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First Jersey Securities Inc. v. Securities and Exchange Commission

Decided: June 6, 1984.

FIRST JERSEY SECURITIES, INC., ROBERT E. BRENNAN, JOHN E. DELL, ANTHONY NADINO, ROBERT SANTO, AND PETER AIELLO, PLAINTIFFS-RESPONDENTS,
v.
SECURITIES AND EXCHANGE COMMISSION, AN AGENCY OF THE UNITED STATES, DEFENDANT-APPELLANT



On appeal from the Superior Court, Law Division, Monmouth County.

Ard, Morton I. Greenberg and Trautwein. The opinion of the court was delivered by Morton I. Greenberg, J.A.D.

Greenberg

This appeal implicates issues involving federal-state relations. An understanding of the matter requires its extraordinary procedural history to be set forth at length.

The origins of this case are traceable to an order issued on May 17, 1979 by defendant Securities and Exchange Commission, an agency of the United States of America. The SEC ordered First Jersey Securities, Inc. and Robert E. Brennan, John E. Dell, Anthony Nadino, Robert Santo and Peter Aiello,*fn1 all of whom were then or formerly associated with First Jersey, to appear at a public hearing before the SEC to determine whether they had violated federal securities laws in certain transactions and if so what remedies would be appropriate.

First Jersey and the enumerated individuals in the federal hearing eventually became the plaintiffs in this action and will so be identified in this opinion. The case was assigned to David Markun, a federal administrative law judge, who, after denying plaintiffs' motion for his disqualification, started the matter on November 20, 1979. The plaintiffs' files at the hearing were so voluminous that they were permitted to store them in a hearing room in the public building in which the hearings were conducted. On October 22, 1980 the hearing was adjourned pending settlement negotiations. During the ensuing lengthy recess plaintiffs' files were left in the hearing room. In December 1980 the SEC discovered that the files were missing.

In August 1982, following failure of the settlement negotiations, the SEC rescheduled the administrative proceedings. The SEC also advised plaintiffs that it was considering filing an enforcement action against some of them seeking relief because of their activities concerning a company called "Geosearch." This renewal of activity caused plaintiffs on September 22, 1982 to file a motion in the SEC proceedings seeking an adjournment because of the lost files. Plaintiffs considered it unfair for the matter to proceed until their files were recovered, an event which has not yet occurred.

Plaintiffs also sought relief in a second forum. On September 25, 1982 they filed a complaint in the United States District Court for the District of New Jersey requesting an injunction against the SEC from continuing the pending administrative proceedings. Additionally in this federal court action plaintiffs sought to enjoin the SEC from further investigations, prosecution or proceedings with respect to Geosearch. In seeking this relief, plaintiffs again alleged that it would be unfair for these actions to continue because of the lost files.

On December 13, 1982 United States District Court Judge Lee Sarokin decided the federal court matter in a reported opinion. First Jersey Securities, Inc. v. S.E.C., 553 F. Supp. 205 (D.N.J.1982). He held that he was without jurisdiction to

hear plaintiffs' claim because they had not exhausted their administrative remedies and none of the exceptions to the federal exhaustion rule applied. Id. at 208-211. He refused to enjoin the SEC from filing an enforcement action with respect to Geosearch because plaintiffs could present the lost files defense in defending such an action. Thus he dismissed plaintiffs' complaint. Id. at 212-213. Plaintiffs appealed from the dismissal but ultimately they caused their appeal to be dismissed after the United States Court of Appeals for the Third Circuit on January 14, 1983 refused to grant them relief pending appeal.

The dismissal by Judge Sarokin did not affect plaintiffs' attempt to obtain administrative relief under their pending motion of September 22, 1982. On December 16, 1982 the SEC referred that motion to Judge Markun for disposition and on December 20, 1982 he scheduled an evidentiary hearing on it. Plaintiffs responded by moving to disqualify Markun from conducting this hearing. In addition they sought discovery in anticipation of it. Judge Markun denied these applications. Plaintiffs administratively appealed this ruling to the SEC which affirmed Judge Markun on March 18, 1983.

On December 16, 1982 plaintiffs filed a second action in the United States District Court for the District of New Jersey. They sought a declaratory judgment that their rights would be violated if they were forced to defend an enforcement action concerning Geosearch.

On January 14, 1983 the SEC filed a third district court action related to this case. In a complaint in the United States District Court for the Southern District of New York the SEC charged that plaintiffs First Jersey and Brennan had violated securities laws in trading Geosearch stock. It asked for appropriate relief for the alleged violations.

On January 24, 1983 plaintiffs amended their complaint in their declaratory judgment action ...


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