
USCA1 Opinion

	




                            United States Court of Appeals                            United States Court of Appeals                                For the First Circuit                                For the First Circuit                                 ____________________        No. 97-1038                                  GERALD R. SWIRSKY,                                Plaintiff, Appellant,                                          v.                     NATIONAL ASSOCIATION OF SECURITIES DEALERS,                                 Defendant, Appellee.                                 ____________________                    APPEAL FROM THE UNITED STATES DISTRICT COURT                           FOR THE DISTRICT OF MASSACHUSETTS                   [Hon. Douglas P. Woodlock, U.S. District Judge]                                              ___________________                                 ____________________                                        Before                           Selya and Lynch, Circuit Judges,                                            ______________                          and Gibson,* Senior Circuit Judge.                                       ____________________                                 ____________________            Gerald A. Phelps for plaintiff-appellant.            ________________            David  C. Fixler, with  whom Michael Unger and  Rubin & Rudman LLP            ________________             _____________      __________________        were on brief, for defendant-appellee.                                 ____________________                                   August 28, 1997                                  ____________________                                    ____________________        *  Hon. John R. Gibson of the Eighth Circuit, sitting by designation.                      LYNCH,  Circuit Judge.  This case presents an issue                      LYNCH,  Circuit Judge.                              _____________            of first impression  for this circuit concerning  whether the            doctrine of exhaustion of administrative remedies  applies in            certain   actions   against  the   National   Association  of            Securities  Dealers  ("NASD").   We  hold  that  it does,  in            agreement  with  the  other circuits  which  have  faced this            issue.  We therefore affirm the district court's dismissal of            the actions because  Mr. Swirsky failed to  follow the proper            review process in litigating this dispute.            I.  Background                      Gerald R. Swirsky  worked for Prudential Securities            Inc.  as a  broker until November  of 1992.   In  November of            1990,  Swirsky  and   Prudential  were  parties  to   a  NASD            arbitration proceeding ("the  Murray Arbitration") brought by            one of Swirsky's  customers, who accused them  of causing her            to lose  money by  concentrating  her position  in a  single,            risky stock.   The customer  was awarded $370,260  in damages            jointly  and  severally  from  Prudential  and  Swirsky   and            punitive  damages of $50,000  from Prudential.   Swirsky lost            his  job  with  Prudential  as a  result  of  a comprehensive            management restructuring.                      Tucker  Anthony hired  Swirsky soon  after he  left            Prudential, and fired  him on September 16, 1994.   Four days            later,   the  NASD  filed  a  complaint  against  Swirsky  in            connection  with the Murray Arbitration and complaints by two            other  former Prudential customers.  Prior to the termination            of  Swirsky's  employment, the  NASD informed  Tucker Anthony            (according  to Swirsky) that  if Tucker Anthony  continued to            employ Swirsky, Tucker  Anthony would be held  as a guarantor            of Swirsky's conduct.                      To  resolve  the  NASD  complaints, Swirsky,  while            represented by counsel,  executed an Offer of  Settlement and            Waiver  of Procedural Rights, without admitting any guilt, on            October 21, 1994.   Swirsky avers that during  the settlement            negotiations  he was unaware  of the NASD's  "threat" to hold            Tucker  Anthony  liable  as  Swirsky's  guarantor.    Swirsky            apparently only  learned  of  this  communication  through  a            letter  from  the  General Counsel  of  Tucker  Anthony dated            February 8, 1995.                        According to the terms of the settlement agreement,            Swirsky was fined  $10,000, suspended  from association  with            any  NASD member firm for ten  days, and waived all rights to            appeal.  The National Business Conduct  Committee of the NASD            Board   of  Governors   ("NBCC")  approved   this  settlement            agreement,  and the  local  NASD  District  Business  Conduct            Committee  ("DBCC") issued a Decision and Order of Acceptance            of Offer of  Settlement on January 9,  1995.  The NASD  filed            the  settlement  with  the  Securities  Exchange   Commission            ("SEC") on March 2, 1995.                                         -3-                                          3                      Swirsky, represented by  different counsel, filed a            Motion to Vacate Decision and Order of Acceptance of Offer of            Settlement with the NBCC on May 2, 1995.   Swirsky asserted a            host of claims.2  The  NBCC denied Swirsky's motion to vacate            on July 10.   Swirsky appealed to the SEC,  alleging the same            claims as in  his motion to  the NBCC.   The SEC declined  to            review the NBCC  decision because Swirsky's motion  to vacate            was untimely.3                      Swirsky brought suit  in federal district court  on            October 11, 1995.  The district court characterized Swirsky's            complaint as "essentially a collateral attack on a settlement            he   has  been  unable   to  undo  through   the  established                                            ____________________            2.  Swirsky   raised    the   following    claims:   tortious            interference  with   contract;  tortious   interference  with            advantageous  relations; fraud; violations  of Mass.  Gen. L.            ch. 93A; defamation; procedural  due process violations under            the  United States Constitution  and the Constitution  of the            Commonwealth  of Massachusetts;  violations  of  42 U.S.C.               1983; violations of Mass. Gen. L. ch. 12    11H and  11I; and            violations  of sections 6(d)(1) and 15A(h)(1) of the Exchange            Act.            3.  In a letter  dated September 7, 1995, the  SEC stated the            following:               Under Section 19(d)(2), an application for review is to               be filed  within 30 days  after the date notice  of the               action is filed with the Commission and received by the               aggrieved  person.  Even if Swirsky could be considered               aggrieved by a settlement to which he consented, he was               obliged to  file an  application for  review within  30               days of  the filing of  notice of the action.   Swirsky               did not seek Commission review of the action within the               30-day  period  and   has  made  no  showing   for  the               Commission   to  consider   the  extraordinary   relief               necessary  for  a  filing outside  of  the  normal time               limits.                                         -4-                                          4            administrative process."   Memorandum  and Order at  1.   The            district court dismissed  the complaint  because Swirsky  had            failed to  exhaust his  administrative remedies.   Under  the            process established by  the Exchange Act, the  district court            said, Swirsky should  have appealed the adverse  SEC decision            in federal circuit court.  Swirsky now appeals.            II.  The Exchange Act                      The  Securities  Exchange  Act   of  1934  and  its            subsequent amendments create a detailed, comprehensive system            of  federal regulation  of  the  securities  industry.    The            system's   foundation   is    self-regulation   by   industry            organizations  established according to the guidelines of the            Maloney Act.   The NASD is a  national securities association            registered with  the SEC pursuant  to the  Maloney Act  which            provides self-regulation  of the  over-the-counter securities            market.  See 15 U.S.C.   78o-3.                     ___                      The Exchange Act mandates a three-tiered process of            both administrative and judicial review of NASD  disciplinary            proceedings.  At  the first level, proceedings  are conducted            by the local  DBCC with appeal to, and de novo review by, the            NBCC.   The Maloney  Act  prescribes an  array of  procedural            safeguards to ensure  fairness at this first  tier of review.            The NASD must "bring specific charges, notify such  member or            person of,  and give  him an  opportunity to defend  against,            such charges, and keep a record." 15 U.S.C.   78o -3(h)(1).                                           -5-                                          5                      The  NASD is  authorized  to  impose  a  number  of            sanctions,   including   censure,   fines,   suspension,   or            prohibition from association  with member firms. 15  U.S.C.              78o-3(b)(7);  NASD Rules of Fair  Practice, Art. V,    1.  In            addition to  these specific  sanctions, the  NASD may  impose            "any  other  fitting  sanction deemed  appropriate  under the            circumstances." Id.   Sanctions must be supported  by written                            ___            statements specifying the activity that caused the violation,            the specific provision or  rule violated, and the  reason for            the sanction imposed.                      At the  second level,  the SEC  reviews NBCC  final            orders de novo.  15 U.S.C.   78s(d).  Once the NBCC files its            decision  with the SEC, disciplinary respondents have 30 days            to petition the SEC for  review. 15 U.S.C.   78s(d)(2).   The            SEC  can affirm or modify any sanction, or remand to the NASD            for further  proceedings.  15  U.S.C.    78s(e).  The  SEC is            empowered to seek an injunction in district court if the NASD            "is  engaged or  is  about  to engage  in  acts or  practices            constituting  a violation" of the securities laws.  15 U.S.C.              78u(d).   The SEC  may "censure or impose  limitations upon            the activities, functions and  operations" of self-regulatory            organizations  (such as the  NASD) that violate  the Exchange            Act,  the rules thereunder,  or its own  rules.  15  U.S.C.              78s(h)(1).   The SEC may remove any  officer or director of a            self-regulatory  organization from  office if  he  or she  is                                         -6-                                          6            found  to  have violated  the  rules  or  abused his  or  her            position.  15 U.S.C.   78s(g)(2).                      The NASD  is  also subject  to  extensive,  ongoing            oversight and control by the SEC.  See United States v. NASD,                                               ___ _____________    ____            422 U.S. 694, 700-01 n.6  (1975) (The Act "authorizes the SEC            to exercise a  significant oversight function over  the rules            and activities of  the registered associations.").   With few            exceptions,  the  SEC  must   approve  all  rules,  policies,            practices, and interpretations  before they are  implemented.            15 U.S.C.    78s(b)(1).  Consistent with the  requirements of            the Exchange Act,  the SEC may  abrogate or  add rules as  it            deems necessary.  15  U.S.C.   78s(b)(3).   The SEC may  also            suspend  or revoke  the license  of  any national  securities            organization  which  fails  to enforce  compliance  with  the            Exchange  Act, SEC  regulations,  or  the organization's  own            rules. 15 U.S.C.   78s(h)(1).                      The third tier  of the process provides  for review            of final SEC  orders by the United States  Courts of Appeals.            15 U.S.C.   78y(a); see Mister Discount Stockbrokers, Inc. v.                                ___ __________________________________            SEC, 768 F.2d  875, 876 (7th Cir. 1985)  (stating that "final            ___            orders of the  Commission are reviewable  only in the  United            States  Courts of  Appeals").   Congress  believed that  this            three-tiered  process  founded   upon  self-regulation  would            garner  several  benefits,   including  "the  expertise   and            intimate familiarity with complex securities operations which                                         -7-                                          7            members of  the  industry can  bring  to bear  on  regulatory            problems,  and  the  informality  and  flexibility  of  self-            regulatory procedures."   S.Doc.  No. 93-13,  93d Cong.,  1st            Sess. 149 (1973).            III.  The Merits                      The Exchange Act creates  a comprehensive procedure            to  safeguard due process  in disciplinary hearings,  and for            administrative  and  judicial  review  of  NASD  disciplinary            actions.  We agree  with other circuits that  have considered            the  question  that  the  "comprehensiveness  of  the  review            procedure  suggests  that  the  doctrine  of  exhaustion   of            administrative  remedies   should  be   applied  to   prevent            circumvention  of  established  procedures."    First  Jersey                                                            _____________            Securities,  Inc. v.  Bergen,  605 F.2d  690,  695 (3rd  Cir.            _________________     ______            1979).  See Merrill  Lynch v. NASD, 616 F.2d  1363, 1370 (5th                    ___ ______________    ____            Cir. 1980);  see also Nassar & Co. v.  SEC, 566 F.2d 790, 792                         ________ ____________     ___            n.3 (D.C. Cir.  1977); Roach v. Woltmann, 879  F. Supp. 1039,                                   _____    ________            1041-42  (C.D.  Cal.  1994); Maschler  v.  National  Ass'n of                                         ________      __________________            Securities Dealers,  Inc., 827  F. Supp.  131, 132  (E.D.N.Y.            _________________________            1993);  Prevatte  v.  National Ass'n  of  Securities Dealers,                    ________      _______________________________________            Inc.,  682 F.  Supp. 913,  918  (W.D. Mich.  1988).   Because            ____            Swirsky  failed  to  invoke  the third  tier  of  the  review            process,   the   district   court   lacked   subject   matter            jurisdiction, and it properly dismissed Swirsky's complaint.                                         -8-                                          8                      The doctrine  of exhaustion  of remedies  is stated            starkly  in Myers v.  Bethlehem Shipbuilding Corp.,  303 U.S.                        _____     ____________________________            41,  50-51 (1938),  where the Supreme  Court noted  the "long            settled  rule of  judicial  administration  that  no  one  is            entitled  to judicial  relief for  a  supposed or  threatened            injury until  the prescribed  administrative remedy has  been            exhausted."  (footnote omitted).  The central purpose of this            doctrine is "the  avoidance of premature interruption  of the            administrative process."   McKart v. United States,  395 U.S.                                       ______    _____________            185,  193 (1969).   See Portela-Gonzalez v.  Secretary of the                                ___ ________________     ________________            Navy,  109  F.3d  74,  79  (1st  Cir.  1997)  ("Insisting  on            ____            exhaustion forces parties to  take administrative proceedings            seriously, allows  administrative agencies an  opportunity to            correct their own errors, and potentially avoids the need for            judicial involvement  altogether."); Ezratty  v. Commonwealth                                                 _______     ____________            of Puerto  Rico, 648 F.2d  770, 774 (1st Cir.  1981) (stating            _______________            that "the doctrine serves interests of  accuracy, efficiency,            agency autonomy and judicial economy.").                      Exhaustion  is required  if explicitly  mandated by            Congress, McCarthy v. Madigan, 503  U.S. 140, 144 (1992), but                      ________    _______            courts  may relax this requirement somewhat where Congress is            silent.  Darby  v.  Cisneros, 509  U.S.  137,  153-54 (1993).                     _____      ________            There are  "three broad sets  of circumstances  in which  the            interests  of the individual  weigh heavily against requiring            administrative  exhaustion."    McCarthy,  503  U.S.  at 146.                                            ________                                         -9-                                          9            These  exceptions are  when the  requirement occasions  undue            prejudice  to subsequent assertion  of a court  action; where            the agency is  not empowered to  grant effective relief;  and            when  there  are  clear  indicia of  agency  bias  or  taint.            McCarthy at  146-48.  See  Portela-Gonzalez, 109  F.3d at  77            ________              ___  ________________            (1st Cir. 1997).  None of these exceptions applyto this case.                      Before examining  the exceptions  to administrative            exhaustion listed above, we  refute Swirsky's threshold claim            that he could not appeal the SEC decision because it  did not            constitute a "final order."   On the contrary, the SEC letter            is   an  adjudication  of  Swirsky's  motion  to  vacate  the            settlement agreement.  The SEC declined to review the  NBCC's            decision not to vacate the settlement agreement on the ground            that Swirsky's  petition was  time-barred.   Though based  on            procedural grounds, the SEC's ruling on Swirsky's petition is            final, and Swirsky could have appealed this decision.                      Swirsky's  clearest  argument that  the  exhaustion            doctrine  should  not  apply  to  this   case  is  rooted  in            allegations  that  the NASD  is  biased  against  him.   This            argument consists  of little  more than  the assertion  that,            because the  NASD is the  defendant in this action,  it could            not possibly provide  him with  a fair  hearing.   We do  not            believe that  this  is  enough  to demonstrate  the  kind  of                                         -10-                                          10            thoroughgoing  taint which  concerned  the  Supreme Court  in            McCarthy.4  The review process here provides for both SEC and            ________            court of appeals review after the NASD determination, not  to            mention review by the NBCC,  a separate entity from the DBCC.            Swirsky has not accused the SEC or this court of unacceptable            bias against  him.  Though  it can be  unsettling, it  is not            uncommon  in administrative law  for a litigant's  case to be            heard in the first instance  by the very agency against which            the plaintiff  has a complaint.  In  this case, resort to the            correct appeals procedure would not have been a "futile act."            See Portela-Gonzalez,  109 F.3d at  78-80 (plaintiff required            ___ ________________            to pursue her claim to  "the final rung of the administrative            ladder," despite the  fact that she had been  rebuffed at all            prior stages).                      Neither  is resort  to  the  proper review  process            futile in the sense that  Swirsky could not have received the            relief he  sought.  The  SEC has extensive powers  to modify,            reverse and enjoin disciplinary actions  by the NASD.  As the            Third  Circuit has  said, "Ultimate  review  by the  court of            appeals ensures  that constitutional or statutory errors will            not go unremedied."  First Jersey Securities, Inc., 605  F.2d                                 _____________________________            at 696.   See SEC v. Waco Financial,  Inc., 751 F.2d 831, 833                      ___ ___    _____________________                                            ____________________            4.     See  McCarthy, 503  U.S.  at 148  (citing Houghton  v.                   ___  ________                             ________            Shafer, 392 U.S. 639, 640 (1968), where administrative review            ______            procedure  culminated  with  the  Attorney  General, who  had                       __________            already expressed his views on the merits).                                         -11-                                          11            (6th Cir.  1985) ("By  preserving the issue  before the  NASD            bodies and the SEC the  appellants could have obtained direct            judicial review of their constitutional claims  following all            administrative steps.").                      Swirsky  attempts  to  avoid  these  doctrines   by            distinguishing  his action in district court from that before            the NASD and SEC.  Swirsky's claims are, however, essentially            the same as  those he raised before  the NASD and the  SEC in            his  motion to  vacate the  settlement  agreement.5   Swirsky            argues that the harms he suffered  as a result of the  NASD's            "threat" to Tucker Anthony give rise to independent causes of            action, analogous to causes of action he would have if a NASD            employee had punched him in the nose during the course of the            disciplinary  complaint.   Assaults  are not  a  part of  the            NASD's regulatory arsenal,  but it is  clear that the  NASD's            communication to Tucker  Anthony arose out of  a disciplinary            action by the NASD.  Swirsky's analogy is inapt.            IV.  Conclusion                      Swirsky's proper  course of  action,  once the  SEC            denied his appeal, was to appeal  to this court.  He did  not            do  so.   Swirsky  reached  this court  by  a different,  and            incorrect, route.  At oral argument, Swirsky's counsel stated            that it was "ironic" that this case was now before the  First                                            ____________________            5.  We note  that Swirsky  was alerted  to the  NASD "threat"            before the settlement agreement was filed with the SEC.            ______                                         -12-                                          12            Circuit.   The irony  instead lies in  the fact  that Swirsky            asks this court  to do what he  claims could not be  done via            the  proper  review process  --  a process  that  should have            culminated here.                      The decision of the district court is affirmed.                                                            ________                                         -13-                                          13
