In a recent decision, the U.S. Court of Appeals for the Second Circuit affirmed an earlier decision by the U.S. District Court for the S.D. of New York, which entitled the NASD and it’s officers absolute immunity from money damages because its actions were taken within scope of its official duties under the Securities Exchange Act. Scher v. NASD, 386 F.Supp.2ed 402, 407-08 (D. S.D.N.Y. 2005).
Jamie K.C. Scher, Plaintiff, brought action against NASD and various NASD officials for failure to adequately warn her that false or misleading testimony given during an interview, which was conducted while Scher was under oath, could result in a perjury conviction. Among other things, Scher claimed that her constitutional right afforded by the 5th Amendment was violated due to “improper collusion or collaboration between the NASD and the Manhattan District Attorney’s Office.” Id. at 408. However, the district court held that the NASD is not a state actor, and therefore constitutional principles do not apply to its proceedings. 386 F.Supp.2ed at 408. (“It is by no means ‘inconsistent’ to find that, on the one hand, the NASD exercises insufficient state action to trigger constitutional protections… while nevertheless holding that the NASD is entitled to absolute immunity in the exercise of its quasi-public regulatory duties.”).
On appeal, the Second Circuit Court affirmed the lower courts decision, noting that as a self-regulatory organization, the NASD stands in the shoes of the SEC in interpreting the securities laws for its members, and therefore, it follows that the NASD should be entitled to the same immunity enjoyed by the SEC. Scher v. NASD, No. 05-5139-cv, 2007 WL 631687 (2nd Cir. February 26, 2007).
The primary materials for this case may be found on the DU Corporate Governance website.