United States Court of Appeals — Fifth Circuit

David H. Disraeli
v.
Rotunda, Grauer, Morgan & Six Unnamed Defendants

Case No. 05-51418  |  Filed February 24, 2006
Appellant's Brief — Pro Se
Part of an ongoing series — D.C. Circuit No. 08-1037 →  |  SCOTUS Petition No. 09-941  |  WhoIsDavidDisraeli.com

What This Case Was About

On November 6, 2002, three attorneys employed by the Texas State Securities Board issued an "Emergency Cease and Desist Order" against David Disraeli — a career securities professional with a 17-year, blemish-free record — without prior notice, without a hearing, and without ever having appeared before a court of any kind. The order accused him of fraud in the offer of securities and was published worldwide on the Board's website before he was even served. Within hours, the order became a permanent entry in Disraeli's CRD file — the national securities registration database — viewable by every employer and regulator in the industry.

The investment in question was a proposed fee-simple real estate development in Horseshoe Bay, Texas: ten buildings with four units each, structured so that a homeowners association would split rental income among owners. Disraeli and the developer believed the offering represented fee-simple real property — not a security. No investor had been solicited for money. No entity existed into which anyone could have invested. The Board's own undercover investigator, Letha Sparks, made false representations to enforcement attorney Joseph Rotunda: she claimed she had been "offered" a $495,000 investment by phone, while omitting that she had been told the project could not move forward without six identified investors — none of whom had been found.

"The legal hurdle is higher for a traffic stop in this country than for issuing ex-parte injunctions at the Texas State Securities Board." — Appellant's Brief

Disraeli filed suit under 42 U.S.C. §1983, alleging that the Defendants' actions violated his Fourteenth Amendment due process rights. The Defendants' first move was to seek a stay of all discovery — arguing that absolute immunity is immunity from the burdens of suit itself, not merely from judgment. Disraeli, proceeding pro se, successfully lifted the stay. The Defendants then substituted their attorney, replacing Lindsay Ayres Todd with Russ W. Harris of the Texas Attorney General's General Litigation Division. What the state had anticipated would be a motion to dismiss resolved in weeks stretched into 26 months of active litigation.

Disraeli was permitted to depose each named defendant for one hour. At the deposition of the state's attorneys — men who had issued an order accusing him of fraud — an armed guard was present in the room. The district court also denied Disraeli's motion for appointment of counsel, meaning he navigated the full summary judgment record without legal representation. The docket entry for his Notice of Appeal confirms: "Appeal Transcript NOT requested as there were no hearings." No oral argument was ever permitted at any stage below.

The district court granted summary judgment on September 13, 2005, awarding all three Defendants absolute immunity under the Butz v. Economou framework. This appeal challenged that ruling on seven distinct grounds: that Defendants lacked jurisdiction over what was a real estate transaction; that their functions were investigative and administrative rather than prosecutorial or quasi-judicial; that the Butz factors were misapplied; that the emergency order procedure failed the Mathews v. Eldridge due process test; and that Disraeli's consent to a subsequent agreed order was the product of undue influence in the absence of an impartial forum.

At the time of filing, the statute enabling the Board to issue its own injunctions — §23.2 of the Texas Securities Act — had never been challenged in any court. The only testimony in its favor during the legislative session had come from the Securities Commissioner herself.

Core Arguments — Seven Points of Error

Point I — Jurisdiction

The Defendants lacked jurisdiction to regulate what was a real estate transaction. Under the Howey test, no "security" was present: no money was solicited, no common enterprise had been formed, and investors were told they would manage their own homeowners association. Without jurisdiction, no immunity applies.

Point II — Butz Misapplied

The district court misapplied the six-factor Butz analysis. None of the Defendants appeared before a court; none issued subpoenas or took depositions; and by their own sworn testimony, each performed investigative or administrative functions. Defendant Grauer admitted under oath that issuance of the emergency order was an administrative act.

Point III — Due Process Failure

The emergency order procedure fails the Mathews v. Eldridge test. The statute requires no showing of reasonable suspicion, probable cause, or preponderance of the evidence. Defendant Morgan admitted under deposition that he never considered the effect of the order on Disraeli or his family before signing it.

Point IV — Not Prosecutors or Judges

Rotunda and Grauer were investigators, not prosecutors — they had no statutory authority to issue the order. Only the Commissioner could do so. Morgan "read, considered, and signed" the order — but never ruled on evidence, subpoenaed witnesses, or held a hearing. This is not a judicial function.

Point V — Exhaustion Not Required

Exhaustion of administrative remedies is not a prerequisite to a §1983 action. Patsy v. Florida Board of Regents (1982). The very State power that damaged Disraeli extended into the administrative appeals process — a process in which no respondent had ever prevailed before the incumbent commissioner.

Points VI & VII — Procedural Errors

The district court disposed of the case before Disraeli could amend to name an identified "Doe" defendant. And Disraeli's claim of undue influence in signing the consent order was never properly addressed — the court refused general discovery and oral argument while deposition scope was narrowly restricted.

The Consequences of the Order — And Why They Cannot Be Undone

CRD Record
Permanent — Public — Cannot Be Expunged
Form U4 Disclosure
Two permanent "yes" answers regardless of outcome
Employment
Denied by a dozen securities firms after the order
Hearing Record
No contested emergency order hearing had ever been held
Commissioner
No respondent had prevailed before the incumbent commissioner in a contested case
Legal Standard
Lower than a traffic stop — no probable cause required

Even after the original emergency order was set aside and replaced by an agreed order, the original fraud allegations remained a permanent and public part of Disraeli's securities record. No expungement mechanism exists in the Texas Securities Act. The SSB's enforcement attorney, Rotunda, boasted that the Board had "never lost" at a hearing — a claim that was technically true because no such hearing had ever been held.

Diblasio v. Novello, No. 02-9298 (2d Cir. 2003) — Controlling Analogy

"By blending the roles of investigator, prosecutor, and judge, [the statute] unduly risks compromising the independence and neutrality of the commissioner's judgment, and abrogating the checking function achieved in the judicial system by separating investigative, prosecutorial, and judicial staffs."

Procedural Timeline

October 15, 2002
Disraeli Places Advertisement — Undercover Investigator Responds
Disraeli places a display ad in the Austin American-Statesman seeking investor interest in the Charterhouse at Horseshoe Bay project. SSB investigator Letha Sparks responds, later misrepresenting to Rotunda that she had been "offered" a $495,000 investment.
October 2002
SSB Inspection — Disraeli Cooperates and Halts Advertising
Rotunda sends an inspection team to Disraeli's office and contacts his broker-dealer, James Wheeler and Company. Disraeli informs Rotunda that no investor funds had been collected and voluntarily ceases all advertising. Rotunda never contacts Venture Interests, Inc. — the project developer — despite its prominent mention in all sales materials.
October 31, 2002
Disraeli Withdraws His Securities Registration
Disraeli withdraws his registration from James Wheeler, the NASD, and the State of Texas — effectively removing himself from the securities business entirely before any order was issued.
November 6, 2002
Emergency Cease & Desist Order Issued — Without Notice or Hearing
Six days after Disraeli withdrew his registration, Defendants issue an Emergency Cease and Desist Order under §23.2 of the Texas Securities Act alleging fraud in the offer of securities. The order is published on the Board's website and entered into Disraeli's national CRD record before he is served. He had 17 years of blemish-free regulatory history.
November 2002 – Early 2003
Hearing Requested — Settlement Sought — Rotunda's Admissions
Disraeli retains counsel and requests a hearing while pursuing settlement. Rotunda admits there was "no fraud and no offer" since no investor had committed funds. Rotunda boasts the Board has "never lost" at an emergency order hearing — because, as Disraeli later discovers, no such hearing had ever been held. The Board had also never agreed to modify or set aside an emergency order.
April 2, 2003
Agreed Cease & Desist Order Entered
Days before a scheduled ALJ hearing, Rotunda offers to settle. Disraeli, then without counsel, negotiates removal of the fraud allegation and insertion of "neither admitted nor denied" language. The original fraud allegations, however, remain a permanent part of his CRD record and are never expunged.
November 5, 2004
§1983 Suit Filed — Defendants Move to Dismiss
Disraeli files suit in federal district court. Within weeks, all three Defendants file a motion to dismiss — expecting swift resolution on immunity grounds. Disraeli's motion for appointment of counsel is denied on December 16, 2004. He will navigate the entire case without legal representation.
January 2005
Defendants Stay Discovery — Disraeli Gets It Lifted
The Defendants successfully stay all discovery, arguing that absolute immunity is immunity from the burdens of suit itself — not merely from judgment. Disraeli challenges the stay. On April 19, 2005, the court lifts it. The Defendants respond by substituting their attorney: Lindsay Ayres Todd is replaced by Russ W. Harris of the Texas AG's General Litigation Division. What they expected to resolve in weeks has become a contested federal case.
April – May 2005
Depositions — One Hour Each — Armed Guard Present
The court permits Disraeli to depose each named Defendant for one hour and allows each to submit affidavits. At the deposition of the state's enforcement attorneys — men who had issued an order accusing him of fraud — an armed guard was stationed in the room. No further discovery was permitted. There were no oral hearings at any stage in the district court.
September 13, 2005
District Court Grants Summary Judgment — Absolute Immunity
Twenty-six months after filing — far longer than Defendants anticipated — the district court grants absolute immunity to all three Defendants under Butz v. Economou. No oral argument is permitted. Disraeli is ordered to bear all costs. The court performs no Howey analysis to determine whether a security was even present.
October 12, 2005
Notice of Appeal Filed — Fifth Circuit No. 05-51418
Disraeli timely files his notice of appeal within 30 days of final judgment. The Fifth Circuit has jurisdiction under 28 U.S.C. §1291.
February 24, 2006
Appellant's Brief Filed — Pro Se
Brief filed pro se raising seven points of error on absolute immunity, jurisdiction, due process, and procedural denial of rights. The brief is 8,125 words. At issue is an untested Texas statute — §23.2 of the Texas Securities Act — that no court has ever reviewed.
2007–2008
SEC Administrative Action — D.C. Circuit Appeal
Separately, the SEC brings an administrative enforcement action against Disraeli arising from related conduct. He appeals the Commission's final order to the D.C. Circuit. See D.C. Circuit No. 08-1037.
2009
SCOTUS Petition — No. 09-941
Following the D.C. Circuit's decision in the parallel SEC appeal, Disraeli petitions the United States Supreme Court. See full SCOTUS petition.
June 27, 2024
SEC v. Jarkesy — Constitutional Vindication
The Supreme Court holds 6-3 in SEC v. Jarkesy that the use of in-house administrative tribunals to adjudicate fraud claims violates the Seventh Amendment right to jury trial. The core constitutional framework Disraeli argued for over two decades — that securities regulators cannot be investigators, prosecutors, and judges in the same proceeding — is now the law of the land.

Full Text of the Appellant's Brief

Reproduced from the original filing. Case No. 05-51418, filed February 24, 2006. Court filings are public record.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

 

Case No. 05-51418

 

DAVID HENRY DISRAELI,

Plaintiff-Appellant

 

v.

 

JOSEPH JASON ROTUNDA, DAVID ANDREW GRAUER,

JOHN ROBERT MORGAN, and Six Unnamed Defendants,

Defendants-Appellees

 

On Appeal from the United States District Court

for the Western District of Texas

 

BRIEF FOR PLAINTIFF-APPELLANT

Filed: February 24, 2006

CERTIFICATE OF INTERESTED PARTIES
The undersigned Plaintiff, proceeding pro se, certifies that the following listed persons and entities as described in the fourth sentence of Rule 28.2.1 have an interest in the outcome of this case. These representations are made in order that the judges of this court may evaluate possible disqualification or recusal.
Parties:
Plaintiff-Appellant: David Henry Disraeli
Defendants-Appellees: Joseph Jason Rotunda, David Andrew Grauer, John Robert Morgan
Attorneys:
Plaintiff-Appellant: None — Pro Se
Defendants-Appellees: Mr. Russ Harris, State Attorney General's Office of Texas, P.O. Box 12548, Capitol Station, Austin, TX 78711
STATEMENT REGARDING ORAL ARGUMENT
The major issue in this appeal is whether the Defendants are entitled to absolute immunity for their roles in the issuance of an ex-parte Cease and Desist Order and whether material issues of disputed fact remain. This case involves elements of highly complex securities laws, administrative law, due process, protected property interests, and an untested issue of whether securities regulators can claim immunities for issuing injunctions outside of the normal judicial system. Plaintiff believes that oral argument will aid this Court in the disposition of the issues presented.
JURISDICTIONAL STATEMENT
The District Court had jurisdiction under 42 U.S.C. §1983 and 28 U.S.C. §1331. It granted Defendants' motion for summary judgment on September 13, 2005, finally disposing of all claims. Plaintiff timely filed his notice of appeal on October 12, 2005. This Court has jurisdiction under 28 U.S.C. §1291.
QUESTIONS PRESENTED
I. Did Defendants have legal jurisdiction to take the actions complained of, or does a disputed issue of material fact exist as to jurisdiction?
II. Should absolute immunity extend to enforcement attorneys at the Texas Securities Board for actions taken in the issuance of a regulatory, ex-parte administrative order?
III. Is the issuance of an ex-parte order by the State Securities Board considered the "initiation of litigation or adjudication" described by the Supreme Court?
IV. Does the appeals process for Emergency Cease and Desist Orders provided by the Texas Securities Act and the Texas Government Code sufficiently curb unconstitutional conduct?
V. Were the Defendants' actions investigative, administrative, or prosecutorial in nature?
STATEMENT OF THE CASE
This is an appeal from the final judgment of a civil case. It involves the actions of three employees of the Texas State Securities Board (hereafter "SSB"). The actions in question relate to the investigation for and the issuance of an ex-parte administrative order without notice or hearing. The Plaintiff, David Disraeli, filed this case under 42 U.S.C. §1983 alleging that these actions violated his rights to due process in contravention of the 14th Amendment.
Defendants-Appellees (hereafter "Defendants") did not answer but filed a motion to dismiss which was later converted to a motion for summary judgment. The court then granted summary judgment in favor of Defendants after allotting absolute immunity to all three Defendants.
The Parties: Plaintiff-Appellant David Disraeli is a securities professional who began his career in November of 1985. Defendants-Appellees are three attorneys employed by the Texas Securities Board. Joseph Jason Rotunda was employed as an enforcement attorney. David Grauer was employed as the Director of Enforcement, and John Morgan was employed as the Deputy Securities Commissioner.
Disraeli's Rights: David Disraeli has a protected property interest in his professional reputation and his business name. Disraeli's property interest includes his right to work in his chosen profession.
Defendants Deprive Disraeli of His Rights: On November 6, 2002, Defendants summarily disbarred Plaintiff from the securities profession by issuing an administrative order called an "Emergency Cease and Desist Order" against Disraeli thereby accusing him of securities fraud and enjoining him from certain acts and practices deemed to represent immediate and irreparable harm to the public. The order was published worldwide via the Internet and represented a finding of guilt. A summarized version of the order became a permanent part of Disraeli's CRD file — the securities record operated by the NASD — regardless of any future disposition. In addition, Defendants' actions will permanently require that Disraeli answer "yes" to two questions on his Uniform Securities Application regardless of any future disposition.
Disposition in the Court Below: Disraeli filed suit in Federal Court under 42 U.S.C. §1983 on November 5, 2004. After the court received briefings, the magistrate recommended the dismissal of all claims on the basis that each defendant was entitled to absolute immunity under the "Butz" test articulated by the Supreme Court in Butz v. Economou, 438 U.S. 478 (1978), and various Fifth Circuit cases relying on Butz.
STANDARD OF REVIEW
This Court reviews decisions granting summary judgment de novo, affirming only if "there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c).
STATEMENT OF THE FACTS
David Disraeli is a career securities professional. At the time of the order he had a blemish-free career spanning 17 years with no customer complaints or regulatory actions. Disraeli had passed the NYSE Series 7 and NASD Series 24 exams and was a Certified Financial Planner in good standing.
In October of 2002, Disraeli was employed by James Wheeler and Company, Inc. as an NASD Registered Principal. He was also employed by Venture Interests, Inc., a Dallas-based real estate developer, to assess the viability of a proposed real estate project. His duties included evaluating the viability of the project as a whole and the potential receptivity of investors. The real property development was to be a senior living complex in an upscale resort area of Texas known as Charterhouse at Horseshoe Bay. The project was to have ten buildings with four units each to be rented to individuals. The developer in conjunction with Disraeli developed a concept of selling each unit as a separately platted, fee-simple piece of real property while spreading the risk of vacancies by proposing that the homeowners association split all the rental income among the owners. Using this novel approach, each owner would have a greater modicum of control over the investment and tax benefits not available through limited partnerships. It was the developer and Disraeli's belief that this investment represented fee-simple real estate.
On October 15, 2002, Disraeli placed a display advertisement in the Austin American-Statesman seeking investor responses. On one particular day, an investor called for information about the proposed project and was given oral and written information. The investor turned out to be Ms. Letha Sparks, an investigator with the Texas State Securities Board. Ms. Sparks communicated the content of her conversation with Disraeli to Defendant Joe Rotunda and forwarded the written material provided to her to Rotunda. Ms. Sparks however made false statements to Rotunda that she had been "offered" a $495,000 investment over the telephone. Ms. Sparks also failed to mention that she was told that the project could not move forward without six investors and that none had been identified.
Rotunda then contacted Disraeli's NASD broker/dealer, James Wheeler and Company, and spoke with the compliance supervisor. Rotunda discovered that the real estate project was not sponsored by or offered through James Wheeler. Rotunda then sent an inspection team to Plaintiff's office to conduct an examination of his securities business. During this time Disraeli contacted Rotunda to determine his concerns. Rotunda informed Plaintiff that the real estate project appeared to be a security. Disraeli then informed Rotunda that no investor funds had been collected and that the project was still in the due diligence phase. Disraeli also informed Rotunda that he considered the project a real estate investment but would cease all advertising.
Defendants did not ask James Wheeler and Company to halt Disraeli's activities and did not contact Venture Interests, Inc., the sponsor of the real estate project — even though Venture Interests was prominently mentioned in the sales material. On October 31, 2002, Plaintiff withdrew his securities registration from James Wheeler, the NASD, and the State of Texas. On November 6, 2002, without any further communication with Disraeli, Defendants issued an Emergency Cease and Desist Order under §23.2 of the Texas Securities Act.
The order alleged fraud in the offer of securities and ordered Disraeli to cease offering the real estate investment and to cease operating as an unregistered investment advisor. The order was published on the Board's website and a summarized version was entered on the NASD's CRD system. The order acted as a de-facto disbarment since any potential employer or regulator would see a declaration of guilt on the CRD system. Even though the order was ultimately set aside, the original allegations are a permanent part of Disraeli's securities file, a file available to the public.
Immediately after the order was issued, Disraeli retained counsel in order to address the securities board's concerns. During meetings with Rotunda, Disraeli avers that Rotunda and his superior determined that there was no fraud and no offer because nothing existed into which an investor could have invested. Disraeli's activities were simply seeking investor interest and comment. During these discussions, Rotunda boasted that the board had "never lost" at a hearing, that he personally was responsible for about 40% of the emergency orders issued, and that they had never agreed to modify or set aside an emergency order. Disraeli later discovered that the reason the board had never lost a hearing on an emergency order was because none had ever taken place.
On April 2, 2003, a new order was entered called an agreed cease and desist order. At the time of the April 2, 2003 order, Disraeli was no longer represented by counsel. Disraeli has since been denied employment with a dozen securities firms and has suffered irreparable harm and continues to suffer harm to his reputation.
LEGISLATIVE HISTORY OF §23.2 OF THE TEXAS SECURITIES ACT
§23.2 of the Texas Securities Act reads as follows: On the Commissioner's determination that the conduct, act, or practice threatens immediate and irreparable public harm, the Commissioner may issue an emergency cease and desist order to a person whom the Commissioner reasonably believes: (1) is engaging in or is about to engage in fraud or a fraudulent practice in connection with (A) the offer for sale or sale of a security; or (B) the rendering of services as an investment adviser or investment adviser representative; (2) has made an offer containing a statement that is materially misleading or is otherwise likely to deceive the public; or (3) is engaging or is about to engage in an act or practice that violates this Act or a Board rule.
Prior to the enactment of §23.2, the securities Commissioner was required to refer all civil and criminal matters, including civil injunctive matters, to the Attorney General's office, District Attorney, or U.S. Attorney for prosecution before a State or Federal Judge. During the 77th legislative session, the only person testifying in support of §23.2 was Denise Voigt Crawford, the acting securities commissioner. No one testified in opposition. Section §23.2 was signed into law allowing the Commissioner to enter her own injunctions without the involvement of a judge or neutral party. This statute has, to date, never been challenged.
ORGANIZATIONAL STRUCTURE OF THE TEXAS SECURITIES BOARD
The Texas Securities Board is created by the Texas Securities Act. The governor appoints five board members who serve staggered terms and the board hires the commissioner. All employees of the securities board, including those responsible for bringing enforcement actions, serve at the pleasure of the commissioner. Enforcement actions are generally recommended by the staff, approved by the director of enforcement, and issued by the commissioner or deputy commissioner. The respondent in an enforcement matter may contest the board's action through a hearing at the State Office of Administrative Hearings. These hearings are conducted before an administrative law judge who may only make a non-binding recommendation to the commissioner. The ALJ may rule on various motions but cannot hold anyone in contempt or compel the appearance of witnesses. The management of the Texas Securities Board is structured such that the investigator, prosecutor, and judge are all in the same office and at times their duties overlap.
SUMMARY OF ARGUMENT
This appeal is about absolute immunity and whether the lower court erred in its analysis of the facts and law regarding same. The doctrine of absolute immunity is a creation of common law. The Supreme Court has said that absolute immunity be allotted sparingly and has held that it should apply to three classes of officials (judges, legislators, and prosecutors), and certain administrative agency officials who share many of the same functions with judges and prosecutors. See Butz v. Economou.
As case law has developed, the courts have determined that not all acts of a prosecutor or judge are "quasi-prosecutorial" or "quasi-judicial," and therefore the only actions covered by absolute immunity are those "intimately associated with the judicial process," Imbler v. Pachtman, 424 U.S. 409, 430. For example, a prosecutor's investigative and administrative actions are not entitled to absolute immunity. Therefore a functional analysis must be performed to determine whether the official in question is entitled to absolute immunity for the specific actions complained of.
The lower Court erred in its analysis. The defendants are neither prosecutors, nor judges, nor legislators. The agency refers to itself as a "Law Enforcement Agency." In addition, none of the three named defendants performed duties which must have been performed by a licensed attorney. According to their own sworn affidavits and testimony, each named defendant performed investigative or administrative duties. During his deposition, Defendant Grauer admits that the issuance of an emergency cease and desist order is an administrative act. None of the named Defendants appeared before a court of any kind either before or at the moment the order was issued; none interviewed witnesses; none issued subpoenas; none took depositions or performed any other prosecutorial-type duties. The Defendants should be denied absolute immunity. The Supreme Court has said that the qualified immunity defense provides ample support to all but the plainly incompetent or those who knowingly violate the law. Malley v. Briggs, 475 U.S. 335 (1986).
POINT OF ERROR ONE: JURISDICTION
Defendants Were Acting Outside Their Jurisdiction in Attempting to Regulate a Real Estate Transaction and are Therefore Entitled to No Immunities.
The Defendants were employed by the Texas State Securities Board and were responsible for enforcing the Texas Securities Act. In order for the District Court to allot any type of immunity to Defendants, it must find that the Texas Securities Board had jurisdiction over Disraeli's activities; otherwise it would not be possible to find that they were acting within the "outer perimeter" of their official duties. In order to find that a security was present, the Court is required to determine if the investment meets the "Howey" test. SEC v. Howey, 328 U.S. 293 (1946).
The Howey test defines an investment as a security if four elements are present: (1) the investment of money; (2) a common enterprise; (3) expectation of profits; (4) solely from the efforts of others. It is undisputed that Disraeli never asked any investor for money — only indications of interest. This is the most important of the four elements. No entity had been formed into which an investor could have invested. With respect to the "solely from the efforts of others" test, investors were told they would be responsible for forming a homeowners association and hiring a management company.
The District Court conducted no analysis as required by Howey, yet it erred in finding that Disraeli was offering a security. The issue of what Disraeli was offering is a disputed issue of material fact and not appropriate for a ruling at the summary judgment phase. Defendants filed no response to Disraeli's charges that they were without jurisdiction throughout his pleadings. The lower court abused its discretion by failing to determine if a security was present in the first instance.
POINT OF ERROR TWO: MISAPPLICATION OF THE BUTZ FACTORS
Absolute immunity has been provided to certain government actors employed by government agencies based on the theory that the functions they perform are similar to prosecutors and judges. Butz v. Economou, 438 U.S. 478. In determining whether officials should be granted absolute immunity the court should assess the six factors outlined in Butz that are "characteristic of the judicial process": (a) the need to assure that the individual can perform his functions without harassment or intimidation; (b) the presence of safeguards that reduce the need for private damages actions as a means of controlling unconstitutional conduct; (c) insulation from political influence; (d) the importance of precedent; (e) the adversary nature of the process; and (f) the correctability of error on appeal. Cleavinger v. Saxner, 474 U.S. at 202.
Prosecutors have been denied absolute immunity for giving legal advice to police: Burns v. Reed, 500 U.S. 478. A District Attorney and Assistant District Attorney were denied absolute immunity for giving legal advice to County Commissioners: Hughes v. Tarrant County, 948 F.2d 918 (5th Cir. 1991). The 10th Circuit denied absolute immunity to an agency attorney for the preparation of an administrative search warrant, reasoning that the step was "so preliminary as to be an investigatory and not an advocacy step."
The Supreme Court has ruled that a prosecutor is not absolutely immune when she is acting as a "complaining witness." Kalina v. Fletcher, 522 U.S. 118. None of the Defendants' affidavits, pleadings, or deposition testimony provide support of functions comparable to prosecutors or judges.
The case which most closely articulates Plaintiff's position is Diblasio v. Novello, No. 02-9298 (2d Cir. 2003). The New York State Department of Health summarily suspended a physician's medical license and issued a press release casting the doctor in a very negative light. Due to the ex-parte nature of the suspension and the inadequacy of the hearing process, the 2nd Circuit denied the commissioner absolute immunity. The statutory framework and facts in the instant case are virtually identical to Diblasio.
Butz Factor 2 — Safeguards: There are no safeguards available prior to the issuance of an ex-parte cease and desist order, only afterwards. The Texas Securities Act does provide an appeals process to contest an ex-parte order; however, the appeal is before the commissioner — the supervisor of those making the allegations. This remedy addresses only the future of the order in question, not the damage done during the time the order is in effect. For that, the only remedy is a private action.
Butz Factor 3 — Insulation from Political Influence: All three Defendants serve at the pleasure of the securities commissioner and have no insulation from internal or external pressures.
Butz Factor 5 — Adversarial Nature: The ex-parte nature of this process is not adversarial. At the time of the issuance of the order, the three defendants had no power to compel testimony, rule on evidence, or issue subpoenas.
Butz Factor 6 — Correctability on Appeal: Even if Disraeli had proceeded with a full hearing and even if it resulted in complete exoneration, Disraeli would forever be damaged by the stigma of the original order since it is always a public record and cannot be expunged. The Texas statutes have no mechanism to correct the consequences of error in the issuance of an emergency order — only its final disposition.
POINT OF ERROR THREE: DUE PROCESS — THE MATHEWS TEST
The Supreme Court in Mathews v. Eldridge, 424 U.S. 319 (1976), outlined the elements of due process applicable to every kind of property or liberty interest. The provisions for issuing and contesting an Emergency Cease and Desist Order under the Texas Securities Act do not meet the Mathews test. The Court in Mathews articulated a three-part test to determine the adequacy of due process: (1) the private interest that will be affected by the official action; (2) the risk of an erroneous deprivation of such interest through the procedures used; and (3) the Government's interest, including the fiscal and administrative burdens that additional procedures would entail.
There are no statutory requirements that the Texas Securities Commissioner consider the private interest before issuing an emergency order. Defendant Morgan admitted that he did not consider the effect of issuing the order against Plaintiff or his family in a sworn deposition. Additionally, §23.2 of the Texas Securities Act does not require reasonable suspicion, probable cause, or a preponderance of the evidence in order to issue an emergency order. The legal hurdle is higher for a traffic stop in this country than for issuing ex-parte injunctions at the SSB.
The risk of erroneous deprivation is high in the case of emergency orders. Plaintiff's order accused him of securities fraud — an act which any member of the public would associate with criminal implications — and the text was published worldwide before Plaintiff was served. Plaintiff has averred, and Defendants have not challenged, the fact that no respondent in any contested case from at least 1994 until the present has prevailed before the commissioner, despite the recommendations of administrative law judges to the contrary.
The lower Court deduced that Plaintiff insisted he should have been provided a full hearing prior to the issuance of the emergency order. Plaintiff however only insists that he should have been provided more due process of the type described in Mathews. The District Court relies on Barry v. Barchi, 443 U.S. 55 (1979), but Barry differs from the instant case in meaningful respects: Barry was given 16 days notice; there was a finding of probable cause; and there was scientific evidence that Barry's horse had been drugged. None of these factors were present in Disraeli's case.
Using the District Court's logic, Defendants were permitted to issue any order against anyone using any language as long as the respondent could later contest the accusation. The Supreme Court has said that the timing of a hearing — pre versus post deprivation — can be dispositive in a constitutional sense, as it places someone in the position of proving innocence rather than requiring the government to prove guilt. Armstrong v. Manzo, 380 U.S. 545 (1965).
POINT OF ERROR FOUR: DEFENDANTS ARE NOT PROSECUTORS OR JUDGES
The District Court below seems to have placed undue emphasis on the fact that Defendants Rotunda and Grauer must use discretion to decide whether to bring charges against someone violating the Texas Securities Act. The statute clearly says that only the Commissioner may make a decision to issue an emergency order, upon the recommendation of her staff. Rotunda and Grauer were only empowered to draft possible orders and make recommendations — not to file charges, seek arrest warrants, appear in court, or try cases.
Defendant Morgan stated under testimony that he read the order, considered the facts, and signed it. Morgan has not testified that he ruled on evidence, subpoenaed witnesses, held hearings, or committed any other judicial act. Moreover, Morgan is clearly not held to the same standards as a judge in weighing private interest, public interest, other available remedies, etc. Morgan is an employee of the Texas Securities Board and can be removed like any other employee, unlike a judge or hearing officer.
POINT OF ERROR FIVE: EXHAUSTION NOT REQUIRED
Plaintiff's emergency order was issued on November 6, 2002, and he immediately requested a hearing. Plaintiff retained counsel to represent him before the SSB. Plaintiff was advised that no one had ever prevailed before the current commissioner and that he would likely not be the first. Plaintiff was advised that the cost of a contested case would be as much as $25,000. Plaintiff avers that the Defendants took advantage of his pro se status to exact a settlement and prevent a fully contested case.
An en banc panel of the Fifth Circuit has agreed that exhaustion of administrative remedies is not a prerequisite for a §1983 action. Patsy v. Florida International University, 634 F.2d 900 (5th Cir. 1981); Patsy v. Florida Board of Regents, 457 U.S. 496 (1982). Section 1983 is a remedy designed to provide redress for abuse of State power. In the instant case, that very State power that damaged Plaintiff extends into the administrative appeals process itself.
POINT OF ERROR SIX: PLAINTIFF DID NOT ABANDON HIS CLAIM AGAINST UNNAMED DEFENDANTS
The District Court erred in its conclusion that Plaintiff had abandoned his claim against any unnamed "Does." In his objection to the magistrate's report and recommendation, Disraeli stated that he had identified at least one "Doe" and would file a motion for leave to amend his petition. Before Disraeli had an opportunity to amend his petition, the District Judge had disposed of this case in its entirety.
POINT OF ERROR SEVEN: UNDUE INFLUENCE AND THE CONSENT ORDER
The District Court noted that Disraeli contends he was unduly influenced into signing the Consent Order but never came forward with any evidence to support this allegation. However, Disraeli raised his objection that he was never given an opportunity to examine the witness whose testimony would corroborate Plaintiff's allegation of coercion. Depositions were only permitted to seek information regarding each Defendant's role in the issuance of the Emergency Order. Plaintiff has been unfairly prejudiced by the lower Court's refusal to permit general discovery or oral argument.
PRAYER FOR RELIEF
Plaintiff prays that this Court reverse the District Court's finding of absolute immunity for all three defendants and remand for further proceedings. Plaintiff prays additionally that this Court reverse the District Court's order that Plaintiff bear all costs. Plaintiff further prays that he be permitted to amend his petition to include at least one unnamed "Doe".
 
Respectfully Submitted,
 
David H. Disraeli, Pro Se
609 The High Road
Austin, TX 78746
512.334.6650
 
Filed: February 24, 2006
CERTIFICATE OF COMPLIANCE
Pursuant to 5th Cir. R. 32.2.7(C), the undersigned certifies this brief complies with the type-volume limitations of 5th Cir. R. 32.2.7(B). Exclusive of the exempted portions, the brief contains 8,125 words. The brief has been prepared using Microsoft Word 2003 for Windows in Times Roman 12 pt. font size in proportionally spaced typeface.