Weissman v. NASD (the 11th Cir. Decision)

We continue our discussion about the importance of listing standards as a source of corporate governance and the need for proper enforcement of these standards.  This has become particularly important in an era when self regulatory organizations such as stock exchanges have become for profit entities.  With a profit maximization motive, questions exist about whether stock exchanges will enforce their rules and listing standards even when it means a loss of trading revenue.  One thing that would help would be a private enforcement mechanism, either to sue the violator of the listing standard or the stock exchange for failing to enforce its own rules. 

With that in mind, we return to our analysis of Weissman v. NASD – a case that defines the limits of absolute immunity afforded to SROs for performing quasi-governmental function.  The case illustrates some of the consequences of the movement by stock exchanges to go public and the private remedies that may become available. 

On September 18, The United States Court of Appeals for the Eleventh Circuit, sitting en banc, upheld a lower court decision denying a Rule 12(b)(6) motion (failure to state a claim) made by the National Association of Securities Dealers, Inc. (NASD) and its subsidiary, NASDAQ Stock Market, Inc. (NASDAQ).  Weissman v. NASD, No. 04-13575, 2007 WL 2701308 (11th Cir. Sept. 18, 2007).  The court held that while NASDAQ enjoys absolute immunity from claims arising out of its “statutorily-delegated regulatory or disciplinary functions,” its alleged advertising activities promoting WorldCom, Inc. stock relate to private commercial conduct and as such are not afforded the same level of protection.  Id. at *14.

The present dispute arose from NASDAQ’s $100 million marketing and advertising campaign, allegedly aimed at promoting and selling WorldCom, Inc. stock, in early 2000 through 2002 (prior to the collapse of WorldCom & Enron).  Weissman claimed that during this period he purchased over 80,000 shares of WorldCom, Inc.’s stock while relying on NASDAQ’s statements regarding the credibility of WorldCom’s stock.  He asserted that NASDAQ violated Florida State law by “promoting WorldCom… without disclosing that its revenues were directly enhanced by increased trading in WorldCom stock.”  Id. at *3.

In its defense, NASDAQ insisted it was absolutely immune from suit because it served important quasi-governmental statutorily delegated regulatory functions.  Id. at *10.  Although a publicly traded company:  

• “NASDAQ serves as a self regulatory agency (SRO) within the meaning of the Exchange Act § 78(c)(26), which vests it with a variety of adjudicatory, regulatory, and prosecutorial functions, including implementing and effectuating compliance with securities laws; promulgating and enforcing rules governing the conduct of its members and listing and de-listing stock offerings.”  Id. at *6. 

In its analysis, the court stated that simply because an entity performed governmental functions, did not mean it was afforded “immunity when [it] performs non-governmental functions” – noting SEC Release No. 34-5-700, expressing concern over the growing pressures for the markets to attract order flow, and the inherent conflict between “SRO regulatory and market operations functions.”  Id. at *7.  

The court then set the standards for determining the application of absolute immunity – stating that, in the interest of justice,  “grants of immunity must be narrowly construed.”   Therefore, when an SRO is not strictly performing quasi-governmental tasks, but is instead "acting in its own interest as a private entity, absolute immunity from suit ceases to obtain.”  To determine whether an SRO is performing quasi-governmental functions, “we look to the objective nature and function of the activity for which the SRO seeks to claim immunity,” without regard for the “SRO’s subjective intent and motivation.”  Id. at *9.  

As a result, the Eleventh Circuit concluded that NASDAQ’s advertising activities alleged in this case did not serve as quasi-governmental functions, and therefore affirmed the lower court’s decision.  Id. at *14-15.

The case stands for the proposition that private parties may sometimes successfully sue a self regulatory organization when it acts in a commercial rather than quasi-governmental role.  Primary materials for this case may be found on the DU Corporate Governance website.