LexisNexis Corporate & Securities Law Community 2011 Top 50 Blogs

Bon mots

"You can observe a lot just by watching." Yogi Berra

"We do not distain to borrow wit or wisdom from any man who is capable of lending us either." Henry Fielding, Tom Jones

"In our complex society the accountant's certificate and the lawyer's opinion can be instruments for inflicting pecuniary loss more potent than the chisel or the crowbar." United States v. Benjamin, 328 F.2d 854, 862 (2d Cir. 1964)

Warren E. Turk, Exchange Act Rel. 55942 (June 22, 2007)

NYSE Appeal

Time between appeal and decision - 1 year, 8 days.
Time between last brief and decision - 6 months, 26 days.
Pages - 10


The NYSE found that Turk, a former specialist had failed to provide testimony in connection with a NYSE investigation.  He was censured and barred.   The Commission remanded the matter to the NYSE.  Turk claims that he could not be charged for failing to testify in the NYSE investigation because he could invoke his 5th Amendment rights at such testimony as the NYSE is a "state actor", or because in this case, it was acting as one.  The Commission rejected the claim that the NYSE is generally a "state actor", relying on previous SEC and court decisions.  The Commission remanded because the 5th Amendment does apply to a non-state actor whose actions are "fairly attributable" to the government.  

The Commission has recently remanded similar matters to self regulatory organizations.  See, Frank P. Quattrone, Exchange Act Rel. 53547 (March 24, 2006),  Justin F. Ficken, Exchange Act Rel. 54699 (November 3, 2006).  The hearing here was before the Quatrone decision and the record concerning Turk's claims was sparse.  

On remand Turk must have an opportunity to develop a full evidentiary record and must have "a full opportunity to conduct discovery."  However, such discovery is not grounds for a "fishing expedition" and "a respondent must provide a reasonable and credible basis to conclude hat the SRO's relationship with the government in the case suggests such a 'close nexus between the State and  the challenged action' that the seemingly private behavior 'may be fairly treated as that of the State itself.'" (footnote omitted).

This decision is interesting due to the Commission's contradictory discussion of the scope of discovery that Turk will be entitled to on remand.  On the one hand, it held that mere cooperation and coordination between the government and the NYSE was unremarkable and insufficient to establish the defense.  One the other hand, it ordered that Turk be given a "full  opportunity" to conduct discovery.  Yet, it qualified that pronouncement with the seemingly contradictory caveat that Turk could not use discovery as a fishing expedition and would be required to specifically justify his discovery requests.  This rather unhelpful formulation will not assist the NYSE much on remand.  For example, will Turk be permitted to depose Commission, NYSE, and DOJ staff to determine the extent and nature of their cooperation and coordination?  Will Turk be permitted to review staff notes of meetings?  Unfortunately, the opinion is silent on these issues.

Key Points
  • Self regulatory organizations such as the NYSE and NASD are private actors.  D.L. Cromwell Invs., Inc. v. NASD Regulation, Inc., 279 F.3d 155, 162 (2d Cir. 1999), cert. denied, 531 U.S. 1069 (2001).
  • Cases dealing with firing of government employees for asserting their 5th Amendment rights are inapplicable and do not apply to self regulatory organizations.
  • Private parties' actions "may constitute state action if there is such a 'close nexus between the State and the challenged action' that the seemingly private behavior 'may be fairly treated as that of the State itself.'"
  • The burden of establishing joint activities sufficient to render a SRO a state actor is high.
  • Mere cooperation and coordination of a SRO with the SEC or the DOJ will rarely render the SRO a state actor.
  • On remand respondent must justify discovery with specificity pursuant to the standard used for permitting discovery in response to a motion for summary judgment.  He must show that the specific proposed discovery would lead to information that would support his claims.
Further Discussion

Turk testified before the SEC staff and was scheduled to testify before the NYSE staff.  Before that testimony staff of his firm advised him that he was being placed on leave at the request of the U.S. Attorney's Office.  He then notified the NYSE that he would not testify.  Turk was then charged in an administrative proceeding by the SEC and a separate NYSE proceeding. Approximately 7 months later, Turk advised the NYSE that he was prepared to testify because he no longer felt it likely that he would be criminally charged.