SILVER v. NEW YORK STOCK EXCHANGE

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Argument of David I. Shapiro

Chief Justice Earl Warren: Number 150, Harold J. Silver et al., Petitioners, versus New York Stock Exchange.

We'll wait just a moment.

Mr. Shapiro.

Mr. David I. Shapiro: May it please the Court.

The basic legal issue of this case is whether the New York Stock Exchange is immune from the antitrust laws when it requires its members to boycott a non-member.

Now what are the facts of this case?

Petitioner, Municipal Securities Company, which I assume refer to in argument as MSC was a sole proprietorship owned by Harold J. Silver and was engaged in the municipal bond business in Dallas, Texas.

Municipal Securities Company Incorporated, which I shall refer to as MSC Inc., was formed by Mr. Silver in 1958 and was engaged principally in the over-the-counter corporate securities business.

Now both MSC and MSC Inc. were licensed as securities dealers under the laws of Texas, were registered broker-dealers with the Securities and Exchange Commission, and were members in good standing of the National Association of Securities Dealers.

Neither MSC nor MSC Inc. was a member of the New York Stock Exchange.

In 1956, in an order to more effectively trade back and forth with other dealers who traded in municipal bonds, MSC, that's the proprietorship, installed private telephone wires from its office to the offices of various Dallas banks and to the Municipal Bond Departments of two and later three firms who are members of the New York Stock Exchange.

After the formation of MSC Inc. in 1958, private wires were installed from the Trading Department of the corporation to the Dallas Trading Departments of nine firms who are members of the New York Stock Exchange.

MSC Inc. requested the Stock Exchange to approve these installations and also requested that the Exchange furnish it stock ticker or what is otherwise known as continuous quotations service.

Temporary approval was obtained and both the private wires and stock ticker service were installed during the summer of 1958.

In the meantime, the Exchange was carrying on a background investigation of MSC Inc. officers.

Then on February 12, 1959, without notice, either the MSC or MSC Inc., Exchange directed as member firms to discontinue all of their private wire connections to both MSC and MSC Inc.

Justice John M. Harlan: Could I ask you a question?

Mr. David I. Shapiro: Yes, sir.

Justice John M. Harlan: Maybe I'm wrong.

I thought that the Stock Exchange rules required the applications for wire services of this kind, with respect to the nonmember to be made by the member?

Mr. David I. Shapiro: I believe that they do, Your Honor but --

Justice John M. Harlan: And you say that this application was made by your client?

Mr. David I. Shapiro: That's correct.

There is a form in which it appears that both the member and the non-member make application for approval.

The rules, I think, speak of member approval for the establishment of such wires but the form itself apparently is directed to nonmembers.

And such a form was made -- form application was made in this case.

Now --

Justice Potter Stewart: No application at all was made with respect to the --

Mr. David I. Shapiro: Propriety sir.

Justice Potter Stewart: With propriety (Voice Overlap) --

Mr. David I. Shapiro: That's correct, sir.

Apparently they didn't think they needed one.

Justice Potter Stewart: Is that -- is there any explanation for that in the record?

Mr. David I. Shapiro: No.

Apparently there's none at all.

It just wasn't done.

But there were private wires.

Now, the member firms upon receipt of the directive immediately complied with it and by March 2, 1959, all of petitioners private wire connections to member firms were settled.

And at the same time, Stock Exchange withdrew the stock ticker service.

Now, attempts to learn the reasons for the Exchange's action proved futile since the member firms didn't know and couldn't find out the reasons for the Exchange's action, Mr. Silver personally visited the Exchange on February 16, 1959.

He was there told by Walter Coleman, the Assistant Director of the Exchange's department of member firms that the Exchange had a long standing policy against giving the reasons for its disapproval action.

On February 26, Mr. Silver wrote to Mr. G. Keith Funston, President of the Exchange, and explained that irreparable damage was being inflicted upon the financial condition and reputation of his firm.

Mr. Silver stated and I quote, “I appeal to your sense of justice and ask for the following.

(1) Temporary reinstatement of the services.

(2) That we be advised of the reasons for the action of the New York Stock Exchange.

And, (3) That we be given an opportunity to answer any charges and present whatever information you may require.”

On March 4, 1959, Mr. Funston replied as follows and again I quote, “Thank you for writing to me about your problem.

Well, I can understand your position and wanting to know specific reasons for the recent action taken by the Exchange in connection with private wiring ticker service to your organization.

I am sure you can also understand our position in defining to furnish such details.

Before taking any such action, the Exchange always makes a very careful and very thorough investigation.

I personally reviewed the scope and results of such investigation of this case and feel that the Exchange acted properly.”

End quote.

On the 6th of April, 1959, petitioners commenced for this suit under the antitrust laws and prayed for injunctive relief mandamus.

Later, on the petitioners' motion for partial summary judgment, the Exchange for the first time revealed its reasons for terminating petitioners' wire connections.

The Exchange asserted that it took the action it did because, one; its investigation had turned up certain scurrilous matter with respect to the Silvers.

The nature of which Your Honors has been disclosed neither to the petitioners, to petitioners' counsel or even to the courts below.

Two, the Silvers' sold certain shares of the U.S. Hoffman Machinery Corporation in 1955, 2 months after acquiring.

Although at the time of acquisition, they stated they had no present intention of selling.

Three MSC Inc.'s application for private wire connection approval omitted from a long list of corporate connections covering a ten year period, the names of two corporations with which Mr. Silver had been connected.

And four, and perhaps the most important, in 1953, some six years prior to the Exchanges' action, the Defense Department had suspended the security clearance of a corporation, not one of those omitted from MSC Inc.'s application in which the Silvers were principal officers.

Now the District Court considered each of the four grounds relied on by the Exchanges' justification for its actions.

And it found and I quote, “First, the record fails to substantiate these charges against the Silvers.

That's on page 229.

Second, the conduct of the Exchange could not be justified by the denial of security clearance nor by any of the other facts and circumstances on which it relied.

That's at 232.

And third, the Exchange acted arbitrarily and unreasonably in directing that plaintiffs' wire connection will be settled.

And that's at page 233.”

Now these findings were in no way disturbed by the Court of Appeals.

The District Court held that the termination of petitioners' wire connectors constituted a per se violation of the Sherman Act.

And upon the Exchanges' defense that it was immune from the antitrust laws, the District Court held as follows and I'm going to quote it because this is the position, we are asserting before this Court, and we think it's absolutely right.

Quote, “Providing that its members do not indulge in conduct which is illegal or inconsistent with just and equitable principles of trade and exchange has neither the power nor the authority to determine with whom its members may or may not deal or to direct them to desist from dealing with non-member broker dealers engaged in transactions and over-the-counter securities and municipal bonds.

If it does so, it does so at its peril and is subject to such appropriate action as may be taken under the antitrust laws.”

On appeal, a divided Court of Appeals reversed.

The majority held that while there would have been little doubt as to the illegality of the Exchanges' action, if it had not been insulated from liability under the antitrust laws, its actions in this case was within the general scope of its authority under the Securities Exchange Act.

And hence, the Exchange was immune from liability under the Sherman Act, Judge Waterman dissented.

Now, as its claim from the face of the Act, the Securities Exchange Act of 1934 provides no explicit antitrust immunity or actions taken by registered Securities Exchanges and as this Court has repeatedly held, no immunity will be implied unless of course there is a clear repugnancy between this case and the Securities Exchange Act and the antitrust laws and then only to the extent of the repugnancy.

In this case, Your Honors, there is no repugnancy, clear or otherwise.

In the Securities Exchange Act of 1934, Congress empowered the Securities and Exchange Commission to discipline Exchange members.

And it required the Exchanges themselves to discipline members who violated ethical business standards.

With respect to nonmembers however, Congress provided that regulation be conducted by the SEC.

And this was to be accomplished by the broker-dealer registration provisions of the 1934 Act which in 1938 was supplemented by a program of self-regulation in the field of business ethics.

Justice John M. Harlan: Was there any cause of action alleged here beyond the treble damage action?

Mr. David I. Shapiro: Yes sir, there was in the complaint.

There was a cause of action under the American Tobacco Doctrine for the intentional infliction of harm and there was also I believe a cause of action for malicious interference with contractual relations.

Now, we cite --

Justice John M. Harlan: So that under the Court of Appeals' decision, the action is still pending at least insofar as the -- was not brought under the antitrust law, is that it?

Mr. David I. Shapiro: That's correct, Your Honor.

On the foot --

Justice Potter Stewart: If the reasoning of the Court of Appeals is correct, it's difficult for me to see how there would be any liability either the -- in tort either.

Mr. David I. Shapiro: I couldn't agree with Your Honor more.

I mean, we don't have any liability here under the Sherman Act.

We haven't got any place.

Justice Potter Stewart: It would follow from the Court of Appeals' reasoning, I should (Voice Overlap) --

Mr. David I. Shapiro: So, I would think.

We say -- But what it did was it held that there was no liability under the Sherman Act and remanded to determine for the District Court to seek out a remedy as to whether or not there might be some sort of relief in terms of a judicially created remedy in the form of damages or injunctive relief.

But the Court of Appeals did not give any direction to the District Court as to what remedy there should be.

Justice Byron R. White: If there was --

Mr. David I. Shapiro: No, it did not say it wasn't.

It just said there wasn't any under the antitrust laws.

Justice Byron R. White: Well, it suggested that the Court investigate the --

Mr. David I. Shapiro: And find some other law.

Justice William J. Brennan: Well, because of the implication that there might be some equitable remedy charged (Voice Overlap) --

Mr. David I. Shapiro: Yes, there was.

There was such an implication on the Court of Appeals' opinion.

We say that while the 1934 Act, in no way affected the right of the Exchange's to discipline their own members even for derelictions in over-the-counter transactions that is off the Exchange itself.

Power to prevent abuses by nonmembers was vested not in the Exchanges but in the SEC and later in 1938 in the SEC and National Association of Securities Dealers.

Accordingly we say, Section 6 (b) of the 1934 Act, which requires an Exchange to make an enforced rules for the discipline of its members for member misconduct provides no antitrust immunity for Exchange action against nonmembers.

And in this case, the Exchanges' action was admittedly directed not against illegal or unethical member conduct but against non-members belief to be, and I quote from the District Court's opinion, “Untrustworthy persons of doubtful character.”

Justice Arthur J. Goldberg: If the Exchange have taken this action against the members, is it all right?

Mr. David I. Shapiro: Well, it --

Justice Arthur J. Goldberg: On the same reference?

Mr. David I. Shapiro: Well no, I don't think so.

I think that that even with regard to members that the Exchange has got to show them some sort of due process and as a matter of fact, the Exchanges' rules provide a great deal of procedural due process for its members but provide absolutely none for nonmembers.

Justice Arthur J. Goldberg: So that this will be under the Sherman Act for members or on equitable theory that they say --

Mr. David I. Shapiro: I would think it would be under the Sherman Act as well.

And the -- in that connection I might say that I think that the Government's brief in this case which is filed amicus curiae that we had been members instead of nonmembers, I think their brief would be absolutely correct.

But since we are nonmembers, I'm going to say why we think it's incorrect in just a moment.

We think the Government is in error when it asserts that immunity as to action against non-members turns on the reasonableness of the Exchanges' determination after notice of hearing.

A private organization as we understand the antitrust laws cannot immunize itself from the Sherman Act by establishing extrajudicial tribunals even though they purport to give what looks like due process.

And we say the District Court correctly held that so long as Exchange members themselves do not indulge in conduct which is illegal or inconsistent with just and equitable principles of trade and Exchange has neither the power nor authority to tell them with whom to deal, with whom not to deal.

Now, it's important to keep in mind at this point in the argument that the Exchanges' rule against non-approved wire connections as applied in this case had the effect of excluding the petitioners from a substantial part of the over-the-counters securities market.

And this is graphically illustrated at page 76 of the record.

And I ask the Court to turn with me with just a moment at page 76.

The exhibit facing page 76 shows MSC Inc.'s private wire network immediately prior to the Exchanges' directive of February 12, 1959.

Incidentally, Your Honors, there's a typographical error here.

The date at the bottom of the page should be February 1, 1959, not February 1, 1960.

Now, after the New York Stock Exchange member firms complied with the Exchanges' directive, MSC Inc.'s private wire connections were reduced to those four which is shown below the box marked MSC Inc.

It's all that were left.

And by October, 1959, MSC Inc. was out of business.

Now, MSC the proprietorship, used its private wires with member firms solely to obtain quotations in municipal securities, in municipal bonds not listed for trading on the New York Stock Exchange.

And MSC Inc., that's a corporation, did know listed business over its private wires with a number of Exchange member firms.

In this connection, I should like to point out that the order of the District Court, in no way affected the Exchanges' right to regulate its members with respect to their manner of reporting transactions upon the Exchange.

In fact, it was specifically restricted to private wired connections which were used for trading or otherwise dealing and then I quote again, ”Securities not listed for trading on the New York Stock Exchange.”

We say therefore that in this case, there is no supersession to an extent problem, no repugnancy problem, whatsoever.”

Justice Byron R. White: Well, I take it then that -- completely decides the point what the District Court found to the -- as to the conduct of MSC or of its officers, that even if -- even in the case of, say, known dishonesty or proved dishonesty that there would be no (Inaudible).

Mr. David I. Shapiro: That's right.

Our position would be exactly the same so long as it did not involve member misconduct.

Justice Byron R. White: Yes, and that some -- there is a -- no joint action against a known crook for example, would be immunized.

Mr. David I. Shapiro: That's correct.

Unless (Inaudible) -- as I say, it involved member misconduct.

And then of course, the action would be against the members themselves for engaging in such misconducts.

And there's plenty of power in the SEC and in the Exchange themselves to prevent any such kind of thing from occurring.

Justice Arthur J. Goldberg: Well, the member [Inaudible]

Mr. David I. Shapiro: Well, let me put it this way, Your Honor.

If the Exchange -- would it tell a member at this particular point, you've given your wire to a known racketeer and we want you to be very careful in your dealings with him.

And it should happen that the Exchange member is very careful and every single one of the dealings that the member has, with the known racketeer, are completely illegal, completely in accordance with the SEC's rules and regulations, I would say that the Exchange has no power to cut that wire off.

Justice Arthur J. Goldberg: Exchange has the power to --

Mr. David I. Shapiro: It has such a rule, I believe.

Justice Arthur J. Goldberg: To question the authority of the Exchange under this statute in the legislative scheme under which it was established to do that and everything.

Mr. David I. Shapiro: No, I do not question the power of the Exchange to police the Exchange.

As a matter of fact, they will require it to police their members.

What they were not required to do, as a matter of fact, they were given no authority to do was to police people other than non-members.

And in the securities business that was taken care of by a comprehensive scheme of legislation which completely excludes the New York Stock Exchange.

Justice Arthur J. Goldberg: How could you prepare in argument so far as [Inaudible]

Mr. David I. Shapiro: Well, for this reason, Your Honor, and not because the statute doesn't talk, 6 (b) does it, doesn't talk in terms of regulation.

It talks in terms of discipline for member misconduct and that's what the Exchanges were required to do, discipline members who engaged in member misconduct.

Now that's the only requirement they've got under 6 (b).

Justice Arthur J. Goldberg: [Inaudible]

Mr. David I. Shapiro: Well, let me put it this way.

It depends in this particular connection on the kind of thing we're talking about.

If we're talking about a private wired connection in which -- which is restricted to a market other than the exchange market, my answer would be they have no power at all.

With regard to a private wire which involved, or the stock ticker service which involved quotations upon the Exchange, I would say in that connection that the Exchange has a reasonable right that the District Court held to protect its property interest and its own quotations.

That's as far as I'm willing to go.

Justice Arthur J. Goldberg: Doesn't the District Court also say [Inaudible]

Mr. David I. Shapiro: Well, I think we can in the light of the order of the District Court which clearly restricted the injunctive relief here to private wires which were used for transactions not taking place on the New York Stock Exchange.

Now, let's take a look at this supersessional repugnancy problem for just a moment.

Section 6 (c) of the 1934 Act which permits the Exchange to adapt and enforce any rule not inconsistent with the Act has got to be read together with Section 19 (b).

Well, that Section authorizes the SEC to order or supplement an Exchanges' rules with respect to such matters as the reporting of transactions on the Exchange and upon tickers maintained by or with the consent of the Exchange.

And we think its plain, the 19 (b) does not include private wires between members and nonmembers which are used to communicate with respect to transactions and over-the-counter markets.

Or a private wire connection is to the over-the-counter market, precisely what the ticker is to the New York Stock Exchange or any other Exchange market.

Furthermore we say, there's nothing either in the 1934 Act or its legislative history that reveals that the Securities and Exchange Commission was given power to decide antitrust issues as such.

Where -- while we agree that antitrust considerations are relevant to the performance of the Commission's functions on the 19 (b), there is no pervasive regulatory scheme including the antitrust laws that's been entrusted to the Commission.

Because admittedly, unless everybody agrees with, including the majority below, the Securities and Exchange Commission lacks power to grant relief against the wire connection rule as applied.

We've got no standing to complain before the Commission.

And so as the District Court pointed out and I quote, “If the theory of the Exchange were correct, plaintiffs would not only have no remedy before the Commission but it would also find themselves barred from remedy in the courts on the mere say so of a private association.

This is in mark contrast to what occurs in a recognized closed regulatory system.”

End quote.

Justice Hugo L. Black: [Inaudible]

Mr. David I. Shapiro: Yes sir.

They can --

Justice William O. Douglas: Under the statute, the antitrust --

Mr. David I. Shapiro: Are you asking me, did they sir?

Justice William O. Douglas: Did they –-

Mr. David I. Shapiro: They could.

They have that power under the statute.

They of course did not.

Justice William J. Brennan: Well, if that -- and if -- is that power comprehends action which they found in violations could affect these wire services?

Mr. David I. Shapiro: Oh yes.

They put him out of business without any question under the -- under the 1934 and 1938 Acts, there is a complete scheme of regulation with respect to over-the-counter dealers and brokers.

As a matter of fact, in the 1938 Act, there was a specific immunity given for a policing system set up through the National Association of Securities Dealers which deals with the problem of business ethics of over-the-counter Securities Dealers.

Now, the 1934 Act, I think we have to face this, was adopted primarily because the New York Stock Exchange failed to police the conduct of its own membership.

The majority below treated this statute as granting to the very same New York Stock Exchange authority to regulate the entire securities industry because that's the effect of the decision below.

And for these reasons, we say that it should be reversed.

I should like to save whatever time I have left for rebuttal.

Chief Justice Earl Warren: Mr. Solicitor General.

Argument of Cox

Mr. Cox: Mr. Chief Justice, may it please the Court.

The Government has filed a brief in this case and requested time to take part in the oral argument because it involves the interplay between two major regulatory statutes, the Securities Exchange Act and the Sherman Act.

I think it would be helpful in the beginning to try to put the case in a nutshell.

The Stock Exchange has a long standing published rule which forbids its members to maintain direct wire connections without the approval of the Exchange and to terminate any wire connection when requested by the Exchange.

In this case, it invoked that published rule against a non-member, apparently in the honest belief that the nonmember, the petitioner, lacked integrity and reliability.

And that such action was therefore appropriate to carry out the Exchanges' obligation and its members' obligation under the Securities Exchange Act to require its members to adhere to just and equitable principles of trade.

The Exchanges' investigation into the particular facts with respect to the petitioner was so inadequate and the conclusions that it drew from the evidence that it did gather were so unreasonable, that the District Court had stated that the Exchange had acted arbitrarily and unreasonably.

The Court of Appeals did not disagree with that but held nevertheless that the Exchange was not liable under the Sherman Act even for arbitrary and unreasonable action.

But the Government's concern is with the legal issue and we are not concerned as the parties are with respect to the particular facts, whether the District Court's characterization is a finding that remains binding or whether the case should go back to be retried under a correct legal theory is not really any of our concern.

We are concerned primarily here with the correct rule of law.

We think that both Courts were wrong in their analysis of the basic legal issues and that the judgment of the Court of Appeals should be reversed and the case sent back for the reasons that I'm about to state.

Our analysis of the critical issues, I think, I can state most clearly, if I may begin by stating a few propositions that apparently are not in dispute because they really lay the necessary groundwork for getting to the more difficult questions.

And I'll state them rather boldly so as to get out as quickly as possible.

First, the Stock Exchanges' conduct was such as to render it liable to the plaintiff under the Sherman Act, unless the Securities Act gives it some kind of a privilege or immunity.

That follows I think, from the Fashion Originator's Guild case and I do not understand it to be disputed in this Court.

Second, the Securities Exchange Act does not give a registered stock exchange, its members or related nonmember firms, a general exemption from the Sherman Act.

There's nothing in the Securities Exchange Act which makes the Sherman Act inapplicable to the securities market, it's either in New York or elsewhere.

There's nothing that authorizes the Securities and Exchange Commission to give blanket immunity.

And of course, it is settled most reasonably by California against the Federal Power Commission that the mere enactment of a regulatory law does not render the Sherman Act inapplicable to the regulated industry.

And I think in this Court there's really no question about that proposition.

Third, the Securities and Exchange Act does place, we say, upon registered Securities and Exchange, a duty of industrial self-regulation, the performance of which is affected with a high public interest.

Now while there is some dispute about the scope of the duty here, I think that everyone agrees that Section 6 of the Securities Exchange Act does put some duty upon the New York Stock Exchange and the other Exchange.

The theory of the legislation was that certain minimum statutory rule should be laid down that the exchanges which were claiming to be public institutions should then act as if they were public institutions and exert their special position for the benefit of the public carrying the initial responsibility for allow -- raising above strict rules of law, the ethical and professional level of those carrying on the Securities' transaction.

I dwell on this point and despite the fact that it is not disputed to emphasize the great importance that the Government especially, the Securities and Exchange Commission attaches to the Exchanges' initial responsibility for the duty of protecting a business.

No adequate substitute is really available for the Commission to take over all the regulatory and quasi-regulatory functions of the Stock Exchange because it would require or uncertainly an impracticable, and probably undesirable increase of personnel and revision of its entire method of operation.

Justice Arthur J. Goldberg: [Inaudible]

Mr. Cox: The Commission essentially supported the Exchange in the Court of Appeals.

I might say that in this Court, I think it is proper to state that the brief that is filed and cited by myself and my assistant, Mr. Friedman, does represent a composite view on the ground that it was up to the Government to formulate a position and as often happens with the Government probably one of the number of agencies might have stated the propositions somewhat differently, they might have answered some of the propositions that we left open here is not involved, but I do think it's fair to say that it was a very great consensus of opinion, and that this is a composite brief for the entire Government although some of the individual people, perhaps including myself might have had it a little differently if they stood alone.

Justice Potter Stewart: Do I understand from your brief that the Commission thinks that it has reviewing power over --

Mr. Cox: I think that the Commission as I understand it, thinks that its failure to set aside a filed rule of a registered Security and Exchange under Section 19 or under Section 6 gives that rule a special status.

The Commission does not say, if my memory is correct, that it has in this case approved what the Exchange did on these facts.

In other words, I'm going to argue as I progress, that there is a marked difference between the case where the challenge is to some particular rule and it is said that the rule was improper where perhaps the exchanges in action is decisive, and the Court may not go behind it.

And the case where the essential advice is in the way the Exchange apply their rule to the particular facts.

And that's the case that we think that we have here.

Now, nobody says that the Exchange could have reviewed exactly what the -- says the Commission could have reviewed exactly what the Exchange did in this case.

Justice Potter Stewart: I read the respondent's brief to say so, --

Mr. Cox: Well --

Justice Potter Stewart: -- and don't you imply that your brief said so, does it -- that your brief says the Commission thinks so.

Mr. Cox: Well, I think that the respondent is wrong on both points.

Justice Potter Stewart: Well, your statement was that nobody said so, right?

Mr. Cox: I said nobody could say so, nobody could sensibly say so.

I think the --

Justice Potter Stewart: And as I -- what's the Commission's attitude about this, could you tell us?

Mr. Cox: I don't think the Commission supposes that there was any way that the petitioner could have gotten relief before it in this particular case.

The Commission does think and I think, we all agree that there are ways in which the particular rule could be changed as to the future.

But there's no way that Mr. Silver's company, or Mr. Silver's -- his administrative trading can get any compensation from the New York Stock Exchange or the Securities and Exchange Commission for what happened here.

Unknown Speaker: [Inaudible]

Mr. Cox: I come now --

Justice Potter Stewart: Workmen compensation and with that, I think that's certainly obvious, isn't it?

Securities Exchange Commission has had no --

Mr. Cox: There's no -- there's no -- there's machinery for challenging the general rule.

Justice Potter Stewart: Yes.

Mr. Cox: There is no machinery for challenging the way the rule is applied in a particular case.

Justice Potter Stewart: So, certainly there was no machinery to give monetary compensation?

Mr. Cox: And there's certainly no machinery for giving --

Justice Potter Stewart: But the --

Mr. Cox: -- monetary compensation.

I come now to one of the propositions that is disputed.

We think that the Exchange's duty of self-regulation extends to the scrutiny of closed business association between members and nonmembers, including direct wire connections.

This is disputed of course.

The petitioner argues that the Exchanges' role in policing securities transaction does not extend to transactions or the exchange of information between members and nonmembers concerning over-the-counter securities.

We disagree and on this point, we stand with the respondent and think that the District Court was wrong and the Court of Appeals was correct.

Justice Hugo L. Black: In doing what?

Mr. Cox: We think that the District Court was wrong in holding that the Exchange has no responsibility for the conduct of its members in maintaining wire connections with people of dubious financial integrity or reliability.

The District Court said that the Exchanges' functions do not extend beyond transactions in listed securities.

And since the direct wire connections were used preponderantly in -- transactions in unlisted securities that that was not on the Exchanges' business.

And it was for that reason that it issued the injunction against cutting off these direct wire connection.

So far as they pertain to the exchange of information or transaction without unlisted security.

The words of the statute plainly just speak, no such limitation or distinction between listed and unlisted security in this respect.

Section 6 (b) requires an Exchange to have rules for disciplining a member for conduct to our proceeding inconsistent with the just or equitable principles of trade.

There's no line between where you must be just and equitable in conducting trade and where you may cheat in conducting trade.

And under Section 6 (b), the Exchanges' rules must be adequate to protect the investee, not just investors in listed securities but investors of all counties.

Surely, we submit that these two sections of the statute relating to the rules cover investors in unlisted security.

A stock exchange member who cheats his customers when he's dealing in unlisted securities and they do deal with unlisted security but is scrupulously honest when it comes to dealing with listed securities surely cannot be said to be engaging in misconduct consistent with the just and equitable principles of trades.

The petitioners' argument in this Court is a little different as I understand it.

He says that while the Exchange has a responsibility for the character and conduct of its own members, it has no responsibility for the conduct or character of nonmembers dealing in over-the-counter markets.

Well, I'm not disposed to quarrel with that proposition as a generalization, I simply submit that it doesn't answer the question and doesn't resolve the issue in this case.

But we think that the maintenance of a closed and continuous business relationship builds about direct wire connection is part of the members' conduct and that when the Exchange threatens to discipline members for maintaining wire connections with a dishonest or unreliable dealer, it is in the words of the statute disciplining a member for conduct, his conduct inconsistent with just and equitable principles of trades.

I suggest first that this is plainly true as a matter of analysis.

The relationships a man voluntarily maintains are part of his conduct.

And if he maintains relationships that bring the dishonest or unreliable into closer touch with the financial community where they can rig the market or better prey upon their victims then he is acting in a manner inconsistent with the just and equitable principles of trade.

Petitioner argued precipitously and at length in his affidavits and papers of the court below that the cutting off of these direct wired connections seriously injured his business because they're so important to one dealing in over-the-counter securities.

Well, I submit that every argument that can be made to demonstrate their importance goes to demonstrate the responsibility of the members that extend those connections and bring the unreliable and dishonest further into the financial community where they have better opportunities to engage in misconduct.

Common sense I think, it was suggested during the argument of Mr. Shapiro confirms that conclusion.

Surely it can't be argued seriously that the Exchange has no legitimate concern with whether its members maintain direct wired connections with swindlers, professional gamblers, bucket shops or others who lack integrity or reliability but only does this increase the unreliable opportunity to do wrong but of course some of the disrepute and moral responsibility and public criticism will rub off on those who maintain such relationships.

Finally, I think that the statute itself at least to a degree in one specific application embraces the principle that a member should refrain from affecting transactions having relationships with unfit person.

Section 19 (a) provides that the Commission may expel a member from the Exchange if the member has affected a transaction or any other person who he has reason to believe is violating any provision of the Act.

In other words, there is a specific application of where the statute says that the member is responsible for the person he brings into the community and enables to engage in an improper or unlawful transaction.

The so-called Maloney Amendment, 15 -- Section 15 (a), as the statute now stands, seems to us to contain nothing to the contrary.

The Amendment put the primary responsibility for over-the-counter brokers and dealers upon the National Association of Securities Dealers.

And there's no doubt that that association exercises with respect to nonmember broker-dealers, the kind of initial responsibility and general requirement of oversight that the registered exchanges exercised with respect to their method.

But the worst that can be said is that under the theory of the court below and our theory, there exists some chance of duplication in the degree of protection accorded to investments.

I submit not only is that inherently desirable, certainly not undesirable but it's not sufficient to show that when Congress enacted the Maloney Amendment, it intended to take away from the registered exchanges, the powers that they previously had under Section 6.

I turn now to the extent of privilege, an issue on which the Government is more nearly aligned with the petitioners, the plaintiff.

That it is with the respondent exchange.

And again I start with what seems to me to be an essentially undisputed proposition.

To wit that the Exchange's duty of self-regulation carries an implied privilege or immunity from liability.

At least where its action is in truth necessary to promote observance of just and equitable principles of trade, and does not unreasonably restrain competition.

I don't think that there's any difference of opinion about this, either among the two courts below or among the parties.

If you go with me on the first main point that I've argued and say that there is a duty to cut off wire connections from a bucket shop or a non-swindler or someone of that kind, surely if there is the duty that the law won't turn around how would the Exchange liable under the Fashion Originator's Guild for carrying out the duty.

Justice Potter Stewart: I gather that -- again, perhaps I misunderstood but I had understood the petitioner -- that the petitioner did disagree with you about this, of this you're making (Voice Overlap) --

Mr. Cox: Well, I'd -- I thought not.

If he does -- I don't -- certainly don't want to mislead.

I thought there was no argument about this point.

It seems to me, Mr. Justice Stewart, that whether there is or not, it's a fairly obvious point.

Justice Potter Stewart: Well we -- the way you stated it, it would if you agree that it was the duty of the --.

Mr. Cox: Oh yes, yes.

Justice Potter Stewart: And the -- but the petitioner says (Voice Overlap) --

Mr. Cox: Says it isn't a duty.

Oh well, it's a dispute on whether it's a duty.

Really, all the point I am actually saying is, if the Exchange is doing what one Act requires it to do, you can't hold it liable and punish it under the other Act for doing it.

Unknown Speaker: What you --

Mr. Cox: It doesn't come down to anything more than that.

It's just really the threshold for my next point which is hotly debated.

Although, there we agree with the petitioner.

Justice William J. Brennan: Well, you're going to spell out what you mean by in truth?

Mr. Cox: I meant very literally, in truth --

Justice William J. Brennan: Not with just an honest belief that you place (Voice Overlap) --

Mr. Cox: No, I'll come to that next.

I really meant literally in fact and in truth.

Now, I come, as Your Honor suggest, to the far more important and more difficult question, what happens when the Exchange supposes that it is promoting just and equitable principles of trade but actually in truth, it is wrong.

And I want here to suggest one very important distinction which comes back to a point that I was discussing earlier with Mr. Justice Stewart.

We think the two kinds of cases, as well as another distinction between the kinds of mistakes but now I'm talking about the kinds of reason the -- kinds of challenge to the Exchanges' action.

What the challenge may be to the Exchanges' rule, let me give two illustrations.

Suppose that the Exchange were to adopt a rule that no direct wire service may be extended to any graduate, to very recognized to it, anyone who has graduated from a recognized law school or anyone who has been admitted to the Bar of the Supreme Court of the United States.

Such a rule, I take it, would have no tendency to promote just and equitable principles of trade.

Take another possibility.

Suppose that the Exchange adopted a rule that no member shall extend wire service to any broker-dealer who deals in listed securities of the big board, over-the-counter, such a rule it can be argued would tend to promote just and equitable principles of trade.

It can also be answered that such a rule is an unreasonable restraint of trade.

In such a case, it would seem to us, this doesn't have to be decided but it would seem to us that someone must make the determination other than the Exchange itself.

And the question becomes whether that determination is made in binding fashion by the Securities and Exchange Commission when it registers the Exchange, it takes no action to require a change in its rules, or perhaps it is open for litigation in any case in the District Court.

We've discussed the pros and cons because this is the first case involving this kind of problem.

It is an issue on which the Government has taken no position, because we don't think the question is presented here.

Now, why isn't it presented here?

Justice Potter Stewart: Does the statute, whether wisely or unwisely, doesn't the statute give the Commission power to review any such rule?

Mr. Cox: Well, perhaps, Justice Stewart, I'd rather leave (Voice Overlap) --

Justice Potter Stewart: 19 (b) and 23 (a), I'm talking about.

Mr. Cox: The Commission undoubtedly has power to require a change in the rule.

On the other hand, I have grave doubt when the Commission registered the New York Stock Exchange whether it's scrutinized every rule in this book --

Justice Potter Stewart: Well, but it's --

Mr. Cox: --- and dealt with --

Justice Potter Stewart: It's not -- if it later decides that any of those rules (Inaudible) -- has power to change, doesn't it?

Mr. Cox: It has power to change rules in certain specific categories.

Whether it has power to change every rule, I'm not sure.

But again, my reply isn't here -- isn't the merits of this question because we think that this question doesn't have to be decided here.

Here, the real basis as we see it in the Exchanges' conduct was not the rule concerning the maintenance of direct wire connections, but rather the manner in which the Exchange attempted to apply the harmless rule in this particular case.

And this we think involves a quite different question from the validity of the rule.

The SEC, I say again, by the wildest stretch of the imagination cannot be supposed to review than to prove the Exchanges' conduct in this particular instance.

And there's no way in which the SEC can fully remedy the wrong if there was in fact a wrong.

Now counsel for the Exchange say that the Commission must have approved the Exchanges' conduct because they didn't require the Exchange to change the rule, but I submit, perhaps I stated it over, overly broadly before, I submit they can't really mean that.

They can't make that the Commission, by its silence, simply by its failure to change the rule, intended to give the Exchange a license to cut off wire connection for any reason, however arbitrary, whimsical, or malicious.

Suppose for example, that the Exchange should decide to honor its Board of Governors by giving each -- by putting all the names of the nonmembers having direct wire connection into a hat.

And then the Board of Governors would be honored because each member on his birthday could pull a name out of the hat and that member's wire connections would then be terminated.

Surely, when the Exchange approved -- failed to object to this rule, it didn't approve that kind of conduct.

Justice Arthur J. Goldberg: [Inaudible]

Mr. Cox: Even -- I suppose that the Exchange did know the general character of the investigations that were being carried on, even if you make the assumption that that was approved.

It seems to me that the Exchanges' action would still remain arbitrary and unreasonable in this case, because quite apart from the procedure followed, the character of the investigation, the inferences it drew from the facts before it in this instance were unreasonable.

What it had was really not enough evidence for a reasonable man to conclude that these people were not of sufficient integrity.

I think it is fair to say that what I would call a standard of conduct that you shan't have wire connections with those who lack integrity in financial reliability.

Or has been, I assume, it has been impliedly approved by the Commission if it can approve finally that sort of thing, and I assume that that is what the Exchange was doing here.

Although, remember that so far as the record goes, they didn't really tell anybody what they were doing here.

Now, in these cases where there is a mistake in the way the proper and standard of conduct is being applied, then we think the Exchange should have only a limited privilege.

Justice William J. Brennan: Now, what's the -- what's the cause of action?

Is this something we fashion now or is for (Voice Overlap) --

Mr. Cox: No, no, no on the contrary.

I assume we start with the existing law and that the question is what privilege with the causes of action remaining the same, perhaps I should begin on this in the morning.

Chief Justice Earl Warren: Very well, you have time, you may do it in the morning.

Mr. Cox: Well, either way, if the Court please.

Chief Justice Earl Warren: Whichever you wish (Voice Overlap) --

Mr. Cox: Well, I'll finish -- I'll finish now then.

Chief Justice Earl Warren: Very well.

Justice William J. Brennan: Well, specifically Mr. Solicitor, is this to say if the -- if this appears and they could prove abuse of the privilege, they would have a cause of action for treble damages?

Mr. Cox: Yes, yes.

It's -- my difference with -- to come directly to, I guess the point Your Honor has in mind, my difficulty with the Court of Appeals' opinion is somewhat the one that Justice Stewart mentioned earlier.

If in order to encourage the Exchange to perform these very important obligations, it is desirable to give them a privilege when they're acting in performance of those obligations, then it would seem to me that this extends to one form of liability just as much as to another.

I see no reason why it should be confined to the Sherman Act.

Now, we think the privilege should be limited to a qualified privilege.

In other words, when they are acting reasonably in the character of the investigations and draw reasonable inferences from the facts --

Justice Byron R. White: But if they could draw completely unreasonable and irrational inferences form the fact that those would still be in good faith.

Mr. Cox: Yes.

Justice Byron R. White: And you -- do you -- in that case however, you would still exclude them to treble damages?

Mr. Cox: Just like the police officer who in complete good faith used his force to prevent what he thinks is a felony, and later the jury finds that he used more force than was reasonably (Voice Overlap) --

Justice William J. Brennan: Well, in truth does not mean that the suspicions are in fact proved that in the sense, they are in fact true but something reasonable --

Mr. Cox: That they reached reasonable conclusion.

Justice William J. Brennan: Even though it may have been the wrong?

Mr. Cox: Even though it might have been wrong.

But if they are arbitrary or unreasonable in their action then there should be liability.

Now, to answer your questions a little more precisely because there is a point here, Judge Hayes in the court below apparently said, “We read the Securities Exchange Act as giving an absolute immunity from all liability at least under the Sherman Act.

And that it seems to me if it's an immunity from liability under the Sherman Act, got to be equally by a parity of reasoning, and immunity from liability for conspiracy.

Not under the Sherman Act, common law conspiracy.”

Then he was obviously troubled by that conclusion, so he said, “Well, now we've got to create a new statutory cause of action.”

This is what he suggested but did not pass it.

Now, we've got to create a new statutory cause of action to take care of arbitrary and unreasonable conduct.

I think that's an extraordinary artifact.

What the law normally does is to start with its rules and with the Sherman Act, there was rules of tort or whatever thereof.

And then when it wants to encourage certain conduct in the public interest and gives a privilege, it carves an exception out.

If you fail to bring yourself within the privilege or the exception then you're liable under the existing law.

If you bring yourself within it, you are not.

We've set forth in our brief the reasons for recognizing only a qualified privilege and I think the case shall be remanded.

Chief Justice Earl Warren: Would you just -- oh, pardon me.

I'm just want to ask you if you want to restate what this position you would make in this case?

Mr. Cox: I think we would reverse holding that the privilege of the Exchange is a privilege limited to protect it while it makes reasonable mistakes that here, there was a characterization by the District Court that it acted arbitrarily and unreasonably that having reasoned that far, the case should then go back to the Court of Appeals to decide whether to hold that the finding of the District Court was conclusive or to say that the case should be reheard on a proper theory of law in the District Court.

I don't think this Court needs to face that question.

Justice Hugo L. Black: I just thought it to say and you won't – [Inaudible] But it seems to me that what you're saying is that we should hold that they are not exempt from the antitrust laws, they have acted without sufficient evidence, what a reasonable man would act, and that if they have acted, could've done that, they are liable under the antitrust laws, given them the exemption there.

But it would seem to me if you're looking for facets in the law that would come near it -- malicious interference of the man's right to contract rather than to engraft such an exception in antitrust laws that you first look to see if they have acted -- in doing what they did, and then say, that although they are given the right to do what they are doing, they violate the Antitrust Act by doing that.

Mr. Cox: Well, I think -- I think not, Your Honor.

First, I think that this cannot be made into a case of malice.

There's no question that they acted in good faith.

Justice Hugo L. Black: Malicious interference of the contract does not mean (Voice Overlap) --

Mr. Cox: Legal malice, intentional interference with contract.

Justice Hugo L. Black: [Inaudible]

Mr. Cox: Well, I would say that the case that they have two causes of action here, really.

One would be the cause of action Your Honor mentioned, the other would be the cause of action under the Sherman Act which does cover cases of malicious interference with the contract where it is by a conspiracy in restraint with interstate trade.

I think they're both causes of action.

In each case, I think their privilege is a limited one and since they acted arbitrarily and unreasonably as this Court I think mistaken here, that in neither each case is the privilege adequate effect.

Chief Justice Earl Warren: We'll adjourn.

Print this transcript Transcript: 

Argument of A. Donald Mackinnon

Chief Justice Earl Warren: -- J. Silver versus New York Stock Exchange.

Mr. MacKinnon.

Mr. A. Donald Mackinnon: Mr. Chief Justice, Associate Justices, may it please the Court.

At the outset of my argument, I wish to state that the Stock Exchange does not take the position that it can act maliciously with predatory motives or in bad faith.

Such is not and never has been our contention.

We say that we must act in good faith and that we did so act and that is the standard by which we shall be judged.

At the outset, I would like to state what a stock exchange is, what it does, and what it is required to do.

The Stock Exchange is an unincorporated association in New York.

It has 1,375 members.

It is and always has been regulated by the membership, by the Stock Exchange with the enactment of the 1934 Act.

There was a decided strengthening of that regulation.

Now, the Exchange is required to police and discipline its members.

That duty is imposed upon it by Congress.

The Stock Exchange is jealous of the financial standing and repute of its members.

It is jealous of protecting that which it is required to protect the rep -- its take -- its reputation and standing for the protection of investors and to ensure equitable and just principles of trade which Congress has imposed upon it.

Now, it has a high degree of accountability and it endeavors and always has endeavored to maintain that degree of accountability.

Very obviously, no rules and regulations of the Exchange would be enforced or could be enforceable if 1,375 members were to go their various ways and say that they would do as they please.

Because of that fact, it is the Exchange that has the duty to see that its members enforce its rules and regulations.

And in doing so, obviously, there are restraints imposed upon the freedom of action of members.

Now, we furnish an auction market for 1,100 odd listings of securities.

When our members deal with one another as they are required to do when a member comes in and offers a security for sale and another member buys a security, they must deal with one another.

They must of necessity and we as an exchange must of necessity be interested in their financial responsibility and in their integrity, so that when and as our members, as they did in this particular case, have private wires, we were and has the duty of being interested in the person who had the wire connection with the member firm.

Now, I should like at this point to deal very briefly with the 1934 Act.

And in doing so, I would like to refer very briefly to a portion of Section 2, which is entitled necessity for regulation as provided in this title.

And to emphasize for Your Honors that what was designed was the regulation of securities transactions as commonly conducted on securities exchanges and over-the-counter markets stating that they were affected with a national public interest which makes it necessary to provide for the regulation and control of such transactions, and of practices.

And I underscore the words, “of practices”, and matters related thereto.

And further, and to impose requirements necessary to make such regulation and control reasonably, complete, and effective.

Now, that is what Congress said and then they provided for the registration of national securities exchanges.

And we are a registered national security exchange.

And under Section 6 of the cert -- 1934 Act, we were required by Congress to meet certain terms and conditions.

And to file a registration statement which provided that we would agree to comply and, and again I emphasize, to enforce so far as within its powers compliance by its members with the provisions of the 1934 Act and any amendment thereto, and any rule or regulation made or to be made thereunder.

We were then required to file data with respect to our organization, rules of procedure, membership, etcetera, and further, copies of our constitution, articles and incorporation, and all amendment, and of its existing bylaws or rules, or instruments corresponding thereto, whatever the name, which were collectively referred to as rules of the Exchange.

We also hand to agree to furnish the Commission with any amendments for changes in our rules, forthwith upon adoption.

Now, Section 6 (b) provides that no exchange shall be granted registration for that the registration shall remain enforced unless the rules of the Exchange include provision for the expulsion, suspension for disciplining of a member.

Now, obviously, no exchange could operate on the basis of one rule.

So the Act then provides that nothing in the title shall be construed to prevent any exchange from adopting and enforcing any rule not inconsistent with the Act, and the rules and regulations thereunder, and the applicable laws of the state in which the exchange is located.

Then we come to, what in my opinion, is an exceedingly important part of the Act dealing with registration and that is that it must appear because now we have the duty imposed upon the Commission.

It states, if it appears to the Commission that the exchange applying for registration is so organized as to be able to comply with the provisions of this title and the rules and regulations thereunder, and the rules of, and that the rules of the exchange are just and adequate to ensure fair dealing, and to protect investors, the Commission shall pose such exchange to be registered as a national securities exchange.

In other words, there is an affirmative duty cast upon the Commission to determine that the exchange is so setup, that it can enforce its rules, and that its rules are designed to protect investors.

Justice Hugo L. Black: Outside of the fact that the National Labor Relations Board is composed of -- has official appointed by the Government.

What's the difference in the philosophy of what you have just read to us and the philosophy of that Act which imposes the duty to enact regulations and acts through Government agency?

Mr. A. Donald Mackinnon: I -- in fact -- I don't put ourselves in the category of the Government agency.

I certainly say we have quasi-government duties and I would say that as far as we are concerned, I know of no other body that has the same duties of self-regulation as the exchanges.

Justice Hugo L. Black: But it's subject to the supervision of the mechanism?

Mr. A. Donald Mackinnon: Oh, yes.

I don't raise that question at all.

Justice Hugo L. Black: And you had charge with responsibility by a Government enactment to do these things and do them as the Act confirms.

Mr. A. Donald Mackinnon: That is correct.

I don't -- I raise no dispute with the statement.

Justice Hugo L. Black: And it's not -- it's not merely that you were charged for doing your business in a certain way; you're charge with the duty of regulating the conducts of other people by your rules and the kind of which Government prescribes.

Mr. A. Donald Mackinnon: That is correct.

Justice Hugo L. Black: And which it could do directly to the Commission.

Mr. A. Donald Mackinnon: There isn't any doubt on my mind on that.

I raise no point on that at all.

Justice Tom C. Clark: Somewhat equivalent to the agriculture (Inaudible)

Mr. A. Donald Mackinnon: Somewhat similar but I think we go much further in regulation under this Act.

Justice Tom C. Clark: And get more power.

Mr. A. Donald Mackinnon: I think that we -- let's put it this way, we have a duty and that's the thing that I want to emphasize, duty.

And obviously, to perform that duty, we must have the power.

Justice Hugo L. Black: Or you make a mistake?

Mr. A. Donald Mackinnon: I'd say, Your Honor --

Justice Hugo L. Black: What happens then?

Mr. A. Donald Mackinnon: I would say, Your Honor, that if we make a mistake that we have not fallen in violation of the Act as long as we have proceeded in good faith.

Because it is inconceivable to me that Congress would have said to the Exchange, as it has said in this Act that you are acting at your peril every time that you act, and in effect to be an insurer of your conduct.

I don't think that any organization could possibly undertake the responsibilities imposed upon them under those circumstances.

Justice Hugo L. Black: Are you performing the governmental function of --

Mr. A. Donald Mackinnon: I think we are.

Justice Hugo L. Black: Performing a government function?

Mr. A. Donald Mackinnon: I think we are and I think --

Justice Hugo L. Black: Suppose the government official performed a function, the same function, under what circumstances could they be held liable?

Mr. A. Donald Mackinnon: I don't believe that a government official would be held liable at all unless he had acted with malice aforethought, and incomplete disregard of his responsibilities.

I don't think that he could be held liable for performing his duties as long as he performs them within the scope of his responsibilities and in good faith.

Justice Hugo L. Black: Could the Secretary of Agriculture be sued for removing somebody from a -- from a place that he held?

Mr. A. Donald Mackinnon: I don't --

Justice Hugo L. Black: -- (Voice Overlap) authority?

Mr. A. Donald Mackinnon: I don't think he could.

Justice John M. Harlan: Under any circumstances?

Mr. A. Donald Mackinnon: I doubt very much whether he could under any circumstances.

Justice Hugo L. Black: But you think --

Mr. A. Donald Mackinnon: But I don't say that we are entitled.

Justice Byron R. White: Aren't you really -- are you covering both injunctive relief and damages to that --

Mr. A. Donald Mackinnon: I'm going to, Your Honor.

Justice Byron R. White: But you said he couldn't be sued just now.

Mr. A. Donald Mackinnon: Well, I --

Justice Byron R. White: I suppose that he makes a mistake, his mistake could be corrected.

Mr. A. Donald Mackinnon: Oh, that's right.

I'm not taking --

Justice Byron R. White: And --

Mr. A. Donald Mackinnon: Injunctive relief, I say to Your Honors, in this case and I'm going to come to that.

They could have had injunctive relief, have they proceeded in the manner that they should have proceeded.

Justice Byron R. White: But they also -- even though you're -- even -- you say that anything within the scope of your duty, you must be free to perform.

You are going to say why this was in the scope of your duty.

Mr. A. Donald Mackinnon: Yes, I am.

I am.

And I'm going to, if I may at this point, if I may answer Your Honor's question --

Justice Hugo L. Black: Alright.

Mr. A. Donald Mackinnon: -- I would like to proceed to the next point.

I would like to just point out to Your Honors, and I think it's exceedingly important at this point to refer to the rule under which the Exchange acted.

The Constitution provides that its Board of Governors must approve these words and we -- that Constitution was filed.

As Mr. Justice Harlan inquired yesterday the origin of these wires comes, as Mr. Justice Harlan stated, at the request of a member and after the member requested then and then only does the applicant filed his application and it is given a temporary approval pending an investigation.

But let me turn to the specific rules.

Rule 355, and I'm reading from the record and I'm only going to read briefly at page 196, “No member or member organization shall establish or maintain any wire connection, private radio, television or wireless system between his or its offices and the office of any nonmember, or permit any private radio or television system between his or its offices without prior consent of the Exchange.”

And 356, “The Exchange may require at any time the discontinuance of any means of communication whatsoever which has a terminus in the office a member or a member organization.”

Now, let me state --

Justice Hugo L. Black: What page is that last --

Mr. A. Donald Mackinnon: 197, Your Honor, of the record.

Let me state that these specific rules were filed with the Exchange and these specific rules --

Justice Byron R. White: With what?

Mr. A. Donald Mackinnon: -- with the Commission.

And these specific rules were approved as they were required to be approved under Section 6 (d) before we were accorded registration.

Further --

Justice John M. Harlan: (Inaudible)

Mr. A. Donald Mackinnon: I would say many do.

I would say there are roughly over 2,000 people that have wires who are nonmembers.

And we give our wires to anybody that will meet our standards of integrity.

Justice John M. Harlan: I suppose that (Inaudible) for practical purpose, does it not?

Mr. A. Donald Mackinnon: I think it can be running but there is roughly as shown by this record, approximately 3,600 over-the-counter dealers that do not have private wires.

I -- if you're asking my personal opinion, I think it is a pri -- a -- a priced instrument.

Justice John M. Harlan: (Inaudible)

Mr. A. Donald Mackinnon: There is no question about that.

That is, that is utilized.

That is utilized.

And also in that connection, Your Honor, let me state that they state that it was a very valuable asset in this case.

But the question of damages, despite the fact you wanted to bring it up at this time, was denied by a split court.

So we're only here on the question of injunctive relief.

Now, let's see what happened here.

We were granted registration under date of September 28 --

Justice William J. Brennan: I'm sorry, Mr. MacKinnon.

I don't think I got that last -- we're only here on the questions of injunction?

Mr. A. Donald Mackinnon: The injunction.

We're, we're not reviewing the -- that's the only thing that is here before Your Honors on certiorari.

The Court of Appeals split three-to-three on the question of damages.

We wanted to bring everything up at one time and only with respect for our private lawyers.

Have I answered Your Honor's question?

Justice William J. Brennan: Yes, it just surprised me.

Justice John M. Harlan: In fact, this case (Inaudible)

Mr. A. Donald Mackinnon: Well, on the question of -- they applied for an en banc was denied and they split it three-three on the question of damages (Inaudible)

He would not let us take it up.

Justice William J. Brennan: As you mentioned back a moment, Mr. MacKinnon, certainly, as I understood the Solicitor General yesterday, he argued the case as if it's still a question of the Treble Damage Act.

Mr. A. Donald Mackinnon: Oh, it is.

That's the basis on which --

Justice William J. Brennan: But only, only for the purpose of injunctive relief?

Mr. A. Donald Mackinnon: Oh, no.

They applied for damages as well but we were not permitted to bring up for review, this question of damages and the trial court this case as all cases for motion -- on motions for summary judgment has a paper record.

The District Court has the same record that Your Honors have before you.

Justice William J. Brennan: That's for the question here, isn't it?

Mr. A. Donald Mackinnon: The question?

Justice William J. Brennan: Whether the Sherman Act, whether --

Mr. A. Donald Mackinnon: Oh, yes.

That is definitely the question and the injunction was granted under the Sherman Act.

But the question of the damage and the amount upon the damages is a question that preserves.

Justice Hugo L. Black: I understood you to say they could get an injunction.

Mr. A. Donald Mackinnon: What's that?

Justice Hugo L. Black: I understood you to say that the stock exchange --

Mr. A. Donald Mackinnon: Not under the -- not under the Sherman Act.

I haven't gotten to that point.

Justice Hugo L. Black: You said they couldn't get it under the Sherman Act?

Mr. A. Donald Mackinnon: I said it couldn't.

Justice Hugo L. Black: But you say they could get in --

Mr. A. Donald Mackinnon: Oh, in my mind -- in my opinion, there is no question about it.

Judge Hays so held and I don't think there's remotest doubt about it.

But I want, I want to come to that --

Justice Hugo L. Black: And why do we have to decide this other question if they can get an injunction.

Mr. A. Donald Mackinnon: They've gotten it under the Sherman Act.

Justice Hugo L. Black: Suppose -- suppose they have lay -- put it -- attributed it to the wrong Act but they had a right to issue it?

Mr. A. Donald Mackinnon: I would say, yes, they had a right to issue it under the proper --

Justice Arthur J. Goldberg: How did they get an injunction issued?

Mr. A. Donald Mackinnon: How could they -- well, they applied for an injunction under --

Justice Arthur J. Goldberg: (Inaudible)

Mr. A. Donald Mackinnon: They got it.

Justice Arthur J. Goldberg: (Inaudible)

Mr. A. Donald Mackinnon: Section 4 and 16.

That's the other --

Justice Arthur J. Goldberg: Am I wrong in thinking that the treble damage was not given directly?

Mr. A. Donald Mackinnon: No, I don't think -- I think you are wrong that they can have injunctive relief --

Justice Hugo L. Black: The statute.

Justice John M. Harlan: I don't think this private individual for the private treble damage in my recollection could get injunction under the treble damage laws.

Justice Hugo L. Black: Well, you can get an injunction on the antitrust laws.

Mr. A. Donald Mackinnon: What's that?

Justice Hugo L. Black: Although the government can get an injunction under the Sherman Act.

Justice John M. Harlan: Maybe this was sort of an inherent power of authority.

Mr. A. Donald Mackinnon: No, they didn't.

No, this would not be exercise of power of authority.

Justice Hugo L. Black: It is specifically --

Mr. A. Donald Mackinnon: 416, they asked for damages and injunctive relief --

Justice William J. Brennan: Yes, but Mr. MacKinnon did the Court of Appeals in effect says we don't know what you may have.

You don't have a right of action under the Sherman Act.

You may have a right to at least, some other way and go back to the District Court and see what the District Court can find something for you, isn't that in effect what it is?

Mr. A. Donald Mackinnon: Now, under Section 4 of the Clayton Act, it provides -- Section 16 of the Clayton Act, any person, firm, corporation or association shall be entitle to sue and have the injunctive the relief against threatened loss or damage by a violation of the antitrust laws when and under the same conditions and principles as injunctive relief against threatened conduct that will cause loss or damage is granted by courts of equity.

But they granted it under the Sherman Act under the rules governing such proceedings that upon a showing of a danger of irreparable loss or damage is immediate, a preliminary injunction may issue.--

Justice Hugo L. Black: Where are you reading it?

Where are you reading it from?

Mr. A. Donald Mackinnon: From Section 16 of the Clayton Act.

Justice Hugo L. Black: On what brief?

What brief?

Mr. A. Donald Mackinnon: That's Appendix A, brief of the petitioners at page 33, Your Honor.

Justice Hugo L. Black: Does that quite answer the question, what you've read?

Mr. A. Donald Mackinnon: Oh, I think it does.

I think it answers Mr. Justice Harlan's question.

Did Your Honor have a question?

Justice Hugo L. Black: Well I -- I've always understood there could be an injunction issued for violating the antitrust law.

Mr. A. Donald Mackinnon: As against the private person.

Justice Hugo L. Black: By the Government.

Do you think that the private person can get it under that same question?

Mr. A. Donald Mackinnon: I do.

I do.

Justice Hugo L. Black: Under equit -- under the equitable power of the Court?

Mr. A. Donald Mackinnon: Well, I don't think that it was --

Justice Hugo L. Black: You could get that anyway.

Mr. A. Donald Mackinnon: I say under the equitable powers of the Court, the Court have inherent equitable powers to grant a -- an injunction in any case.

Justice Hugo L. Black: You'd had that regardless of the statute?

Mr. A. Donald Mackinnon: Yes.

Yes.

Justice Hugo L. Black: So 16 rather doesn't add anything to the power of the Court as far as -- where is that -- it says under the equitable power of the Court as I understood it?

Mr. A. Donald Mackinnon: No, I don't -- well that that may be a correct interpretation.

That is not the interpretation that I --

Justice Hugo L. Black: Will you read it?

Can you repeat it?

Mr. A. Donald Mackinnon: Yes, I will.

Any person, firm, corporation or association shall be entitled to sue for and have injunctive relief against threatened loss or damage by a violation of the antitrust laws when and under the same conditions and principles as injunctive relief against threatened conduct will cause loss or damage is granted by courts of equity under the same conditions.

Justice John M. Harlan: All this means I take it is that this power of authority really (Inaudible)

Justice Hugo L. Black: That's right.

Mr. A. Donald Mackinnon: Oh, I think that's true.

I think it's true but it is under the Sherman Act if they got it.

Justice John M. Harlan: But you're not contesting the power of authority.

Mr. A. Donald Mackinnon: Oh, no.

No, I'm not.

Now, I want to point out at this point, I've read to you our rule.

I told you that we were registered on September 28, 1934.

And in the annual report that was filed for the fiscal year ended June 30, 1935, the Commission stated in considering these applications, the applications for registration, the Constitution bylaws and rules and regulations of each exchange were examined and analyzed.

Now obviously when we state in our rules that were on file that we will have the right to approve member firm wires with nonmembers and to discontinue member firm wires with nonmembers that is a specific rule that was approved by the Commission under its responsibilities under Section 6 (d) before they registered.

Now, in addition to that, there is a provision that if we fail to enforce the rule, enforce the act and enforce the rules that we, under Section 19 (a) can have our registration suspended.

We can have it suspended for a period of 12 months or even withdrawn.

The law and the Bear case, Bear versus Franklin has said and it seems to me self-evident that the Exchange not only has the duty to enact rules and regulations but to enforce.

Now, that being the case, here, you are dealing with a rule or rules that were filed with the SEC that the SEC affirmatively found in approving registration that the rule was just and adequate to ensure fair dealing.

And you will recall that the Solicitor General and the same was true of the District Court petitioner, they did nothing that the Commission had scrutinized the rules with any care and that as far as these rules were concerned, it was more or less lip service.

But the Act, the order of approval and the annual report shows that they did in fact analy -- examine and analyze these rules as they were required to do before they accorded this registration.

Justice John M. Harlan: Where is that at?

Mr. A. Donald Mackinnon: It's on page 95, a quote from it, page 95 of the record.

And I read the -- only a portion thereof.

Now, in addition to -- I have to speed here.

In addition to 19 (a), there is a 19 (b) provision, and the 19 (b) provision provides that the Commission can, if it is supposed to do so, tell us to change our rules.

And if we do not do so, that they can order a hearing and after the hearing promulgate a rule.

In addition thereto under Section 23 (a), the Commission can't issue rules of its own.

And these rules and regulations are subject to review by a person agreed under Section 25 of the Act.

Now, and I want to go a step further than this because it is my position that there can be no question but what anybody reading the Congressional and Senate reports that this -- the Dickinson report at the time of the organization, the SEC knows that the responsibilities were imposed upon the Exchange to enact and to enforce its rules.

There is no question in my mind that as far as the petitioners here are concerned, if they were disposed to do so that they could have brought immediately into the Commission and said, we are a person aggrieved, and as a person aggrieved, we tell you that we want action with respect to this rule, under which the private wire between members and ourselves were discontinued.

And they could do that and despite the fact that the Government, the Solicitor General failed to state so that is the position that he took in his brief at page 17 where he said, “Well, neither the Securities Exchange Act nor the Commission rules of practice, specifically authorized the filing of a complaint with the agency by a person adversely affected by a rule of an exchange, the Commission would ordinarily entertain such a complaint, if it made substantial allegations.”

And here, they chose another course.

They chose to saddle us or attempt to saddle us with a liability which would be treble to with, in this particular case, if and we are charged with the -- with the duty of enforcing a rule if we enforce them through mistake of judgment, not now saying good faith because I say, good faith is a standard that Your Honors must apply.

But we face, according to petitioners contention with a liability of $3 million and also potentially criminal liabilities as well.

I say that Congress at no time could possibly have ever conceived a remedy such as that.

Justice Hugo L. Black: Are you saying by that, are we to imply by -- in what you've said that if there was a lack of, “good faith,” whatever that is.

That you could be sued for -- under the antitrust law in this case?

Mr. A. Donald Mackinnon: I would say definitely so, Your Honor, unless you find that we proceeded in good faith and good faith is a standard.

And good faith in my opinion means that we were attempting to perform the responsibilities cast upon us by statute in a fair, proper, and in my opinion, whether it'd be a mistake of judgment or not, certainly, there can be no liability but if we were motivated by malice, there could no immunity.

If we were motivated with a predatory objective, there could be no, no possible immunity and if we acted in bad faith.

But as long as we acted, misguided if it be but nevertheless acted in good faith, I say that we are entirely outside of the Sherman Act.

Justice John M. Harlan: The Court of Appeals opinion says or at least the record say that the (Inaudible)

Mr. A. Donald Mackinnon: Maliciously?

I think that's stretching.

I think that's stretching --

Justice John M. Harlan: (Inaudible)

Mr. A. Donald Mackinnon: I think that's stretching the Court of Appeals opinion, Your Honor.

I'm conscious of the language that we used.

Justice John M. Harlan: Well, to put that in concrete case, if I -- if you were -- supposing you could (Inaudible) under the guise of exercising your powers, you have what you say, bad faith and predatory (Inaudible)

Mr. A. Donald Mackinnon: I don't think they could but that -- that wouldn't establish.

Justice John M. Harlan: No, no, no, no.

Therefore, you don't go as far to court (Inaudible)

Mr. A. Donald Mackinnon: Well, Your Honor reads Judge Hays opinion more broadly than I do.

Justice Arthur J. Goldberg: (Inaudible)

Mr. A. Donald Mackinnon: Not as -- no, I'm not abandoning any part of our brief.

We are immune but we're not immune for, when I say operating maliciously or with predatory motives, or in bad faith we are not acting within the responsibilities.

Justice Arthur J. Goldberg: (Inaudible)

Mr. A. Donald Mackinnon: I would say, yes.

I would say, we ought not to be if the standard which is applied to government officers in performing a governmental function is applied to us and I'm going to argue that standard to be applied.

But I have, I have a very grave doubt that it will be applied.

Justice Arthur J. Goldberg: (Inaudible)

Mr. A. Donald Mackinnon: I would say in essence, yes.

In essence, I would say that's basically true.

Justice Hugo L. Black: Well, if you're acting in bad faith, you would simply not be acting under the rule.

Mr. A. Donald Mackinnon: But we wouldn't be acting within our responsibilities.

Justice Hugo L. Black: You would not be acting under the rule, would you?

Mr. A. Donald Mackinnon: That's right.

Justice Hugo L. Black: If you're acting in bad faith.

Mr. A. Donald Mackinnon: That's right.

Justice Hugo L. Black: What you are saying is if you are not acting in bad faith, you're not allowed to do it by rule which the Commission has approved.

You could be held liable for violating the antitrust law in this respect like anybody else.

Mr. A. Donald Mackinnon: Like anybody else.

That is precisely what I'm saying, Mr. Justice Black.

Justice Hugo L. Black: I can understand it better that way than in the concept of good faith.

Mr. A. Donald Mackinnon: Well --

Justice Hugo L. Black: Maybe I'm -- maybe I am wrong.

Mr. A. Donald Mackinnon: I think all of this reasonableness is a variable standard as is bad -- good or bad faith, maybe a variable standard.

Justice Byron R. White: Isn't that the problem of the -- with giving any standard that the duty of operating as hazard?

Mr. A. Donald Mackinnon: I think --

Justice Byron R. White: That's what you said a while ago.

Mr. A. Donald Mackinnon: I think, Mr. Justice White that we are not operating as a hazard if this Court tells us that we can operate on the basis of good faith because we believe that is the only standard we apply whereas, if you were to say reasonableness or unreasonableness in the circumstances, you give us no rule to go by.

Justice Byron R. White: But like what you said briefly (Inaudible)

Mr. A. Donald Mackinnon: Well --

Justice Byron R. White: (Inaudible)

Mr. A. Donald Mackinnon: Predatory, as I am using the term is self-interest and not again, I use Mr. Justice Black's term, within our responsibilities.

If we're acting -- if we disregard our responsibilities, I certainly am not going to stand before this Court and tell you that we are immune from the Sherman Act, because I don't think anybody is.

Justice Byron R. White: Well, I suppose you can go on to say and you'll probably get to this but --

Mr. A. Donald Mackinnon: I hope to.

Justice Byron R. White: -- but if you are immune to antitrust laws where -- within these areas that people are trapped are also immune to damages under any circumstances?

Mr. A. Donald Mackinnon: I say that, definitely and I'm as well deal with that now because my time is fast approaching the red light.

I say that they did, if the Commission failed to act, I say that they could have gone in and gotten injunctive relief if they were disposed to do it or they show it.

Justice Byron R. White: But anything --

Mr. A. Donald Mackinnon: Because obviously they couldn't go in and just merely say, we want an injunction, they have to make a showing that they were entitled to it.

Justice Byron R. White: So anything you do within the scope of your (Voice Overlap) doing good faith, there's no liability for that?

Mr. A. Donald Mackinnon: That's right and I'll tell you why --

Justice Byron R. White: (Inaudible)

Mr. A. Donald Mackinnon: That is right.

I will tell you why.

That's my opinion.

I go a step further than that.

If the Court disagrees with me, I say, certainly under no circumstances, are we liable for treble damages because I say even if the Court disagrees with me, and I hope they will not that if another standard is to be held, I am convinced that we ought not on the basis of the duties imposed upon us and which we are required to enforce, we ought not to be risking treble damages because the moment we risk treble damages just at that moment, what is there other than an incentive to withdraw from acting when we are required to act.

And after all as said in congressional intent here was not designed to make us act at our peril.

Justice William J. Brennan: Well isn't that -- is not in essence saying that even if your liable for some damages your not liable for damages for violation of the Sherman Act?

Mr. A. Donald Mackinnon: I'm saying that we are not -- yes, I'm saying that.

But I'm saying we are not liable.

It is my position.

Justice William J. Brennan: I know you are.

You are saying you're not liable for damages --

Mr. A. Donald Mackinnon: That is correct.

Justice William J. Brennan: But on -- what, what would be the basis of an action for damages and assuming you are liable for some damages but not the damages --

Mr. A. Donald Mackinnon: Well, I suppose they would have -- they could have, I can think of an action in negligence.

I can think of an action -- action for tortious interference with contract.

I think that if they succeeded on the tortious contract interference they would certainly have to show and I would think it would be a part -- parcel of it, that we had acted in bad faith.

But I -- I do not think that they are entitled to any damages and I think the Congress waived --

Justice Byron R. White: But this is really just isn't a question of whether Congress intended to exempt some (Inaudible) any damages at all because they told them to do something.

Mr. A. Donald Mackinnon: I think that is true.

I'd go that far with you and I think they definitely did that and I also think that they waived the damage to this individual, bear in mind it was our members that were told to withdraw these wires.

It was our members who suffered the same for all practical purposes.

As far as this business was concerned, they suffered the same damages.

Our members have no cause of action under the antitrust laws.

Our members were then --

Justice Byron R. White: No matter how -- no matter how you do something, whether it's good faith or bad faith, or reasonable or not, there could be something hope you did in good faith is -- but if you made a mistake about the scope of your duty was, you wouldn't be exempt from the standards, I suppose.

There's got to be some standard in determining what is within the scope of this responsibility of Congress or suppose there's something which appears as an exchange, it might be outside the scope of your responsibility.

Mr. A. Donald Mackinnon: I would think there could be but I have to relate it to the facts in the particular case.

This is what we're dealing with and I say we did act within the scope of our responsibility.

Justice Hugo L. Black: Now, if you didn't do that?

Mr. A. Donald Mackinnon: If we didn't?

Justice Hugo L. Black: If you didn't do that?

I have trouble in seeing why it wouldn't be a -- whether that should be enough under this statement of facts you possibly go typical, malicious interference with contracts.

I do have a little difficulty at the present time in seeing if it would be violation of the antitrust laws.

Mr. A. Donald Mackinnon: Well, of course, I do not, Your Honor, see it remotely as a malicious interference with a contract or any other right here.

Justice Hugo L. Black: But suppose you have done this without authority of the law that the rule doesn't allow you to do it.

What you've done is to go out and interfere with these people's rights to make a contract, couldn't you be sued?

Mr. A. Donald Mackinnon: Which people's rights?

Justice Hugo L. Black: These people who are suing you.

Interfering (Voice Overlap)

Mr. A. Donald Mackinnon: In the -- in the present posture.

In the present posture, the case -- no because the rules --

Justice Byron R. White: Assuming it's outside the rule.

Justice Hugo L. Black: I'm assuming that it was outside --

Mr. A. Donald Mackinnon: If it's outside the rules then obviously, we have immunity.

Justice Hugo L. Black: Well, I'm not talking about immunity obviously, if it's outside of the rule, if you go out maliciously interfere with that contract, is there any state in the union where you couldn't -- they couldn't sue?

Mr. A. Donald Mackinnon: My answer to Your Honor is an unequivocal no.

They can sue anywhere, if that be the fact.

Justice Hugo L. Black: I can understand that rather than I can concept of applying the treble damage part of the antitrust law.

Mr. A. Donald Mackinnon: May I just rush ahead here because I must.

May I point out to you very briefly by a quotation of the Director of Trading and the Exchange Division of the SEC, which appears in 28 George Washington Law Review at page 223 as how the Exchange and their member, and the Commission operates.

He said the Exchange has governed themselves and the Commission keeps in touch making informal suggestions for changes when this seems indicated.

Now, one thing more -- my -- the red light is up.

One thing more --

Chief Justice Earl Warren: Your state -- make your statement with that.

Mr. A. Donald Mackinnon: I say to you that you can search the Act from beginning to end.

You will find no distinction between listed and over-the-counter security as my adversary contends.

I say further than that that our rules which were approved deal with wires with nonmembers.

Specifically, I say further than that, I oppose this petition for certiorari here because I wanted this Court to have a complete record.

It is my opinion they've should've had a complete record.

And I say to Your Honors at this time that if Your Honors do not affirm the opinion of Mr. -- of the Court of Appeals, that what should happen is that this case should be sent back for a full record so that Your Honors can have the advantage of a complete and not a paper case.

Thank you.

Justice John M. Harlan: (Inaudible)

Mr. A. Donald Mackinnon: Certainly.

Justice John M. Harlan: What you're saying is (Inaudible) in the absence of a demonstrated purpose (Inaudible) authority to assert antitrust (Voice Overlap) (Inaudible)

Mr. A. Donald Mackinnon: That is definitely my position.

Chief Justice Earl Warren: Would that be regardless of how arbitrarily you might have acted?

Mr. A. Donald Mackinnon: Again, Your Honor, you're dealing when you say arbitrarily if I've say yes to Your Honor.

Because I say there is one standard and one standard alone that could apply.

And that is, did we proceed in good faith, we may have been mistaken.

Bear in mind that there is nobody of men that see eye to eye on all facts and circumstances and the people that were adminis -- administering this rule, they're human.

Justice John M. Harlan: Were you --

Mr. A. Donald Mackinnon: They're not insurers.

Justice William J. Brennan: Were you and the Solicitor General (Inaudible)

Mr. A. Donald Mackinnon: I say, definitely, Your Honor and I say when you say it's been challenged in this case.

With all due respect to Judge Byrne and I have respect for him.

He had no different record than Your Honors have before you so that as far as all its finding, I say it's not a finding, I say it was an expression of opinion, he had no powers greater than Your Honor to come to that conclusion on the identical record.

Justice William J. Brennan: Well, even if he had come to view, you accepted his finding, you say they're effective, in one respect, it doesn't (Inaudible) predatory and antitrust, he did not.

Mr. A. Donald Mackinnon: I'd say go, go further than that.

And I would say in our motion for summary judgment, you don't make findings.

Thank you, Your Honor.

Chief Justice Earl Warren: Mr. Shapiro?

Argument of David I. Shapiro

Mr. David I. Shapiro: May it please the Court.

This is really a very simple case, when unfortunately after listening to the arguments of both the Solicitor General and my opponent I think it's become very tangled indeed.

First of all, there are a couple of things I'd like to get straightened up right at the outset.

Under Section 16 of the Clayton Act, which is 15 U.S. Code Section 26, any private individual may obtain injunctive relief under the Sherman Antitrust Act.

That's been the law since 1914, as I understand it.

Justice John M. Harlan: (Inaudible)

Mr. David I. Shapiro: Well --

Justice John M. Harlan: I think you're right on that --

Mr. David I. Shapiro: This Court so held in the Bedford-Stonecutters case and that was decided, I believe in 1926.

Now, the cause of action in this case is in one sense, a plain ordinary concerted refusal to deal on the part of the member firms of the New York Stock Exchange who were named as co-conspirators with the exchange in this case.

But it's more than that.

It's more than that.

It has also concerted action among competitors to exclude another competitor from a substantial market.

And we say, because this is really the reason that the Solicitor General is so concerned about in this case.

He's concerned because of the fact that he thinks that it may, if you apply the per se rule here, you may weaken the concept to self-regulation.

We don't have that problem here, let me tell you why.

We don't have the problem because it is just as much a violation of the Sherman Act per se for competitors to foreclose another competitor from any substantial market as it is for competitors to foreclose competition among themselves.

And in this case, the record is clear that the over-the-counter dealers who were the member firms of the New York Stock Exchange, with whom these petitioners have private wires, were competitors of these petitioners in the over-the-counter market in Dallas.

And what happened was, is that the combined action of the Exchange and its member firms in the Dallas area excluded these petitioners from the Dallas market, force them out of business.

Justice Potter Stewart: I think there's no dispute, as I understand it, that if this were the shoe business or the bakery business, the refrigerator business that this could be a violation of the antitrust law.

Mr. David I. Shapiro: They just be a plain (Voice Overlap) violation of the antitrust law.

Justice Potter Stewart: I don't understand that anybody disputes that.

Mr. David I. Shapiro: Well, I think I'd like to make that very clearly.

Justice Potter Stewart: Oh, I think it has been made clear by agreement.

Mr. David I. Shapiro: Now, the only other problem --

Justice Byron R. White: Are you saying that no one incurs that it should be a trial in the antitrust violation?

Mr. David I. Shapiro: I'm sorry.

I don't understand your question.

Justice Byron R. White: Do you -- you assert that everybody believed that this is a per se violation except for the exemption of plain defense?

Mr. David I. Shapiro: No.

I assert that it's a per se violation.

I believe that the Solicitor General does but I am sure that Mr. MacKinnon does not.

And he did not -- he certainly, vigorously opposed the application of the per se rule in the District Court.

And the District Court didn't agree with it.

Now, I think the real problem that's posed by this case was posed by Mr. Justice Goldberg's question to me yesterday.

And I'd like to deal with that if I may, because that's really not a problem.

It just looks like it's a problem.

We were talking yesterday about this fellow who was an ex-racketeer who -- the question was caught as to whether or not the Exchange had the power to order its member firms to discontinue its wires to that person.

Well, I think we've got to distinguish the case of the ex-racketeer from the case of the bucket shop because let's talk first about the bucket shop.

If we talk about the bucket shop and we have a situation in which the Exchange tells a member firm, stop dealing with the bucket shop and the member firm says, no.

What we're talking about at that point is member misconduct.

If we're talking about a situation where there are qualifications involved, the qualifications of this ex-racketeer to engage in the securities business, well he can't be qualified to engage in this business unless the Securities and Exchange Commission says that it's all right for him to engage in this business and that's gone from Section 15 of the broker-dealer registration provisions of the 1934 Act.

And they comment, “The criteria set forth in Section 15 are the only criteria that Congress has laid down for admission into the securities business.”

Now, if the Securities and Exchange Commission says, “Yes Mr. ex-racketeer, we think you have shown a sufficient rehabilitation, so that you should now engage in this business.”

Who is the New York Stock Exchange to say, “No, you cannot.”

And that is precisely the point I am making because --

Justice Arthur J. Goldberg: (Inaudible)

Mr. David I. Shapiro: Yes, sir.

Justice Arthur J. Goldberg: (Inaudible)

Mr. David I. Shapiro: Yes, it does.

Justice Arthur J. Goldberg: (Inaudible)

Mr. David I. Shapiro: Well, there is I think a very substantial difference in this sense.

It is illegal under the Act to run -- it may be a violation of the Securities Exchange Act to operate a bucket shop in interstate commerce but the problem here is, is a completely different kind of situation.

In the one hand, you've got a problem involving the misconduct of a member.

And in the other, you have the Exchange superimposing upon the governmental agency charged with the responsibility in the area in the first instance.

Its standards of what the qualifications are for individuals to engage in this business.

And that does not involve member misconduct.

Justice Arthur J. Goldberg: (Inaudible)

Mr. David I. Shapiro: I think not, Your Honor.

Because there of course, who would be predicated upon his own knowledge of the operation that he was involved in.

And if he was involved in that operation, certainly, we have a case of member misconduct.

And precisely, that's what the Solicitor General was talking about when he was talking about the SEC's power under Section 19 (a) 3 of the Act.

Because 19 (a) 3 is clearly a section which goes to member misconduct, the Commission may remove from an exchange any member who with knowledge of the violation affects a nonmember's transaction.

What are we talking about?

We're not talking about the regulation or the regulation of nonmembers in this sense.

We're talking about member misconduct.

As a matter of fact, the Solicitor General and I are talking about the same thing, except we're saying it differently.

But it's in the saying it differently that makes all the difference in this case and makes it an easy case or makes it a difficult case.

Justice Byron R. White: Well, you -- then you're saying that the Exchange shouldn't second guess the NASD --

Mr. David I. Shapiro: That's right.

Justice Byron R. White: If the – it's the NASD which has also got the job of disciplining over-the-counter dealers --

Mr. David I. Shapiro: That's quite right --

Justice Byron R. White: Aren't they --

Mr. David I. Shapiro: -- but I say more than that.

I say because Congress was scrupulous in providing procedural due process for anyone who was subjected to broker-dealer registration revocation under the Act.

And they provided it when you are faced with the disciplinary proceeding by the NASD.

They provided it when you were faced with a disciplinary proceeding by the Securities and Exchange Commission, yet in this case where you have disciplinary proceedings against a nonmember on the basis of qualifications, there's no due process because the Exchange constitution and rules applies only procedural due process.

And I want to emphasize the word, only, only for members and absolutely none for nonmembers.

The Exchange made the representation at Congress.

Justice Byron R. White: We still have a minor question on the side to whether the Exchange does or doesn't have to have the same standards for its members in dealing with nonmembers of the NASD or the SEC.

Mr. David I. Shapiro: I appreciate that but let's take a look at the other side of the coin.

If the Exchange had the power that it says it has, and this Court gives it to him, it's got the power also to regulate the relations between members of the Exchange and members of other registered securities exchanges in connection with private wires relating to over-the-counter securities transactions or securities transactions on an exchange other than the New York Stock Exchange.

They can do that, too.

And I think it's quite clear that this other registered securities exchanges are in direct competition with the New York Stock Exchange.

And it seems to me inconceivable that Congress struck a balance here of permitting the New York Stock Exchange to regulate the conduct of its competitors.

And actually Congress did know such thing, because the balance that has been drawn by the Solicitor General is in our view an erroneous balance.

What he's talking about is a balance between protection of the investor and the rights of the individual broker-dealer.

That's not the balance to be drawn in this case.

The balance to be drawn is the rights involved in the antitrust laws competition and the rights of self-regulation of the Exchange's.

The Solicitor General can't draw that balance.

I can't draw it and this Court can't draw it.

Congress rule it and they drew it in Section 6 (b) of the 1934 Act, where they said and I quote, “No registration shall be granted or remain enforced unless the rules of the exchange include provision for the expulsion, suspension, or disciplining of a member for conduct or proceeding inconsistent with just and equitable principles of trade.”

Member and member misconduct is precisely the extent to which there can be any conceivable repugnancy between the Securities Exchange Act and the Sherman Antitrust Act.

Justice John M. Harlan: Could the Exchange contravene the rule saying all the members shall have wires -- extended wire service except for the nonmembers so that it would be held with wire services to the nonmembers?

Mr. David I. Shapiro: I believe they might say that they couldn't extend wire connections to another member where that wire was used exclusively for carrying on transactions in securities listed for trading on the New York Stock Exchange but you even have problems in that area, substantial problems.

Because as I understand it, you must have reason of -- the question then would turn on an AP application, whether or not there is -- anybody can enter and become a member of the New York Stock Exchange.

And you have a very serious Associated Press problem in that kind of context.

But I think there possibly might be some sort of rep -- of restriction in that area with of course these underlying problems at present.

Justice Hugo L. Black: May I ask?

Are you saying if I get the full implication which is, are you saying that the Exchange is without power under this Section 6 -- in 19 (a), whatever the one you just raised.

Mr. David I. Shapiro: Under Section 6 (b), to do what they did in this case.

Justice Hugo L. Black: Are you saying that while they have power to regulate their members with reference to their members conduct in most respect, they cannot regulate their members conduct in such ways to bar -- bar them from dealing with someone deemed to be bad and bad for the trade?

Mr. David I. Shapiro: That's right, Your Honor.

If and this is the practical problem, the Securities and Exchange Commission has said they are not bad for the trade.

What we're saying is this --

Justice Hugo L. Black: What do you say about the approval of the rule by the Commission that it didn't (Voice Overlap)?

Mr. David I. Shapiro: It didn't give them any antitrust immunity because that wasn't the basis upon which the Commission does not purport, as I understand it.

It does not purport to grant any antitrust immunity when it approves the rules and of Exchange.

Justice Hugo L. Black: It's getting down to the actual conduct.

Mr. David I. Shapiro: Yes.

Justice Hugo L. Black: Are you saying that this rule that they had didn't show on its face that they would attempt to regulate their members in that dealing with nonmembers?

Mr. David I. Shapiro: No.

What they would attempt to regulate their members, yes.

But they wouldn't apply it in such a way as to pass on the qualifications of nonmember dealings with members.

That I think --

Justice Hugo L. Black: But they couldn't do that without regard to how bad the man more -- as I'm assuming or that might be --

Mr. David I. Shapiro: That's correct.

Justice Hugo L. Black: -- engaged in a lawless business or a company might be dedicated to violating the law that the Exchange could not pass a regulation which barred its members from dealing with them.

Mr. David I. Shapiro: Well, I would think that that would be correct unless we had what was involved under 6 (b), member misconduct.

Now, for example, let me put it this way, if in fact there were relationships between an illegal operation at a member firm and the member firm was aware of it, this of course is member misconduct.

What the Exchange is seeking is an installation of its members but that installation is provided in the first instance under the scheme of this statute by the Securities and Exchange Commission.

Any other way, any other construction of these statutes, and it's really a very comprehensive one, would throw the complete scheme of regulation in my view, out of kilter.

I want to say one other thing with regard to the question of remedy.

I see my time is up.

Justice Hugo L. Black: (Voice Overlap) to despite your statement is simple, now the first thing (Inaudible) and I presently believe, do I understand you then to say that while they can regulate their member's misconduct, they cannot bar their members from dealing with somebody else on account of -- to a nonmember on account of their misconduct?

Mr. David I. Shapiro: That is correct as long as it doesn't involve member misconduct itself.

If it --

Justice Hugo L. Black: You say they can't make member misconduct define it as being dealing with nonmembers --

Mr. David I. Shapiro: Who have a bad reputation?

Justice Hugo L. Black: Who are bad -- who are bad themselves.

Mr. David I. Shapiro: Who have a bad reputation.

If it's an act that's involved as distinguished from reputation, you've got a completely different problem.

Justice Hugo L. Black: And you say the Commission could not approve such a rule, do you?

Mr. David I. Shapiro: I don't think the Commission could approve such a rule.

But they couldn't envision that it would have such an application.

Justice Byron R. White: Well, this is considerably broader than I understood you awhile ago.

Let's assume that the -- let's assume that someone -- that some former dealer had his license revoked and broker-dealer had his license revoked but he goes on dealing.

Now, can -- can we say then I suppose that the Exchange cannot be this cumbersome.

Mr. David I. Shapiro: No, I would say that in that case the Exchange can.

Justice Byron R. White: Because this member is supposed to know?

Mr. David I. Shapiro: No, because the mem -- once the member had been put on notice --

Justice Byron R. White: I know but you'll notice he just goes on.

Mr. David I. Shapiro: Well, if the -- I think that if the member does not know then it does not involve member misconduct.

But if a member does know and he continues to do so after he's been given notice, you have a question perhaps of member misconduct.

What I'm saying is I'm trying to restrict it to this particular kind of situation where we have a question of reputation.

Justice Byron R. White: So let's assume that -- you would say then that the broker-dealer who has had suspension put on him three times in a row within a year for a temporary period that even then the Stock Exchange did not keep its member from dealing with that person?

Mr. David I. Shapiro: What it could do would -- as long it could keep -- put the member unnoticed and if that member acted in such a way as not to violate any rules of the Exchange or ethical business conduct in his relation with that nonmember, the Exchange has no power to cut off the wire in that instance.

Justice Byron R. White: Well, you're then saying that the Exchange hasn't got power to order him to quit -- to cut off the wire?

Hasn't that the -- hasn't that the Exchange -- the Exchange hasn't got the power to waive his fellow than cease doing business with this --

Mr. David I. Shapiro: With a nonmember who has a bad reputation.

That is correct.

Justice Hugo L. Black: Just call it a bad man?

Mr. David I. Shapiro: That's right.

That's my position.

I wanted to make one more statement.

I realize my time is over --

Justice Arthur J. Goldberg: Mr. Shapiro, suppose the Exchange has a specific rule (Inaudible)

Mr. David I. Shapiro: My answer would be the same because that's precisely the criteria that's covered under Section 15 of the broker-dealer registration provisions of the 1934 Act, and in such a case, it may be.

Let's take for example, the man was adjudged, had a conviction for a felony 20 years before.

The SEC's provision, the provision set forth in the statute is conviction of 10 years or less.

If the Stock Exchange wanted to impose a requirement of 20 years, high aid as between the conviction and the entering into the business, my answer would be precisely the same.

Now, the point I did want to make is this, and that's with regards to this question of remedy and I can make this very clear.

The SEC's general counsel in response to a question put to him by Judge Hays in the Court of Appeals for the Second Circuit expressly told that court that these petitioners had no remedy before the Securities and Exchange Commission.

That's my argument.