Thom v. New York Stock Exchange

• Decision Date: 18 November 1969
• Docket Number: No. 69 Civ. 4092,4205.,69 Civ. 4092
• Citation: 306 F. Supp. 1002
• Parties: John THOM and R. J. Flynn, Plaintiffs, v. NEW YORK STOCK EXCHANGE, American Stock Exchange, Goldman, Sachs and Company, Shields and Company, and Louis Lefkowitz, individually and as Attorney General of the State of New York, Defendants. Donald J. MILLER, Plaintiff, v. NEW YORK STOCK EXCHANGE, American Stock Exchange, Paine, Webber, Jackson and Curtis, and Louis Lefkowitz, individually and as Attorney General of the State of New York, Defendants.
• Court: U.S. District Court — Southern District of New York

306 F. Supp. 1002

John THOM and R. J. Flynn, Plaintiffs, v. NEW YORK STOCK EXCHANGE, American Stock Exchange, Goldman, Sachs and Company, Shields and Company, and Louis Lefkowitz, individually and as Attorney General of the State of New York, Defendants.

Donald J. MILLER, Plaintiff, v. NEW YORK STOCK EXCHANGE, American Stock Exchange, Paine, Webber, Jackson and Curtis, and Louis Lefkowitz, individually and as Attorney General of the State of New York, Defendants.

Nos. 69 Civ. 4092, 4205.

United States District Court S. D. New York.

November 18, 1969.

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Paul G. Chevigny, New York City, for plaintiffs.

Milbank, Tweed, Hadley & McCloy, New York City, for defendant New York Stock Exchange; Andrew J. Connick, Adlai S. Hardin, Jr., Edward J. Hardin, New York City, of counsel.

Forsythe, McGovern, Pearson & Nash, New York City, for defendant American Stock Exchange; Gordon L. Nash, New York City, of counsel.

Sullivan & Cromwell, New York City, for defendant Goldman, Sachs and Co., David S. Henkel, New York City, of counsel.

Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for defendant Shields and Co.; Leonard Joseph, New York City, of counsel.

Beekman & Bogue, New York City, for defendant Paine, Webber, Jackson & Curtis; Milton Weiss, New York City, of counsel.

Louis J. Lefkowitz, Atty. Gen. of the State of New York, pro se; Samuel A. Hirshowitz, First Asst. Atty. Gen., Brenda Soloff, Asst. Atty. Gen., of counsel.

EDWARD WEINFELD, District Judge.

These are two actions wherein three plaintiffs challenge the constitutionality of New York State's recently enacted law, Chapter 1071, 1969 Laws of New York,¹ which requires all employees of member firms of national security exchanges registered with the Securities and Exchange Commission and employees of affiliated clearing corporations to be fingerprinted as a condition of employment. The plaintiffs are a lawyer, a computer programmer and an executive dining room employee, each employed by a different stock exchange firm. Named as defendants are these employers, the Attorney General of the State of New York and the New York and American Stock Exchanges.

The plaintiffs move for a preliminary injunction to enjoin the defendants from enforcing the statute, which became effective September 1, 1969, and for the convening of a three-judge court pursuant to 28 U.S.C., sections 2281, 2284. A temporary restraining order is in effect. The defendants move to dismiss the complaint for lack of jurisdiction over the subject matter and for failure to state a claim on which relief can be granted.

Plaintiffs contend that the statute is unconstitutional in that it constitutes: (1) an invasion of privacy in violation of the Ninth and Fourteenth Amendments; (2) an illegal search and seizure in violation of the Fourth Amendment; (3) punishment without due process of law in violation of the Fourteenth Amendment; and (4) an invidious and irrational discrimination against employees of member firms of national security exchanges, resulting in denial of equal protection of the laws in violation of the Fourteenth Amendment.

The single narrow issue on the motion for a three-judge court is whether one or more of the constitutional claims are of substance and present a basis for equitable relief.² After careful consideration of the complaint and plaintiffs' contentions in support thereof, the Court concludes the questions presented lack the necessary constitutional substance, and accordingly denies the motion for a three-judge court and grants the defendants' motion to dismiss.

We first turn to the evils which gave rise to the statute and the means by which the state sought to meet them.³ Chapter 1071 was enacted to meet problems that have bedeviled an industry and concerned the state—the year by year increase in stolen or lost securities. The evils of rising thefts in the securities industry have followed in the wake of a tremendous expansion in the daily volume of stock exchange transactions, resulting in an increase in the number of persons employed in the "back office" or clerical area. In 1967 the average daily transactions in the New York Stock Exchange alone totalled ten million shares a day; in 1968 the daily average was thirteen million shares, an increase of thirty per cent in one year. The volume of increase from 1963 to 1968 was seventy-five per cent. When the statute was passed in May 1969 it was estimated that the number of persons employed in the business was close to 50,000, with 6,000 employees added in 1968; that the yearly number of applicants for positions in the industry average about 10,000.

During the period of the expanded volume in transactions and the increase in personnel, the number of securities lost or stolen reached staggering amounts: whereas in 1966 the total amount of such securities was slightly over nine million dollars, in 1967 and again in 1968 the total of lost or stolen securities soared to thirty-seven million dollars. Hardly a day passed without the press carrying reports of the theft or disappearance of securities from brokerage houses, ofttimes running into the hundreds of thousands, and at times millions, of dollars. The depredations involved not only persons who had immediate access to the securities, but others who illicitly received and disposed of them.

Existing procedures to obtain background information of prospective employees in the industry had not proved altogether effective. SEC Rule 17a-3(a) (12)⁴ requires most members (with limited exception) of registered exchanges to maintain extensive employee records, including arrests, indictments or convictions for all crimes except traffic offenses. The rule also applies to partners, officers, directors, managers and all persons handling funds or securities. A separate rule of the New York Stock Exchange requires its members and member organizations to verify and maintain employee records containing, among other matters: (1) a recent photograph; (2) a signature exemplar; and (3) the information required by SEC Rule 17a-3(a) (12) for three years after termination of employment.⁵ Despite these regulations, theft of securities occurred involving employees with criminal records undisclosed at the time of their employment. Efforts by security industry representatives to exchange information with the Federal Bureau of Investigation, as authorized by 28 C.F.R. § 0.85 (1969), or to enlist the aid of the New York City Police Department in verifying the background information failed because of insufficient funds and inadequate personnel. The Legislature responded to the situation by enacting the statute, which provides:⁶

"All persons including partners, officers, directors and salesmen employed by a member or a member organization of a National Security Exchange, registered with the federal securities exchange commission and any employee of a clearing corporation affiliated with any such registered National Security Exchange employed on or after September first, nineteen hundred sixty-nine, who are regularly employed within the state of New York shall, as a condition of employment, be fingerprinted. Every set of fingerprints taken pursuant to this subdivision shall be promptly submitted to the attorney general for appropriate processing."

The Governor, in approving the bill, after noting the tremendous increase in the volume of securities transactions and the corresponding increase in the number of employees engaged in the securities industry in New York State, added:⁷

"It has been learned recently that several securities thefts from member organizations of registered national security exchanges have been perpetrated with the aid of new back office or clerical employees with previously undisclosed criminal records.

"The fingerprint checks required by this bill will significantly aid employers in the securities industry in evaluating prospective employees' qualifications for employment in an industry requiring the highest standards of integrity and in weeding out those with criminal backgrounds."

Thus, the legislation was designed to meet a specific and worsening problem in the securities industry. That the securities industry is a business affected with a public interest and that the state has a legitimate concern with the problem of ever-mounting thefts in the industry is not disputed.⁸ And likewise not open to challenge is the state's power to take reasonable steps to prevent or reduce thefts, embezzlement and related crimes, and to combat the intrusion of criminal elements in the industry by providing a means of identification of persons with criminal backgrounds who work or apply for work in the industry.⁹ Fingerprints have long been recognized as a scientific and accurate means of identification.¹⁰ The statute provides a simple method for security industry employers confronted with the problem of shifting personnel and mounting crime to verify at slight inconvenience to employees and applicants for employment the information submitted by them. Upon its face, it appears reasonably calculated to meet the evils toward which it was directed without imposing any undue burden upon individuals, and consequently represents a valid exercise of the state's police power.¹¹

Plaintiffs, however, dispute that the statute is a reasonable exercise of police power to regulate business; they say that the standards derived from cases involving economic interests are inapplicable here and cannot save the statute. Their separate claims that Chapter 1071 is void for invasion of privacy, denial of due process and unlawful search and seizure are interrelated, but the principal assault centers about the invasion of their right of privacy—the right not to be fingerprinted absent a criminal charge or other compelling state purpose. Plaintiffs argue that there is such a right of privacy in fingerprints; that fingerprints are a system of social control, of intrusion upon one's...