MFS Securities Corp. v. New York Stock Exchange, Inc.

In 1993, two floor brokers for MFS Securities Corporation (MFS) (plaintiff) engaged in a stock-trading practice known as flipping, or trading for eights. The practice entailed purchasing or selling a security on behalf of a customer and then immediately selling or purchasing that same security for a profit of one-eighth of a point. The one-eighth of a point was due to the spread between bid and ask quotes for the security. MFS’s brokers profited from flipping and typically shared their profits with their customers. In 1997, the Securities and Exchange Commission (SEC) and the Department of Justice launched an investigation into flipping. Subsequently, on February 25, 1998, the federal government arrested several MFS brokers (plaintiffs) and charged them with violating § 11(a) of the Securities Exchange Act of 1934 (Exchange Act). That same day, the New York Stock Exchange (NYSE) (defendant) expelled MFS’s membership and discontinued MFS’s phone lines on the NYSE floor. The NYSE’s actions were taken without providing MFS or its brokers with any notice or an opportunity to be heard. On July 27, 2000, MFS filed a lawsuit against the NYSE in federal district court. MFS claimed that the NYSE committed breach of contract as well as a violation of the Sherman Antitrust Act (Sherman Act). Specifically, on the Sherman Act claim, MFS argued that the NYSE’s termination of MFS’s membership without notice or hearing constituted an unlawful group boycott. On the breach-of-contract claim, MFS alleged that its membership agreement with the NYSE required that the NYSE fairly and accurately advise MFS of NYSE rules and that the NYSE failed to do so. The NYSE moved to dismiss. Among other defenses, the NYSE argued that MFS failed to exhaust its administrative remedies. The district court granted the motion to dismiss, and MFS appealed.