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First Jersey Securities Inc. v. Bergen

decided: August 29, 1979.

FIRST JERSEY SECURITIES, INC., A CORPORATION OF THE STATE OF NEW JERSEY; ROBERT E. BRENNAN; JOSEPH GALLIGAN; JACK MONDEL; CHARLES OEHLERT; JOHN DELL; MICHAEL ZUDONYI; AND ANTHONY NADINO, RESPONDENTS
v.
GEORGE J. BERGEN, INDIVIDUALLY AND IN HIS OFFICIAL CAPACITY; AND NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., A CORPORATION OF THE STATE OF DELAWARE, PETITIONERS AND HONORABLE VINCENT P. BIUNNO, JUDGE, UNITED STATES DISTRICT COURT, NOMINAL RESPONDENT



PETITIONS FOR WRITS OF MANDAMUS

Before Adams, Rosenn, and Higginbotham, Circuit Judges.

Author: Rosenn

Opinion OF THE COURT

We are presented with a petition for a writ of mandamus, urging us to direct the district court to dismiss a suit for want of subject matter jurisdiction.*fn1 The suit was filed in the United States District Court for the District of New Jersey, by First Jersey Securities, Inc., and some of its officers and personnel ("First Jersey"), seeking to enjoin the National Association of Securities Dealers, Inc., (NASD) and George J. Bergen, vice president of NASD and District Director for NASD District 12, from proceeding with a disciplinary hearing. The complaint also sought monetary relief. First Jersey requested a preliminary injunction while NASD moved for dismissal of the suit. The district judge denied both motions and retained jurisdiction over the suit. NASD then filed this petition. We stayed discovery in the action pending final disposition of the matter in this court. Because the district court is without jurisdiction to entertain this action which has resulted in unwarranted interference with the administrative process, we will grant the petition for a writ of mandamus and direct the district court to dismiss the case.

I. BACKGROUND

NASD is a securities association registered with the Securities and Exchange Commission pursuant to the provisions of the Maloney Act, 15 U.S.C. § 78O -3 (1976). The purpose of the voluntary association is to provide self-regulation of the over-the-counter securities market. The Maloney Act authorizes the association to promulgate rules

designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest . . . .

15 U.S.C. § 78O -3(b)(6) (1976); See United States v. National Association of Securities Dealers, Inc., 422 U.S. 694, 700-01 n.6, 95 S. Ct. 2427, 45 L. Ed. 2d 486 (1975); Todd & Co. v. SEC, 557 F.2d 1008, 1012 (3d Cir. 1977). Furthermore, the statute gives the association the power to discipline its members who fail to conform to the standard of conduct established by the organization. 15 U.S.C. § 78O -3(h) (1976). "The Act also authorizes the SEC to exercise a significant oversight function over the rules and activities of the registered associations." United States v. National Association of Securities Dealers, Inc., supra, 422 U.S. at 700-01 n.6, 95 S. Ct. at 2434.

The NASD is headed by a Board of Governors. Its certificate of incorporation and by-laws divide the organization into thirteen geographical districts, each headed by a District Committee. The District Committee is required to appoint a District Business Conduct Committee, which assumes primary responsibility for enforcing the NASD rules. See II L. Loss, Securities Regulation 1365-69 (2d ed. 1961).

In November 1977, NASD staff examiners began investigating First Jersey Securities, Inc., a New Jersey corporation. First Jersey, a registered member of NASD, has fourteen offices located in four states and Puerto Rico employing approximately 350 people. NASD claims that its investigators uncovered "a pattern of market domination and price manipulation used to perpetrate a massive fraud on First Jersey's public customers." On February 1, 1979, the Business Conduct Committee of District 12 began a disciplinary proceeding by issuing a complaint against First Jersey, Robert E. Brennan (its president), six branch managers, and the supervisor of the trading department. As of yet, no hearing has been held by the NASD on this matter.

On April 17, 1979, First Jersey filed suit in the United States District Court for the District of New Jersey against NASD and George Bergen. The complaint sought damages, declaratory relief, and an injunction enjoining NASD from proceeding further with its disciplinary action against First Jersey. It alleged that Bergen had a long-standing bias against Brennan and that he influenced and corrupted the entire Business Conduct Committee to hold a similar bias, the effect of which was to deny First Jersey's constitutional rights to a fair hearing before an impartial tribunal. The complaint further alleged that the NASD had violated or would violate the Administrative Procedure Act, the Maloney Act, and various internal rules, resulting in a gross abuse of power; that the Maloney Act is an unconstitutional delegation of legislative power to the NASD; and that Bergen had maliciously and willfully caused a deprivation of First Jersey's constitutional rights and interfered with its contractual and business relations. First Jersey moved, and was granted, leave to take early depositions pursuant to Fed.R.Civ.P. 30(a). The district court refused a subsequent request by NASD for a stay of discovery.

First Jersey requested a preliminary injunction, and at the same time, NASD moved for dismissal of the suit. On June 4, 1978, the district judge delivered an oral opinion denying both motions without prejudice. During the pendency of these motions, two developments occurred. First, the SEC instituted its own independent proceeding by issuing a complaint against First Jersey. Second, NASD decided to transfer its proceedings to District 8 headquarters in Chicago in order to vitiate the accusations of bias.

The denial of the injunction was based on eight assumptions.*fn2 The district court assumed, among other things, that the District 12 staff would disassociate itself with the proceedings in District 8 and that District 8 would not proceed until after the SEC hearings were completed. The court retained jurisdiction over the matter "in the event that the stated and implied assumptions may be frustrated." NASD subsequently advised the district judge that it intended to use the District 12 staff attorney, who up to that point had not been involved in the First Jersey investigation, to present the case to the District 8 panel, and that the NASD proceeding would not necessarily await completion of the SEC hearings. NASD also moved for certification under 28 U.S.C. § 1292(b) (1976) of the denial of the motion to dismiss. This request was denied, prompting NASD to file the petition for a writ of mandamus requesting that this court command the district court to dismiss the suit.

To succeed in obtaining a writ of mandamus, NASD must show that: 1) the district court lacks jurisdiction over First Jersey's suit, and 2) mandamus is the appropriate remedy in this case.

II. JURISDICTION IN THE DISTRICT COURT

First Jersey contends that jurisdiction in the district court can be based on 15 U.S.C. § 78aa (1976) and 28 U.S.C. § 1331 (1976). 15 U.S.C. § 78aa provides in part: "The district courts . . . shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder." The primary purpose of this provision is to provide exclusive federal jurisdiction for suits brought by the SEC or private parties in response to substantive violations of the chapter. Although under certain circumstances section 78aa may confer jurisdiction on the district court to entertain suits against the NASD, Cf., Bright v. Philadelphia-Baltimore-Washington Stock Exchange, 327 F. Supp. 495, 500 (E.D.Pa.1971), we reject the notion that this provision conclusively establishes jurisdiction in the district court in this case.

The same can be said for 28 U.S.C. § 1331. This statute grants jurisdiction to the district court for cases arising under the Constitution or laws of the United States, but it does not mean that jurisdiction is not precluded by another statute or doctrine of judicial administration.

NASD claims that the statutory review procedure establishes exclusive jurisdiction in the courts of appeals. Original jurisdiction over enforcing the NASD rules rests with the District Business Conduct Committee. The NASD Code of Procedure requires the District Business Conduct Committee to hold a hearing replete with procedural safeguards to determine whether sanctions should be imposed against an alleged violator of the rules. The written decision of the Committee is reviewable by a subcommittee of the NASD Board of Governors, which is in turn reviewed by the entire Board. The Board's ruling can be appealed to the SEC for a De novo review. 15 U.S.C. § 78s(d)(2) (1976). Finally, a "person aggrieved by a final order of the Commission . . . may obtain review of the order in the United States Court of Appeals" by filing a petition for review. 15 U.S.C. § 78y(a)(1) (1976). The statute further provides: "On the filing of the petition, the court has jurisdiction, which becomes exclusive on the filing of the record, to affirm or modify and enforce or to set aside the order in whole or in part." 15 U.S.C. § 78y(a)(3) (1976).

Thus, the statute, although establishing a comprehensive system of review, does not Explicitly preclude an aggrieved party from seeking relief in a federal district court until the record is filed in the court of appeals. Yet the comprehensiveness of the review procedure suggests that the doctrine of exhaustion of ...


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