Swirsky v. National Ass'n of Securities Dealers

• Decision Date: 30 July 1997
• Docket Number: No. 97-1038,97-1038
• Citation: 124 F.3d 59
• Parties: Fed. Sec. L. Rep. P 99,521 Gerald R. SWIRSKY, Plaintiff, Appellant, v. NATIONAL ASSOCIATION OF SECURITIES DEALERS, Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 59

124 F.3d 59

Fed. Sec. L. Rep. P 99,521

Gerald R. SWIRSKY, Plaintiff, Appellant, v. NATIONAL ASSOCIATION OF SECURITIES DEALERS, Defendant, Appellee.

No. 97-1038.

United States Court of Appeals First Circuit.

Heard July 30, 1997.

Decided Aug. 28, 1997.

David C. Fixler, Boston, MA, with whom Michael Unger and Rubin & Rudman LLP were on brief, for defendant-appellee.

Gerald A. Phelps, Quincy, MA, for plaintiff-appellant.

Before SELYA and LYNCH, Circuit Judges, and GIBSON, ^* Senior Circuit Judge.

LYNCH, Circuit Judge.

This case presents an issue of first impression for this circuit concerning whether the doctrine of exhaustion of administrative remedies applies in certain actions against the National Association of Securities Dealers ("NASD"). We hold that it does, in agreement with the other circuits which have faced this issue. We therefore affirm the district court's dismissal of the actions because Mr. Swirsky failed to follow the proper review process in litigating this dispute.

I. Background

Gerald R. Swirsky worked for Prudential Securities Inc. as a broker until November of 1992. In November of 1990, Swirsky and Prudential were parties to a NASD arbitration proceeding ("the Murray Arbitration") brought by one of Swirsky's customers, who accused them of causing her to lose money by concentrating her position in a single, risky stock. The customer was awarded $370,260 in damages jointly and severally from Prudential and Swirsky and punitive damages of $50,000 from Prudential. Swirsky lost his job with Prudential as a result of a comprehensive management restructuring.

Tucker Anthony hired Swirsky soon after he left Prudential, and fired him on September 16, 1994. Four days later, the NASD filed a complaint against Swirsky in connection with the Murray Arbitration and complaints by two other former Prudential customers. Prior to the termination of Swirsky's employment, the NASD informed Tucker Anthony (according to Swirsky) that if Tucker Anthony continued to employ Swirsky, Tucker Anthony would be held as a guarantor of Swirsky's conduct.

To resolve the NASD complaints, Swirsky, while represented by counsel, executed an Offer of Settlement and Waiver of Procedural Rights, without admitting any guilt, on October 21, 1994. Swirsky avers that during the settlement negotiations he was unaware of the NASD's "threat" to hold Tucker Anthony liable as Swirsky's guarantor. Swirsky apparently only learned of this communication through a letter from the General Counsel of Tucker Anthony dated February 8, 1995.

According to the terms of the settlement agreement, Swirsky was fined $10,000, suspended from association with any NASD member firm for ten days, and waived all rights to appeal. The National Business Conduct Committee of the NASD Board of Governors ("NBCC") approved this settlement agreement, and the local NASD District Business Conduct Committee ("DBCC") issued a Decision and Order of Acceptance of Offer of Settlement on January 9, 1995. The NASD filed the settlement with the Securities Exchange Commission ("SEC") on March 2, 1995.

Swirsky, represented by different counsel, filed a Motion to Vacate Decision and Order of Acceptance of Offer of Settlement with the NBCC on May 2, 1995. Swirsky asserted a host of claims. ¹ The NBCC denied Swirsky's motion to vacate on July 10. Swirsky appealed to the SEC, alleging the same claims as in his motion to the NBCC. The SEC declined to review the NBCC decision because Swirsky's motion to vacate was untimely. ²

Swirsky brought suit in federal district court on October 11, 1995. The district court characterized Swirsky's complaint as "essentially a collateral attack on a settlement he has been unable to undo through the established administrative process." Memorandum and Order at 1. The district court dismissed the complaint because Swirsky had failed to exhaust his administrative remedies. Under the process established by the Exchange Act, the district court said, Swirsky should have appealed the adverse SEC decision in federal circuit court. Swirsky now appeals.

II. The Exchange Act

The Securities Exchange Act of 1934 and its subsequent amendments create a detailed, comprehensive system of federal regulation of the securities industry. The system's foundation is self-regulation by industry organizations established according to the guidelines of the Maloney Act. The NASD is a national securities association registered with the SEC pursuant to the Maloney Act which provides self-regulation of the over-the-counter securities market. See 15 U.S.C. § 78o-3.

The Exchange Act mandates a three-tiered process of both administrative and judicial review of NASD disciplinary proceedings. At the first level, proceedings are conducted by the local DBCC with appeal to, and de novo review by, the NBCC. The Maloney Act prescribes an array of procedural safeguards to ensure fairness at this first tier of review. The NASD must "bring specific charges, notify such member or person of, and give him an opportunity to defend against, such charges, and keep a record." 15 U.S.C. § 78o -3(h)(1).

The NASD is authorized to impose a number of sanctions, including censure, fines, suspension, or prohibition from association with member firms. 15 U.S.C. § 78o-3(b)(7); NASD Rules of Fair Practice, Art. V, § 1. In addition to these specific sanctions, the NASD may impose "any other fitting sanction deemed appropriate under the circumstances." Id. Sanctions must be supported by written statements specifying the activity that caused the violation, the specific provision or rule violated, and the reason for the sanction imposed.

At the second level, the SEC reviews NBCC final orders de novo. 15 U.S.C. § 78s(d). Once the NBCC files its decision with the SEC, disciplinary respondents have 30 days to petition the SEC for review. 15 U.S.C. § 78s(d)(2). The SEC can affirm or modify any sanction, or remand to the NASD for further proceedings. 15 U.S.C. § 78s(e). The SEC is empowered to seek an injunction in district court if the NASD "is engaged or is about to engage in acts or practices constituting a violation" of the securities laws. 15 U.S.C. § 78u(d). The SEC may "censure or impose limitations upon the activities, functions and operations" of self-regulatory organizations (such as the NASD) that violate the Exchange Act, the rules thereunder, or its own rules. 15 U.S.C. § 78s(h)(1). The SEC may remove any officer or director of a self-regulatory organization from office if he or she is found to have violated the rules or abused his or her position. 15 U.S.C. § 78s(g)(2).

The NASD is also subject to extensive, ongoing oversight and control by the SEC. See United States v. NASD, 422 U.S. 694, 700-01 n. 6, 95 S.Ct. 2427, 2434 n. 6, 45 L.Ed.2d 486 (1975) (The Act "authorizes the SEC to exercise a significant oversight function over the rules and activities of the registered associations."). With few exceptions, the SEC must approve all rules, policies, practices, and interpretations before they are implemented. 15 U.S.C. § 78s(b)(1). Consistent with the requirements of the Exchange Act, the SEC may abrogate or add rules as it deems necessary. 15 U.S.C. § 78s(b)(3). The SEC may also suspend or revoke the license of any national securities organization which fails to enforce compliance with the Exchange Act, SEC regulations, or the organization's own rules. 15 U.S.C. § 78s(h)(1).

The third tier of the process provides for review of final SEC orders by the United States Courts of Appeals. 15 U.S.C. § 78y(a); see Mister Discount Stockbrokers, Inc. v. SEC, 768 F.2d 875, 876 (7th Cir.1985) (stating that "final orders of the Commission are reviewable only in the United States Courts of Appeals"). Congress believed that this three-tiered process founded upon self-regulation would garner several benefits, including "the expertise and intimate familiarity with complex securities operations which members of the industry can bring to bear on regulatory problems, and the informality and flexibility of self-regulatory procedures." S.Doc. No. 93-13, 93rd Cong., 1st Sess. 149 (1973).

III. The Merits

The Exchange Act creates a comprehensive procedure to safeguard due process in disciplinary hearings, and for administrative and judicial review of NASD disciplinary actions. We agree with other circuits that have considered the question that the "comprehensiveness of the review procedure suggests that the doctrine of exhaustion of administrative remedies should be applied to prevent circumvention of established procedures." First Jersey Securities, Inc. v. Bergen, 605 F.2d 690, 695 (3rd Cir.1979). See Merrill Lynch v. NASD, 616 F.2d 1363, 1370 (5th Cir.1980); see also Nassar & Co. v. SEC, 566 F.2d 790, 792 n. 3 (D.C.Cir.1977); Roach v. Woltmann, 879 F.Supp. 1039, 1041-42 (C.D.Cal.1994); Maschler v. National Ass'n of Securities Dealers, Inc., 827 F.Supp. 131, 132 (E.D.N.Y.1993); Prevatte v. National Ass'n of Securities Dealers, Inc., 682 F.Supp. 913, 918 (W.D.Mich.1988). Because Swirsky failed to invoke the third tier of the review process, the district court lacked subject matter jurisdiction, and it properly dismissed Swirsky's complaint.

The doctrine of exhaustion of remedies is stated starkly in Myers v. Bethlehem Shipbuilding Corp., 303 U.S. 41, 50-51, 58 S.Ct. 459, 463-64, 82 L.Ed. 638 (1938), where the Supreme Court noted the "long settled rule of judicial administration that no one is entitled to judicial relief for a supposed or threatened injury until the prescribed administrative remedy has been exhausted." (footnote omitted). The central purpose of this doctrine is "the avoidance of premature interruption of the administrative process." McKart v. United States, 395 U.S. 185, 193, 89 S.Ct. 1657, 1662, 23 L.Ed.2d 194 (1969). See Portela-Gonzalez v. Secretary of the Navy, 109 F.3d 74, 79 (1st Cir.1997) ("Insisting on exhaustion forces parties to take administrative proceedings seriously,...