STEVEN I. WEISSMAN, as Custodian under the Florida Uniform Transfers to Minors Act, as Trustee and individually, Plaintiff-Appellee, versus NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., a Delaware not-for-profit corporation, NASDAQ STOCK MARKET, INC., a Delaware corporation organized for profit, Defendants-Appellants.
No. 04-13575
United States Court of Appeals, Eleventh Circuit
November 1, 2006
D. C. Docket No. 03-61107-CV-WJZ
Appeal from the United States District Court for the Southern District of Florida
(November 1, 2006)
BARKETT, Circuit Judge:
The National Association of Securities Dealers, Inc. (NASD) and its subsidiary, the NASDAQ Stock Market, Inc. (NASDAQ), seek reversal of the district court‘s denial of their motion to dismiss Steven Weissman‘s complaint, as well as the district court‘s order permitting Weissman to engage in pre-trial discovery.1 NASD and NASDAQ (Appellants) claim absolutely immunity from Weissman‘s suit. They argue that Weissman complains of conduct undertaken pursuant to their quasi-governmental role as market regulators under the Securities Exchange Act (SEA),
Between December 2000 and June 2002, Weissman purchased 82,800 shares of WorldCom, Inc. (WorldCom) stock on behalf of his minor children. In the wake of WorldCom‘s collapse, and after losing almost the entire investment, Weissman filed a diversity suit in federal district court against the NASD and NASDAQ. Weissman‘s complaint was initially dismissed for failure to allege diversity of citizenship, but he redrafted it to correct that defect. In his second complaint, Weissman disavowed any reliance on Appellants’ regulatory activity as the basis for his suit,2 emphasizing that “this action is based solely on the for-profit commercial business activity of the Defendants[, . . .] includ[ing] Defendants’ approximately $100 million dollar marketing and advertising campaign during the years 2000, 2001 and 2002 to promote and sell . . . shares of WorldCom.”
The complaint set forth the following allegations:
First, Weissman alleged that NASDAQ violated
During 2000 and 2001, NASDAQ3 expended $74 million dollars on marketing and advertising. In 2002, NASDAQ expended an additional $27 million dollars on marketing and advertising. The marketing and advertising campaign featured NASDAQ-listed companies, including WorldCom. NASDAQ published numerous print and television advertisements in Florida endorsing WorldCom as a great company and a good investment. . . . Though not purporting to offer WorldCom stock for sale, NASDAQ undertook said advertising and promotion for a consideration received or to be received directly or indirectly from WorldCom, market markers and/or stock dealers without disclosing the receipt, whether past or prospective, of such consideration . . . .
The purpose of NASDAQ‘s advertising campaign to build the NASDAQ Brand is to generate revenue through maintaining its listings, obtaining new listings and to jointly market shares with the listed companies . . . . NASDAQ sought to engender [the] trust and confidence of the investing public, including Plaintiff, that when they invest in a NASDAQ-listed stock, . . . [they are] assur[ed] of the quality of their investment. The failure of NASDAQ to disclose that it was compensated by WorldCom, market makers and/or stock dealers, directly or indirectly[,] for the advertisements and promotions violated Florida Statute Section 517.301(1)(b). NASDAQ‘s advertisements and endorsements of WorldCom carried extraordinary weight and power with Plaintiff . . . .
Second, Weissman alleged that NASDAQ offered WorldCom shares for sale without registering as a broker, in violation of
Third, Weissman alleged that Appellants committed common-law fraud and/or negligent misrepresentation in their attempts to induce investors to purchase shares of WorldCom. With regard to these counts, Weissman‘s complaint specifically charged, again, that:
During 2000 and 2001, NASDAQ and NASD, jointly and in concert with each other, expended $74 million dollars on marketing and advertising. In 2002, NASDAQ expended an additional $27 million dollars on marketing and advertising. The purpose of this marketing and advertising campaign was to induce investors, including Plaintiff, to purchase shares of stock traded on the NASDAQ stock market, including WorldCom, in order to benefit the NASD and NASDAQ . . . by:
(i) generating increased trading volume and the attendant revenue;
(ii) generating and retaining listing income from NASDAQ-listed companies, including WorldCom; and,
(iii) increasing the value of NASDAQ‘s stock.
As part of [its] advertising and marketing campaign . . . NASDAQ published numerous print and television advertisements in Florida which knowingly, with intent to deceive, endorsed WorldCom and conveyed the false representation and impression
that WorldCom was a great company with accounting in accordance with [Generally Accepted Accounting Principles] GAAP . . . . NASDAQ also provided publicity to WorldCom on its web-site and assisted in the dissemination of WorldCom‘s fraudulent financial statements. The aforesaid advertising and marketing campaign conducted during the year prior to Plaintiff‘s purchases of WorldCom shares included, but was not limited to . . . a two full page spread advertisement in the Wall Street Journal discussing [NASDAQ‘s] belief in the need for NASDAQ-listed companies to provide accurate financial reporting in accordance with [GAAP], supported by a Knowledgeable Audit Committee. On one page is a picture of the NASDAQ ticker with the slogan The Responsibilities We All Share. On the opposite page under the headline Keeping Our Markets True – It Is All About Character is a list of the chief executives of the good NASDAQ listed companies under the sub-heading Our Beliefs Stand in Good Company. Listed thereunder as an endorser of these NASDAQ goals is Bernard J. Ebbers, President and Chief Executive Officer[,] WorldCom, Inc. . . . In addition . . ., during the months prior to his purchases of WorldCom shares, Plaintiff saw, heard and relied upon other public media advertisements/communications by the Defendants conveying the same false representations and impression to the effect that WorldCom was a great company with accounting in accordance with GAAP; a good investment; and, that it met the listing requirements of the NASDAQ stock market. . . .
NASDAQ and NASD‘s advertising and marketing campaign was designed and intended by Defendants to induce investors, including Plaintiff, to purchase shares of WorldCom and, as part of that campaign, Defendants knowingly and intentionally made false laudatory representations regarding WorldCom while concealing their direct profit motive and interest in generating purchases of WorldCom shares. The intention of NASDAQ and NASD in making these false representations and concealing their direct profit motive and interest in selling the stock of that company, was to convince and induce investors, including Plaintiff, to purchase
shares of WorldCom.
Elsewhere in his complaint, and in support of his claim that NASDAQ was touting WorldCom stock, Weissman pointed to NASDAQ‘s April 2001 registration statement filed with the Securities and Exchange Commission (SEC), which stated that “NASDAQ‘s branding strategy is designed to convey to the public that the world‘s most innovative, successful growth companies are listed on NASDAQ.”
Appellants moved to dismiss the complaint, claiming absolute immunity. In the alternative, they argued that Weissman lacked a federal private right of action, failed to exhaust his administrative remedies, and failed to state a cause of action under Florida law. The district court held that both the absence of a federal private right of action, as well as any failure to exhaust SEC remedies, were immaterial because all of Weissman‘s claims were based solely on state law. It further held that, because Appellants’ enjoyment of absolute immunity for quasi-governmental activity does not insulate them from suit for activity related to private business, their alleged advertisement and promotion of WorldCom was outside the scope of such immunity.
Appellants timely appealed. Weissman moved to dismiss the appeal for lack of jurisdiction. We granted that motion in part, dismissing Appellants’ claims that
STANDARD OF REVIEW
We review de novo the district court‘s denial of a motion to dismiss on the basis of immunity. See Maggio v. Sipple, 211 F.3d 1346, 1350 (11th Cir. 2000) (applying de novo standard of review to denial of qualified immunity). We review the complaint, and all inferences to be drawn therefrom, in the light most favorable to the plaintiff, accepting all well-pleaded factual allegations as true. Id.
DISCUSSION
Appellants are self-regulatory organizations (SROs) within the meaning of the Securities Exchange Act,
To be sure, self-regulatory organizations do not enjoy complete immunity from suits. Sparta, 159 F.3d at 1213. Only when an SRO is acting under the aegis of the Exchange Act‘s delegated authority does it enjoy that privilege. Id. Absolute immunity is not appropriate unless the relevant conduct constitutes a delegated quasi-governmental prosecutorial, regulatory, or disciplinary function. See D‘Alessio v. New York Stock Exch., Inc., 258 F.3d 93, 105 (2d Cir. 2001) (a[n] SRO, such as the [New York Stock Exchange], may be entitled to immunity
Except with regard to those portions of Weissman‘s complaint involving NASDAQ‘s dissemination of WorldCom‘s fraudulent financial statements, Appellants fail to carry their burden of demonstrating entitlement to absolute immunity from Weissman‘s suit.5 Although dissemination of company financial statements warrants absolute immunity because, at the very least, it is undertaken pursuant to NASDAQ‘s regulatory authority to remove impediments and perfect the free market,
To advertise its own sense of responsibility and its honesty and character, NASDAQ compared itself to WorldCom, asserting that its Beliefs Stand In Good Company. This is not a regulatory action. More generally, the whole point of the advertisements was to entice investors to buy stock on NASDAQ‘s exchange – such as NASDAQ‘s exchange-traded fund, QQQ, which included WorldCom. This, too, is a non-regulatory action. Indeed, none of NASDAQ‘s advertisements relate to its statutorily delegated responsibility to prevent fraudulent and manipulative . . . practices, promote just and equitable principles of trade, remove impediments to and perfect the free market, or protect investors and the public interest.
Weissman does not contest either NASDAQ‘s decision to list or de-list WorldCom, nor any prosecutorial actions that NASDAQ took or failed to take against that corporation. Although a company‘s appearance on the NASDAQ
As a private corporation, NASDAQ places advertisements that are patently intended to increase trading volume and, as a result, company profits. Even if NASDAQ‘s status as a money-making entity does not foreclose absolute immunity for any number of its activities, its television and newspaper advertisements cannot be said to directly further its regulatory interest under the Securities Exchange Act. These advertisements were in the service of NASDAQ‘s own business, not the government‘s, and such distinctly non-governmental conduct is unprotected by absolute immunity.6
In his partial concurrence, Judge Tjoflat concludes that today‘s decision
AFFIRMED IN PART and REVERSED IN PART.
I concur with the portion of the majority‘s decision reversing the order of the district court and holding the appellants immune insofar as Weissman bases his claims on the links to WorldCom‘s financial statements on NASDAQ‘s internet site. I respectfully dissent from the remainder of majority‘s opinion, however, because I believe that all of the other activities for which Weissman seeks to hold the appellants liable fall within the broad scope of the appellants’ regulatory duties under the Exchange Act. Accordingly, NASD and NASDAQ should enjoy immunity from all of Weissman‘s claims.1
In his complaint, Weissman alleges that he bought WorldCom shares in reliance on several NASDAQ representations, all of which were false and made by NASDAQ for the purpose of inducing investment in WorldCom stock. These representations, and the means NASDAQ used to make them, are alleged as follows:
1. WorldCom met NASDAQ‘s listing requirements for audit committees; that is, WorldCom possessed an audit committee composed of three financially literate, independent directors. NASDAQ made this representation implicitly through advertisements that named WorldCom as a company whose stock was traded on its exchange, and thus, by definition, met the listing requirements. One series of advertisements appeared on television, beginning in September 2001, and described NASDAQ‘s own exchange-traded fund, known as QQQ. This fund
2. WorldCom‘s financial statements were prepared in accordance with generally accepted accounting principles (GAAP) and thus were accurate. NASDAQ made this representation implicitly by listing the names of Ebbers and WorldCom in the Wall Street Journal advertisement of April 11, 2002, which also referenced NASDAQ‘s belief in GAAP.
3. WorldCom was a good investment. NASDAQ made this representation
Underlying all these representations, according to Weissman, was NASDAQ‘s ulterior motive. His complaint alleges that NASDAQ‘s management – its officers and directors – listed and touted WorldCom because they had a financial incentive to do so. That is, the greater the number of companies NASDAQ listed on its exchange and the more investors traded in shares of the listed companies, including WorldCom, the greater NASDAQ‘s profits and the officers’ and directors’ compensation. Weissman patently intends his allegations of NASDAQ‘s profit motive to distance his complaint from the regulatory functions protected under the immunity doctrine. He asserts that his suit is based solely on the for-profit commercial business activity of the appellants and disclaims any connection between that activity and the appellants’ regulatory functions under the Exchange Act. The majority credits Weissman‘s disavowal of any reliance on the appellants’ regulatory activities to support his claims, holding that the alleged profit motive behind NASDAQ‘s representations places its actions outside the scope of the regulatory duties that NASD and NASDAQ assumed under the Exchange Act and SEC regulations.
I am of a different view. While we must accept the factual allegations of
II.
A.
In framing the Exchange Act of 1934 and its subsequent amendments, Congress envisaged a system of cooperative regulation in which regulation of the over-the-counter market would be largely performed by self-regulatory organizations (SROs) – representative organizations of investment bankers, dealers, and brokers – with the SEC exercising appropriate supervision in the public interest. See S. REP. 75-1455, at 4 (1938). When acting pursuant to this mandate, NASD and NASDAQ effectively stand in the shoes of the SEC, see Austin, 757 F.2d at 692, which enjoys sovereign immunity from suit, Sprecher v. Graber, 716 F.2d 968, 973–74 (2d Cir. 1983). Accordingly, NASD and NASDAQ enjoy absolute immunity from suit when acting under the aegis of the Exchange Act‘s delegated authority[.] Sparta Surgical Corp. v. NASD, 159 F.3d 1209, 1214 (9th Cir. 1998); see also, e.g., DL Capital Group, LLC v. NASDAQ, 409 F.3d 93, 97 (2d Cir. 2005) (There is no question that an SRO and its officers are entitled to absolute immunity when they are, in effect, ‘acting under the aegis’ of their regulatory duties. (quoting Sparta, 159 F.3d at 1214)).
The immunity doctrine is not so inflexible, however, as to be strictly limited in scope to these few quintessentially regulatory activities. Immunity extends to protect an SRO from claims based on conduct consistent with the quasi-governmental powers delegated to it pursuant to the Exchange Act and the regulations and rules promulgated thereunder. DL Capital Group, LLC, 409 F.3d at 97 (emphasis added) (quoting D‘Alessio v. N.Y. Stock Exch., 258 F.3d 93, 106 (2d Cir. 2001)). See also D‘Alessio, 258 F.3d at 105 (recognizing the broad authority delegated . . . by the Exchange Act and holding that an SRO . . . may be entitled to immunity from suit for conduct falling within the scope of the SRO‘s regulatory and general oversight functions. (construing Barbara, 99 F.3d at 59)).
The Exchange Act’s expansive language indicates the breadth of NASD’s self-regulatory authority to perform the duties delegated to it; however, that authority is exercised subject to the SEC’s direct supervision of all of NASD’s regulatory activities. The close oversight of SROs by the SEC is precisely what justifies their immunity from suit for regulatory actions. NASD “stands in the shoes” of the SEC, and thus is “entitled to the same immunity enjoyed by the SEC when [NASD] is performing functions delegated to it under the SEC’s broad oversight authority.” See D’Alessio, 258 F.3d at 105. Without the SEC’s
This regulatory scheme leaves a good deal of room for SROs to take actions consistent with applicable rules and regulations in order to fulfill the mandates of the Exchange Act. In seeking to circumvent this broad immunity, however, plaintiffs have often couched claims against SROs – claims that ultimately arise from the organizations’ actions consistent with their duties under the Exchange Act – in terms of bad faith and fraud. See DL Capital Group, LLC, 409 F.3d at 98–99; D’Alessio, 258 F.3d at 98, 106; Sparta, 159 F.3d at 1215. In so doing, plaintiffs have alleged bad-faith or fraudulent motives in hopes of re-characterizing SROs’ actions as falling outside the scope of immunity. These attempts have been unavailing, as courts have properly rejected attempts to create a bad-faith exception to the absolute immunity doctrine protecting self-regulatory organizations. See DL Capital Group, LLC, 409 F.3d at 98–99; Sparta, 159 F.3d at 1215. Aside from the general precedential principle that absolute immunity cannot be overcome by
B.
To determine whether NASD and NASDAQ should enjoy immunity from the claims in this case, we must look not at the manner in which Weissman casts his claims, but instead at the nature of the specific actions alleged by Weissman to have caused him injury. See D’Alessio, 258 F.3d at 105–06. Weissman does not dispute that NASD and NASDAQ enjoy absolute immunity when acting in their regulatory capacity. To the contrary, he claims that what they did – what induced him to buy WorldCom stock – was to engage in activity falling outside of their regulatory function. By referencing WorldCom in their television and newspaper advertisements, he contends, NASD and NASDAQ represented that WorldCom
1.
Weissman first complains about a series of television advertisements that, according to his allegations, ran for some time beginning the week of September 24, 2001 during “major prime time programming.” Reading Weissman’s vague allegations about the content of these advertisements in the light most favorable to him, the ads promoted the sale of the NASDAQ-100 Index Trust, or QQQ (“the QQQ fund“), which is the exchange-traded fund offered by the for-profit entity NASDAQ. At the time Weissman viewed the advertisements, WorldCom was one of NASDAQ’s top-100 companies, and its stock was included in the QQQ fund. According to Weissman, the advertisements “feature[d] a group of companies included in the trust,” including WorldCom. It was upon this mention of WorldCom that Weissman allegedly relied in drawing the inference that WorldCom must meet listing requirements, conduct its finances in accordance with GAAP, and generally constitute a “good investment.”
It is true, as Weissman argues, that “[w]hen conducting private business, [SROs] remain subject to liability.” Sparta, 159 F.3d at 1214. Perhaps it may also
NASDAQ’s communication of those simple facts about WorldCom pertains directly to the regulatory function of NASD and NASDAQ to make listing decisions, and the corollary duty to announce listing decisions to the public. The duty to monitor compliance with the listing standards and de-list companies for failing to adhere to them falls squarely within the self-regulatory framework provided by the Exchange Act. NASD Rules provide the standards for initial and continued listing on NASDAQ’s stock exchange and delegate to NASDAQ the responsibility for enforcing these listing standards. See NASD Manual, Rule 4300,
Furthermore, the ability of NASD and NASDAQ to announce publicly the exercise of their quasi-governmental regulatory duties is inherent in those duties, or is, “at the very least, certainly consistent with [NASDAQ’s] quasi-governmental powers as an SRO.” DL Capital Group, LLC, 409 F.3d at 98 (internal quotations omitted, emphasis and alteration in original); see also Basic Inc. v. Levinson, 485 U.S. 224, 245–46 (1988) (noting that
Fundamentally, Weissman’s allegations about the television advertisements do not implicate any action by NASD or NASDAQ beyond the decision to continue listing WorldCom and the communication of that decision to the marketplace by including the name of WorldCom as among the companies traded on the exchange. These activities fall within the scope of the quasi-governmental activities covered by the immunity doctrine.
2.
Weissman also complains of an advertisement NASDAQ ran in the Wall Street Journal on April 11, 2002. He alleges that NASDAQ ran the ad “[s]eeking to calm the markets in the wake of the Enron fraud.”4 The advertisement, which
As with the television advertisements, NASDAQ’s action in publishing the newspaper advertisement falls within the scope of its regulatory duties. No reasonable reading of the content of the advertisement can support Weissman’s allegation that the ad constituted a non-regulatory representation “tout-ing” WorldCom. One entire page of the ad consisted of statements summarizing NASDAQ’s listing standards; the communication of that content could not be more obviously related to NASD’s and NASDAQ’s performance of their listing duties under the Act, which is covered by immunity. The inclusion of the names of
In light of the obvious regulatory nature of the newspaper advertisement, the gravamen of Weissman’s claims is laid bare. Stated in its most basic terms, Weissman’s complaint is that NASD and NASDAQ continued to communicate that WorldCom was being traded on its exchange when they either knew or should have known that WorldCom was in serious trouble. That NASD and NASDAQ may have fallen down on the job in continuing to list WorldCom, however, is irrelevant to the question of whether they are covered by immunity for communicating that
III.
Finally, I respectfully suggest that in addition to reaching the wrong result in this case, the majority’s opinion establishes an untenable precedent. The regulatory scheme established by the Exchange Act allows an exchange to operate for profit under the auspices of an SRO’s regulatory authority, at least in the case of NASDAQ specifically. In 2000, the SEC explicitly approved the restructuring of NASDAQ into a for-profit entity under the supervision of NASD, finding it “consistent with” the requirements set forth in the Exchange Act. Order Approving Proposed Rule Change Amending the Nasdaq By-Laws and Restated Certificate of Incorporation, Exchange Act Release No. 42,983, 65 Fed. Reg. 41,116, 41,118 (July 3, 2000). Because NASDAQ operates for profit, everything it does arguably contributes to its coffers. Simply by listing a new concern on the exchange – the most obvious regulatory function – NASDAQ will profit from the listing fees and trading of the newly listed company’s shares. Obviously, the SEC has determined that the operation of an exchange for profit in such a manner is not inherently
At the very least, the majority’s holding will seriously impact the practicalities of litigation strategy in future suits by investors against SROs for investment losses. As the majority would have it, an aggrieved investor like Weissman need simply identify any action by an SRO that may be motivated by profit and allege that the action falls outside a narrowly defined set of regulatory activities. By pleading these magic words, the investor can avoid a detailed analysis of whether the exchange is entitled to immunity for its action, and he may proceed with his litigation. Discovery will of course reveal the true contours of the investor’s claim, but the prospect of expensive discovery will likely pressure the SRO to settle regardless of the merit of the complaint.
The majority’s narrow construction of what may be considered “regulatory” ignores the broad scope of immunity that is intended under the Exchange Act. Moreover, it thwarts the public policy of the immunity doctrine by ultimately requiring more suits against SROs to proceed into litigation. For example, there
The majority’s result cannot be consistent with the regulatory framework established pursuant to the Exchange Act and approved under the supervision of the SEC. Accordingly, I dissent from the portion of the majority opinion affirming the order of the district court.
Notes
NASD subsequently, between 2000 and 2002, divested itself of the majority of its equity interest in NASDAQ. See Order Approving Proposed Rule Change Amending the NASDAQ By-Laws and Restated Certificate of Incorporation, Exchange Act Release No. 42,983, 65 Fed. Reg. 41,116, 41,116 (July 3, 2000). As required by the SEC, however, NASD retained voting control over NASDAQ via a voting trust pending approval of NASDAQ‘s application for registration as a separate national securities exchange. See Notice of Filing of Application for Registration as a National Securities Exchange, Exchange Act Release No. 44,396, 66 Fed. Reg. 31,952, 31,953 (June 13, 2001). See also
At all times relevant to this appeal, NASDAQ‘s application for registration as a national securities exchange was still pending. Accordingly, it operated under the supervision of NASD, and thus the Exchange Act provisions relevant to this appeal are those governing national securities associations, of which NASD is one. See
After this appeal was argued and submitted, the SEC approved NASDAQ‘s application to register as a national securities exchange, and thus NASDAQ now operates as an independent SRO. See Order Approving Proposed Rule Change and Notice of Filing Following the Nasdaq Exchange‘s Operation as a National Securities Exchange, Exchange Act Release No. 34-54084, 71 Fed. Reg. 38,935, 38,935 (July 10, 2006). Accordingly, the rules governing the operation of the NASDAQ exchange have been removed from current versions of the NASD Manual and are now found in a separate NASDAQ Manual. See id.; NASDAQ Manual, Rules 4300 through 4950 (2006), available at http://nasdaq.complinet.com/nasdaq/display/index.html. Because, however, the NASD Manual governed NASDAQ at all times pertinent to this appeal, I refer throughout this opinion to the relevant NASD Rules.