IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
__________________________
No. 97-31118
__________________________
KENNETH M. LANG,
Plaintiff-Appellant,
versus
PATRICK E. FRENCH,
Defendant-Appellee.
___________________________________________________
Appeal from the United States District Court
For the Eastern District of Louisiana
___________________________________________________
September 4, 1998
Before WIENER, BARKSDALE, and, DeMOSS Circuit Judges.
WIENER, Circuit Judge:
Plaintiff-Appellant Kenneth M. Lang appeals the district
court’s grant of summary judgment in favor of Defendant-Appellee
Charles E. French. Lang brought suit in district court seeking to
enforce a restitution order issued by the National Association of
Security Dealers (“NASD”) and affirmed by order of the Securities
Exchange Commission (“SEC”), disciplining French —— Lang’s former
investment advisor —— for violating the NASD’s Rules of Fair
Practice. The court dismissed Lang’s suit on the ground that it
was without jurisdiction to enforce a restitution order entered
pursuant to the NASD’s self-regulatory disciplinary process.
Despite concluding that the Securities and Exchange Act of 1934
1
(“the Exchange Act”) explicitly contemplates such enforcement
authority, we nonetheless affirm, raising the issue of standing sua
sponte and determining that Lang’s suit is jurisdictionally
defective for his lack of standing.
I
FACTS AND PROCEEDINGS
The facts are not in dispute. French, an NASD-registered
securities representative, operated a Metairie, Louisiana satellite
office of LaSalle St., a Chicago-based broker-dealer. Lang opened
a LaSalle St. account through French in 1989. Two years later,
French advised Lang to invest in First Care Medical Corporation
(“First Care”) by purchasing an interest in the company from a
doctor who was purportedly “getting out.” Lang paid the doctor
$50,000, in exchange for which he received, inter alia, a
promissory note from First Care and First Care stock certificates
as collateral. First Care filed for bankruptcy protection in April
1993.
In July 1993, Lang requested an investigation by the NASD into
French’s conduct in recommending the First Care investment.
Following an investigation, the NASD issued a formal complaint
charging, inter alia, that French induced Lang to purchase the
First Care promissory note by making misrepresentations of material
fact and by failing to provide disclosure adequate for Lang to make
a fully informed investment decision.
The NASD initiated disciplinary proceedings against French for
violations of the association’s Rules of Fair Practice.
2
Specifically, Lang was charged with violating Article III, Sections
1 and 18 of the Rules. Section 1 provides: “A member, in the
conduct of his business, shall observe high standards of commercial
honor and just and equitable principles of trade.”1 Section 18
provides: “No member shall effect any transaction in, or induce the
purchase or sale of, any security by means of any manipulative,
deceptive or other fraudulent device or contrivance.”2
Following a hearing in which French was represented by
counsel, the NASD’s District Business Conduct Committee found,
inter alia, that French had engaged in a scheme to defraud Lang, in
violation of the Rules of Fair Practice. The district committee
censured French, fined him $15,000, and barred him from associating
in any capacity with any member of the NASD. The committee also
ordered French to pay restitution to Lang in the amount of $50,000,
plus simple interest at the rate of 9% per annum from September 3,
1991 through the date of full payment.
French appealed to the National Business Conduct Committee,
which affirmed the district committee. He then appealed the
national committee’s affirmance to the SEC, which, after an
independent review of the record and the briefs filed, issued an
opinion and order sustaining the action taken by the NASD. French
did not appeal the SEC order to either the Fifth or D.C. Circuit
1
1997 NASD Manual: Conduct Rules (CCH) ¶ 4111 (currently
designated as Rule 2110).
2
Id. ¶ 4141 (currently designated as Rule 2120).
3
Court of Appeals, as authorized under the Exchange Act.3
In November 1996, Lang brought an action in district court
seeking judicial enforcement of the restitution facet of the
disciplinary action taken by the NASD and affirmed by the SEC.
Specifically, Lang’s complaint prayed for a “judgment in his favor
enforcing the orders of the NASD and the SEC and ordering [French]
to pay [Lang the amount mandated by the NASD pursuant to its
restitution order].” Following French’s failure to respond to
Lang’s Request for Admissions, Lang filed a motion for summary
judgment. The district court denied the motion, holding that it
lacked jurisdiction to enforce SEC orders affirming NASD
disciplinary actions. Armed with the court’s ruling, French filed
a motion to dismiss, which the court treated as a summary judgment
motion and granted. Lang timely appealed.
II
ANALYSIS
A. STANDARD OF REVIEW
We review grants of summary judgment de novo, applying the
same standards as the district court.4 When, however, “this Court
finds ‘an adequate, independent basis’ for the imposition of
summary judgment, the district court’s judgment may be affirmed
‘regardless of the correctness of the district court’s rulings.’”5
3
See Exchange Act § 25(a)(1), 15 U.S.C. § 78y(a)(1) (1994).
4
Melton v. Teacher’s Ins. & Annuity Ass’n of America, 114 F.3d
557, 559 (5th Cir. 1997).
5
Hetzel v. Bethlehem Steel Corp., 50 F.3d 360, 363 (5th Cir.
1995) (citing Schuster v. Martin, 861 F.2d 1369, 1371 (5th Cir.
4
B. APPLICABLE LAW
Lang’s claim raises novel issues on appeal, the resolution of
which must begin with an understanding of the NASD disciplinary
process and federal regulation of the over-the-counter (“OTC”)
securities markets. The NASD, a private nonprofit corporation
organized under the laws of Delaware, is registered with the SEC as
a national securities association. As a prerequisite to its
registration under the Exchange Act, the NASD was required to
promulgate association rules “designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade . . . and, in general, to protect investors and
the public interest.”6 To this end, the NASD adopted the Rules of
Fair Practice, which govern the conduct of its members and
associates of its members.
Beyond the adoption of professional rules, the Exchange Act
requires the NASD to enforce compliance with those rules and, more
broadly, with the “provisions of [the Exchange Act], the rules and
regulations thereunder, [and] the rules of the Municipal Securities
Regulation Board.”7 As mandated by the Exchange Act, the NASD has
implemented a “fair procedure for the disciplining of members and
persons associated with members”8 suspected of violating the act’s
legal or ethical precepts. The Rules of Fair Practice, together
1988); Degan v. Ford Motor Co., 869 F.2d 889, 892 (5th Cir. 1989)).
6
Exchange Act, § 15A(b)(6), 15 U.S.C. § 78o-3(b)(6) (1994).
7
Exchange Act, § 15A(b)(7), 15 U.S.C. § 78o-3(b)(7) (1994).
8
Exchange Act, § 15A(b)(8), 15 U.S.C. § 78o-3(b)(8) (1994).
5
with a Code of Procedure, set forth the disciplinary framework
within which complaints are handled and members are disciplined.
The Exchange Act also requires the NASD’s rules to provide for
the imposition of sanctions when violations are found. NASD
sanctions may include, “expulsion, suspension, limitation of
activities, functions, and operations, fine, censure, being
suspended or barred from being associated with a member, or any
other fitting sanction.”9 Through its sanctioning authority, the
NASD has been “delegated governmental power . . . to enforce, at
(its) own initiative, compliance by members of the [securities]
industry with both the legal requirements laid down in the Exchange
Act and ethical standards going beyond those requirements.”10
Several tiers of administrative review are available to
persons aggrieved in the disciplinary process,11 and disciplinary
orders are reviewable by the SEC after administrative remedies
within the NASD are exhausted.12 Following a de novo determination
of the facts and the law and an independent decision on the
violation and the penalty,13 the SEC is authorized to affirm,
9
Exchange Act, § 15A(b)(7), 15 U.S.C. § 78o-3(b)(7) (1994)
(emphasis added).
10
Merrill Lynch, Pierce, Fenner, & Smith v. National Ass’n of
Sec. Dealers, Inc., 616 F.2d 1363, 1367 (5th Cir. 1980) (quoting S.
REP. NO. 94-75, 94th Cong., 1st Sess. 23 (1975), reprinted in 1975
U.S.C.C.A.N. 201).
11
See LOUIS LOSS & JOEL SELIGMAN, SECURITIES REGULATION, 2820-2830 (3d
ed. 1990).
12
See Royal Sec. Corp., 36 S.E.C. 275 (1955).
13
See Shultz v. Securities & Exch. Comm’n, 614 F.2d 561, 568
(7th Cir. 1980).
6
modify, or set aside any sanction, and, if necessary, remand to the
NASD for further proceedings.14 Final SEC orders are appealable to
the United States Court of Appeals.15 On appeal from an SEC order,
“the court [of appeals] has jurisdiction . . . to affirm or modify
and enforce or to set aside the order in whole or in part.”16
Aside from its role as an adjudicator in the NASD’s
disciplinary process, the SEC may “take direct action against the
NASD to ensure that the association enforces its own rules and the
statutory provisions regarding disciplinary proceedings.”17 Section
21(e) of the Exchange Act was specifically amended in 1975 to
authorize the SEC to “institute injunctive actions to enjoin a
violation of the rules of a self-regulatory organization.”18
Significantly, section 21(e) contains a provision explicitly
vesting district courts with jurisdiction, on application of the
SEC, to issue “orders commanding . . . any person to comply with
[the Exchange Act], [and] the rules, regulations, and orders
thereunder[.]”19 Thus, the SEC is authorized not only to enjoin
violations of the Rules of Fair Practice but also to enforce
14
Exchange Act § 19(e), 15 U.S.C. § 78s(e) (1994).
15
Exchange Act § 25(a)(1), 15 U.S.C. § 78y(a)(1) (1994).
16
Exchange Act § 25(a)(3), 15 U.S.C. § 78y(a)(3) (1994).
17
Merrill Lynch, 616 F.2d at 1367; see Exchange Act § 21(e),
15 U.S.C. § 78u(e) (1994).
18
S. REP. NO. 94-75, 94th Cong., 1st Sess. 135 (1975), reprinted
in 1975 U.S.C.C.A.N. 312.
19
Exchange Act § 21(e)(1), 15 U.S.C. § 78u(e)(1) (1994)
(emphasis added).
7
compliance with SEC disciplinary orders based on violations of
those rules. And, we are aware of nothing that would except
restitution orders from this authorization.
The joint roles taken by the NASD and the SEC in the
regulation of OTC securities transactions reflects a congressional
intent “to establish a ‘cooperative regulation’ where [securities]
associations would regulate themselves under the supervision of the
SEC.”20 The Fourth Circuit recently offered the following
observations on the cooperative regulatory scheme governing the OTC
markets:
The NASD’s proceedings are intended to provide
front-line, less formal enforcement of rules
governing day-to-day operations of [OTC]
securities markets. On the other hand, the
SEC administrative proceedings cover all
markets and organizations and are designed to
prevent and punish more serious securities
laws violations which, as the SEC determines,
must be redressed in the public
interest . . . .
Congress’ decision to give both the NASD
and the SEC overlapping disciplinary authority
reflects a considered decision to bring two
separate vantage points to enforcement efforts
—— one from the industry itself and one from
the regulator. Consistent with these varying,
but cooperative roles, the SEC thus acts as
supervisor and adjudicator of the NASD’s
actions but as prosecutor and adjudicator in
its own enforcement efforts.21
Against this backdrop, we can resolve the question whether
disciplinary sanctions issued by the NASD and upheld by order of
20
Jones v. Securities & Exch. Comm’n, 115 F.3d 1173, 1179 (4th
Cir. 1997) (quoting S. REP. NO. 75-1455, at 3-4; H.R. REP. NO. 75-
2307, at 4-5), cert. denied, —— U.S. ——, 118 S.Ct. 1512, 140
L.Ed.2d 666 (1998).
21
Id. at 1180.
8
the SEC22 are judicially cognizable. In opposing dismissal in the
district court, Lang argued that section 27 of the Exchange Act
provides the jurisdictional foundation for judicial enforcement of
disciplinary sanctions embodied in SEC orders. Section 27 of the
Exchange Act grants district courts exclusive jurisdiction over
suits brought “to enforce any liability or duty created by [the
act] or the rules and regulations thereunder.”23
The district court rejected Lang’s argument, relying on
various grounds which, although admittedly not directly on point,
nonetheless indicated to the court “that it was not congress’
intent for the district court to enforce this type of disciplinary
order.” The court observed that the United States Courts of Appeal
have exclusive jurisdiction over appeals from SEC orders.24 The
district court reasoned that as it would have no power to entertain
the matter if French —— the party aggrieved by the order —— were
seeking relief, its jurisdiction to entertain any action based on
disciplinary measures ordered by the SEC was doubtful.25
22
As the NASD’s disciplinary order was affirmed by the SEC, we
are not presented with the question whether NASD orders are
judicially cognizable in and of themselves, without the independent
review and ratification of the SEC.
23
15 U.S.C. § 78aa (1994).
24
See Exchange Act § 25(a)(1), 15 U.S.C. § 78y(a)(1) (1994).
25
The court relied on Maschler v. National Ass’n of Sec.
Dealers, Inc., 827 F.Supp 131 (E.D.N.Y. 1993), in support of its
conclusion. In Maschler, plaintiff, an NASD member, brought suit
in district court challenging disciplinary action taken against it
by the NASD. Id. at 132. The plaintiff predicated jurisdiction
on, inter alia, section 27 of the Exchange Act, but the court
dismissed the suit, finding that section 25(a)(1) limits judicial
review of final disciplinary orders of the SEC exclusively to the
9
Second, the district court inferred its lack of enforcement
authority from the fact that section 27 of the Exchange Act creates
no private cause of action with respect to the Rules of Fair
Practice. Because Lang could not assert a cause of action directly
against French based on NASD rule violations, reasoned the court,
he could not do so indirectly by attempting to enforce a
disciplinary judgment predicated on transgressions of those same
rules.26
At the outset, we reiterate that the Exchange Act, as we read
the statute, explicitly provides for district court jurisdiction
over actions brought to enforce SEC-ordered sanctions. Section
21(e)(1) of the Exchange Act provides, in pertinent part:
Upon application of the [SEC] the district
courts of the United States . . . shall have
United States Courts of Appeal. Id.
26
The court relied on Shahmirzadi v. Smith Barney, Harris Upham
& Co., Inc., 636 F.Supp 49 (D.D.C. 1985), in support of its
contention that there are no private rights of action for NASD rule
violations. In so doing, the court failed to observe that the
issue of implied rights under stock exchange or dealer association
rules is far from settled. See Jablon v. Dean Witter & Co., 614
F.2d 677, 681 (9th Cir. 1980) (refusing to recognize implied
rights); Shull v. Dain, Kalman & Quail, Inc., 561 F.2d 152, 160
(8th Cir. 1977) (refusing to recognize private right of action in
the absence of a finding of fraud), cert. denied, 434 U.S. 1086, 98
S.Ct. 1281, 55 L.Ed.2d 792 (1978); Securities & Exch. Comm’n v.
First Sec. Co., 463 F.2d 981, 988 (7th Cir.) (noting that rule
violations provide the basis for private actions where the rule
violated serves to protect the public), cert. denied, 409 U.S. 880,
93 S.Ct. 85, 34 L.Ed.2d 134 (1972); Colonial Realty Corp. v. Bache
& Co., 358 F.2d 178, 182 (2d Cir.), cert. denied, 385 U.S. 817, 87
S.Ct. 40, 17 L.Ed.2d 56 (1966) (holding that the question whether
“to imply federal civil liability for violation of exchange or
dealer association rules by a member cannot be determined on [an]
all-or-nothing basis”). We have yet to comment on the viability of
private causes of action under such rules, and we are not presented
with the opportunity to do so now.
10
jurisdiction to issue writs of mandamus,
injunctions, and orders commanding (1) any
person to comply with the provisions of [the
Exchange Act], the rules, regulations, and
orders thereunder, the rules of a national
securities exchange or registered securities
association of which such person is a member
or person associated with a member . . . .27
Inasmuch as the SEC’s affirmance, by order, of sanctions
imposed by the NASD operates as an “order” to the same degree and
in the same fashion as do orders issued by the agency pursuant to
its own enforcement initiatives, this provision indisputably endows
district courts with the enforcement authority at issue in this
case. The fact that the SEC’s order derives from the agency’s
adjudicatory role in the NASD’s self-regulating disciplinary
process —— as opposed to its more direct regulatory role as the
agency charged with primary responsibility for enforcing the
securities laws —— has no bearing on the jurisdictional
grant embodied in section 21(e)(1). There is no adjudicatory-
enforcement dichotomy with respect to circuit court jurisdiction
over final SEC orders; sanctions ordered by the SEC are reviewable
by the circuit courts under section 25(a)(1) of the Exchange Act
without reference to the procedural posture of the sanctions on
appeal. Internal consistency under the Exchange Act mandates a
similar construction of section 21(e)(1).
Given the district court’s enforcement authority over SEC
orders, the question reduces itself to whether a private litigant
has standing to instigate such enforcement in that court. Raising
27
Exchange Act § 21(e)(1), 15 U.S.C. § 78u(e)(1) (1994)
(emphasis added).
11
the issue sua sponte,28 we determine that Lang does not have
standing to pursue the relief sought in the district court.
As an initial observation, we note that the circumstances
surrounding this case make it unique. We are satisfied that, but
for the facts that (a) restitution was one of the sanctions ordered
by the NASD, and (b) the statute of limitations appears to have run
on a Rule 10b-5 fraud claim, Lang would not have taken the NASD/SEC
disciplinary order enforcement route to recover from French. The
atypical nature of the civil action fashioned by Lang in the
district court becomes apparent when the viability of private
“enforcement” actions outside the context of restitution orders is
considered. Of the several disciplinary sanctions available to the
NASD and the SEC —— all of which are intended to discourage and
punish legal and ethical misconduct —— only restitution orders have
the ancillary effect of conferring a private benefit on the victims
of such malfeasance. If, for example, Lang had sought to “enforce”
any other aspect of the SEC’s disciplinary order —— e.g., the
member-association bar —— we would be confronted with a situation
in which a private individual was attempting to exercise
governmental or quasi-governmental authority in the promotion of
essentially public interests. We do not interpret the regulatory
scheme created by the Exchange Act as permitting the SEC’s
28
See In re Weaver, 632 F.2d 461, 463 n. 6 (5th Cir. 1980)
(noting that “[b]ecause standing is an element of the
constitutional requirement of ‘case or controversy,’ lack of
standing deprives the court of subject matter jurisdiction[,]” and,
as a result, “objections to standing are never waived and must be
raised by an appellate court sua sponte”) (citing Fairley v.
Patterson, 493 F.2d 598 (5th Cir. 1974)).
12
supervisory authority over the securities industry to be
commandeered by private parties in this fashion.
Lang relies on the jurisdictional grant embodied in section 27
of the Exchange Act as the statutory basis for his private
enforcement suit. Section 21(e)(1), however, expressly vests only
the SEC with authority to apply to the district court for orders
commanding compliance with the SEC’s orders. Lang would
nevertheless have us infer from the language of section 27 a
parallel authority for private litigants to apply to the district
court for enforcement of SEC orders.29 Such an inference is
implicitly foreclosed, though, by the plain language of section
21(e)(1), which names the SEC as the only authorized applicant for
judicial enforcement of SEC orders. We view section 21(e)(1) as
manifesting a congressional intent to reserve exclusively to the
SEC the authority to seek district court enforcement of such
29
To our knowledge, this case represents one of the only
reported instances in which a litigant has relied on an SEC order
to obtain private relief. In Pitofsky v. Brucker, 291 F.Supp. 321
(S.D.N.Y. 1966), plaintiff moved for summary judgment in his
private action for damages under Rule 10b-5, resting his motion on
the findings and opinion of the SEC, and a stop order previously
issued by the agency based thereon. Id. The court refused to
grant the motion, holding that summary judgment in a private action
for damages for claimed violations of the Exchange Act and Rule
10b-5 could not be granted solely on the basis of the
administrative findings, opinion and order of the SEC in a separate
stop order proceeding. Id. In so holding, the court announced
what it considered to be the dispositive rule: “[A]n agency
determination does not relieve a plaintiff seeking a private remedy
of the generally applicable requirement that he prove the elements
of his case . . ., nor does it preclude the defendants . . . from
attempting to establish their pleaded defenses.” Id. (citations
omitted). Lang moved for summary judgment in the instant case on
even more unconventional grounds, asking the court to simply adopt
the restitution order without asserting a private claim for damages
under the Exchange Act, its rules or regulations.
13
orders.30
Lang argues to the contrary, insisting that congressional
intent can only be effectuated through private enforcement requests
such as his, as a denial of judicial relief would thwart what he
characterizes as “the full realization of the self-regulation
contemplated by the statutory scheme.” We disagree. The Exchange
Act does delegate substantial enforcement authority to self-
regulatory organizations like the NASD, but the private enforcement
mechanism advocated by Lang would go well beyond the system of
cooperative regulation envisioned by Congress. Our refusal to
recognize a private enforcement mechanism does not detract from the
disciplinary goals of deterrence and investor protection. In the
instant case, French has been barred from associating with any NASD
member; and, as he has been removed from the securities industry,
he poses no future threat to investors, regardless of whether Lang
ever receives restitution.
Moreover, alternative means —— including, most commonly,
private civil actions for securities law violations —— exist for
ensuring that members of the securities industries are unable to
profit from their own misconduct. And, in cases deemed by the
agency to implicate the public’s interest to such an extent as to
warrant the procedure, the SEC could apply, pursuant to section
30
See Liesen v. Louisiana Power & Light Co., 636 F.2d 94, 95
(5th Cir. 1981) (examining the enforcement scheme of the Atomic
Energy Act, and determining that Congress prohibited private
judicial enforcement of the act, relegating such enforcement
requests to the exclusive jurisdiction of the Nuclear Regulatory
Commission).
14
21(e)(1) of the Exchange Act, for an order of the district court
commanding payment of the restitution previously ordered by the
SEC. We know of nothing that would have prevented the SEC from
petitioning the district court for enforcement of the restitution
“ordered” by the agency; yet, try as we may, we cannot discern
standing for Lang to do so.
III
CONCLUSION
For the foregoing reasons, the decision of the district court
is
AFFIRMED
15