The opinion of the court was delivered by: Julius J. Hoffman, District Judge.
A seeming conflict between the federal antitrust laws and the
Securities Exchange Act of 1934 is the source of this
controversy. The reconciliation of these apparently opposing
policies is a matter of considerable moment to the financial
community and to the investing public. The point at issue is the
legality of the practices of stock exchanges in fixing minimum
rates for the commissions charged by stock exchange members for
the purchase and sale of securities on the exchange.
The action was brought by the plaintiff Kaplan and by the
plaintiff Dunn (on behalf of her minor children) as a
shareholder's derivative suit and at the same time as a
representative class action. The plaintiffs thus purport to sue
on behalf of, and in the right of, some five corporations which
are qualified as investment companies and which are generally
known in the financial world as mutual funds, and to sue on
behalf of their shareholders as a class. These five mutual funds
are joined as nominal defendants, and include the One William
Street Fund, Inc., The Lehman Corporation, Energy Fund, Inc., The
Dominick Fund, Inc., and The Chemical Fund.
The actual defendants are the New York Stock Exchange
(hereafter referred to as the Exchange) and four member firms of
that exchange: Lehman Brothers, Goodbody & Co., Dominick &
Dominick, Incorporated, and Paine, Webber,
Jackson & Curtis. These firms, with others, it is alleged, act as
brokers and agents for the mutual funds in the purchase and sale
of stocks listed on the Exchange. Jurisdiction is based upon the
antitrust laws, the Securities Exchange Act of 1934, and Sections
1331 and 1337 of the Judicial Code, 28 U.S.C. § 1331, 1337.
The gist of the complaint is the allegation that "Since the
year 1792 and up to the present time, an avowed purpose of the
defendant (Exchange) has been to set and fix minimum rates of
commission to be charged to the public by its members * * * on
all brokerage transactions executed on the" Exchange. The
constitution of the Exchange thus specifies the exact schedule of
minimum commissions to be charged, and pledges all members to
obedience. The Exchange polices these rates, and members who
violate them are subject to expulsion. Claiming that this
arrangement amounts to a combination and conspiracy in restraint
of trade in violation of Section 1 of the Sherman Anti-trust Act,
15 U.S.C. § 1 et seq., and that the mutual funds have been
damaged thereby in an amount equal to the difference between
commission rates which have been charged under the Exchange rules
and the rates that would have been available to the mutual funds
"by the operation of free and open competition had no such
contract, combination and conspiracy existed," a demand for
judgment for three times those damages is made under the
antitrust laws, and, in the same count and upon the same factual
allegations, a demand for judgment for the actual damages,
unmultiplied, is presented on the theory that the alleged
misconduct also offends against the Securities Exchange Act of
1934. Still in the same count, the complaint prays for a
declaratory judgment holding the rules of the Exchange to be null
and void insofar as they prescribe minimum rates of commission,
and declaring that all Exchange members are individually free to
determine and set their own rates of commission.
The defendant Exchange and its member firms named as defendants
have joined in a motion for summary judgment or, alternatively,
to dismiss the complaint for failure to state a claim upon which
relief can be granted. The parties have presented voluminous
affidavits and exhibits outside the pleadings, and the Court is
thereby constrained to treat the motion solely as a motion for
summary judgment. Rule 12(c), Fed.R.Civ.Pro.
The opposing briefs disclose no significant disagreements
between the opposing sides on the factual basis of the
controversy. The affidavits present no genuine issue of material
fact to be tried.
The sole question is a matter of law, appropriate for
disposition on a motion for summary judgment.
It is undisputed that the Exchange, by vote of its membership,
has fixed the rates of commission to be charged by its members,
and that those members have agreed to, and do, abide by those
rates. Whether the antitrust laws forbid such price-fixing turns
upon the interpretation of the Securities Exchange Act of 1934.
The parties are agreed on the authoritative source of the
principles which control the reconciliation of the Sherman Act
and the Securities Exchange Act: the pronouncements of the
Supreme Court in Silver v. New York Stock Exchange, 373 U.S. 341,
83 S.Ct. 1246, 10 L.Ed.2d 389 (1963). They part company on the
application of those principles to the case at hand.
At the outset, the Court concluded that the Exchange was
empowered to make rules on the subject of its members'
connections with non-members, in order to exclude "bucket shops",
"boiler shops", and similar operations. Under the statutory
scheme of the Securities Exchange Act of 1934, the various
exchanges are obliged to regulate themselves, subject to the
surveillance of the SEC, in the interests of stability in the
securities market. The exchange, in this process of
self-regulation, is obliged to have rules which are "just and
adequate to insure fair dealing and to protect investors."
Section 6(d), 15 U.S.C. § 78f (d). Registration may be granted to
the exchange only if its rules provide "for the expulsion,
suspension, or disciplining of a member for conduct or proceeding
inconsistent with just and equitable principles of trade."
Section 6(b). These broad declarations sufficed to validate
exchange rules requiring approval of direct-wire connections, the
This conclusion led to the collision of policy. "It is plain,
to begin with," wrote Mr. Justice Goldberg for the majority,
"that removal of the wires by collective action of the Exchange
and its members would, had it occurred in a context free from
other federal regulation, constitute a per se violation of § 1 of
the Sherman Act." 373 U.S., at 347, 83 S. Ct., at 1252. In this
circumstance, the Court unanimously concluded that such conduct
could not constitute a violation, in and of itself, of the
antitrust laws. In other words, the decision makes it plain that
action taken by the Exchange and its members, pursuant to its
statutory authority to make rules, is not illegal per se under
the Sherman Act.
This basic conclusion served only as a beginning in the
Silver case, in view of the remaining questions raised by its
facts. It is the final conclusion here. The plaintiffs have cast
their lot entirely upon their proposition that the fixing of
minimum rates of commission through the collective action of the
Exchange is illegal per se under the Sherman Act. If such action
is within the authority conferred upon the Exchange by the Act of
1934, however, the direct precedent of the Silver decision
stands squarely against them.
Since 1792, when the Exchange was founded with the so-called
Buttonwood Tree Agreement, the rules of the Exchange have set
minimum rates for the commissions to be charged by its members
for buying or selling stocks upon the Exchange. These rules were
not called into question after the adoption of the Sherman Act.
In the legislative deliberations which preceded the enactment of
the Securities Exchange Act of 1934, the existence of such rules
was plainly in evidence and duly noted. No action was taken to
outlaw the long-established practice. The securities exchange,
although not a free and open market, served a public purpose by
assuring investors of ready liquidation of their holdings and by
affording a ready source of capital for ...