Weissman v. National Ass'n of Securities Dealers

• Decision Date: 01 November 2006
• Docket Number: No. 04-13575.,04-13575.
• Citation: 468 F.3d 1306
• Parties: Steven I. WEISSMAN, as Custodian under the Florida Uniform Transfers to Minors Act, as Trustee and individually, Plaintiff-Appellee, v. NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., a Delaware not-for-profit corporation, NASDAQ Stock Market, Inc., a Delaware corporation organized for profit, Defendants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

468 F.3d 1306

Steven I. WEISSMAN, as Custodian under the Florida Uniform Transfers to Minors Act, as Trustee and individually, Plaintiff-Appellee, v. NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., a Delaware not-for-profit corporation, NASDAQ Stock Market, Inc., a Delaware corporation organized for profit, Defendants-Appellants.

No. 04-13575.

United States Court of Appeals, Eleventh Circuit.

November 1, 2006.

Jeffrey A. Wadsworth, Douglas R. Cox, Michael James Edney, Gibson, Dunn & Crutcher, LLP, Washington, DC, David Scott Mandel, Mandel & Mandel, LLP, Miami, FL, for Defendants-Appellants.

David Allan Freedman, Burlington, Well, Schwiep, Kaplan, Miami, FL, Steven I. Weissman, Hollywood, FL, for Plaintiff-Appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before TJOFLAT and BARKETT, Circuit Judges, and FULLER,^* District Judge.

BARKETT, Circuit Judge:

The National Association of Securities Dealers, Inc. ("NASD") and its subsidiary, the NASDAQ Stock Market, Inc. ("NASDAQ"), seek reversal of the district court's denial of their motion to dismiss Steven Weissman's complaint, as well as the district court's order permitting Weissman to engage in pre-trial discovery.¹ NASD and NASDAQ ("Appellants") claim absolutely immunity from Weissman's suit. They argue that Weissman complains of conduct undertaken pursuant to their quasi-governmental role as market regulators under the Securities Exchange Act (SEA), 15 U.S.C. § 78a et seq. The district court rejected this defense, explaining that while Appellants do enjoy absolute immunity for statutorily-mandated regulatory or disciplinary functions, they are not entitled to such immunity in this case because Weissman's complaint relates to private commercial conduct not mandated by the Act.

BACKGROUND

Between December 2000 and June 2002, Weissman purchased 82,800 shares of WorldCom, Inc. ("WorldCom") stock on behalf of his minor children. In the wake of WorldCom's collapse, and after losing almost the entire investment, Weissman filed a diversity suit in federal district court against the NASD and NASDAQ. Weissman's complaint was initially dismissed for failure to allege diversity of citizenship, but he redrafted it to correct that defect. In his second complaint, Weissman disavowed any reliance on Appellants' regulatory activity as the basis for his suit,² emphasizing that "this action is based solely on the for-profit commercial business activity of the Defendants[,...] includ[ing] Defendants' approximately $100 million dollar marketing and advertising campaign during the years 2000, 2001 and 2002 to promote and sell ... shares of WorldCom."

The complaint set forth the following allegations:

First, Weissman alleged that NASDAQ violated Fla. Stat. § 517.301(1)(b) by promoting WorldCom through its marketing and advertising without disclosing that their revenues were directly enhanced by increased trading in WorldCom stock. With regard to this count, Weissman's complaint specifically charged that:

During 2000 and 2001, NASDAQ³ expended $74 million dollars on marketing and advertising. In 2002, NASDAQ expended an additional $27 million dollars on marketing and advertising. The marketing and advertising campaign featured NASDAQ-listed companies, including WorldCom. NASDAQ published numerous print and television advertisements in Florida endorsing WorldCom as a great company and a good investment .... Though not purporting to offer WorldCom stock for sale, NASDAQ undertook said advertising and promotion for a consideration received or to be received directly or indirectly from WorldCom, market markers and/or stock dealers without disclosing the receipt, whether past or prospective, of such consideration ... .

The purpose of NASDAQ's advertising campaign to build the "NASDAQ Brand" is to generate revenue through maintaining its listings, obtaining new listings and to jointly market shares with the listed companies .... NASDAQ sought to engender [the] trust and confidence of the investing public, including Plaintiff, that when they invest in a NASDAQ-listed stock, ... [they are] assur[ed] of the quality of their investment. The failure of NASDAQ to disclose that it was compensated by WorldCom, market makers and/or stock dealers, directly or indirectly[,] for the advertisements and promotions violated Florida Statute Section 517.301(1)(b). NASDAQ's advertisements and endorsements of WorldCom carried extraordinary weight and power with Plaintiff . . . .

Second, Weissman alleged that NASDAQ offered WorldCom shares for sale without registering as a broker, in violation of Fla. Stat. § 517.12. With regard to this count, Weissman's complaint reiterated that "Plaintiff relied upon the endorsements and recommendation of WorldCom shares by NASDAQ in purchasing same" and that "NASDAQ directly benefitted and profited [from] Plaintiff's purchases of WorldCom shares because, inter alia, its income is increased by increased trading volume on the NASDAQ stock market."

Third, Weissman alleged that Appellants committed common-law fraud and/or negligent misrepresentation in their attempts to induce investors to purchase shares of WorldCom. With regard to these counts, Weissman's complaint specifically charged, again, that:

During 2000 and 2001, NASDAQ and NASD, jointly and in concert with each other, expended $74 million dollars on marketing and advertising. In 2002, NASDAQ expended an additional $27 million dollars on marketing and advertising. The purpose of this marketing and advertising campaign was to induce investors, including Plaintiff, to purchase shares of stock traded on the NASDAQ stock market, including WorldCom, in order to benefit the NASD and NASDAQ . . . by:

(i) generating increased trading volume and the attendant revenue;

(ii) generating and retaining listing income from NASDAQ-listed companies, including WorldCom; and,

(iii) increasing the value of NASDAQ's stock.

As part of [its] advertising and marketing campaign . . . NASDAQ published numerous print and television advertisements in Florida which knowingly, with intent to deceive, endorsed WorldCom and conveyed the false representation and impression that WorldCom was a great company with accounting in accordance with [Generally Accepted Accounting Principles] GAAP . . . . NASDAQ also provided publicity to WorldCom on its web-site and assisted in the dissemination of WorldCom's fraudulent financial statements. The aforesaid advertising and marketing campaign conducted during the year prior to Plaintiff's purchases of WorldCom shares included, but was not limited to . . . a two full page spread advertisement in the Wall Street Journal discussing [NASDAQ's] belief in the need for NASDAQ-listed companies to provide accurate financial reporting in accordance with [GAAP], "supported by a Knowledgeable Audit Committee." On one page is a picture of the NASDAQ ticker with the slogan "The Responsibilities We All Share." On the opposite page under the headline "Keeping Our Markets True—It Is All About Character" is a list of the chief executives of the "good" NASDAQ listed companies under the sub-heading "Our Beliefs Stand in Good Company." Listed thereunder as an endorser of these NASDAQ goals is "Bernard J. Ebbers, President and Chief Executive Officer[,] WorldCom, Inc." ...

In addition ..., during the months prior to his purchases of WorldCom shares, Plaintiff saw, heard and relied upon other public media advertisements/communications by the Defendants conveying the same false representations and impression to the effect that WorldCom was a great company with accounting in accordance with GAAP; a good investment; and, that it met the listing requirements of the NASDAQ stock market . . . .

NASDAQ and NASD's advertising and marketing campaign was designed and intended by Defendants to induce investors, including Plaintiff, to purchase shares of WorldCom and, as part of that campaign, Defendants knowingly and intentionally made false laudatory representations regarding WorldCom while concealing their direct profit motive and interest in generating purchases of WorldCom shares. The intention of NASDAQ and NASD in making these false representations and concealing their direct profit motive and interest in selling the stock of that company, was to convince and induce investors, including Plaintiff, to purchase shares of WorldCom.

Elsewhere in his complaint, and in support of his claim that NASDAQ was touting WorldCom stock, Weissman pointed to NASDAQ's April 2001 registration statement filed with the Securities and Exchange Commission (SEC), which stated that "NASDAQ's branding strategy is designed to convey to the public that the world's most innovative, successful growth companies are listed on NASDAQ."

Appellants moved to dismiss the complaint, claiming absolute immunity. In the alternative, they argued that Weissman lacked a federal private right of action, failed to exhaust his administrative remedies, and failed to state a cause of action under Florida law. The district court held that both the absence of a federal private right of action, as well as any failure to exhaust SEC remedies, were immaterial because all of Weissman's claims were based solely on state law. It further held that, because Appellants' enjoyment of absolute immunity for quasi-governmental activity does not insulate them from suit for activity related to private business, their alleged advertisement and promotion of WorldCom was outside the scope of such immunity.

Appellants timely appealed. Weissman moved to dismiss the appeal for lack of jurisdiction. We granted that motion in part, dismissing Appellants' claims that Weissman failed to adequately plead his state law claims and did not exhaust his administrative remedies. We permitted the appeal to proceed as to Appellants' absolute immunity defense, as well as their claim that Weissman lacked a federal private right of action.⁴

STANDARD...