January 9, 2012
SCOTT EPSTEIN, PLAINTIFF-APPELLANT,
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.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION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 ABSOLUTE
IMMUNITY, EXPOSES FINRA, AND ITS EMPLOYEES,
IV. THE TRIAL COURT ERRED IN DISMISSING THE COMMON LAW CLAIMS ON THE BASIS THAT NO SUCH ACTIONS EXIST AND THE DEFENDANTS ARE IMMUNE.
V. THE ONLY REASON SCOTT EPSTEIN WAS CHARGED WITH A 10(b)5 VIOLATION AND RECEIVED A PERMANENT BAR WAS TO PUNISH HIM FOR BLOWING THE WHISTLE ON MERRILL LYNCH'S CRIMINAL ACTIVITY AND FINRA'S PROTECTION OF MERRILL LYNCH IN VIOLATION OF NEW JERSEY'S CONSCIENTIOUS EMPLOYEE PROTECTION ACT WHICH ENTITLES EPSTEIN TO DAMAGES.
VI. THE COURT BELOW HAD A DUTY TO REPORT THE RICO ENTERPRISES AND OTHER CRIMES AND OFFENSES AT THE FAC RESULTING IN FINRA'S PROTECTIVE COLLUSION TO CONCEAL ILLEGAL CONDUCT FROM THE PROPER AUTHORITIES.
A. The Defendants And The SEC
Continue To Engage In Their Refusal To Produce Documents In An Attempt To Conceal The Massive Fraud At The Merrill Lynch FAC.
B. The Attorneys For FINRA, The
DOE, The NAC And The SEC Violated The Rules Of Professional Conduct Relating To "Candor To The Tribunal" And "Fairness To Opposing Counsel."
VII. THE DEFENDANTS, THE NAC, THE SEC, AND THE COURT BELOW HAVE A CONTINUING DUTY TO REPORT A RICO ENTERPRISE AND OTHER CRIMES, MISCONDUCT AND SECURITIES VIOLATIONS TO THE APPROPRIATE AUTHORITIES.
A. The SEC And Their General
Counsel Had Credible Knowledge Of The Wide-Spread Fraud, The Massive Crimes And The Rico Enterprise Committed By Merrill Lynch At Their FAC After Conducting A De Novo Review Of The Record.
B. The Merrill Lynch Wells Notice And The Corresponding LAWC And Findings Of The SEC Did Not Dispute Epstein's Charge That A Massive Fraud And Rico Enterprise Operated At The FAC.
We find insufficient merit in these arguments to warrant discussion in a written opinion, R. 2:11-3(e)(1)(E), and add only the following brief comments.
Although the district judge carefully limited her decision to what was properly before her, and consequently preserved an opportunity for plaintiff to commence this action based upon state statutory or common law theories, in fact there are no viable state law claims presented by these circumstances.
Plaintiff has failed to demonstrate a state interest in the transactions and occurrences that fuel his complaint; permitting plaintiff to proceed further with his alleged state law claims would invite the insidious consequence of "allow[ing] states to define by common law the regulatory duties of a self-regulatory organization, a result which cannot co-exist with the Congressional scheme of delegated regulatory authority under the Exchange Act." Sparta Surgical Corp. v. Nat'l Assoc. of Securities Dealers, Inc., 159 F.3d 1209, 1215 (9th Cir. 1998).
The essence of plaintiff's complaint is his claim that the disciplinary proceedings before FINRA were unfairly conducted and unduly limited. Because these contentions invoke only federal concerns, plaintiff's attempt to cloak them in state clothing*fn2 must be unavailing. Indeed, as the trial judge correctly held, all issues relating to the fairness of the regulatory proceeding were matters cognizable in plaintiff's appeal to the SEC and, later, to the court of appeals and, therefore, were adjudicated elsewhere. As a result, the trial judge properly held plaintiff's claims barred by the doctrine of res judicata.
And, to the extent these barriers might arguably be insufficient to preclude the future prosecution of this case, the trial judge alternatively -- and correctly -- concluded that FINRA and the other defendants were absolutely immune from suit. Standard Inv. Chartered, Inc. v. Nat'l Assoc. of Sec. Dealers, Inc., 637 F.3d 112, 115 (2d Cir. 2011); Weissman v. Nat'l Assoc. of Sec. Dealers, Inc., 500 F.3d 1293, 1296 (11th Cir. 2007). Affirmed.