On March 18, 2009, the United States Court of Appeals for the Second Circuit issued its decision in Standard Investment Chartered,Inc. (Plaintiff-Appellant) v. National Association of Securities Dealers, Inc., a/k/a NASD, NYSE Group., Mary L. Schapiro, Richard F. Brueckner and Barbara Z. Sweeney (Defendants-Appellants) (07-3372-cv).
The case was submitted to the 2nd Circuit on appeal from the July 13, 2007, judgment of the United States District Court for the Southern District of New York; See, Standard Investment Chartered, Inc. v. NASD et al., 07 Civ. 2014, 2007 WL 1296712 (S.D.N.Y. May 2, 2007) (Shirley Wohl Kram, District Judge), dismissing, for failure to exhaust administrative remedies, a lawsuit challenging aspects of the merger of the regulatory functions of the National Association of Securities Dealers and the New York Stock Exchange, which was approved by the Securities and Exchange Commission. The appellant also appeals from an order denying reconsideration.
The 2nd Circuit concluded that the controversy as to the appeal, though not as to the case, has been eliminated, and dismissed the appeal as moot, without prejudice to the right of any party to pursue any issues sought to be raised on this appeal in the event of a subsequent appeal from a final judgment of the District Court.
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In March 2007, Standard filed the instant lawsuit on behalf of the putative class of NASD members that are not also NYSE members. The complaint alleged that the terms of the proposed consolidation "represent a massively unfair disenfranchisement of NASD members," in both governance and financial terms. The complaint pleaded three claims:
- the NASD officers breached their fiduciary duties to the proposed class in negotiating the consolidation and failing to disclose all material facts in the Proxy Statement;
- the defendants engaged in negligent misrepresentation with respect to the proxy statement; and
- the NYSE and individual defendants would be unjustly enriched by the consolidation.
In May 2007, the District Court granted the defendants-appellees' motion to dismiss Standard's amended complaint on the ground that it failed to establish subject matter jurisdiction under Rule 12(b)(1). Standard Investment, 2007 WL 1296712, at *10. The Court held that because the proposed bylaw amendments necessary for the consolidation's consummation were an exercise of the NASD's rule making authority, Standard was required to exhaust the administrative remedies provided by the Securities Exchange Act and failed to do so.
Separately, the SEC approved the NASD/NYSE consolidation, and as part of its review process stated
The Commission ordinarily does not make determinations regarding state law issues but, when required to do so because state law necessarily informs its findings under the Exchange Act, it relies on the conclusions of experts or other authorities. . . . With respect to the adequacy of the proxy statement, the Commission has considered the NASD's explanation regarding the proxy statement's representation about the $35,000 payment. The Commission believes that NASD has made a prima facie showing that these representations were not misleading and that NASD's explanation is uncontradicted by the commenters' submissions regarding this matter. Accordingly, after reviewing the record in this matter, the Commission believes that NASD has provided a sufficient basis on which the Commission can find that, under the Exchange Act, NASD complied with its Certificate of Incorporation and By-Laws with respect to the proxy approval process and that the proposed amendments to its By-Laws were properly approved by NASD members.
In considering the appeal, the 2nd Circuit noted that it had not located a precedential decision of any court in which a party whose suit was dismissed for failure to exhaust administrative remedies purported to exhaust those remedies prior to appellate consideration of an appeal from the judgment of dismissal. Considering this apparently novel situation, even though the parties disagree on the significance of many aspects of the steps taken in this litigation thus far, the ultimate relief they seek from the 2nd Circuit, whether an affirmance or a reversal of the District Court’s judgment, would result in a return of this case to the District Court. In that circumstance, 2nd Circuit concluded that the essential controversy has been eliminated from the appeal, and the proper course is to dismiss the appeal as moot. However, unlike the typical situation where the entire controversy between the parties has become moot, there remain substantial disagreements between the parties, and for that reason the dismissal will not be accompanied by a direction to dismiss the case.