New York Law Review

Tag: Securities Exchange Act

  • National Assn. of Securities Dealers, Inc. v. Fiero, 11 N.Y.3d 63 (2008): Exclusive Federal Jurisdiction Over Exchange Act Enforcement

    National Assn. of Securities Dealers, Inc. v. Fiero, 11 N.Y.3d 63 (2008)

    Section 27 of the Securities Exchange Act vests exclusive jurisdiction in federal district courts over actions to enforce liabilities or duties created by the Act or its rules and regulations, precluding state court jurisdiction.

    Summary

    The National Association of Securities Dealers (NASD) brought an action in New York State Supreme Court to recover fines and costs imposed on John J. Fiero and Fiero Brothers for violations of the Securities Exchange Act. The New York Court of Appeals reversed the lower courts’ decisions, holding that Section 27 of the Securities Exchange Act grants exclusive jurisdiction to federal district courts over actions to enforce any liability or duty created by the Act. Therefore, the state courts lacked subject matter jurisdiction over NASD’s action to collect the penalties.

    Facts

    John J. Fiero and his firm, Fiero Brothers, registered with the NASD and agreed to comply with its rules. NASD’s Department of Enforcement filed a disciplinary complaint against the Fieros, alleging a “bear raid” to manipulate securities prices. NASD found the Fieros violated the Securities Exchange Act and its rules, imposing fines, expulsion, and a bar from associating with member firms. The Fieros did not appeal to the SEC or the federal courts. When the Fieros refused to pay the fines, NASD sued in New York State Supreme Court to recover the amount due.

    Procedural History

    NASD sued the Fieros in New York State Supreme Court. The Supreme Court granted NASD’s motion for summary judgment. The Appellate Division affirmed the Supreme Court’s decision. The New York Court of Appeals granted leave to appeal and reversed, dismissing the complaint for lack of subject matter jurisdiction.

    Issue(s)

    Whether state courts have subject matter jurisdiction over an action brought by NASD to enforce penalties imposed for violations of the Securities Exchange Act and its implementing rules.

    Holding

    No, because Section 27 of the Securities Exchange Act vests exclusive jurisdiction in federal district courts over actions to enforce any liability or duty created by the Act or its rules and regulations.

    Court’s Reasoning

    The Court of Appeals focused on Section 27 of the Securities Exchange Act, which explicitly grants federal district courts “exclusive jurisdiction of violations of [the Securities Exchange Act] or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by [the Securities Exchange Act] or the rules and regulations thereunder” (15 USC § 78aa). The court reasoned that NASD was not seeking to adjudicate a state law claim but rather to enforce a penalty imposed for violations of the Securities Exchange Act. Because the action was directly related to enforcing the federal securities laws, exclusive jurisdiction rested with the federal courts. The court emphasized the importance of adhering to the statutory framework that designates federal courts as the primary forum for adjudicating such matters. The court stated, “[S]tate courts do not possess the power to hear and decide this controversy.” The court explicitly declined to address the other issues raised by the parties, as the jurisdictional defect was dispositive.

  • Matter of Scherk v. Alberto-Culver Sales Co., 417 U.S. 506 (1974): Arbitration of International Agreements

    417 U.S. 506 (1974)

    A broadly worded arbitration clause in an international commercial agreement is enforceable, even when a party alleges violations of U.S. securities laws, unless Congress has clearly mandated that such claims are non-arbitrable.

    Summary

    Alberto-Culver, an American company, purchased European businesses from Scherk, a German citizen. The agreement contained an arbitration clause. Alberto-Culver alleged Scherk violated securities laws by misrepresenting the businesses’ trademarks. Scherk sought arbitration, while Alberto-Culver sued in U.S. court. The Supreme Court held that the arbitration clause was enforceable. Given the international nature of the contract, the Court reasoned that arbitration provided a neutral forum and promoted international commerce by ensuring predictable dispute resolution, outweighing the domestic policy favoring judicial resolution of securities claims. The Court emphasized the importance of upholding international agreements.

    Facts

    Alberto-Culver purchased three businesses from Scherk, a German citizen. The transaction involved the transfer of ownership of companies organized under the laws of Germany and Liechtenstein, along with trademarks related to those businesses.
    The contract included a clause that any controversy or claim arising out of the agreement or related to it would be referred to arbitration before the International Chamber of Commerce in Paris, France, and that the laws of Illinois would govern the agreement.
    Alberto-Culver alleged that Scherk violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by fraudulently misrepresenting the ownership and exclusive rights to certain trademarks associated with the businesses.

    Procedural History

    Alberto-Culver filed suit in the United States District Court for the Northern District of Illinois, seeking damages and injunctive relief.
    Scherk moved to dismiss the action or, alternatively, to stay the litigation pending arbitration, relying on the arbitration clause in the contract.
    The District Court denied Scherk’s motion, holding that the arbitration agreement was unenforceable under the Securities Exchange Act of 1934.
    The Court of Appeals for the Seventh Circuit affirmed, finding the arbitration agreement unenforceable with respect to the securities law claim.
    The Supreme Court granted certiorari to address the important question of the enforceability of arbitration agreements in the context of international securities transactions.

    Issue(s)

    Whether an agreement to arbitrate disputes arising out of an international commercial transaction is enforceable when a party alleges violations of the Securities Exchange Act of 1934.

    Holding

    Yes, because the arbitration clause in this international agreement should be respected and enforced by the federal courts. The strong public policy favoring arbitration in the international context outweighs the domestic policy of protecting securities laws claims in court.

    Court’s Reasoning

    The Court emphasized the significance of the international nature of the agreement. It stated, “The expansion of American business and industry will hardly be encouraged if, notwithstanding solemn contracts, we insist on a parochial concept that all disputes must be resolved under our laws and in our courts.”
    The Court distinguished this case from cases involving domestic transactions, noting that an agreement to arbitrate future disputes arising out of domestic transactions, although not specifically authorized by the Securities Act of 1933, was a significantly different situation.
    The Court observed that the agreement was truly international, involving extensive contacts with other countries, and that the arbitration clause was a vital part of the agreement, going to the essence of the contract. The Court stated, “Such a clause would eliminate uncertainty with respect to the forum, and would assure the parties that the agreement will be subject to neither the local law nor the local adjudication of either party.”
    The Court reasoned that nullifying the arbitration clause would invite considerable uncertainty, potentially nullifying the entire international business transaction.
    The Court acknowledged that the Securities Exchange Act of 1934 was designed to protect American investors, but it held that this purpose did not outweigh the need to enforce international agreements, particularly when the agreement contained a broad arbitration clause.
    The Court concluded that the “agreement of the parties to arbitrate any dispute arising out of their international commercial transaction is to be respected and enforced by the federal courts.”
    Justice Douglas dissented, arguing that the case involved issues of public policy that should be resolved in U.S. courts, and that the arbitration clause was an impermissible waiver of rights under the Securities Exchange Act.