Swirsky v. National Association ( 1997 )

United States Court of Appeals
United States Court of Appeals
For the First Circuit
For the First Circuit
No. 97-1038
GERALD R. SWIRSKY,
Plaintiff, Appellant,
v.
NATIONAL ASSOCIATION OF SECURITIES DEALERS,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
Before
Selya and Lynch, Circuit Judges,
and Gibson,* Senior Circuit Judge.
Gerald A. Phelps for plaintiff-appellant.
David C. Fixler, with whom Michael Unger and Rubin & Rudman LLP
were on brief, for defendant-appellee.
August 28, 1997
* Hon. John R. Gibson of the Eighth Circuit, sitting by designation.
LYNCH, Circuit Judge. This case presents an issue
LYNCH, Circuit Judge.
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.
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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.2 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.3
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
2. Swirsky raised the following claims: tortious
interference with contract; tortious interference with
advantageous relations; fraud; violations of Mass. Gen. L.
ch. 93A; defamation; procedural due process violations under
the United States Constitution and the Constitution of the
Commonwealth of Massachusetts; violations of 42 U.S.C.
1983; violations of Mass. Gen. L. ch. 12 11H and 11I; and
violations of sections 6(d)(1) and 15A(h)(1) of the Exchange
Act.
3. In a letter dated September 7, 1995, the SEC stated the
following:
Under Section 19(d)(2), an application for review is to
be filed within 30 days after the date notice of the
action is filed with the Commission and received by the
aggrieved person. Even if Swirsky could be considered
aggrieved by a settlement to which he consented, he was
obliged to file an application for review within 30
days of the filing of notice of the action. Swirsky
did not seek Commission review of the action within the
30-day period and has made no showing for the
Commission to consider the extraordinary relief
necessary for a filing outside of the normal time
limits.
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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).
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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
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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 (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
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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, 93d 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.
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The doctrine of exhaustion of remedies is stated
starkly in Myers v. Bethlehem Shipbuilding Corp., 303 U.S.
41, 50-51 (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 (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, allows administrative agencies an opportunity to
correct their own errors, and potentially avoids the need for
judicial involvement altogether."); Ezratty v. Commonwealth
of Puerto Rico, 648 F.2d 770, 774 (1st Cir. 1981) (stating
that "the doctrine serves interests of accuracy, efficiency,
agency autonomy and judicial economy.").
Exhaustion is required if explicitly mandated by
Congress, McCarthy v. Madigan, 503 U.S. 140, 144 (1992), but
courts may relax this requirement somewhat where Congress is
silent. Darby v. Cisneros, 509 U.S. 137, 153-54 (1993).
There are "three broad sets of circumstances in which the
interests of the individual weigh heavily against requiring
administrative exhaustion." McCarthy, 503 U.S. at 146.
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These exceptions are when the requirement occasions undue
prejudice to subsequent assertion of a court action; where
the agency is not empowered to grant effective relief; and
when there are clear indicia of agency bias or taint.
McCarthy at 146-48. See Portela-Gonzalez, 109 F.3d at 77(1st Cir. 1997). None of these exceptions applyto this case.
Before examining the exceptions to administrative
exhaustion listed above, we refute Swirsky's threshold claim
that he could not appeal the SEC decision because it did not
constitute a "final order." On the contrary, the SEC letter
is an adjudication of Swirsky's motion to vacate the
settlement agreement. The SEC declined to review the NBCC's
decision not to vacate the settlement agreement on the ground
that Swirsky's petition was time-barred. Though based on
procedural grounds, the SEC's ruling on Swirsky's petition is
final, and Swirsky could have appealed this decision.
Swirsky's clearest argument that the exhaustion
doctrine should not apply to this case is rooted in
allegations that the NASD is biased against him. This
argument consists of little more than the assertion that,
because the NASD is the defendant in this action, it could
not possibly provide him with a fair hearing. We do not
believe that this is enough to demonstrate the kind of
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thoroughgoing taint which concerned the Supreme Court in
McCarthy.4 The review process here provides for both SEC and
court of appeals review after the NASD determination, not to
mention review by the NBCC, a separate entity from the DBCC.
Swirsky has not accused the SEC or this court of unacceptable
bias against him. Though it can be unsettling, it is not
uncommon in administrative law for a litigant's case to be
heard in the first instance by the very agency against which
the plaintiff has a complaint. In this case, resort to the
correct appeals procedure would not have been a "futile act."
See Portela-Gonzalez, 109 F.3d at 78-80 (plaintiff required
to pursue her claim to "the final rung of the administrative
ladder," despite the fact that she had been rebuffed at all
prior stages).
Neither is resort to the proper review process
futile in the sense that Swirsky could not have received the
relief he sought. The SEC has extensive powers to modify,
reverse and enjoin disciplinary actions by the NASD. As the
Third Circuit has said, "Ultimate review by the court of
appeals ensures that constitutional or statutory errors will
not go unremedied." First Jersey Securities, Inc., 605 F.2d
at 696. See SEC v. Waco Financial, Inc., 751 F.2d 831, 833
4. See McCarthy, 503 U.S. at 148 (citing Houghton v.
Shafer, 392 U.S. 639, 640 (1968), where administrative review
procedure culminated with the Attorney General, who had
already expressed his views on the merits).
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(6th Cir. 1985) ("By preserving the issue before the NASD
bodies and the SEC the appellants could have obtained direct
judicial review of their constitutional claims following all
administrative steps.").
Swirsky attempts to avoid these doctrines by
distinguishing his action in district court from that before
the NASD and SEC. Swirsky's claims are, however, essentially
the same as those he raised before the NASD and the SEC in
his motion to vacate the settlement agreement.5 Swirsky
argues that the harms he suffered as a result of the NASD's
"threat" to Tucker Anthony give rise to independent causes of
action, analogous to causes of action he would have if a NASD
employee had punched him in the nose during the course of the
disciplinary complaint. Assaults are not a part of the
NASD's regulatory arsenal, but it is clear that the NASD's
communication to Tucker Anthony arose out of a disciplinary
action by the NASD. Swirsky's analogy is inapt.
IV. Conclusion
Swirsky's proper course of action, once the SEC
denied his appeal, was to appeal to this court. He did not
do so. Swirsky reached this court by a different, and
incorrect, route. At oral argument, Swirsky's counsel stated
that it was "ironic" that this case was now before the First
5. We note that Swirsky was alerted to the NASD "threat"
before the settlement agreement was filed with the SEC.
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Circuit. The irony instead lies in the fact that Swirsky
asks this court to do what he claims could not be done via
the proper review process -- a process that should have
culminated here.
The decision of the district court is affirmed.
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