Court Opinion

ID: 2964898
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:32:45.597643+00
Date Added: 2024-06-11T11:41:49.686397
License: Public Domain

USCA1 Opinion

	

                            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).  

                                         -5-
                                          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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