A lawsuit brought by MFS Securities Corp. and its owner, Marco Savarese, against the New York Stock Exchange was properly dismissed, the Second Circuit recently held, where plaintiffs failed to state an antitrust claim when they failed to allege any anticompetitive effects of the NYSE’s termination of MFS’s membership in the Exchange.

Plaintiffs filed their complaint in 2000, following the arrests of MFS’s brokers, Savarese’s two sons, for their alleged role in a scheme involving “trading ahead” of MFS’s customers. On May 20, 1999, the brokers pleaded guilty to a conspiracy to violate federal securities laws. U.S. v. The Oakford Corporation, 79 F.Supp. 2d 357, 359 (S.D.N.Y. 1999). Following the arrests, the Exchange summarily suspended the brokers, the sole members affiliated with MFS, and terminated MFS’s membership in the Exchange.

MFS’s antitrust claim was that the Exchange’s termination of MFS’s membership constituted an illegal group boycott. The district court granted the Exchange’s motion to dismiss the antitrust claim on the grounds that antitrust claims against self-regulating securities exchanges are evaluated under the “rule of reason” and MFS failed to state any facts showing the Exchange’s action to be an unreasonable restraint on competition. MFS Sec. Corp. v. New York Stock Exch., No. 00 Civ. 5600, 2001 WL55736, 2001 U.S. Dist. Lexis 420 (S.D.N.Y. Jan. 23, 2001). On initial review, the Second Circuit vacated the district court’s holding based on the “primary jurisdiction” doctrine, and remanded to the district court and instructed it to stay proceedings pending the Exchange’s review of MFS’s termination. MFS Sec. Corp. v. New York Stock Exch., 277 F.3d 613 (2d Cir. 2002).

On remand, the Exchange dismissed MFS’s application for review of its termination on the grounds that MFS failed to exhaust all administrative remedies provided by the Exchange. MFS then unsuccessfully petitioned the Second Circuit for review and then proceeded to renew its antitrust claim before the district court. The Exchange, for its part, renewed its motion to dismiss which the court granted.

On review, the Second Circuit affirmed the district court’s dismissal. Quoting from the district court’s decision, the Second Circuit wrote in its unpublished decision that “[w]hile in many circumstances allegations of a group boycott state a ‘per se’ violation of the antitrust laws, the statutorily imposed ‘anticompetitive’ obligation of a self-regulating securities exchange under the Securities Exchange Act to define and limit membership and enforce Exchange rules against members mandate application of the ‘rule of reason,’ rather than a per se analysis, when a group boycott is alleged against a securities exchange.” 2001 WL55736, at *1, 2001 U.S. Dist. Lexis 420, at *1-*2. This holding relies on the Supreme Court’s decision in Silver v. New York Stock Exch., 373 U.S. 341, 360 (1963). In Silver, the Supreme Court held that although the statutory scheme of the Securities Exchange Act of 1934 is not sufficiently persuasive to create a total exemption from the antitrust laws, particular instances of Exchange self-regulation that fall within the scope of purposes of the Act may be regarded as justified in answer to the assertion of an antitrust claim. Id. at 360-61.

Applying the rule of reason and in the absence of allegations by MFS of the anticompetitive effects of the alleged illegal group boycott, the Second Circuit held that MFS failed to state a claim under the antitrust laws. Dismissal of MFS’s antitrust claim, the Second Circuit held, was proper.

Authored by:
Heather M. Cooper