney's Office for the Southern District of New York began an investigation of stock flipping.1 MFS claimed that when senior NYSE officials met with the investigators, the Exchange officials attempted to cover up NYSE practices and curry favor with the investigators by scapegoating MFS. This was done by providing false information about MFS and by concealing relevant information, for instance, as to the extent of stock flipping that was occurring on the Exchange.

On February 25, 1998, the Savarese brothers were arrested on a charge that they had violated Section 11(a) by flipping stocks. Shortly thereafter, the SEC began an action against the Savarese brothers and against MFS. On the same day as the arrests, the NYSE expelled MFS from Exchange membership and cut MFS's phone lines on the Exchange floor. According to MFS, these actions violated both the Exchange Act and the rules of the NYSE, because each requires notice and an opportunity to be heard before a member's privileges can be revoked. MFS, in fact, did not receive a pre-termination hearing before the NYSE. In addition, according to MFS, because the NYSE did not proceed according to its disciplinary rules, MFS was barred from seeking SEC review of the NYSE's termination of MFS's Exchange membership. MFS, therefore, was allegedly left without any recourse from, or source of review of, the Exchange's actions.2

On July 27, 2000, MFS brought this suit alleging both a group boycott in violation of the Sherman Act, 15 U.S.C. § 1, and a breach of contract. MFS claimed that the termination of its Exchange membership, occurring as it did without notice and without an opportunity to be heard, amounted to participation by the NYSE in a group boycott. And, because MFS's membership contract required the NYSE fairly and accurately to advise MFS of the rules of the Exchange, MFS argued that the NYSE's failure so to inform MFS, with respect to the rule that outlaws stock flipping, meant that the Exchange had breached its contract with MFS.

In due course, the NYSE moved to dismiss the claims under Fed. R. Civ. P. 12(b)(6). It suggested multiple reasons for dismissing the Sherman Act claim including: (1) the Exchange's absolute immunity from antitrust suits for actions taken by it in connection with its regulatory duties under the Exchange Act; (2) the implied repeal (by the Exchange Act) of the antitrust laws, with respect to regulatory decisions of the Exchange (including membership termination); (3) the applicability, in this case, of a rule of reason analysis rather than a per se Sherman Act analysis, and, hence, of the rule of reason requirement - not here met - that the complaint allege an anticompetitive effect on the marketplace; and (4) the failure, since MFS had not pleaded that the Exchange's actions involved more than one party, adequately to allege a conspiracy. With respect to the claim for breach of contract, the NYSE claimed absolute immunity.

The district court granted defendant's motion and dismissed the case in an order dated January 22, 2001. MFS Secs. et ano. v. New York Stock Exch., Inc., No. 00-Civ.-5600, 2001 WL 55736 (S.D.N.Y. Jan. 23, 2001). The court held that the contract claim must be dismissed for the reasons it had stated in D'Alessio v. New York Stock Exch., Inc., 125 F. Supp. 2d 656 (S.D.N.Y. 2000), a companion case with similar facts, which had held that the Exchange and its officers are entitled to absolute immunity from such a suit because of the quasi-governmental nature of the interpretive and referral functions of the Exchange. MFS. Secs., 2001 WL 55736, at *1. With respect to the Sherman Act claim, the court held that because the NYSE, as a self-regulating securities exchange, was under a statutorily imposed obligation to oversee both Exchange membership and the enforcement of Exchange rules, a rule of reason analysis under the antitrust laws was the appropriate way of reviewing the claim of group boycott. Applying the rule of reason, the court determined that MFS's claim must be dismissed since its complaint had failed to state the minimum facts required to find an unreasonable restraint on competition - namely, MFS had not alleged the existence of any anticompetitive effects. Id.


On appeal, MFS claims (1) that the district court's application of the antitrust rule of reason was inconsistent with Supreme Court precedent; (2) that, in any event, the allegations in the complaint satisfied the rule of reason analysis; and (3) that the district court erred in holding that defendant had absolute immunity for breach of contract. MFS also contends that none of the alternate rationales for dismissal that the NYSE argued below, and again on appeal, apply.3

A. Standard of Review

The district court's dismissal pursuant to Fed. R. Civ. P. 12(b)(6) is subject to de novo review, with the appellate court accepting as true all well-pleaded factual allegations. Lee v. Bankers Trust Co., 166 F.3d 540, 543 (2d Cir. 1999). The reviewing court may, of course, affirm on any ground appearing in the record below. Shumway v. United Parcel Serv., Inc., 118 F.3d 60, 63 (2d Cir. 1997).

B. The Contract Claim

In dismissing MFS's contract claim, the district court relied on D'Alessio v. New York Stock Exch., Inc., 125 F. Supp. 2d 656 (S.D.N.Y. 2000). Since the district court's decision in the instant case, we have affirmed the lower court in D'Alessio. See D'Alessio v. New York Stock Exch., Inc., 258 F.3d 93 (2d Cir. 2001), cert. denied, ___ U.S. ___, 122 S.Ct. 666, ___ L.Ed.2d ___ (2001).

D'Alessio's claim arose out of a set of events similar to those in this case. D'Alessio had participated in stock flipping and had sued the NYSE alleging that it had failed accurately to interpret Section 11(a) and, in turn, had failed to monitor D'Alessio's compliance with the Act. We agreed with the district court's dismissal of the suit and held that the "NYSE is immune from liability for...

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