Published on:

NYSE Class Action Defense Cases-In re NYSE Specialists: Second Circuit Upholds District Court Dismissal Of Class Action Against New York Stock Exchange Holding Absolute Immunity Applied To Its Quasi-Governmental Regulatory Role

NYSE Entitled to Absolute Immunity Against Class Action’s Regulatory Violations Claims but District Court Misinterpreted Rule 10b-5 Case Law Regarding Standing in Dismissing Balance of Class Action Complaint thus Necessitating Remand as to those Claims Second Circuit Holds

Plaintiffs filed a class action against the New York Stock Exchange (NYSE) seeking damages for its alleged failure to “regulate and provide a fair and orderly market” as required by federal law and for violations of Rule 10b-5. In re NYSE Specialists Securities Litig., 503 F. 3d 89, 90-91 (2d Cir. 2007). The class action alleged that the NYSE, a nonprofit corporation that oversees the world’s largest stock exchange and facilitates trades for more than 2800 companies through seven Specialist Firms, “which are charged with managing ‘the stocks assigned to them to create a fair, competitive, orderly and efficient market,’” allowed the Specialist Firms to manipulate the prices at which it traded stocks to their own financial benefit. Id., at 91-92. NYSE defense attorneys moved to dismiss the class action complaint’s Rule 10b-5 claim arguing that plaintiffs’ lacked standing; defense attorneys moved to dismiss the class action’s regulatory claims on the ground that the NYSE enjoyed absolute immunity. Id., at 91. Lawyers for lead-plaintiff California Public Employees’ Retirement System (CalPERS) and Empire Programs countered that the NYSE lost this immunity because it “abandoned its regulatory role to maintain a fair and orderly market” and acted contrary to its quasi-governmental powers “when it permitted and encouraged misconduct and fraud on its trading floor.” Id. The district court agreed with defense counsel and dismissed the class action claims against the NYSE, id. The Second Circuit affirmed the judgment with respect to the regulatory claims, agreeing with the district court that the NYSE enjoyed absolute immunity and that the fraud exception did not save the class action claims; the Circuit Court reversed, however, as to the Rule 10b-5 claim.

Preliminarily, the Circuit Court recognized that “[t]he substantial powers of, and the near-total control exercised by, the Specialist Firms over any given stock on the NYSE create an opportunity to manipulate the market for self-gain.” In re NYSE, at 92. An SEC investigation precipitated this class action, as that SEC report reportedly found “that the NYSE had failed ‘to police its elite floor-trading firms’ and ‘ignor[ed] blatant violations’ of prohibitions on self-dealing,” and concluded “that the Exchange was ‘an in-house regulator either ill-quipped or too worried about increasing its workload to care’; and that the NYSE had ‘no meaningful surveillance, allowing inappropriate behavior to continue’ and causing ‘significant’ customer harm totaling in the hundreds of millions of dollars.” Id., at 93-94. According to the class action complaint, however, the NYSE repeatedly released statements to the public alleging that it provided oversight of the daily functions of the Specialist Firms, id., at 94, and that the members of the putative class action relied on those misrepresentations in choosing to trade stocks listed on the NYSE, id., at 95.

Turning to the merits of the district court order dismissing the class action complaint, the Second Circuit discussed at length whether the NYSE is entitled to absolute immunity as to those class action claims challenging its regulatory activities by virtue of its “quasi-governmental role in the regulation of the securities market,” In re NYSE, at 96, and held that it did indeed enjoy such immunity, see id., at 95-101. The question, then, is whether the fraud exception applies so as to preclude the NYSE from benefiting from conduct that would otherwise fall within the scope of its absolute immunity. Id., at 101. Plaintiffs’ lawyers argued that “the wide-ranging misconduct and fraud allegedly permitted or undertaken here by the NYSE” present the “most unusual of circumstances” so as to “overcome whatever grant of absolute immunity [the Second Circuit] might otherwise accord.” Id. The Circuit Court disagreed, explaining that the exception advanced by plaintiffs would swallow the rule. Id., at 101-02.

As to the Rule 10b-5 class action claims against the NYSE, the Second Circuit held that the district court erred in determining that plaintiffs lacked standing to prosecute those claims. In essence, the Circuit Court held that the district court misinterpreted its prior authority “to mean that an action under Rule 10b-5 for false statements about a security purchased by the plaintiff lies only against the issuer of the security, or that only statements about a security issuer are actionable.” In re NYSE, at 102. The Court remanded the matter so that the district court could consider the NYSE’s other arguments attacking standing and the class action’s Rule 10b-5 claim, including specifically whether the NYSE enjoys immunity as to that claim, too. Id., at 102-03. The Second Circuit could not resolve that issue, however, because the matter had not been properly briefed before it, id., at 102. Accordingly, the Circuit Court affirmed in part and reversed in part the judgment of the lower court, id., at 103.

Download PDF file of In re NYSE Specialists