[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
________________________ ELEVENTH CIRCUIT
NOVEMBER 1, 2006
No. 04-13575 THOMAS K. KAHN
________________________ CLERK
D. C. Docket No. 03-61107-CV-WJZ
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.
________________________
Appeal from the United States District Court
for the Southern District of Florida
_________________________
(November 1, 2006)
Before TJOFLAT and BARKETT, Circuit Judges, and FULLER,* District Judge.
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), 15 U.S.C. § 78a et seq. The district court rejected this
defense, explaining that while Appellants do enjoy absolute immunity for
statutorily-mandated regulatory or disciplinary functions, they are not entitled to
such immunity in this case because Weissman’s complaint relates to private
commercial conduct not mandated by the Act.
*
Honorable Mark E. Fuller, United States Chief District Judge for the Middle District of
Alabama, sitting by designation.
1
Weissman’s motion to dismiss this appeal for lack of jurisdiction was granted in part by
prior order dated October 13, 2004. Specifically, this Court dismissed the appeal to the extent it
sought review of the district court’s determination that Weissman adequately pled his state law
claims and exhausted his administrative remedies. We denied Weissman’s motion as to
Appellants’ immunity claims, over which we have jurisdiction. We noted that our jurisdiction
extends to the district court’s discovery order; if Appellants’ immunity claim is meritorious, they
will necessarily be insulated from pre-trial discovery.
2
BACKGROUND
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 Fla. Stat. § 517.301(1)(b)
by promoting WorldCom through its marketing and advertising without disclosing
2
Appellants’ arguments focus on the allegations in Weissman’s first complaint, which is
obviously not the one relevant to this appeal. While we may take notice of Weissman’s prior
pleading to the extent it bears on this appeal, see Paul v. Dade County, 419 F.2d 10, 12 (5th Cir.
1969), it is the allegations in the operative complaint that must support Appellants’ claim of
absolute immunity if that claim is to prevail.
3
that their revenues were directly enhanced by increased trading in WorldCom
stock. With regard to this count, Weissman’s complaint specifically charged that:
During 2000 and 2001, NASDAQ 3 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 Fla. Stat. § 517.12. With regard to
3
The complaint frequently refers to NASDAQ as the “The For Profit.” For the sake of
clarity and consistency, when citing the complaint, this opinion will in each instance render “The
For Profit” as NASDAQ.
4
this count, Weissman’s complaint reiterated that “Plaintiff relied upon the
endorsements and recommendation of WorldCom shares by NASDAQ in
purchasing same” and that “NASDAQ directly benefitted and profited [from]
Plaintiff’s purchases of WorldCom shares because, inter alia, its income is
increased by increased trading volume on the NASDAQ stock market.”
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
5
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
6
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
7
Weissman failed to adequately plead his state law claims and did not exhaust his
administrative remedies. We permitted the appeal to proceed as to Appellants’
absolute immunity defense, as well as their claim that Weissman lacked a federal
private right of action.4
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, 15 U.S.C. § 78c(a)(26), which vests them with a duty
to promulgate and enforce rules concerning the conduct of their members. See 15
U.S.C. §§ 78s(g) and 78f(b); see also Silver v. New York Stock Exch., 373 U.S.
4
Weissman has also moved for attorneys' fees and double costs, arguing that this appeal
is frivolous within the meaning of Federal Rule of Appellate Procedure 38. “Rule 38 sanctions
have been imposed against appellants who raise ‘clearly frivolous claims’ in the face of
established law and clear facts.” Farese v. Scherer, 342 F.3d 1223, 1232 (11th Cir. 2003) (citing
Misabec Mercantile, Inc. De Panama v. Donaldson, Lufkin & Jenrette ACLI Futures, Inc., 853
F.2d 834, 841 (11th Cir.1988)). Because Appellants raise colorable arguments as to why the
district court’s immunity determination should be reversed, we deny Weissman’s Rule 38
motion.
8
341, 352 (1963) (explaining the “federally mandated duty of self-policing by
[securities] exchanges”). Our sister circuits have accorded SROs absolute
immunity from civil damages for conduct undertaken as part of their statutorily
delegated adjudicatory, regulatory, and prosecutorial authority. See Barbara v. New
York Stock Exch., 99 F.3d 49, 59 (2d Cir. 1996); Austin Mun. Sec., Inc. v. Nat’l
Ass’n of Sec. Dealers, Inc., 757 F.2d 676, 692 (5th Cir. 1985); Sparta Surgical
Corp. v. Nat’l Ass’n of Sec. Dealers, Inc., 159 F.3d 1209, 1215 (9th Cir. 1998);
Zandford v. Nat’l Ass’n of Sec. Dealers, Inc., 80 F.3d 559 (D.C. Cir. 1996). Such
grants of immunity accommodate SROs’ unique position in the regulatory scheme:
SROs perform a variety of functions that would otherwise be performed by a
governmental agency, but they lack the sovereign immunity which governmental
agencies enjoy. See Barbara, 99 F.3d at 59; Austin, 757 F.2d at 692.
“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
9
from suit for conduct falling within the scope of the SRO's regulatory and general
oversight functions”) (emphasis added); see also Austin, 757 F.2d at 692 (“NASD is
entitled to absolute immunity for its role in disciplining its members and
associates.”); Barbara, 99 F.3d at 59 (absolute immunity granted in suit arising from
disciplinary action against employee of exchange member); Sparta, 159 F.3d at
1213 (holding that decision to suspend trading was “a regulatory function cloaked
in 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, 15 U.S.C. § 78o-3(b)(6), the rest of Weissman’s complaint
expressly and exclusively relates to Appellants’ for-profit commercial activity,
without any reliance on their quasi-governmental enforcement or regulatory
functions. The complaint mainly concerns Appellants’ advertising activities,
which, according to Weissman, fraudulently touted WorldCom’s stock in order to
5
See Butz v. Economou, 438 U.S. 478, 506 (1978) (burden placed on party claiming immunity
from suit).
10
profit from resulting increases in trading volume. This conduct does not fall “under
the aegis” of Appellants’ delegated disciplinary or regulatory authority and
therefore is not shielded by absolute immunity. Sparta, 159 F.3d at 1213.
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.” 15
U.S.C. § 78o-(3)(b)(6). The advertisements were in no sense mandated by, or
coterminous with, any regulatory activity contemplated by the Exchange Act. This
conduct was private business activity; and “[w]hen conducting private business,
[SROs] remain subject to liability.” Sparta, 159 F.3d at 1213.
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
11
exchange is surely a prerequisite to being touted as a sound NASDAQ investment,
these occurrences are materially distinct for the purposes of immunity analysis, as
only one of them falls under the mandate of the Exchange Act. In listing and de-
listing companies like WorldCom, NASDAQ clearly does “stand in the shoes of the
SEC.” But NASDAQ represents no one but itself when it entices investors to trade
on its exchange and, specifically, when it suggests that particular companies are
sound investments.
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
6
Appellants also argue that the district court erred in concluding that the absence of a
federal private right of action proved immaterial because Weissman's cause of action was
grounded in state law. Specifically, Appellants argue that this cannot terminate the inquiry, as
state-law claims that relate to SRO activities are nonetheless subject to the immunity bar. We
agree. However, as discussed above, the conduct Weissman alleges does not “relate to SRO
activities.” Thus, the district court did not err on this point.
12
creates an untenable precedent, a slope made slippery by the fact that “everything
[NASDAQ] does arguably contributes to its coffers.” This fear is unwarranted. On
the contrary, our holding, in and of itself, marks a clear and sturdy line. In granting
immunity for certain contested NASDAQ activities while withholding it from
others, we have acknowledged the existence of NASDAQ’s absolute immunity
while more precisely defining its contours. Far from simply asking whether
NASDAQ was enriched by the activities described in Weissman’s complaint, our
immunity analysis has also and especially asked whether those for-profit activities
were quasi-governmental in nature – whether, in other words, they were regulatory,
adjudicatory, or prosecutorial actions taken pursuant to the Securities and Exchange
Act. Because NASDAQ satisfies this test when it provides to the public the
financial statements of companies listed on its exchange, but does not satisfy this
test when it engages in advertising activity unsuited to a government actor like the
Securities and Exchange Commission, the district court’s denial of absolute
immunity to Defendants is
AFFIRMED IN PART and REVERSED IN PART.
13
TJOFLAT, Circuit Judge, concurring in part and dissenting 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
1
A note on the evolving relationship between NASD and NASDAQ is in order. At its
inception, NASDAQ was a wholly-owned subsidiary of NASD. In 1996, NASD delegated to
NASDAQ functions and responsibilities relating to the operation of NASDAQ’s stock market,
including the authority “[t]o develop, adopt and administer rules governing listing standards
applicable to securities traded on The Nasdaq Stock Market and the issuers of those securities.”
Order Granting Approval of Proposed Rule Change by NASD Relating to the Allocation and
Delegation of Authority and Responsibilities, Exchange Act Release No. 37,107, 61 Fed. Reg.
16,948, 16,952 (Apr. 18, 1996).
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 15 U.S.C. § 78f (registration of national securities
exchanges); 17 C.F.R. § 240.3a1-1 (“An organization . . . shall be exempt from the definition of
the term ‘exchange’ . . . if such organization . . . [i]s operated by a national securities
association.”).
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 15 U.S.C. § 78o-3. In addition, the rules
14
I.
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
then governing the operation of the NASDAQ exchange were included among the rules in the
NASD Manual.
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.”
15
tracked the performance of NASDAQ’s 100 largest companies, including – at that
time – WorldCom.2 Another advertisement appeared in the Wall Street Journal on
April 11, 2002. Under the headline “Keeping Our Markets True – It Is All About
Character,” one side of this advertisement consisted of a picture of the NASDAQ
ticker, located in Times Square, with the slogan “The Responsibilities We All
Share.” Adjacent to the picture of the stock ticker, NASDAQ set forth a number of
general statements summarizing the requirements it believed necessary to safeguard
a fair and honest market, including the role of “knowledgeable Audit Committee[s]”
in providing accurate information to investors. The other side of the advertisement
consisted of a list of dozens of CEOs of NASDAQ companies – including Ebbers of
WorldCom – under the subheading “Our Beliefs Stand In Good Company.”
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
2
Shares in exchange-traded funds are traded on exchanges and represent ownership
interests in a fund holding securities of the companies tracked by the fund. Shares in QQQ are
traded on NASDAQ and represent ownership interests in the NASDAQ-100 Index Trust, which
holds securities of the 100 highest market-capitalized companies listed on NASDAQ.
16
implicitly through the television and newspaper advertisements, which “touted” the
companies listed on its exchange, including WorldCom.
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
17
Weissman’s complaint as true in reviewing the denial of the motion to dismiss, any
conclusory allegations, unwarranted deductions of facts or legal conclusions
masquerading as facts do not prevent dismissal. See Oxford Asset Mgmt. v.
Jaharis, 297 F.3d 1182, 1188 (11th Cir. 2002); see also Associated Builders, Inc. v.
Ala. Power Co., 505 F.2d 97, 100 (5th Cir. 1974). Because the facts relevant to the
immunity question are deemed undisputed and reasonably construed in Weissman’s
favor upon review of the district court’s dismissal of the complaint, the scope of
immunity applicable in this case is purely a question of law. See Austin Mun. Sec.
Inc. v. NASD, 757 F.2d 676, 685 (5th Cir. 1985) (determining the scope of absolute
immunity as a matter of law where facts critical to the issue were not disputed in the
record). Accordingly, we cannot accept as determinative Weissman’s bald assertion
that, because they were taken “for-profit,” the actions he complains of fall outside
the scope of regulatory actions for which the appellants are immune under the
Exchange Act. Nor, in any event, should an alleged profit motive on the part of the
NASD and NASDAQ be dispositive; as discussed in greater detail below, “the
intent with which . . . defendants operate is irrelevant to the absolute immunity
issue.” Id. In order to answer the immunity question, we must examine only the
nature of the specific actions complained of, not the reason those actions were
taken. I believe that, when viewed with the proper degree of specificity, the actions
18
about which Weissman complains are ultimately regulatory in nature, and the
appellants are thus entitled to immunity.
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. R EP. 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)).
19
Certain types of activities regularly performed by SROs fall unambiguously
“under the aegis” of the functions delegated by the Exchange Act. These activities
are characteristically governmental in nature. See Sparta, 159 F.3d at 1214
(“[T]here are few functions more quintessentially regulatory than suspension of
trading.”); Barbara v. N.Y. Stock Exch., 99 F.3d 49, 58 (2d Cir. 1996) (“[T]he
courts have not hesitated to extend the doctrine of absolute immunity to . . .
adjudicatory and prosecutorial duties.”); Austin, 757 F.2d at 692 (“We . . . conclude
that the NASD is entitled to absolute immunity for its role in disciplining its
members and associates.”).
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)).
20
This broad interpretation of the scope of SROs’ immunity is “consistent with
the structure of the securities market as constructed by Congress.” See Sparta, 159
F.3d at 1213. NASD adopts its rules pursuant to its mandate under Section 15A of
the Exchange Act, which imposes upon NASD the duty to adopt and enforce rules
“designed to prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, . . . to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and, in general,
to protect investors and the public interest.” 15 U.S.C. § 78o-3(b)(6). The SEC,
pursuant to its statutory oversight authority, must approve all NASD rules before
they are implemented, 15 U.S.C § 78s(b), and may “abrogate, add to, and delete
from . . . the rules . . . as [it] deems necessary or appropriate,” 15 U.S.C. § 78s(c).
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
21
imprimatur, NASD would no more have grounds for asserting immunity for a
particular action than any market participant. Thus, the determination of whether a
given action by an SRO is properly considered quasi-governmental – and thus
immune – rests entirely on whether the nature of the action complained of falls
within the broadly construed authority granted by the Exchange Act and supervised
by the SEC.
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
22
allegations of bad faith or fraud, see, e.g., Macuba v. Deboer, 193 F.3d 1316, 1321
(11th Cir. 1999), a bad-faith exception to the immunity doctrine is unadvisable “[a]s
a matter of common sense. . . . It is, after all, hard to imagine the plaintiff . . . who
would – when otherwise wronged by an SRO but unable to seek money damages –
fail to concoct some claim of fraud in order to try and circumvent” immunity. DL
Capital Group, LLC, 409 F.3d at 99. See also Sparta, 159 F.3d at 1215 (holding
that although “the results of any immunity rule may be harsh” to a putative plaintiff,
SROs must be immune for regulatory actions taken “in a capricious, even tartuffian
manner which caused [the plaintiff] enormous damage”).
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
23
satisfied its listing requirements and thus implied that WorldCom was a sound
investment. I will address first the television advertisements, then the newspaper
advertisement.
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
24
be true that the television advertisements about which he complains constitute
“private business” on the part of NASD and NASDAQ to the extent that they
promote and stimulate trading of shares in the QQQ fund itself (as distinct from
shares of its component securities, which are not products of NASDAQ). But we
need not decide that case, for Weissman’s allegations with regard to the television
advertisements do not link his alleged injury to the aspect of the ads that may
constitute non-immune, “private business” conduct. Weissman does not allege that
he bought shares of the QQQ fund in reliance on the ads promoting that fund, and
therefore suffered harm. There are no allegations that Weissman ever purchased
shares of the QQQ fund. Rather, he alleges that he bought shares of WorldCom, to
his detriment, in reliance on an implicit representation contained in NASDAQ’s
mere mention of the WorldCom name in the ads. His allegations of injury do not
depend on the representation, arguably made by NASDAQ through the
advertisements, that the QQQ fund was a good investment. Instead, Weissman
bases his claims on the theory that, by mentioning WorldCom in the context of an
advertisement that promoted the QQQ fund as a good investment, and given that
WorldCom stock was a constituent element of the QQQ fund, NASDAQ implicitly
represented something about the quality of WorldCom stock as a potential
investment.
25
Creative pleading, however, cannot save a claim that fails as a matter of law.
At their core, Weissman’s allegations ultimately speak to the duties of NASD and
NASDAQ to decide whether or not certain securities should be listed on the
exchange and to communicate those decisions – duties that fall squarely within the
universe of quasi-governmental regulatory functions for which NASD and
NASDAQ enjoy immunity from suit. Weissman does not allege that the television
advertisements made any specific representation about WorldCom whatsoever; they
simply mentioned the name of WorldCom in the context of the QQQ fund. Thus, in
essence, the act about which Weissman complains is not that NASDAQ advertised
the QQQ fund, but that NASDAQ mentioned that WorldCom was one of the 100
largest concerns listed on the exchange.
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,
26
et seq. (2005). NASD Rules also give NASDAQ “broad discretionary authority
over the initial and continued inclusion of securities in Nasdaq in order to maintain
the quality of and public confidence in its market.” NASD Manual, Rule 4300
(Aug. 26, 2005). NASD and NASDAQ therefore enjoy absolute immunity from
liability for acts committed in discharging such duties.3 See Sparta, 159 F.3d at
1214 (“[T]here are few functions more quintessentially regulatory than suspension
of trading.”).
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, 108 S.Ct. 978, 991, 99 L. Ed. 2d 194 (1988) (noting that
3
Although the majority focuses its discussion on allegations that NASDAQ sought to
profit from the advertisement scheme, those portions of Weissman’s complaint quoted in the
majority opinion also contain allegations that directly invoke the core regulatory functions of
SROs. For example, Weissman alleges that, among other purposes, NASDAQ initiated the ad
campaign “to generate revenue through maintaining its listings [and] obtaining new listings . . .
[and to] engender trust and confidence of the investing public” (emphasis added) – actions that
fall squarely within the regulatory framework established by the Exchange Act, regulations, and
NASD Rules. These allegations directly contradict Weissman’s disclaimer of any reliance on
NASDAQ’s regulatory functions. Although I do not believe these contradictory allegations are
necessary for a finding that the appellants are entitled to immunity – after all, we must construe
pleading ambiguities in Weissman’s favor – they reveal the extent to which Weissman’s claims
are inseparable from the appellants’ regulatory duties. Indeed, even in his conscious attempt to
craft his complaint without reference to regulatory functions, Weissman apparently was not able
to avoid describing some of those activities for which SROs are clearly immune from suit.
27
“Congress expressly relied on the premise that securities markets are affected by
information” in drafting the Exchange Act); Barr v. Mateo, 360 U.S. 564, 575, 79 S.
Ct. 1335, 1341, 3 L. Ed. 2d 1434 (1959) (“It would be an unduly restrictive view of
the scope of the duties of a policy-making executive official to hold that a public
statement of agency policy in respect to matters of wide public interest and concern
is not action in the line of duty.”).
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
4
Here again, Weissman reveals by the language of his pleading that his claims necessarily
implicate regulatory functions by NASD and NASDAQ. If, as Weissman alleges, the Wall
Street Journal advertisement was an action taken “to calm the markets,” that activity must fall
within NASDAQ’s regulatory duties to “remove impediments to and perfect the mechanism of a
free and open market,” 15 U.S.C. § 78o-3(b)(6), and “preserve and strengthen the quality of and
public confidence in its market.” NASD Manual, Rule 4300 (Aug. 26, 2005). In any event, the
immunity inquiry must be determined through an independent examination of the specific nature
28
consisted of a full two-page spread, identified the CEOs of some of the companies
listed on NASDAQ’s exchange. Ebbers’s and WorldCom’s names appeared among
dozens of others opposite some general statements of the principles underlying
NASD’s rules – principles such as independent audit committees and acceptance of
standard accounting practices. Weissman argues that because NASDAQ chose to
name Ebbers and WorldCom opposite the statements regarding listing
requirements, and because the ad included headlines such as “It’s All About
Character” and “Our Beliefs Stand In Good Company,” NASDAQ was implicitly
representing that WorldCom met listing requirements regarding the audit committee
and GAAP and was a “good investment.”
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 “touting”
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
of the advertisement, regardless of what Weissman claims about NASDAQ’s motive in
publishing it.
29
Ebbers and WorldCom adjacent to that content does nothing to convert the
advertisement into something outside the scope of NASD’s and NASDAQ’s quasi-
governmental functions. The part of the advertisement listing the names of CEOs
and companies merely communicated that those companies were currently being
traded on the exchange in accordance with the rules summarized in the other part of
the advertisement. As I have noted supra, the authority to list companies on
NASDAQ’s exchange – which is part of NASD and NASDAQ’s regulatory
function – necessarily encompasses the authority to announce which companies are
listed at any given time, as WorldCom was at the time of the advertisement. See
DL Capital Group, LLC, 409 F.3d at 98 (“[A]nnouncing the suspension or
cancellation of trades is as much a part of the defendants’ regulatory duties as is the
actual suspension or cancellation of trades.” (internal quotation marks omitted)).
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
30
decision to the marketplace. That they may have decided to continue listing
WorldCom in order to increase their profits, as Weissman alleges, is also irrelevant.
The action was essentially regulatory in nature, and thus NASD and NASDAQ
should enjoy immunity from all of Weissman’s claims.
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
31
inconsistent with the regulatory functions for which an SRO merits immunity from
suit. But the majority’s approach suggests no limit beyond which a plaintiff’s
allegation of profit-seeking could not reach to circumvent an SRO’s immunity.
Taken to its extreme, this reasoning could expose NASDAQ to suit for damages
allegedly resulting from any action taken in the operation of the exchange.
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
32
may be any number of situations in which advertising by an SRO might be
consistent with its regulatory duties; I would argue that the case at hand so qualifies.
Under the majority’s holding, however, an SRO must think twice before speaking
to the public, lest its advertisements be construed categorically as profit-seeking and
thus non-regulatory, regardless of their actual nature. This necessarily limits the
SRO’s ability to exercise the broad regulatory discretion delegated to it. Of course,
there may also be instances in which an advertisement crosses the line into purely
commercial, non-regulatory activity. Claims based on the non-regulatory aspect of
such an advertisement would properly avoid an SRO’s immunity. I simply believe
that a more searching inquiry than that undertaken by the majority is required to
make that distinction.
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.
33