Pennmont Securities, and its partners v. Meyer Frucher

PRECEDENTIAL
IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 08-1476
_____________
PENNMONT SECURITIES,
and its partners,
Appellant,
v.
MEYER FRUCHER; PHILADELPHIA STOCK
EXCHANGE; PHILADELPHIA STOCK EXCHANGE
BOARD OF GOVERNORS, JOHN DOES 1-12;
NATIONAL SECURITIES CLEARING CORPORATION
On Appeal from the District Court
for the Eastern District of Pennsylvania
(No. 07-cv-05543)
District Judge: Honorable Anita B. Brody
Argued March 12, 2009

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Honorable A. Wallace Tashima, Circuit Judge for the*
United States Court of Appeals for the Ninth Circuit, sitting by
designation.
2
Before: FUENTES, CHAGARES, and TASHIMA,*
Circuit Judges
(Opinion Filed: August 17, 2009)
Lynanne B. Wescott, Esq. [ARGUED]
The Wescott Law Firm P.C.
239 S. Camac Street
Philadelphia, PA 19107
Counsel for Appellant
Stephen J. Kastenberg, Esq. [ARGUED]
Edward D. Rogers, Esq.
Paul Lantieri III, Esq.
Ballard Spahr Andrews & Intersoll, LLP
1735 Market Street, 51 Floorst
Philadelphia, PA 19103
Counsel for Appellees
FUENTES, Circuit Judge.
This case concerns a dispute between the Philadelphia

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Stock Exchange (“the Exchange”) and PennMont Securities
(“PennMont”), a member of the Exchange. PennMont appeals
an Order and Opinion of the District Court, dismissing
PennMont’s motion for a temporary restraining order (“TRO”)
and a preliminary injunction on grounds of absolute immunity,
and dismissing the entire case for failure to state a claim upon
which relief could be granted. For the reasons that follow, we
conclude that the District Court was without subject matter
jurisdiction to consider any aspect of PennMont’s case because
of PennMont’s failure to exhaust its administrative remedies.
Accordingly, we vacate the Order and Opinion of the District
Court and remand this case with instructions to dismiss.
I.
The Philadelphia Stock Exchange is a registered national
securities exchange. As a registered exchange, it is deemed a
self-regulatory organization by the Securities Exchange Act of
1934 (“Exchange Act”). See 15 U.S.C. § 78c(a)(26). Like all
similar entities, the Exchange “has a duty to promulgate and
enforce rules governing the conduct of its members.” See
Barbara v. N.Y. Stock Exch., Inc., 99 F.3d 49, 51 (2d Cir. 1996).
In 1998, the Exchange entered into negotiations to sell its
assets to the American Stock Exchange (“AMEX”). This sale
would have generated more than $100 million for the Exchange,
but also would have divested Exchange members of certain
governance and equity trading privileges. PennMont Sec. v.
Fruscher, 534 F. Supp. 2d 538, 539 (E.D. Pa. 2008). PennMont,
a member of the Exchange, vehemently objected to the sale,
arguing that it would have drastically devalued PennMont’s
ownership stake in the Exchange. PennMont subsequently

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brought an action against the Exchange, seeking to enjoin the
sale. Although the trial court denied PennMont’s injunction, the
sale to AMEX fell through while the case was pending.
Several years later, the Exchange’s leadership again
earned the ire of PennMont. In 2003, the Exchange attempted
to alter its corporate structure by converting the Exchange from
a non-stock company, with ownership interest measured by seats
on the Exchange, to a stock corporation, with ownership
interests measured by shares. As with the proposed sale to
AMEX, this planned restructuring would have diminished the
value of PennMont’s ownership stake in the Exchange.
PennMont amended its complaint in the previous action to
challenge this “demutualization.” Again, the trial court denied
the injunction. The Appellees subsequently moved for summary
judgment, which was ultimately granted by the trial court.
In August 2004, shortly before the trial court ruled on the
summary judgment motion, the Exchange passed a fee-shifting
provision pursuant to its rule-making authority. The provision
in question – Rule 651 – states that
[ a ] n y m e m b e r , m e m b e r
organization, foreign currency
options participant, foreign
currency options participant
organization, or person associated
with any of the foregoing who fails
to prevail in a lawsuit or other legal
proceeding instituted by such
person or entity against [the
Exchange] or any of its board

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members, officers, committee
members, employees, or agents,
and related to the business of [the
Exchange], shall pay to [the
Exchange] all reasonable expenses,
including attorneys’ fees, incurred
by [the Exchange] in the defense of
such proceeding, but only in the
event that such expenses exceed
$50,000. This provision shall not
apply to disciplinary actions by [the
Exchange], to administrative
appeals of [the Exchange] actions
or in any specific instances where
the Board has granted a waiver of
this provision.
Self-Regulatory Organizations; Philadelphia Stock Exchange,
Inc.; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Relating to Legal Fees Incurred by the Exchange,
S.E.C. Rel. No. 34-50159, 2004 WL 2049378, at *1 (Aug. 5,
2004). This rule, in sum, would require a member of the
Exchange to reimburse the Exchange for its legal fees if the
member failed to prevail in a lawsuit it initiated against the
Exchange, and the Exchange spent more than $50,000 defending
itself.
Approximately one month after the Exchange instituted
Rule 651, the Exchange won its summary judgment motion
against PennMont. The decision was affirmed by the
Pennsylvania Superior Court in 2006.

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Members of the Exchange keep an account with the1
National Securities Clearing Corporation (“NSCC”) to facilitate
the collection of fees owed to the Exchange.
PennMont and Appellees disagree as to why PennMont2
did not participate. PennMont argues that it was never provided
with the call-in information necessary to participate in the
hearing. Appellees, on the other hand, argue that PennMont was
apprised of the necessary information by fax, and offer a fax
confirmation sheet attesting that the relevant contact information
was received by PennMont.
6
In November 2007, more than a year and a half after the
Superior Court affirmed the grant of summary judgment, the
Exchange invoked Rule 651 and billed PennMont $925,612 for
legal fees incurred in defending the lawsuit. This bill included
fees incurred well prior to passage of Rule 651. The Exchange
stated that it would debit the amount from PennMont’s clearing
account if PennMont refused to pay. PennMont objected to the1
invoice and then moved for a TRO and preliminary injunction
enjoining the collection of attorneys’ fees.
While the District Court considered PennMont’s motion,
the Exchange’s Special Committee to Review Delinquencies
and Payments (“Special Committee”) reviewed PennMont’s
objections to the invoice. The Special Committee conducted a
telephone hearing that was presided over by three Exchange
board members, one of whom was a named party in the 1998
lawsuit. PennMont did not participate in this hearing.2
Approximately two weeks after the hearing, the Special
Committee issued an order and opinion upholding the

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imposition of attorneys’ fees. The Exchange assured the District
Court, however, that it would not attempt to collect the funds
until the District Court ruled on PennMont’s TRO and
preliminary injunction.
On February 12, 2008, the District Court denied
PennMont’s motion for a TRO and preliminary injunction and
also dismissed the case for failure to state a claim. Specifically,
the District Court noted that: (1) courts have upheld fee shifting
provisions mirroring those in Rule 651 time and time again as
consistent with the Exchange Act; (2) the Securities and
Exchange Commission (“SEC”) declared Rule 651 “effective
upon filing” and has not attempted to amend or abrogate the rule
since; and (3) the Exchange’s decision to apply or not apply an
internal rule governing the conduct of its members constitutes
an exercise of delegated regulatory power and therefore cannot
serve as the basis for a private civil suit in a district court.
Accordingly, the District Court held that the Exchange had
absolute immunity from suit and thus PennMont could not show
a likelihood of success on the merits, nor state a claim upon
which relief could be granted. The District Court noted,
however, that PennMont was not completely without remedies
– it could appeal the Special Committee’s decision to the SEC,
and thereafter appeal the SEC’s decision to the Court of
Appeals.
II.
A.
We review a denial of a preliminary injunction for an
“abuse of discretion, a clear error of law, or a clear mistake on
the facts.” Allegheny Energy, Inc. v. DQE, Inc., 171 F.3d 153,

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158 (3d Cir. 1999). We review the dismissal of the complaint
de novo. Anspach v. City of Philadelphia, 503 F.3d 256, 260
(3d Cir. 2007). We exercise plenary review over questions of
subject matter jurisdiction. Lightfoot v. United States, 564 F.3d
625, 626 (3d Cir. 2009).
B.
The District Court decided PennMont’s case on the
merits, holding that PennMont could not satisfy the
requirements of a TRO/preliminary injunction, nor state a claim
upon which relief could be granted, because the Exchange was
absolutely immune from this lawsuit. PennMont, 534 F. Supp.
2d at 542. The District Court observed that when a self-
regulatory organization takes regulatory action consistent with
the goals of the Exchange Act, the self-regulatory organization
is absolutely immune from private civil suits challenging the
regulatory action. Finding that Rule 651 was consistent with the
goals of the Exchange Act, the District Court held that the
Exchange had absolute immunity from PennMont’s lawsuit and
thus PennMont could not show a likelihood of success on the
merits. In reaching this conclusion, the District Court
“assume[d] – without deciding – that jurisdiction [was] proper.”
Id. at 540-41. For the reasons that follow, we find that
jurisdiction was not proper, and that the District Court should
not have addressed the merits of PennMont’s claims.
It is a “long-settled rule of judicial administration that no
one is entitled to judicial relief for a supposed or threatened
injury until the prescribed administrative remedy has been
exhausted.” Myers v. Bethlehem Shipbuilding Corp., 303 U.S.
41, 50-51 (1938). “The primary purpose of this well-established

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The Exchange Act provides for SEC review when any3
self-regulatory organization
imposes any final disciplinary
sanction on any member thereof or
p a r t i c i p a n t th e r e in , d e n ie s
membership or participation to any
applicant, or prohibits or limits any
person in respect to access to
s e r v i c e s o f f e r e d b y s u c h
organization or member thereof or
if any self-regulatory organization
(other than a registered clearing
agency) im poses any final
disciplinary sanction on any person
9
doctrine is the avoidance of premature interruption of the
administrative process . . . .” First Jersey Secs., Inc. v. Bergen,
605 F.2d 690, 695 (3d Cir. 1979) (internal citations and
quotation marks omitted). “Furthermore, the principle allows the
administrative agency to utilize its discretion and apply its
expertise; it gives the agency the opportunity to correct its own
errors; and it minimizes piecemeal appeals of agency actions.”
Id.
The Exchange Act provides a comprehensive
administrative review procedure applicable to decisions
rendered by self-regulatory organizations. Once a self-
regulatory organization, such as the Exchange, issues a final
ruling, that decision is subject to administrative review by the
SEC. 15 U.S.C. § 78s(d)(1)-(2). If an aggrieved party is3

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associated with a member or bars
any person from becoming
associated with a member
. . . .
15 U.S.C. §§ 78s(d)(1)-(2).
Pursuant to the Exchange Act,4
[a] person aggrieved by a final
order of the Commission entered
pursuant to this chapter may obtain
review of the order in the United
States Court of Appeals for the
circuit in which he resides or has
his principal place of business, or
for the District of Columbia
Circuit, by filing in such court,
within sixty days after the entry of
the order, a written petition
requesting that the order be
modified or set aside in whole or in
part.
15 U.S.C. § 78y(a)(1).
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dissatisfied with the SEC’s determination, it can obtain further
review from the United States Court of Appeals for the circuit
in which the aggrieved party resides. 15 U.S.C. § 78y(a)(1).4
We have endorsed the requirement that litigants exhaust this

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specific administrative remedy provided by the Exchange Act,
emphasizing that “it is essential that courts refrain from
interfering with the process unnecessarily.” First Jersey, 605
F.2d at 696.
PennMont did not avail itself of this administrative
process. Rather, once the Exchange sought to enforce Rule 651,
the fee-shifting rule, PennMont decided not to seek SEC review
and went straight to the District Court to request an injunction.
Typically, when a litigant refuses to exhaust the available
administrative remedies provided by the Exchange Act, a district
court may not exercise jurisdiction over the case. Id. at 696
(observing that “the doctrine of exhaustion of administrative
remedies applies with equal force to the disciplinary
proceedings” of a self-regulatory organization). We have,
however, laid out two “extraordinary” exceptions to the
exhaustion requirement, either of which would compel a court
to hear an unexhausted case: “1) when the administrative
procedure is clearly shown to be inadequate to prevent
irreparable injury; or 2) when there is a clear and unambiguous
statutory or constitutional violation.” Id. For the reasons that
follow, however, PennMont cannot demonstrate the
“extraordinary circumstances” necessary to satisfy either
exception.
PennMont’s only basis for alleging irreparable harm
sufficient to satisfy the first exception relates to the threat that
Rule 651, the fee-shifting rule, poses to the financial health of
its business operations. In First Jersey, however, we noted that
claims of corporate financial collapse cannot satisfy the
irreparable harm exception, given that financial harm can occur
in many, if not most, disciplinary hearings of securities traders.

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Id. at 697. As we previously observed, “[a]ny company
threatened by [a self-regulatory organization] hearing could run
into district court claiming that the imposition of sanctions
would result in irreparable injury.” Id. Without more,
PennMont cannot satisfy the first exception.
Nor can PennMont demonstrate the sort of “clear and
unambiguous” statutory or constitutional injury that would
satisfy the second exception. As pointed out by the District
Court, regulations similar to Rule 651 have been consistently
approved by the SEC. See, e.g., Order Granting Approval to
Proposed Rule Change by the Pacific Stock Exchange, Inc.,
Relating to the Liability of the Exchange and its Governors,
Officers and Agents, S.E.C. Release No. 37563, 62 S.E.C.
Docket 1527, 1996 WL 466637 (Aug. 14, 1996) (“Pacific Stock
Exchange Rule”). The Pacific Stock Exchange Rule – which
contains an attorney fee provision largely identical to Rule 651
– applies to “a member or associated person who fails to prevail
in a lawsuit or other legal proceeding instituted by that person
against the Exchange or other specified persons, and related to
the business of the Exchange . . . .” Id. The SEC found that this
rule was consistent with the Pacific Stock Exchange’s mandate
under the Exchange Act to craft rules “provid[ing] for the
equitable allocation of reasonable dues, fees, and other charges
among its members . . . .” Id. (citing 15 U.S.C. § 78f(b)(4)).
The Commission further noted that because the obligation to pay
attorneys’ fees would only be triggered once the fees climb
above $50,000, “the rule change should not provide an undue
disincentive to litigation, in so far as it will permit the discovery
needed to assess the merits of the members’ cases.” Id.
Although PennMont’s argument regarding the Exchange’s

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retroactive application of Rule 651 would not be foreclosed by
the SEC’s prior approval of similar rules, the consistent
endorsement of these rules by the SEC surely complicates
PennMont’s ability to demonstrate a “clear and unambiguous”
violation of statutory or constitutional law.
In our view, the lawfulness of the Exchange’s conduct is
far from clear and unambiguous. Moreover, this is precisely the
sort of question that would have benefited from administrative
review: we would be far better positioned to consider the
propriety of the application of Rule 651 had PennMont given the
SEC the opportunity to apply its expertise to this matter in the
first place. See First Jersey, 605 F.2d at 696 (noting that the
structure of administrative review enables the SEC to “apply its
expertise” and, if necessary, “correct its own errors without
resort to the courts”). Accordingly, PennMont also fails to
satisfy the second exception to the administrative exhaustion
requirement.
III.
Because PennMont has failed to administratively exhaust
its challenge to the application of Rule 651, we dismiss this
appeal for lack of subject matter jurisdiction and remand to the
District Court with instructions to vacate its order and to dismiss
this action for lack of subject matter jurisdiction.

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