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Philadelphia Exchange Sanctions Based On Unsuccessful Member Suit Against Exchange Governor Overturned

Richard B. Feinberg, Exchange Act Rel. 59577, March 13, 2009

Time since appeal – 7 months 1 day
Time since last brief – 3 months 18 days
Pages – 11
Footnotes – 30


Feinberg was a member and stockholder of the Philadelphia Stock Exchange. A Special Committee of the Exchange's Board of Governors ordered that he pay $464,000 of fees and expenses incurred by the exchange in a law suit Feinberg filed against a member of the exchange's Board of Governors.


Feinberg's suit alleged insider trading by a governor. He had sold his seat on the exchange in late 2004 to a partnership controlled by the governor who was also a member of various of the exchange's governing committees. At the same time Feinberg was selling, the exchange was in private negotiations to sell all or part of itself. In 2005 partial sales of the exchange occurred at prices substantially higher per share than Feinberg obtained. Feinberg brought his suit in late 2005. The litigation was contentious and after Feinberg rested his case the district court entered a directed verdict against him.

A month later the exchange sent Feinberg an invoice for $470,000 which it claimed were for its legal fees and expenses in defending the lawsuit against the governor. The exchange had a rule that required members to repay legal costs it incurred in defending itself or its board members from suits "related to the business" of the exchange. Feinberg argued that since he had not sued the exchange the rule did not apply. The exchange rejected this argument and ordered Feinberg to pay $464,000.

The Commission has jurisdiction under Exchange Act Section 19(d) over any SRO action that involves disciplinary sanctions. Because the exchange made findings of wrongdoing by Feinberg (not paying the fine) it is appropriate to characterize its action as one that imposed a sanction.

The issue here is whether the exchange's rules allow it to recoup litigation expenses when Feinberg's action was not against the exchange itself. The Commission noted that in finding that the law suit related to the business of the exchange that the exchange had cited no precedent or authority. The Commission ruled that such a phrase must have reasonable limits. When it sought Commission approval for the rule, the exchange argued that the intent of the rule was to deal with suits brought against the exchange of persons acting on behalf of the exchange. Since the governor in buying Feinberg's shares was not acting on behalf of the exchange the rule should not apply.


The Commission did the right thing here. The opinion is relatively brief, and was rendered reasonably promptly.