Court Opinion

ID: 197541
Source: CourtListenerOpinion
Date Created: 2011-02-07 03:32:38+00
Date Added: 2024-06-11T09:43:26.343170
License: Public Domain

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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                                          3

          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.

                             -4-
                                          4

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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                                          5

          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

                             -6-
                                          6

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

                             -7-
                                          7

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.

                             -8-
                                          8

          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.
                                                    

                             -9-
                                          9

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

                             -10-
                                          10

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).

                             -11-
                                          11

(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.
                  

                             -12-
                                          12

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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                                          13