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LENOWITBZ v. PHILADELPHIA STOCK EXCH.

December 2, 1980

Arthur I. LENOWITZ, Bi-Planning Security Corp. of New York
v.
PHILADELPHIA STOCK EXCHANGE, INC.



The opinion of the court was delivered by: LUONGO

Plaintiffs in this securities action are Bi-Planning Security Corporation of New York, and its president, Arthur Lenowitz, both members of and registered specialists with the defendant Philadelphia Stock Exchange (PHILX). On February 15, 1975, Lenowitz, individually and as a representative of Bi-Planning, was appointed specialist on PHILX for options in the stock of Marriott Corporation. Lenowitz traded in Marriott options until November 15, 1977, at which time Marriott options were delisted from the exchange because the underlying security, Marriott Corporation stock, had dropped below ten dollars per share, and PHILX rules required the immediate delisting of the option in such a case. Accordingly, Lenowitz stopped trading in Marriott options.

On June 9, 1978, PHILX announced that, subject to approval by the Securities Exchange Commission (SEC), it intended to relist Marriott options, and it requested applications from members who were interested in becoming the specialist for Marriott options. After receiving applications from five members in addition to Lenowitz, the Options Committee of PHILX appointed Joseph F. Tomek, who had no prior experience as an options specialist, as the specialist for Marriott. Lenowitz appealed the selection of Tomek to the PHILX Board of Governors, which appointed an Advisory Board to hear the appeal. The Advisory Board held two hearings on Lenowitz' complaint, and filed a report with the Board of Governors recommending that the decision of the Options Committee appointing Tomek be affirmed. Lenowitz then appealed to the Board of Governors itself, which, after hearing oral argument, adopted the report of the Advisory Board.

 Lenowitz contends that PHILX violated its own by-laws and regulations both during the process of selecting Tomek as the specialist, and during the appeals process, and argues that the failure of PHILX to comply with its own rules constitutes a violation of § 6 of the Securities Exchange Act of 1934, 15 U.S.C. § 78f(b), as amended, (1975). Section 6 provides in part that an exchange must be structured so as to be able to

 
enforce compliance by its members and persons associated with its members, with the provisions of this chapter, the rules and regulations thereunder, and the rules of the exchange.

 Lenowitz also contends that PHILX is liable to him for breach of contract, on the ground that even after Marriott options were delisted, he remained the specialist in them, and was entitled to continue as the specialist after relisting, and on the ground that PHILX was bound to abide by its by-laws and regulations in its dealings with him.

 Both parties now move for summary judgment.

 Defendant's Motion for Summary Judgment

 A. Lenowitz' Claim Under the Securities Exchange Act

 PHILX contends that Lenowitz has failed to state a claim upon which relief may be granted under the Exchange Act, because § 6 does not grant a private right of action in favor of a member of an exchange.

 On its face, § 6 does not confer a private right of action on any party. If there is such a right, it is necessarily an implied one. Lenowitz relies upon Bright v. Philadelphia-Baltimore-Washington Stock Exchange, 327 F. Supp. 495 (E.D.Pa.1971), as authority for his position. In Bright, the dispute involved an election for the board of governors of the exchange. The exchange contended that there were nine vacancies to be filled, and denied a seat on the board to the plaintiff, an exchange member who finished tenth in the balloting. The plaintiff established that under the by-laws of the exchange, a tenth vacancy had been created when an incumbent board member was elevated to vice chairman of the exchange, and therefore Judge Huyett of this court entered judgment in the plaintiff's favor. Judge Huyett reasoned that if the exchange were insulated from a member's suit to enforce its rules, then § 6, which requires establishment of rules, would be meaningless, because the exchange could violate them at will. 327 F. Supp. at 502. Subsequent developments in the law, however, call into question the continued viability of the Bright decision.

 The Court of Appeals for the Third Circuit has not decided whether § 6 gives rise to a private right of action on behalf of a member of an exchange. In dicta, however, it has noted that it is reluctant to recognize such a cause of action even on behalf of shareholders, whom the 1934 Act was specifically intended to protect:

 
Implication of liability should be done reluctantly for the following reasons: first, accurate evaluation of the degree to which any particular rule represents SEC policy is often difficult, if not impossible...; second, imposition of liability might chill the process of self-regulation by creating fear of damaging liability; and finally ... (w)e believe Congress intended to encourage self-regulation to invoke higher standards than could feasibly be implemented by Congress or the SEC, and we should tread carefully before interfering with that scheme.

 Landy v. Federal Deposit Insurance Corp., 486 F.2d 139, 166 n.23 (3d Cir. 1973), cert. denied, 416 U.S. 960, 94 S. Ct. 1979, 40 L. Ed. 2d 312 (1974).

 Other circuits which have directly confronted the issue have held that § 6 does not create a right of action in favor of exchange members. In Jablon v. Dean Witter & Co., 614 F.2d 677, 680 (9th Cir. 1980), the court declined to find a private right of action on the ground that since § 6 neither confers rights on private parties, nor proscribes any conduct as unlawful, it does not reflect a congressional intent to create a private cause of action, (citing Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S. Ct. 2479, 61 L. Ed. 2d 82 (1979), discussed infra). Similarly, in Lank v. New York Stock Exchange, 548 F.2d 61, 66 (2d Cir. 1977), the court found after a review of the legislative history that § 6 was intended for the benefit of public ...


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