Silver v. New York Stock Exchange

RESPONDENT:New York Stock Exchange
LOCATION:Spokane Filling Station

DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 373 US 341 (1963)
ARGUED: Feb 25, 1963 / Feb 26, 1963
DECIDED: May 20, 1963

Facts of the case


  • Oral Argument – February 26, 1963
  • Audio Transcription for Oral Argument – February 26, 1963 in Silver v. New York Stock Exchange

    Audio Transcription for Oral Argument – February 25, 1963 in Silver v. New York Stock Exchange

    Earl Warren:

    Number 150, Harold J. Silver et al., Petitioners, versus New York Stock Exchange.

    We’ll wait just a moment.

    Mr. Shapiro.

    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.

    John M. Harlan II:

    Could I ask you a question?

    David I. Shapiro:

    Yes, sir.

    John M. Harlan II:

    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?

    David I. Shapiro:

    I believe that they do, Your Honor but —

    John M. Harlan II:

    And you say that this application was made by your client?

    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 —

    Potter Stewart:

    No application at all was made with respect to the —

    David I. Shapiro:

    Propriety sir.

    Potter Stewart:

    With propriety (Voice Overlap) —

    David I. Shapiro:

    That’s correct, sir.

    Apparently they didn’t think they needed one.

    Potter Stewart:

    Is that — is there any explanation for that in the record?

    David I. Shapiro:


    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.

    David I. Shapiro:

    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.

    John M. Harlan II:

    Was there any cause of action alleged here beyond the treble damage action?

    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 —

    John M. Harlan II:

    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?

    David I. Shapiro:

    That’s correct, Your Honor.

    On the foot —

    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.

    David I. Shapiro:

    I couldn’t agree with Your Honor more.

    David I. Shapiro:

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

    We haven’t got any place.

    Potter Stewart:

    It would follow from the Court of Appeals’ reasoning, I should (Voice Overlap) —

    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.

    Byron R. White:

    If there was —

    David I. Shapiro:

    No, it did not say it wasn’t.

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

    Byron R. White:

    Well, it suggested that the Court investigate the —

    David I. Shapiro:

    And find some other law.

    William J. Brennan, Jr.:

    Well, because of the implication that there might be some equitable remedy charged (Voice Overlap) —

    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.”

    Arthur J. Goldberg:

    If the Exchange have taken this action against the members, is it all right?

    David I. Shapiro:

    Well, it —

    Arthur J. Goldberg:

    On the same reference?

    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.

    Arthur J. Goldberg:

    So that this will be under the Sherman Act for members or on equitable theory that they say —

    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.

    David I. Shapiro:

    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.”

    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).

    David I. Shapiro:

    That’s right.

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

    Byron R. White:

    Yes, and that some — there is a — no joint action against a known crook for example, would be immunized.

    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.

    Arthur J. Goldberg:

    Well, the member [Inaudible]

    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.

    Arthur J. Goldberg:

    Exchange has the power to —

    David I. Shapiro:

    It has such a rule, I believe.

    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.

    David I. Shapiro:

    No, I do not question the power of the Exchange to police the Exchange.

    David I. Shapiro:

    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.

    Arthur J. Goldberg:

    How could you prepare in argument so far as [Inaudible]

    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).

    Arthur J. Goldberg:


    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.

    Arthur J. Goldberg:

    Doesn’t the District Court also say [Inaudible]

    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.

    Hugo L. Black:


    David I. Shapiro:

    Yes sir.

    They can —

    William O. Douglas:

    Under the statute, the antitrust —

    David I. Shapiro:

    Are you asking me, did they sir?

    William O. Douglas:

    Did they –-

    David I. Shapiro:

    They could.

    They have that power under the statute.

    They of course did not.

    William J. Brennan, Jr.:

    Well, if that — and if — is that power comprehends action which they found in violations could affect these wire services?

    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.

    Earl Warren:

    Mr. Solicitor General.

    Archibald 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.

    Archibald Cox:

    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.

    Arthur J. Goldberg:


    Archibald 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.

    Potter Stewart:

    Do I understand from your brief that the Commission thinks that it has reviewing power over —

    Archibald 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.

    Potter Stewart:

    I read the respondent’s brief to say so, —

    Archibald Cox:

    Well —

    Potter Stewart:

    — and don’t you imply that your brief said so, does it — that your brief says the Commission thinks so.

    Archibald Cox:

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

    Potter Stewart:

    Well, your statement was that nobody said so, right?

    Archibald Cox:

    I said nobody could say so, nobody could sensibly say so.

    I think the —

    Potter Stewart:

    And as I — what’s the Commission’s attitude about this, could you tell us?

    Archibald 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.

    Archibald Cox:

    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.


    Archibald Cox:

    I come now —

    Potter Stewart:

    Workmen compensation and with that, I think that’s certainly obvious, isn’t it?

    Securities Exchange Commission has had no —

    Archibald Cox:

    There’s no — there’s no — there’s machinery for challenging the general rule.

    Potter Stewart:


    Archibald Cox:

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

    Potter Stewart:

    So, certainly there was no machinery to give monetary compensation?

    Archibald Cox:

    And there’s certainly no machinery for giving —

    Potter Stewart:

    But the —

    Archibald 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.

    Hugo L. Black:

    In doing what?

    Archibald 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.

    Archibald Cox:

    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.

    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) —

    Archibald 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.

    Potter Stewart:

    Well we — the way you stated it, it would if you agree that it was the duty of the –.

    Archibald Cox:

    Oh yes, yes.

    Potter Stewart:

    And the — but the petitioner says (Voice Overlap) —

    Archibald 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.

    What you —

    Archibald 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.

    William J. Brennan, Jr.:

    Well, you’re going to spell out what you mean by in truth?

    Archibald Cox:

    I meant very literally, in truth —

    William J. Brennan, Jr.:

    Not with just an honest belief that you place (Voice Overlap) —

    Archibald 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?

    Potter Stewart:

    Does the statute, whether wisely or unwisely, doesn’t the statute give the Commission power to review any such rule?

    Archibald Cox:

    Well, perhaps, Justice Stewart, I’d rather leave (Voice Overlap) —

    Potter Stewart:

    19 (b) and 23 (a), I’m talking about.

    Archibald 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 —

    Potter Stewart:

    Well, but it’s —

    Archibald Cox:

    — and dealt with —

    Potter Stewart:

    It’s not — if it later decides that any of those rules (Inaudible) — has power to change, doesn’t it?

    Archibald 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.

    Arthur J. Goldberg:


    Archibald 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.

    William J. Brennan, Jr.:

    Now, what’s the — what’s the cause of action?

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

    Archibald Cox:

    No, no, no on the contrary.

    Archibald Cox:

    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.

    Earl Warren:

    Very well, you have time, you may do it in the morning.

    Archibald Cox:

    Well, either way, if the Court please.

    Earl Warren:

    Whichever you wish (Voice Overlap) —

    Archibald Cox:

    Well, I’ll finish — I’ll finish now then.

    Earl Warren:

    Very well.

    William J. Brennan, Jr.:

    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?

    Archibald 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 —

    Byron R. White:

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

    Archibald Cox:


    Byron R. White:

    And you — do you — in that case however, you would still exclude them to treble damages?

    Archibald 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) —

    William J. Brennan, Jr.:

    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 —

    Archibald Cox:

    That they reached reasonable conclusion.

    William J. Brennan, Jr.:

    Even though it may have been the wrong?

    Archibald 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.

    Archibald Cox:

    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.

    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?

    Archibald 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.

    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.

    Archibald 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.

    Hugo L. Black:

    Malicious interference of the contract does not mean (Voice Overlap) —

    Archibald Cox:

    Legal malice, intentional interference with contract.

    Hugo L. Black:


    Archibald 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.

    Earl Warren:

    We’ll adjourn.