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Scott Epstein v. Financial Industry Regulation Authority

January 9, 2012

SCOTT EPSTEIN, PLAINTIFF-APPELLANT,
v.
FINANCIAL INDUSTRY REGULATION AUTHORITY, INC. (FINRA); FINRA DEPARTMENT OF ENFORCEMENT (DOE); MARY L. SCHAPIRO; MICHAEL NEWMAN; ALAN W. HEIFETZ AND AMY MOSHO, DEFENDANTS-RESPONDENTS.



On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-2338-09.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued December 20, 2011

Before Judges Fisher, Baxter and Nugent.

Plaintiff Scott Epstein was a registered general securities representative employed by Merrill Lynch, Pierce, Fenner & Smith, Inc., until November 2002. In 2004, the Department of Enforcement (DOE) of the Financial Industry Regulatory Authority (FINRA) initiated disciplinary proceedings, which resulted in a finding of an "egregious" pattern regarding plaintiff's mutual fund recommendations to twelve "elderly, unsophisticated, and vulnerable investors" that warranted plaintiff's lifetime ban from the industry. This determination was upheld by the National Advisory Committee (NAC), the Securities Exchange Commission (SEC), and the United States Court of Appeals for the Third Circuit. See Epstein v. Securities Exch. Comm'n, 416 Fed. Appx. 142 (3d Cir. 2010).

Prior to the ruling of the court of appeals, plaintiff filed a 152-page complaint in the United States District Court for the District of New Jersey, alleging, among other things, that FINRA violated his constitutional rights in the manner in which it adjudicated the regulatory matter. In dismissing, on her own motion, most of the claims with prejudice, the district judge found a lack of subject matter jurisdiction and an absence of merit in the constitutional claims, chiefly because FINRA is not a state actor. See, e.g., Desiderio v. Nat'l Assoc. of Sec. Dealers, Inc., 191 F.3d 198, 206 (2d Cir. 1999) (holding that the NASD, which is FINRA's predecessor, "is a private actor, not a state actor"), cert. denied, 531 U.S. 1069, 121 S. Ct. 756, 148 L. Ed. 2d 659 (2001). The district judge also recognized there was another forum for plaintiff's claims of unfairness in the administrative proceedings -- a direct appeal to the SEC and thereafter the court of appeals -- and that plaintiff had, in fact, taken those steps. See Epstein, supra, 416 Fed. Appx. at 148-49.*fn1 The district judge lastly dismissed, without prejudice, the complaint "insofar as it asserts claims under state law." In light of the district court's "without-prejudice" disposition of any state law claims that might be found in the federal complaint, plaintiff filed in the Law Division, on May 8, 2009, a 120-page complaint which reprised, among other things, his federal assertions that the FINRA proceedings were not fairly conducted.

In June 2009, FINRA and all other defendants moved for dismissal pursuant to Rule 4:6-2(e). On August 28, 2009, the trial judge denied the motion without prejudice, noting the absence from the record of various pleadings and other materials relating to the earlier federal proceedings. Defendants thereafter provided the materials sought by the judge and, in October 2009, moved again for dismissal. On June 3, 2010, after hearing oral argument, the trial judge entered an order dismissing the complaint with prejudice based on an oral decision, rendered that same day, in which the judge concluded plaintiff's claims were either barred by the doctrine of res judicata, precluded by the Securities and Exchange Act of 1934 (Exchange Act), 15 U.S.C.A. §§ 78(a) - 78(pp), or barred by the "absolute immunity" to which FINRA and the other defendants were entitled when performing regulatory functions.

Plaintiff appealed, presenting the following arguments for our consideration:

I. THE COURT BELOW ERRED BY APPLYING THE WRONG STANDARD OF REVIEW.

A. The Standard Of Review On A Motion To Dismiss.

B. The Ruling Below.

C. Even If The Court Were To Go Beyond The Complaint, The Undisputed Facts Preclude A Granting Of Dismissal.

II. THE COURT BELOW ERRED IN ITS RELIANCE ON THE FEDERAL COURT'S DISMISSAL OF FEDERAL CLAIMS TO DISMISS STATE LAW CLAIMS.

III. DESPITE WHAT APPEARS TO BE SETTLED LAW, THERE IS ABSOLUTELY NO STATUTORY BASIS FOR GRANTING A PRIVATE CORPORATION, FINRA ABSOLUTE IMMUNITY; CURRENT CASE LAW, EVEN WITH ITS BIAS IN FAVOR OF ...

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