Court Opinion

ID: 2960336
Source: CourtListenerOpinion
Date Created: 2015-09-17 17:47:31.26692+00
Date Added: 2024-06-11T09:15:50.335161
License: Public Domain

07-3372-cv
Standard Investment v. Nat’l. Assn. of Security Dealers

                                   UNITED STATES COURT OF APPEALS

                                          FOR THE SECOND CIRCUIT

                                                August Term 2008

Heard: January 26, 2009                                                Decided: March 18, 2009

                                           Docket No. 07-3372-cv

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STANDARD INVESTMENT CHARTERED, INC., on
behalf of itself and all others similarly
situated,
          Plaintiff-Appellant,

                                     v.

NATIONAL ASSOCIATION OF SECURITIES DEALERS,
INC., a/k/a NASD, NYSE GROUP, INC., MARY L.
SCHAPIRO, RICHARD F. BRUECKNER and BARBARA
Z. SWEENEY,
          Defendants-Appellants.
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Before: NEWMAN, SOTOMAYOR, and WESLEY Circuit Judges.

         Appeal from the July 13, 2007, judgment of the United States

District Court for the Southern District of New York (Shirley Wohl

Kram,         District           Judge),           dismissing,   for    failure   to   exhaust

administrative remedies, a lawsuit challenging aspects of the merger

of the regulatory functions of the National Association of Securities

Dealers and the New York Stock Exchange, which was approved by the

Securities and Exchange Commission.                         The appellant also appeals from

an order denying reconsideration.
     Appeal dismissed as moot and case remanded, without adjudication

of any substantive issues, because of action taken in the Court of

Appeals for the Ninth Circuit dismissing a petition for review of the

order of the Securities and Exchange Commission, on consent of parties

to the review proceeding.

                                  Jonathan W. Cuneo, Wash., D.C. (William
                                    (H. Anderson, Charles Tiefer, R. Brent
                                    Walton, Matthew Wiener, Cuneo Gilbert &
                                    Laduca, LLP, Wash., D.C.; Richard D.
                                    Greenfield, Greenfield & Goodman, LLC,
                                    Easton,   MD,   on  the   brief),   for
                                    Plaintiff-Appellant.

                                  Douglas R. Cox, Wash., D.C. (F. Joseph
                                    Warin, Jennifer H. Rearden, Howard S.
                                    Hogan, Gibson, Dunn & Crutcher LLP,
                                    Wash., D.C.; John J. Flood, Financial
                                    Industry Regulatory Authority, Inc.,
                                    Wash., D.C.; Srinivas M. Raju, Seth
                                    Barrett Tillman, Richards, Layton &
                                    Finger, P.A., Wilmington, DE, on the
                                    brief), for Defendants-Appellees Nat’l
                                    Assn. of Securities Dealers, Schapiro,
                                    Brueckner and Sweeney.

                                  Douglas W. Henkin, New York, N.Y. (Manuel
                                    Yanez, Milbank, Tweed, Hadley & McCloy,
                                    LLP, on the brief), for Defendant-
                                    Appellee NYSE Group, Inc.

JON O. NEWMAN, Circuit Judge.

     This    appeal   arises    out    of   the   consolidation   of   the   member

regulation    operations   of    the    National    Association   of   Securities

                                        -2-
Dealers (“NASD”) and the New York Stock Exchange Group, Inc. (“NYSE”).1

The appeal presents the unusual situation of a case, dismissed for

lack of exhaustion of administrative remedies, in which the appellant,

Standard Investment Chartered, Inc. (“Standard”) contends that the

required exhaustion was concluded before argument of the appeal.     The

appeal is taken from the May 3, 2007, judgment of the District Court

for the Southern District of New York (Shirley Wohl Kram, District

Judge). See Standard Investment Chartered, Inc. v. NASD et al., 07

Civ. 2014, 2007 WL 1296712 (S.D.N.Y. May 2, 2007).     The appellees are

NASD, three of its officers, and NYSE.

     The appellant wants us to reverse so that the case may be

returned to the District Court.      The appellees want us to affirm the

dismissal, a result that would also leave the case available for

return to the District Court.     Under these circumstances, we conclude

that the controversy as to the appeal, though not as to the case, has

been eliminated, and we therefore dismiss the appeal as moot, without

prejudice to the right of any party to pursue any issues sought to be

raised on this appeal in the event of a subsequent appeal from a final

judgment of the District Court.

                                Background

     1
         New York Stock Exchange Group, Inc. is the successor in interest

to the New York Stock Exchange.

                                    -3-
     The parties and their functions.        Standard is a California

corporation and a member of NASD.       NASD is a Delaware corporation,

registered with the Securities and Exchange Commission ("SEC") as a

national securities association pursuant to the 1938 Maloney Act

Amendments to the Securities Exchange Act of 1934 ("Exchange Act"), 15

U.S.C. §§ 78o-3, 78s(a)(1).    NYSE is also a Delaware corporation,

registered with the SEC as a national securities exchange. See id.

§ 78f.    Both entities are self-regulatory organizations ("SROs")

within the meaning of the Exchange Act.     See id. § 78c(a)(26).   NYSE

exercises its regulatory functions through its wholly-owned subsidiary

NYSE Regulation, Inc. (“NYSE Regulation”). As SROs, the NASD and NYSE

have "a duty to promulgate and enforce rules governing the conduct of

[their] members," under the oversight of the SEC. Barbara v. New York

Stock Exchange, Inc.,    99 F.3d 49, 51 (2d Cir. 1996); see also

D'Alessio v. New York Stock Exchange, Inc., 258 F.3d 93, 105 (2d Cir.

2001).   This Court has recognized that “the NASD serves as a critical

aid to the SEC in implementing and effectuating compliance with the

securities laws.” DL Capital Group, LLC v. Nasdaq Stock Market, Inc.,

409 F.3d 93, 95 (2d Cir. 2005).

     The Exchange Act grants the SEC "broad oversight" of SROs'

promulgation and enforcement of rules. See id.      An SRO's rules are

broadly defined as including the organization's constitution, articles

of incorporation, bylaws, and rules. See 15 U.S.C. § 78c(a)(27).      An

                                  -4-
SRO's proposed rules, and any proposed rule changes, must be filed

with the SEC. See id. § 78s(b)(1).            With few exceptions not relevant

here, an SRO cannot change its rules, including its bylaws, without

the SEC's approval. See id.

       Under the Exchange Act, the SEC "shall approve a proposed rule

change    of    a   self-regulatory   organization       if   it   finds   that   such

proposed rule change is consistent with the requirements of [the

Exchange Act,] and the rules and regulations thereunder applicable to

such organization." 15 U.S.C. § 78s(b)(2).           In addition, the Exchange

Act authorizes the SEC to "abrogate, add to, and delete from the rules

of a self-regulatory organization as the Commission deems necessary or

appropriate to conform its rules to requirements of [the Exchange Act]

and    the     rules   and   regulations      thereunder      applicable    to    such

organization, or otherwise in furtherance of the purpose of this

chapter." Id. § 78s(c).

       The consolidation. In November 2006, NASD and NYSE announced a

plan to consolidate the member regulation operations of NASD and NYSE

Regulation into a combined organization.           The regulatory organization

created by the consolidation, known as FINRA, would become the sole

U.S.     private-sector      provider   of      member     firm    regulation     and

enforcement.         To accommodate the consolidation, NASD's Board of

Governors proposed a set of amendments to NASD's bylaws that would

modify NASD’s governance structure to be compatible with those of the

                                        -5-
NYSE.2

     NASD called a special meeting of its members to vote on the bylaw

amendments, permitting members to vote by proxy.            The proxy statement

explained that NASD members were being asked to vote only on the bylaw

amendments, not the transaction itself. The proxy statement described

certain    aspects    of   the   proposed    transaction   in   addition   to   the

governance changes. In particular, it explained that NASD anticipated

substantial    cost    savings     from     the   consolidation   of   regulatory

functions and proposed to share these saving with members in two ways.

First, upon closing, NASD would make a one-time payment to each NASD

member of $35,000.         Second, for the next five years, NASD would

discount all members' annual dues, subject to annual Board approval.

The proxy statement asserted that "[a] larger payment [than $35,000]

is not possible" because "NASD is a tax-exempt organization and

therefore is limited by tax laws regarding size and source of payments

it can make to its members.        The special member payment of $35,000 per

     2
         The bylaw amendments reserved seven seats on the Board of

Governors for election by NASD members: three seats to be elected by

small firms, three by large firms, and one by mid-sized firms.              And a

larger number of Board members were to be "public" governors from

outside the securities industry. NYSE would not agree to proceed with

the consolidation unless these bylaw amendments were approved.

                                          -6-
NASD member, or approximately $175 million in the aggregate, will be

funded   by--and    therefore   limited    by--the   expected   value   of   the

incremental cash flows that will be produced by the consolidation

transaction."      In January 2007, the bylaw amendments were approved by

a majority of voting members.

     The lawsuit.      In March 2007, Standard filed the instant lawsuit

on behalf of the putative class of NASD members that are not also NYSE

members.    The complaint alleged that the terms of the proposed

consolidation "represent a massively unfair disenfranchisement of NASD

members," in both governance and financial terms.               The complaint

pleaded three claims: the NASD officers breached their fiduciary

duties to the proposed class in negotiating the consolidation and

failing to disclose all material facts in the Proxy Statement; the

defendants engaged in negligent misrepresentation with respect to the

proxy statement; and the NYSE and individual defendants would be

unjustly enriched by the consolidation.

     The defendants-appellees moved to dismiss Standard's complaint

pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure for

lack of subject matter jurisdiction because of Standard's failure to

exhaust administrative remedies or, in the alternative, pursuant to

Rule 12(b)(6) because NASD's absolute regulatory immunity barred

Standard's claim for damages and because Standard failed to state a

claim.

                                     -7-
      Standard     filed    an     amended       complaint     in    response       to    the

defendant-appellees' first motion to dismiss.                  The amended complaint

emphasized    that    Standard     was     not    challenging       the   wisdom     of   the

consolidation, but only the manner of accomplishing it.                       In addition

to the original three claims, the amended complaint alleged a denial

of   state   law   rights    under       Delaware        corporate    law,    conversion,

substantial diminution of value in membership, and deprivation of

voting membership.      Standard sought declaratory relief, an injunction

prohibiting the consolidation, an order that the NASD prepare a new

proxy   statement     and   hold    a    new     vote,    compensatory       and   punitive

damages, and an accounting, among other prayers for relief.

      The    defendants-appellees          again    filed     a     motion    to    dismiss

Standard's claims based on their jurisdictional and immunity defenses.

While briefing was underway, Standard sought and obtained expedited

discovery from all defendants.                   Standard obtained communications

between NASD and the Internal Revenue Service (“IRS”) regarding NASD's

tax-exempt status and the special $35,000 member payment.

      In May 2007, the District Court granted the defendants-appellees'

motion to dismiss Standard's amended complaint on the ground that it

failed to establish subject matter jurisdiction under Rule 12(b)(1).

Standard Investment, 2007 WL 1296712, at *10.                      The Court held that

because      the     proposed      bylaw       amendments         necessary        for    the

consolidation's consummation were an exercise of the NASD's rule-

                                           -8-
making authority, Standard was required to exhaust the administrative

remedies provided by the Securities Exchange Act and failed to do so.

The Court also ruled that Standard's damages claims could not proceed

because   they   were   "based    entirely   on   a   future   contingency--the

[c]onsolidation's consummation." Id. at *7.           The Court did not reach

the defendants-appellees' absolute immunity defense.

     Standard then filed a motion for reconsideration of the District

Court's ruling.     Its motion included two new arguments, first that

NASD members were entitled to a "control premium" based on the

adoption of the bylaw amendments, and second that under the doctrine

of primary jurisdiction the dismissal should be changed to a stay

pending SEC proceedings.         The District Court denied the plaintiff's

motion for reconsideration. Standard Investment Chartered, Inc. v.

NASD et al., 07 Civ. 2014, 2007 WL 2049730 (S.D.N.Y. July 13, 2007).

The Court stated that the "newly-asserted 'control premium' claim

. . . d[id] not affect the Court's exhaustion analysis," and that the

request for a stay was untimely raised. Id. at *4.

     Standard filed in this Court an appeal of the District Court's

judgment and the order denying reconsideration.

     SEC proceeding.     In March 2007, shortly after Standard filed its

original complaint, NASD filed with the SEC a proposed rule change to

amend its bylaws.   Pursuant to the Exchange Act, the SEC published the

proposed bylaw amendments in the Federal Register to solicit comments.

                                      -9-
See 15 U.S.C. § 78s(b)(1).      After dismissal of the lawsuit, Standard

submitted comments to the SEC, attached the proxy statement, and urged

the SEC to request and review the NASD-IRS communications produced in

expedited discovery.       In response to the comments, the SEC requested

that    NASD   provide   additional    information   about   the   disclosures

regarding the $35,000 payment (but did not request the communications

with the IRS).       NASD submitted a purported explanation for its

statement that "a larger payment [than $35,000] is not possible,"

including a letter from NASD's general counsel, a letter from expert

tax counsel, and a letter from Delaware counsel.

       In July 2007, the SEC approved the proposed rule change in a

lengthy release, thereby approving the NASD bylaw amendments. See

Order Approving Proposed Rule Change To Amend the By-Laws of NASD,

Exchange Act Release No. 56145 (July 27, 2007), 72 Fed. Reg. 42,169

(Aug.      1,      2007)       (“SEC      Release”),         available     at

http://edocket.access.gpo.gov/2007/pdf/E7-14855.pdf.               The   SEC's

release expressly considered Standard's comment that "the focus of the

proxy statement was 'the fundamental change in members' voting rights

and the $35,000 that each member is to receive in exchange for

“surrendering” members’ equity valued at as much as $300,000, or more,

per NASD member.'" Id. at 42,186 (quoting letter from Benchmark

Financial Services, Inc. and Standard (“Benchmark/Standard letter”)).

The release noted that Standard had alleged “‘an inconsistency between

                                       -10-
the statements in the proxy statement and the statements in the NASD

Response Letter regarding the $35,000 payment,’” and had also alleged

that    “'[t]he   SEC   cannot   approve   the   $35,000   payment      without

determining whether the statements with respect to the Proxy Statement

were truthful and complete.'” Id. (quoting Benchmark/Standard letter).

       The SEC stated, however, that it had reviewed Standard’s claims

only to the extent necessary to make a finding that NASD’s proxy

approval process was consistent with the Exchange Act’s requirement

that SROs comply with their bylaws and certificates of incorporation.

As the SEC's release explained, the SEC does not ordinarily consider

“[w]hether an SRO failed to complete all action required to be taken

under its constitution, articles of incorporation, bylaws, rules, or

similar instruments . . . at the time it considers whether to approve

a proposed rule change.” Id.       If such a dispute arises, the SEC’s

general practice is to ask the SRO “to supplement the proposed rule

change to address issues raised by commenters.” Id. The SEC explained

that it had followed this practice with respect to Standard's comment

and "requested that NASD provide additional information about the

disclosures    regarding   the   $35,000   payment   noted   in   the    proxy

statement." Id.

       After describing all the information provided by NASD about the

$35,000 payment, the SEC stated in the following language what it had

done with respect to consideration of Standard’s state-law claims:

                                    -11-
          The Commission ordinarily does not make determinations
     regarding state law issues but, when required to do so
     because state law necessarily informs its findings under the
     Exchange Act, it relies on the conclusions of experts or
     other authorities. . . . With respect to the adequacy of the
     proxy statement, the Commission has considered the NASD's
     explanation regarding the proxy statement's representation
     about the $35,000 payment.    The Commission believes that
     NASD   has  made   a   prima   facie   showing  that   these
     representations were not misleading and that NASD's
     explanation is uncontradicted by the commenters' submissions
     regarding this matter.    Accordingly, after reviewing the
     record in this matter, the Commission believes that NASD has
     provided a sufficient basis on which the Commission can find
     that, under the Exchange Act, NASD complied with its
     Certificate of Incorporation and By-Laws with respect to the
     proxy approval process and that the proposed amendments to
     its By-Laws were properly approved by NASD members.

Id. at 42,188 (emphases added).

     On   July   30,   2007,   the   consolidation   of   NASD   and   NYSE   was

concluded.

     The petition to review the SEC order in the Ninth Circuit.

Standard filed a petition for review of the SEC's order in the Ninth

Circuit, pursuant to 15 U.S.C. § 78y(a), and requested the Court of

Appeals to "modify the SEC's order to vacate its state-law finding

regarding the proxy statement." Brief of Pet’r Standard at 22, No. 07-

73405 (9th Cir. Dec. 3, 2007).        Standard argued to the Ninth Circuit

that “[t]here is no question that the order can stand without that

finding.” Id.

     The Ninth Circuit never reviewed the SEC's approval order.

Before the SEC's responsive brief was due in the Ninth Circuit,

                                      -12-
Standard and the SEC filed a joint motion in which the Commission

sought a remand of its order “to allow the Commission to clarify the

order by making it clear that the order did not purport to reach a

final and binding judgment on whether the NASD proxy statement was

deceptive or misleading under state law.” Joint Motion of Parties at

6, Standard Investment Chartered, Inc. v. SEC, No. 07-73405 (9th Cir.,

Jan. 16, 2008) (“Joint Motion”).3         The joint motion represented that

     3
         The joint motion further explained:

     The remand would allow the Commission to add language to the

     order to make it clear: that in the order the Commission did

     not make a definitive adjudication, such as a trial court

     would make after an evidentiary hearing, that the proxy

     statement was not misleading under state law; that the

     Commission’s determination regarding the proxy statement was

     only for purposes of the Exchange Act; that the Commission

     did not purport to decide a question of state law, except to

     the extent state law informed the Commission’s determination

     under the Exchange Act; and that the Commission did not

     intend     that   any   such   state-law   determination   would   be

     binding on a court in a related action based upon state law.

                                       -13-
“[t]he Commission would also add language to the order stating that,

in   adding    clarifying   language,     the    Commission    is    not    vacating,

nullifying or rendering void the NASD-NYSE consolidation and that the

consolidation remains in effect as of the original issuance date of

the order, i.e., July 26, 2007.” Id. at 7.           The Ninth Circuit granted

the joint motion in April 2008.

       In May 2008, the SEC issued a release amending the SEC approval

order.    See Amended Order Approving Proposed Rule Change To Amend the

By-Laws of NASD, Exchange Act Release No. 56145A (May 30, 2008), 73

Fed.      Reg.     32,377        (June      6,      2008),         available       at

http://edocket.access.gpo.gov/2008/pdf/E8-12631.pdf.                       The   SEC's

release amending the approval order added a new paragraph immediately

after the sentence that stated that “the Commission can find that,

under    the   Exchange   Act,   NASD    complied   with     its    Certificate    of

Incorporation and By-Laws with respect to the proxy approval process

and that the proposed amendments to its By-Laws were properly approved

by NASD members.”     The new paragraph stated:

       This finding as to NASD compliance and members' approval is
       not a definitive adjudication under state law, such as a
       trial court would make after an evidentiary hearing,
       regarding the claim that the proxy statement was misleading.
       Except to the extent that state law informs the Commission's
       finding that, as a federal matter under the Exchange Act,
       NASD complied with its Certificate of Incorporation and
       By-Laws with respect to the proxy approval process and that

Joint Motion at 6-7 (emphasis in original).

                                         -14-
       the proposed amendments to its By-Laws were properly
       approved by NASD members, the Commission is not purporting
       to decide a question of state law. The Commission does not
       intend that its determination regarding the NASD's
       uncontradicted prima facie showing before the Commission
       that the proxy statement was not misleading be binding on a
       court in a claim based on state law.

       In June 2008, the Ninth Circuit dismissed Standard's petition.

       The parties return to this Court. After the Ninth Circuit's

dismissal of Standard's petition, the parties in the pending appeal

filed supplemental briefs in this Court.       Standard contended that the

SEC's amended order confirms that the SEC has no authority to, and did

not,   consider   Standard's   state   law   claims.   In   response,   NASD

contended that Standard had abandoned any possibility of exhausting

its claims by voluntarily dismissing its petition to review the SEC's

order.     NYSE contended that Standard had waived the ability to

demonstrate that its administrative remedies were inadequate.

                                Discussion

       Although the procedural developments preceding the argument of

this appeal are complicated, the disposition at this point is not.

Both parties are in essence seeking from this Court the same relief–a

return of the case to the District Court.        Standard seeks a reversal

of the District Court’s judgment and a remand to the District Court.

The appellees seek an affirmance of the District Court’s judgment, but

that disposition would also result in a return of the lawsuit to the

District Court.    The District Court dismissed for failure to exhaust

                                   -15-
administrative remedies. Although the dismissal was not expressly

stated to be “without prejudice,” a dismissal for failure to exhaust

available administrative remedies should be “without prejudice” as we

have previously ruled. See Giano v. Goord, 250 F.3d 146, 150-51 (2d

Cir. 2001); Snider v. Melindez, 199 F.3d 108, 111-12 (2d Cir. 1999).

Other circuits agree.         See, e.g., Rivera-Diaz v. American Airlines,

Inc., 229 F.3d 1133 (1st Cir. 2000) (table); Greene v. Meese, 875 F.2d

639, 643 (7th Cir. 1989); Wyatt v. Terhune, 315 F.3d 1108, 1120 (9th

Cir. 2003).        We will therefore deem the District Court’s dismissal to

have been “without prejudice.”          Such a dismissal leaves the plaintiff

free       to   return   to   the   District     Court      after   exhaustion     of

administrative remedies.4

       4
           The parties have not briefed the issue of whether return to the

District Court after exhaustion of administrative remedies is to be

accomplished        by   refiling     the   lawsuit    or    simply    by    seeking

reinstatement. Compare Walker v. Thompson, 288 F.3d 1005, 1009 (7th

Cir.       2002)   (dismissal   for    failure    to     exhaust    does    not   bar

“reinstatement”), with Terrell v. Brewer, 935 F.2d 1015, 1019 (9th

Cir. 1991) (after dismissal plaintiff was “free to refile his suit”).

It is not clear whether these courts meaningfully used the terms

“reinstatement” and “refile.”          In any event, we leave the issue of the

precise procedural route back to the District Court for consideration

                                        -16-
     We have not located a precedential decision of any court in which

a party whose suit was dismissed for failure to exhaust administrative

remedies purported to exhaust those remedies prior to appellate

consideration     of   an    appeal     from   the   judgment   of     dismissal.5

Considering this apparently novel situation, we note that, even though

the parties disagree on the significance of many aspects of the steps

taken in this litigation thus far, the ultimate relief they seek from

this Court, whether an affirmance or a reversal of the District

Court’s judgment, would result in a return of this case to the

District Court.     In that circumstance, we conclude that the essential

controversy has been eliminated from the appeal, and the proper course

is to dismiss the appeal as moot.

     However,     unlike     the     typical   situation     where    the    entire

controversy     between     the    parties   has   become   moot,    there   remain

by that Court if the issue should arise.
     5
         In a decision of the Sixth Circuit not published in the Federal

Reporter, and hence not binding on subsequent panels of that Court,

see 6th Cir. R. 206(c), the Court dismissed as moot an appeal from a

judgment of dismissal for failure to exhaust administrative remedies

because the administrative remedies had been exhausted during the

pendency of the appeal. See S.S. v. Eastern Kentucky University, 125

Fed. Appx. 644 (6th Cir. 2005).

                                        -17-
substantial disagreements between the parties, and for that reason the

dismissal will not be accompanied by a direction to dismiss the case.

Cf. United States v. Munsingwear, Inc., 340 U.S. 36, 39 (1950).                 Among

the    remaining    issues    is   whether       Standard   has     exhausted     its

administrative remedies.       That dispute pits the appellees’ contention

that the stipulated dismissal of the petition for review in the Ninth

Circuit abandoned and hence failed to complete the exhaustion of

administrative     remedies     against      Standard’s     contention    that     it

successfully challenged the only aspect of the SEC’s order that it

ultimately wished to challenge, it secured the relief it wanted, and

it had no need to ask the Ninth Circuit for any further relief.                  Also

at    issue   between   the   parties   is     the   significance   of   the    SEC’s

amendment to its order approving the bylaw amendments.               On that issue

Standard contends that the SEC has eliminated any possible obstacle

its original order created to Standard’s pursuit of its state law

claims in the District Court.       The appellees respond that the amended

order leaves in place some sort of a finding that precludes Standard’s

state law claims.

       None of these matters has been considered by the District Court,

which should have the opportunity to deal with them before any

substantive review by this Court.            Although we intimate no views on

the merits of any of these issues (or any other substantive issue

between the parties), we suggest to the District Court that it might

                                        -18-
consider inviting the SEC to explain what the Commission meant by its

seemingly contradictory assertions that NASD has made “a prima facie

showing” that its proxy statement representations were not misleading

and that the Commission can “find” that, “under the Exchange Act, NASD

complied with its Certificate of Incorporation and By-Laws.”      The

Commission might also be invited to explain the assertions that state

law “informs its findings under the Exchange Act” and that its finding

as to NASD compliance “is not a definitive adjudication under state

law.”

     In short, we do not decide whether exhaustion was required; if

required, whether it has been adequately pursued; or whether Standard

has viable state-law claims that may be pursued in the District Court.

     We also do not decide whether Standard’s damage claims encounter

a valid defense of immunity, as asserted by the appellees.        The

successful assertion of an immunity defense, had the District Court

reached that issue, would have resulted in a dismissal of the damage

claims with prejudice.    However, the judgment dismissing all of

Standard’s claims for failure to exhaust administrative remedies is

deemed to be a dismissal without prejudice.   An appellee may not seek

to enlarge its rights under a judgment on appeal without taking a

cross-appeal. See, e.g., United States v. American Railway Express

Co., 265 U.S. 425, 435 (1924); International Ore & Fertilizer Corp. v.

SGS Control Services, Inc., 38 F.3d 1279, 1285 (2d Cir. 1994).   This

                                -19-
rule applies to preclude an appellate court, in the absence of a

cross-appeal,    from   changing   a   dismissal   without   prejudice   to   a

dismissal with prejudice. See, e.g., Alejo v. Heller, 328 F.3d 930,

937 (7th Cir. 2003); Figueroa v. Rivera, 147 F.3d 77, 81 (1st Cir.

1998); New Castle County v. Hartford Accident & Indemnity Co., 933

F.2d 1162, 1205-06 (3d Cir. 1991).

     The appellees suggested at oral argument that we should reach

their immunity defense even though that issue has not yet been

considered by the District Court.        They relied on the principle that

an appellate court may affirm a judgment on any ground supported by

the record.    See Barbara v. New York Stock Exchange, Inc., 99 F.3d 49,

57-58 (2d Cir. 1996).       They particularly enlist Barbara in their

argument because, without a cross-appeal, we there adjudicated and

upheld an immunity defense after a suit had been dismissed for failure

to exhaust administrative remedies. However, Barbara differs from the

pending case in several respects.        In Barbara, the panel did not, as

we have here, deem the dismissal to have been without prejudice,

perhaps because it ruled that the dismissal for failure to exhaust

administrative remedies was in error. See id. at 56-58.         Furthermore,

the District Court had fully (although erroneously) adjudicated the

exhaustion issue, whereas here the critical developments concerning

exhaustion in the Ninth Circuit occurred after the District Court’s

decision.     We also note that the appellant in Barbara did not alert

                                       -20-
the panel to the absence of a cross-appeal.         In the pending case, we

have deemed the dismissal to have been without prejudice and we think

it advisable to have the District Court make the initial determination

as to whether exhaustion has now been completed.               For all these

reasons, we do not reach the immunity defense for lack of a cross-

appeal.

                                   Conclusion

     We therefore dismiss the appeal, but not the case, as moot,

without prejudice to the right of any party to pursue any issues

sought to be raised on this appeal in the event of a subsequent appeal

from a final judgment of the District Court.6

     6
         We will not vacate the District Court’s decision, a course

appropriate in some circumstances where an appeal is dismissed as

moot, see Munsingwear, 340 U.S. at 39.            As the Supreme Court has

instructed, vacatur in the event of an appeal that has become moot is

an equitable matter, see U.S. Bancorp Mortgage Co. v. Bonner Mall

Partnership, 513 U.S. 18, 29 (1994), and with the substantive issues

between the parties unresolved in this Court and available to be

reasserted in the event of a subsequent appeal, it would not be

appropriate    to   vacate   the   District   Court’s   decision.   We   note,

however, that the District Court’s decision would not be entitled to

preclusive effect in the event of subsequent litigation between the

                                      -21-
parties. See Gelb v. Royal Globe Insurance Co., 798 F.2d 38, 44 (2d

Cir. 1986) (“[A]lthough failure to appeal does not prevent preclusion,

inability to obtain appellate review, or lack of such review once an

appeal is taken, does prevent preclusion.”).

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