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A U.S. district court judge in the Northern District of California Tuesday threw out a lawsuit by the securities industry against the California Judicial Council over the state’s new ethical rules for arbitrators. Senior U.S. District Judge Samuel Conti’s decision extracts the federal courts from a legal morass pitting the New York Stock Exchange and the National Association of Securities Dealers arbitration arm against the elite of the state judiciary. Conti cited 11th Amendment prohibitions on suing states and their agencies in federal courts as the basis for his decision. Though even the chief lawyer for the Judicial Council, Joseph Cotchett, says it’s likely the case will be appealed, the judge’s decision is a tough blow to efforts by securities dealers and the stock exchange to halt California’s rules. And it’s likely a vindication for members of the council who were outraged when plaintiffs served them in their own courtrooms. Among those named in the suit were two California Supreme Court justices, Ronald George and Marvin Baxter. “I think the plaintiffs, procedurally, made some initial mistakes with serving judges in their courtrooms,” said Cotchett of Cotchett, Pitre, Simon & McCarthy in Burlingame, Calif. “However, once we got to a courtroom, the lawyering was superb.” Cotchett added there was “no question” the plaintiffs would appeal to the 9th U.S. Circuit Court of Appeals. In fact, he said he could see the matter going all the way to the U.S. Supreme Court. One of the lawyers for the Stock Exchange, Douglas Henkin of Milbank, Tweed, Hadley & McCloy in New York, refused to comment, referring all questions to the exchange’s spokesman, Ray Pellecchia, who also refused. Pellecchia said there would be no discussion until after the Stock Exchange had reviewed the decision. NASD spokeswoman Nancy Condon also refused comment until after the group reviewed Conti’s ruling. Conti’s 21-page opinion ceded several points in the plaintiffs’ favor. He said that his court has subject matter jurisdiction and that the plaintiffs presented evidence that the new rules caused immediate harm to their businesses. And he acknowledged his opinion “puts the plaintiffs in a somewhat awkward position.” “Because the state law depends upon private implementation,” Conti wrote, “plaintiffs will be unable to find a government defendant to sue and will have no choice but to wait for other parties to assert these arguments as defenses against the vacatur of an arbitration award.” However, those gimmes were trumped by Conti’s main point, that the 11th Amendment extends to the Judicial Council and its statewide policies. “The Judicial Council … enjoys the full protection of the 11th Amendment and cannot, without its consent, be named as a defendant,” Conti said. The Judicial Council implemented the new rules after the passage of legislation carried by state Sen. Martha Escutia, D-Montebello, and conceived by California Gov. Gray Davis and Chief Justice George. The rules require, among other things, that arbitrators disclose financial relationships or other conflicts of interest between themselves and parties in disputes. Failure to follow the standards could result in vacating an arbitration award. Cotchett said other states already have their own arbitration rules, so that wasn’t the plaintiffs’ problem. What they didn’t like, he said, was that California’s are so strict. “Obviously we’re delighted because it is hard to conceive of a lawsuit that can attack state arbitration rules in the manner in which they did it,” Cotchett said. “They essentially said they’re too busy and too important to comply with the state arbitration rules.” The stock exchange and securities dealers sued in July after the council adopted the standards. The plaintiffs said their own rules for arbitrators were good enough and that the Securities Exchange Act of 1934 preempted California’s new rules. The case is NASD Dispute Resolution Inc. v. Judicial Council of California, 02-3486.

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