Spicer v. Chicago Bd. of Options Exchange, Inc.

• Decision Date: 24 September 1992
• Docket Number: 91-1918,Nos. 91-1488,s. 91-1488
• Citation: 977 F.2d 255
• Parties: , Fed. Sec. L. Rep. P 97,016 Myles M. SPICER, individually and as a partner of the Myles and Richard Spicer partnership; John A. Brittain; and Buys-MacGregor, MacNaughton, Greenwalt & Co., a corporation, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. CHICAGO BOARD OF OPTIONS EXCHANGE, INC., and Michael B. Saltzman, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 255

977 F.2d 255

61 USLW 2185, Fed. Sec. L. Rep. P 97,016

Myles M. SPICER, individually and as a partner of the Myles

and Richard Spicer partnership; John A. Brittain; and Buys-MacGregor, MacNaughton, Greenwalt & Co., a corporation, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. CHICAGO BOARD OF OPTIONS EXCHANGE, INC., and Michael B.

Saltzman, et al., Defendants-Appellees.

Nos. 91-1488, 91-1918.

United States Court of Appeals,

Seventh Circuit.

Argued Jan. 17, 1992.

Decided Sept. 24, 1992.

Ronald L. Futterman, James G. Bradtke, Hartunian & Associates, Stephen B. Diamond, Beeler, Schad & Diamond, Philip Fertik, Herbert Beigel, Leigh R. Lasky (argued), Brian R. Worth, Beigel & Sandler, Chicago, Ill., Steve J. Toll, Cohen, Milstein & Hausfeld, Washington, D.C., Ron M. Landsman, Bethesda, Md., Edward T. Joyce, James X. Bormes, Paul A. Castiglione, Joyce & Kubasiak, Chicago, Ill., for plaintiffs-appellants.

Lloyd A. Kadish, Kadish & Associates, Jerrold E. Salzman, Phillip L. Stern, Freeman, Freeman & Salzman, Kevin M. Flynn, Shelley R. Weinberg, Coffield, Ungaretti, Harris & Slavin, Harry P. Lamberson, David S. Barritt, Chapman & Cutler, Paul B. Uhlenhop, Charles J. Risch, Michael Wise, Lawrence, Kamin, Saunders & Uhlenhop, Joseph D. Keenan, III, Sklodowski, Franklin, Puchalski & Reimer, Robert A. Vanasco, Matthew D. Wayne, Fishman & Merrick, Aaron E. Hoffman, Schwartz & Freeman, Lawrence R. Samuels, Jacquelyn F. Kidder, Ross & Hardies, Garrett B. Johnson, Robert S. Steigerwald, David M. Matteson, Mark S. Bernstein, Kirkland & Ellis, David C. Bohan (argued), Jenner & Block, Roger Pascal, Burton R. Rissman, Paul E. Dengel (argued), Jeanne L. Nowaczewski, Amy S. Belcove, Schiff, Hardin & Waite, Chicago, Ill., for defendants-appellees.

Before FLAUM and MANION, Circuit Judges, and CURRAN, District Judge. ^*

FLAUM, Circuit Judge.

Section 6 of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78f (1988), governs, among other things, the registration of national securities exchanges with the Securities and Exchange Commission (the Commission). Subsection 6(b), id. § 78f(b), provides that the Commission may register an exchange only if the exchange has established rules to govern trading, internal operations, and the discipline of wayward exchange members, and has demonstrated the capacity to comply with those rules and enforce compliance by its members. The plaintiffs, who purchased securities on a national securities exchange, maintain that § 6(b) furnishes them an implied private right of action against members of the exchange who allegedly violated certain exchange trading rules, and against the exchange itself for failing to enforce compliance with those rules, and for violating, on its own accord, other exchange rules. We decline to announce a categorical rule regarding all potential private actions under this provision. We hold only that § 6(b) may never support a private suit against an exchange for violating or failing to enforce its own rules, and that it does not support an action against exchange members for violating the exchange rules at issue in this case.

I.

This lawsuit, like many before it, arises from the ashes of Black Monday, the stock market crash of October 19, 1987. See, e.g., Ruffolo v. Oppenheimer & Co., 949 F.2d 33 (2d Cir.1991); DeBruyne v. Equitable Life Assurance Soc'y, 920 F.2d 457 (7th Cir.1990); Thomas McKinnon Sec., Inc. v. Clark, 901 F.2d 1568 (11th Cir.1990), cert. denied, --- U.S. ----, 111 S.Ct. 678, 112 L.Ed.2d 670 (1991). The plaintiff class consists of all investors, other than the individual defendants, who purchased certain Standard & Poors 100 (S & P 100) index options during trading rotations at the Chicago Board of Options Exchange (CBOE) on October 20. The defendants are the CBOE, a national securities exchange registered to conduct options trading, and 35 individual "market-makers" in the S & P 100 pit, all of whom are CBOE members. Market-makers are individual traders appointed by the CBOE to maintain a fair, orderly and liquid market in one or more classes of option contracts. Their function is similar, although not identical, to that of "specialists" on national stock exchanges. The market-makers trade for their own account on the floor of the exchange, buying options from brokers representing investors who wish to sell, and selling options to brokers representing investors who wish to buy. Of the individual defendants here, 24 traded on the day in question and 11 did not; we shall refer to the two groups as the "participants" and the "nonparticipants," respectively.

On October 20, the plaintiffs issued "market orders"--meaning orders to buy (or, as the case may be but is not here, sell) S & P 100 options at the prevailing market price--to their brokers. The gravamen of their lawsuit is that when their brokers executed those orders, the participants, who sold the options, charged grossly inflated prices to recoup losses they had suffered the previous day. The CBOE, the investors allege, facilitated the participants' wrongdoing by violating the securities laws and certain CBOE rules, and by failing to enforce compliance by the market-makers with other exchange rules. The nonparticipants are also alleged to have facilitated the wrongdoing by failing to appear for trading on October 20, in violation of yet another CBOE rule.

The basis of the plaintiffs' lawsuit might appear odd from the perspective of commonly accepted finance principles. The price of an option is determined by a number of factors, one being the price volatility of the underlying security, see generally Julian Walmsky, The New Financial Instruments 156-61 (1988), which in this case is the S & P 100 stock index. October 19 and 20 were arguably the most volatile days in the history of the stock market. See Report of the Presidential Task Force on Market Mechanisms (The Brady Report), [1987-88 Transfer Binder] Fed.Sec.L.Rep. (CCH) p 84,213. The S & P 100 stock index lost about 21% of its value on October 19; in the first two and one-half hours of trading on October 20, the Dow Jones Industrial Average experienced more than a 23% swing in value. In light of this unprecedented volatility, it should have come as no surprise that the price of S & P 100 index options was much higher than usual. But these observations are relevant primarily to liability and damages; at issue here is whether the plaintiffs' complaint states a valid cause of action under federal law.

The plaintiffs brought suit under the Securities Act of 1933 and the Exchange Act, and under state law for negligence and breach of fiduciary duty. The complaint sought relief from the market-makers under only one count, which alleged that they had violated § 6(b) of the Exchange Act by failing to comply with CBOE Rules 4.1 and 8.7. Likewise, one of the several counts against the CBOE alleged that it had violated § 6(b) by failing to enforce compliance by the market-makers with those rules, and by violating itself other CBOE rules. The district court dismissed both of these counts under Fed.R.Civ.P. 12(b)(6), reasoning that § 6(b) does not provide an implied private right of action (all agree that there is no express right of action) for the violation of or the failure to enforce exchange rules. Spicer v. Chicago Bd. Options Exchange, Inc., 1990 WL 172712, at * 3-17, 1990 U.S. Dist. LEXIS 14469, slip op. at 8-20 (N.D.Ill. Oct. 24, 1990) [hereinafter "Dist. Op."]. Although several counts against the CBOE and other defendants survived the motion to dismiss, the district court entered final judgment as to the § 6(b) counts under Fed.R.Civ.P. 54(b). We affirm.

II.

About five years ago, in the context of another lawsuit brought by investors against an exchange and its members, we observed that the whole question of implied private rights of action "is deeply vexed," Bosco v. Serhant, 836 F.2d 271, 275 (7th Cir.1987), and for good reason. Weighty institutional and prudential concerns, which relate in large part to our role as an Article III body, pull in arguably inconsistent directions. On one hand, they counsel against too quickly recognizing causes of action for which Congress did not expressly provide. See Cannon v. University of Chicago, 441 U.S. 677, 730-49, 99 S.Ct. 1946, 1974-85, 60 L.Ed.2d 560 (1979) (Powell, J., dissenting); George D. Brown, Of Activism and Erie-- Implication Doctrine's Implications for the Nature and Role of the Federal Courts, 69 Iowa L.Rev. 617, 644-49 (1984). Yet, at the same time, courts interpreting statutes are charged with effectuating their underlying intent, which Congress often chooses to convey through vehicles more subtle than statutory text. See Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11, 18, 100 S.Ct. 242, 246, 62 L.Ed.2d 146 (1979) (intent may appear implicitly in the structure of a statute or the circumstances of its enactment) [hereinafter "TAMA "]. An additional, and somewhat related, dilemma lies in the fact that divining from silence an intent to create or foreclose private actions, or for that matter an intent to do anything, is admittedly an inexact science. See In re Grabill Corp., 967 F.2d 1152 (7th Cir.1992); Luddington v. Indiana Bell Tel. Co., 966 F.2d 225 (7th Cir.1992); Mozee v. American Commercial Marine Serv. Co., 963 F.2d 929 (7th Cir.1992). Complicating matters further, the Supreme Court has yet to announce a completely consistent set of interpretive rules for doing so. Compare Touche Ross & Co. v. Redington, 442 U.S. 560, 571-72, 99 S.Ct. 2479, 2486-87, 61 L.Ed.2d 82 (1979) (where one section of a statute expressly provides a private remedy, there is a presumption against implying private actions in other sections of the same statute) with Herman & MacLean v. Huddleston, 459 U.S. 375, 387 n. 23, 103 S.Ct. 683, 690 n. 23, 74 L.Ed.2d 548 (1983) (rejecting presumption); see Erwin Chemerinsky, Federal Jurisdiction §...