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Marchiano v. National Association of Securities Dealers

February 16, 2001


The opinion of the court was delivered by: Henry H. Kennedy, Jr. United States District Judge


Plaintiff Anthony J. Marchiano ("Marchiano") seeks a preliminary and permanent injunction barring defendants National Association of Securities Dealers, Inc. ("NASD") and NASD Regulation, Inc. ("NASD Regulation") (collectively, "NASD Defendants") from prosecuting a NASD Regulation disciplinary proceeding against him. Marchiano claims that the disciplinary proceeding violates his federal and state constitutional rights and is based solely on his invocation of his Fifth Amendment privileges in a 240-count, New York criminal indictment, charging Marchiano with violating New York securities laws. Marchiano further claims that NASD Defendants are acting in concert with the government and plan to share information obtained during the NASD disciplinary proceeding with criminal prosecutors. Before the court is NASD Defendants' motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6). Upon consideration of the motion, the opposition thereto, and the record of the case, the court concludes that NASD Defendants' Rule 12(b)(1) motion should be granted because this court lacks subject matter jurisdiction to hear this suit.


NASD is a self-regulatory organization registered with the Securities and Exchange Commission ("SEC") as a national securities association. Pursuant to the Securities Exchange Act of 1934, 15 U.S.C. § 78o - 3 (1976), NASD may adopt rules and regulations designed "to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, . . . [and] to protect investors and the public interest." 15 U.S.C. § 78o - 3(b)(6) (1976). NASD Regulation is NASD's fully-owned subsidiary and serves as the regulatory entity that disciplines brokers and dealers who fail to conform to NASD rules and standards of conduct. See NASD Sanction Guidelines (1998); 15 U.S.C. § 78o -3(h) (1976) (describing NASD disciplinary procedures).

Marchiano was the president and co-founder of A.S. Goldmen & Co., a now-defunct brokerage firm registered with NASD and SEC. On December 29, 1999, NASD Regulation issued a disciplinary complaint ("NASD Complaint") against Marchiano, alleging that he violated NASD Procedural Rule 8210, which requires firms and registered persons to respond to NASD Regulation requests for information. *fn1 The NASD Complaint alleges that Marchiano failed to respond to their requests to provide testimony on February 18, 1999. However, Marchiano contends that NASD Defendants are acting in concert with New York prosecutors and have brought the NASD Complaint solely to gather evidence in support of pending criminal proceedings. *fn2

On February 23, 2000, Marchiano filed this suit seeking a temporary restraining order ("TRO") against NASD Defendants to enjoin them for continuing the NASD disciplinary proceeding. In his complaint, Marchiano alleged that NASD Defendants have violated his federal and state constitutional rights, the Civil Rights Act of 1871, as amended by 42 U.S.C. § 1983, and Section 190.40 of the Criminal Procedure Law of New York State. He also claims that NASD Rules 8210 and 2110 are unconstitutionally vague and violate the Administrative Procedure Act. The court held a hearing on February 24, 2000, and denied the motion for a temporary restraining order on the grounds that Marchiano made a weak showing of irreparable injury and failed to demonstrate a substantial likelihood of success on the merits. See Memorandum Opinion and Order, No. 00-00331, Feb. 28, 2000 ("TRO Order"). During that proceeding, the central issue raised by the parties was whether NASD Defendants were state actors such that Marchiano could succeed on his constitutional claims. See Lugar v. Edmondson Oil Co., Inc., 457 U.S. 922, 936-37 (1982) (noting that most constitutional violations require state action).

On March 14, 2000, NASD Defendants filed a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6). NASD Defendants argued that the complaint must be dismissed under Rule 12(b)(1) for lack of subject matter jurisdiction because Marchiano has failed to exhaust his administrative remedies in the NASD disciplinary process. NASD Defendants also argued that the complaint must be dismissed under Rule 12(b)(6) for failure to state a claim because the NASD Defendants are private entities, thereby barring Marchiano's constitutional claims. As to the Rule 12(b)(1) motion to dismiss, Marchiano responded that he did not need to exhaust his administrative remedies because he properly alleged constitutional violations. With respect to the Rule 12(b)(6) motion to dismiss, Marchiano argued, as he did at the TRO hearing, that NASD Defendants are state actors 1) because they act as a "quasi-governmental agency" when performing their regulatory role and 2) because in this case they have acted in concert with government prosecutors in initiating the NASD disciplinary proceeding.


A. TRAC Jurisdiction

The court must first determine whether it has jurisdiction to hear Marchiano's claims. See, e.g., Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 94 (1988) ("Without jurisdiction the court cannot proceed at all in any cause.") (internal citations omitted). The court finds that it does not.

In Telecommunications Research and Action Center v. F.C.C., 750 F.2d 70 (D.C. Cir. 1984) ("TRAC"), the Court of Appeals for this Circuit held that "where a statute commits review of agency action to the Court of Appeals, any suit seeking relief that might affect the Circuit Court's future jurisdiction is subject to the exclusive review of the Court of Appeals." Id. at 75. This holding was "considered separately and approved by the whole court, and thus constitutes the law of the circuit." Id. at 75 n. 24. See also Air Line Pilots Ass'n, Int'l v. Civil Aeronautics Board, 750 F.2d 81, 88 (D.C. Cir. 1984) (holding that under TRAC the district court lacked jurisdiction to review claims that the agency was biased against the plaintiff).

Pursuant to TRAC, this court must first determine whether the enabling statute at issue commits review to the Court of Appeals. The NASD disciplinary proceeding that Marchiano seeks to enjoin was commenced under 15 U.S.C. § 78 et seq. That statute provides multiple levels of review for NASD disciplinary orders. See 15 U.S.C. § 78s(d)(2) (1976). First, disciplinary proceedings are reviewed by NASD's District Business Conduct Committee (now called the National Adjudicatory Council), next by a subcommittee of the NASD Board of Governors, then by the full NASD Board of Governors, and ultimately by the Securities and Exchange Commission. See First Jersey Securities, Inc. v. Bergen, 605 F.2d 690, 694-95 (3d Cir. 1979), cert. denied, 444 U.S. 1074 (1980) (discussing NASD review procedures). Finally, a "person aggrieved by a final order of the Commission . . . may obtain review of the order in the United States Court of Appeals." 15 U.S.C. § 78y(a)(1). This Circuit has held that a "statute which vests jurisdiction in a particular court cuts off original jurisdiction in other courts in all cases covered by that statute." TRAC v. F.C.C., 750 F.2d 70, 77 (D.C. Cir. 1984). Therefore, the Court of Appeals has exclusive jurisdiction to review final NASD disciplinary orders after they are reviewed by the SEC, and the first prong of the TRAC test is satisfied.

The second prong of TRAC requires this court to determine whether the action seeks "relief that might affect the Circuit Court's future jurisdiction." Id. at 75. Here it is clear that Marchiano's request for a preliminary and permanent injunction, if granted, would prevent NASD from issuing a final order. Without a final NASD order, there would be no review by the Court of Appeals. See Jamison v. Federal Trade Commission, 628 F. Supp. 1548, 1551 (D.D.C. 1986) (holding that the district court lacked jurisdiction under TRAC because the preliminary injunction sought against the agency would eliminate the possibility of the Circuit Court's review); Ohio Edison Co. v. Zech, 701 F. Supp. 4, 7 (D.D.C. 1988) (holding that under TRAC the district court lacked jurisdiction to order the Nuclear Regulatory Commission to suspend license restrictions).

However, the Court of Appeals has indicated that there is an exception to TRAC for constitutional claims. In Ticor Title Ins. Co. v. F.T.C., 814 F.2d 731 (D.C. Cir. 1987), now-Chief Judge Edwards questioned, but did not decide, "whether a constitutional challenge could ever be so separate from the underlying agency proceedings that the district court would have jurisdiction under section 1331." Id. at 743. Also writing an opinion in Ticor was Judge Joyce H. Green, sitting by designation, who declared that "TRAC is inapplicable to cases involving challenges to the constitutionality of an agency's enabling statute." Id. at 757-58. Judge Green reasoned that because such cases involve questions of ...

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