# Petition — Fleschner v. Abrahamson > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_0595%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1978 - **Citation:** 436 U.S. 913 ## Text Supreme Court, U. S. FILED No. 77- ] 2 : MAR 14 1978 IN THE MICHAEL RODAK, JR., Supreme Court of the United States October Term, 1977 al MALCOLM K. FLESCHNER, WILLIAM J. BECKER, HAROLD B. EHRLICH and FLESCHNER BECKER ASSOCIATES, Petitioners, v. ROBERT ABRAHAMSON and MARJORIE ABRAHAMSON, Respondents. PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT . RICHARD E, CARLTON 125 Broad Street New York, New York 10004 Counsel for Petitioners Fleschner, Becker and Fleschner Becker Associates Davip M. OLASOV ROBERT D. OWEN SULLIVAN & CROMWELL Of Counsel MARK M. JAFFE One World Trade Center New York, New York 10048 Counsel for Petitioner Ehrlich ALLAN J. GRAF Hi__, Betts & NAsH Of Counsel March 14, 1978 INDEX PAGE ITE ETD Ie ITS A ot SRN am RS 1 EE SR Ree ea Coe aA I a a 2 RR ER EIR al are ce tage Oe an ae 3 a ee lealinscnewans 3 Reasons for Granting the Writ ..................0..00..000... 7 a a eae 21 BI So hiiarcchetisessithiabapdasnidavebhs dlakdehobsinn ff. .. & . , Serer aee 5 20 ii Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341 (2d Cir. 1973), rev'd, Piper v. Chris-Craft Industries, Inc., 430 U.S. RARER a eareealind oS penne nein me vers PAGE 15 Cort v. Ash, 422 U.S. 66 (1975) «0.000000... 10, 16, 17 Courtland v. Walston & Co., Inc., 340 F. Supp. I SII: disivcvnnasinetiansacoscenneneniil Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) ........... Men OA St tig NAD aOR eR Gh Esplin v. Hirschi, 402 F.2d 94 (10th Cir. 1968), cert. denied, 394 U.S. 928 (1969) .........00000.... Estate Counseling Service, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 303 F.2d 527 SUI, TIE 1. cdesnsaccccussedennetanennieiodbahen Ferschtman v. Schectman, 450 F.2d 1357 (2d ee ee ahaa ieaneeige Gammage Vv. Roberts, Scott & Co., [1974-1975 Transfer Binder] Fep. Sec. L. Rep. (CCH) bo 8 2 | | ReenrEEnerr Garnatz V. Stifel, Nicolaus & Co., 559 F.2d 1357 ar OL AEE aReae ae ee Greenspan v. del Toro, [1975-1976 Transfer Binder] Fep. Sec. L. Rep. (CCH) 4 95,488 (S.D. Fla.) appeal dismissed for want of prose- cution, No. 74-2943 (Sth Cir. 1974) .............. Harris v. American Investment Company, 523 F. 2d 220 (8th Cir. 1975), cert. denied, 423 IRE SIRES Tei ioran ie a Rae Herpich v. Wallace, 430 F.2d 792 (Sth Cir. SIT .c:.scpihiases uch taceadinnddenehadesdudmanaiannenendiaietios Hull v. Newman, Kennedy & Co., No. 118-283 I acai tiene as 19 20 13 ~~ a ——— wie 0 cnet hee see tee one Ks. iii PAGE In the Matter of Donner Estates, Inc., Investment Advisers Act Release No. 21 (November 3, 1941), 10 S.E.C. 400, [1941-1944 Transfer Binder] Feb. Sec. L. Rep. (CCH) 4 75,216 .... 18 In the Matter of Loring, Investment Advisers Act Release No. 33 (July 22, 1942), 11 S.E.C. 885, [1941-1944 Transfer Binder] Feb. Src. S FF os i Gk A ee 18 In the Matter of the Pitcairn Company, Invest- ment Advisers Act Release No. 52 (March 7, 1949), 29 S.E.C. 186, [1948-1952 Transfer Binder] Feb. Sec. L. Rep. (CCH) 4 75,990 ... 18 In the Matter of Roosevelt & Son, Investment Ad- visers Release No. 54 (September 2, 1949), 29 S.E.C. 879, [1948-1952 Transfer Binder] Fep. Sec. L. Rep. (CCH) 4 76,016 Janigan v. Taylor, 344 F.2d 781 (1st Cir.), cert. denied, 382 U.S. 879 (1965) 2.000000. 19 Kohler v. Kohler Co., 208 F. Supp. 808 (E.D. Wisc. 1962), affd, 319 F.2d 634 (7th Cir. RRR EE SY oe a Opa Wet ee ee 19 Levine v. Seilon, 439 F.2d 328 (2d Cir. 1971) .... 19, 20 Lewis v. Transamerica Corp., No. C 73-2180 (N.D. Cal. 1974), appeal argued, No. 75-1285 ! , , TR eran 8 National Railroad Passenger Corp. v. National Ass'n of Railroad Passengers, 414 U.S. 453 SUE Do oer ee inl Se a eo 15 Piper v. Chris-Craft Industries, Inc., 430 U.S. 1 Ub eit ee Ah ea Ean a 16, 17 Richardson v. MacArthur, 451 F.2d 35 (10th BRE RIE 1 ae Ce nT eo 20 iv PAGE Santa Fe Industries, Inc. v. Green, 430 U.S. 462 Perea cee 16 Schaefer v. First National Bank, 326 F. Supp. 1186 (N.D. Ill. 1970), appeal dismissed, 465 iw we Te, |e S| eee ee 20 Scripps-Howard Radio v. FCC, 316 US. 4 C BGBD cn iicvevesssissececssssseenconeucasaeenaneeeeee 17 Securities Investor Protection Corp. v. Barbour, 421 UB, 413 CIGTE) «.. “(The fact that, in contrast to each of the other securities acts, Congress did not] provide for any express civil liability in damages . . . indicates rather that, in its cautious approach to the regula- 4“Investment adviser” is defined by § 202(a)(11) of the Advisers Act, 15 U.S.C. § 80b-2(a) (11). 6 tion of investment advisers, Congress was not yet ready to impose any civil liability for damages.” (A38-39) The dissent also voiced concern that the court was creating a “claim for relief by judicial legislation, without the ability to define the outer limits of such a claim” (A44). The absence of such limits, the dissent stated, creates a “distinct danger that, by implying an open-ended private right of action, the court is giving the clients of investment advisers carte blanche to convert them- selves from victims to defrauders.” (A45) * * * “Implying a claim for relief without limitation will encourage actions against investment advisers for poor judgment, disguised by pleadings subtly im- plying fraud and deceit.” (A48) Finally, noting that the majority was affirming the dismissal of respondents’ claim under § 10(b) of the 1934 Act be- cause of their failure to satisfy the “purchase or sale” requirement reaffirmed by Blue Chip Stamps, the dissent urged that the Court “ought instead to leave the issue to Congress. To create an analogue to Section 10(b) without the re- quirement that the ‘fraud’ be ‘in connection with the purchase or sale’ of a security hardly gives broad effect to the policy considerations so clearly expressed in the majority opinion of the Supreme Court in Blue Chip Stamps and in Mr. Justice Powell’s concurring opinion... . The majority specifies no limits to the civil liability under § 206 which it is in the process of creating over this dis- sent. Yet, it is simply extending 10b-5 by resort to a different statute.” (A47) Petitions for rehearing, with suggestions for rehearing in banc, were filed on three issues: (1) the implication of a bein + a oemneit td 7 private right of action under § 206, (2) the holding that FBA’s general partners were investment advisers, and (3) the measure of “damages.” Rehearing was granted in part to allow further supplemental briefs from the parties and the SEC only on the second issue. After receiving the additional briefs the majority adhered to its holding that the general partners are “investment advisers” but withdrew its earlier conclusion that they were advisers “to the limited partners” rather than the partnership itself (A51). In all other respects the petitions for rehearing were denied. Reasons for Granting the Writ This case, which has been in the federal courts since 1971, raises questions that the lower federal courts, the SEC, and the investment community have all recognized to be novel and important. The issue of an implied right of action under § 206 has now been considered by sharply divided panels of two Courts of Appeals,° is awaiting decision 5 Eight entities in addition to the SEC filed briefs amicus curiae, either contemporaneously with the petitions for rehearing or the sup- plemental briefs on rehearing, or both: (1) Investment Asso- ciation (the industry organization whose counsel had drafted the bill enacted as the Advisers Act in 1940), in opposition to the implication of a private right of action under the Advisers Act; and (2) Stein- hardt, Berkowitz & Co.; (3) A.W. Jones & Associates; (4) A.W. Jones Company; (5) Avalon; (6) Euclid Partners; (7) Goodnow, Gray & Co.; and (8) Jubilee, all in opposition to the holding that general partners of investment partnerships are investment advisers. After rehearing was ted another entity, National Venture Capital Association, t to file a brief amicus curiae on the latter point, but was refused permission. * The Fifth Circuit, relying on the decision below, recently deter- mined, again over a vigorous dissent, that although Blue Chip Stamps barred plaintiff's 10b-§ claim, he nonetheless had an implied right of action for damages under § 206. Wilson v. First Houston Investment Corp., 566 F.2d 1235 (Sth Cir., Feb. 2, 1978). after argument in a third,’ and seems likely to trouble the federal courts for years, unless resolved now by this Court.* The decision below implied a right of action in dis- regard of the Act’s distinctive legislative history and the policy considerations enunciated by this Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). In doing so, the court created an open-ended cause of action for damages against “investment advisers,” expansively construed by the court to include even investors managing their own funds in a common pool with the property of family and friends. The majority opinion vests rights to sue in a large and extremely ill-defined class of plaintiffs, creates corresponding liabilities in a broadly defined class of defendants, and leaves open many central questions the resolution of which, even if possible, would burden the federal courts for decades.’ 7 Lewis v. Transamerica Corp., No. 75-1285 (9th Cir., docketed 1975) (argued May 12, 1977). 8 The district courts have divided on the issue: Sullivan v. Chase Investment Services of Boston, 434 F.Supp. 171 (N.D.Cal. 1977) (cause of action implied after dismissal of 10b-5 claim) ; Angelakis v. Churchill Management Corp., [1975-1976 Transfer Binder] Fen. Sec. L. Rep. (CCH) {95,285 (N.D.Cal. 1975) (cause of action implied) ; Lewis v. Transamerica Corp., No. C 73-2180 (N.D.Cal. 1974) (“no Federal jurisdiction” and no right of action ; oral decision by District Court, see transcript of argument held Sept. 27, 1974 at 10), appeal argued, No. 75-1285 (9th Cir., May 12, 1977) ; Bolger v. Laventhol, Krekstein, Horwath & Horwath, 381 F.Supp. 260 (S.D. N.Y. 1974) (cause of action implied) ; Greenspan v. del Toro, [1975- 1976 Transfer Binder] Fep. Sec. L. Rep. (CCH) § 95,488 (S.D. Fla.) (no right of action), appeal dismissed for want of prosecution, No. 74-2943 (5th Cir. 1974); Gammage v. Roberts, Scott & Co., [1974-1975 Transfer —— Fep. Sec. L. Rep. (CCH) { 94,760 (S.D.Cal. 1974) (no right of action). ® In addition to the lack of a “purchase or sale” limitation in actions under § 206, and the overbroad construction of the defendant class, the majority’s decision forbodes other areas of difficulty : (footnote continued on following page) 9 The result is, as the dissent below noted, “a claim for relief without limitation” (A44). This new claim is indeed broader than any other right of action, express or implied, under the federal securities laws. With or without judicial definition, it will necessarily result in an “inexorable broad- ening of the class of plaintiffs who may sue.” Blue Chip Stamps, supra at 747-48. The full measure of this extension of federal jurisdiction into an area of law traditionally governed by state partnership and contract law cannot now be known, but, according to the SEC, even this case—in which respondents received a huge profit on their invest- ment and allege no fraud in connection with the purchase or sale of a security—“is not one that would test the outer limits of the cause of action created by the antifraud pro- visions of the federal securities laws” (SEC Br. 30 n.34). The apparent expectation of the SEC is that this right of action, like the right of action under Rule 10b-5 so aptly (footnote continued from preceding page) Virtually Boundless Plaintiff Class. Section 206 applies not only to clients of investment advisers but also to “prospective clients,” an undefined and as yet unconstrued term. Moreover, by excising from its opinion the statement that the general partners were investment advisers “to the limited partners” ae modifying Al9 n.16), the majority appears to hold i) that the partnership, not the limited partners thereof, was the “client,” and (ii) that the class of plaintiffs extends to non-client individuals with some interest in an advised “client” who sue, not derivatively, but in their own right. _ Overbroad Construction of Advisers’ Duty. Although § 206 imposes a duty on investment advisers to refrain from “fraudu- lent, deceptive or manipulative” conduct, the majority below has created a right of action under § 206 in which nondisclosure is the gravamen of the complaint. Recovery for Negligent Misstatement. Likewise, claimants under § 206 may not be required to prove sciénter ; Rule 206(4)- 1(a) ( ), 17 C.F.R. § 275.206(4)-1(a)(5), appears to define any “untrue statement” in any “advertisement” (a broadly de- fined term, see Rule 206(4)-1(b)) to be, whether or not inten- tional, a “fraudulent, deceptive, or manipulative act, practice or course of business... .” 10 described by this Court, may someday become “a judicial oak which has grown from little more than a legislative acorn.” Blue Chip Stamps, supra at 737. “The starting point in every case involving construction of a statute is the language itself.” Blue Chip Stamps, supra at 756 (Powell, J., concurring). In the case of the Advisers Act, the unmistakably distinctive language of the jurisdic- tional section, § 214, especially when read against the back- ground of the Act’s legislative history, demonstrates a clear Congressional intent to deny implied actions for damages under the Act. See generally Cort v. Ash, 422 U.S. 66, 78 (1975). Section 214 of the bill finally enacted by Congress in 1940, unlike the earlier drafts submitted by the SEC and others, and unlike every other federal securities act,’® does not confer jurisdiction on the district courts to hear “actions at law brought to enforce any liability or duty created by” the Act. The district courts are granted only jurisdiction to hear criminal prosecutions and “suits in equity to enjoin any violation of this subchapter.” The deliberate omission of the words “actions at law” and the use of the word “vio- lation” rather than “liability” can only be construed as limiting the jurisdiction of the federal courts under § 206 to criminal prosecutions and SEC enforcement proceedings. Since 1940, Congress has foregone at least three oppor- tunities to include a provision for civil liability. As recently 10 Securities Act of 1933, Section 22, 15 U.S.C. §77v; Securities Exchange Act of 1934, Section 27, 15 U.S.C. § 78aa; Public Utility Holding Company Act of 1935, Section 25, U.S.C. §79y; Trust Indenture Act of 1939, Section 322, 15 U.S.C. § 77vvv; and Invest- ment Company Act of 1940, Section 44, 15 U.S.C. § 80a-43. se 11 as 1975, Congress declined to act on a recommendation by the SEC that it reinsert the “actions at law” language deleted from the early drafts in 1940. Congressional intent has rarely been clearer. A. 1940 The legislative record demonstrates Congress’ recognition that in 1940 it knew very little about the “investment coun- sel” profession, even after a brief study by the SEC and Congress." The “basic approach” of the Act was, in the words of the chief counsel to the SEC study, a “compulsory census” designed only to reveal the identity, number and general activities of those who receive compensation for advising others concerning securities transactions.” The 11 The majority below refers to “exhaustive studies” and “extensive reports” (A15) by the SEC that preceded enactment of the Invest- ment Company Act and Investment Advisers Act, which were passed as Titles I and II of the same bill, but fails to note that only 70 of 5,335 pages of SEC reports, and only 72 of 1,276 pages of testimony before Congressional committees concerned Title II, the Advisers Act. (Compilation of reports appears at Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. (1940) [hereinafter “Senate Hearings’’| at 307; Advisers Act testi- mony appears at Investment Trusts and Investment Companies: Hearings on H.R. 10065 Before a Subcomm. of the House Comm. on Interstate and Foreign Commerce, 76th Cong., 3d Sess. (1940) [hereinafter “House Hearings” at 86-93, and Senate Hearings at 47-51, 318-21, 711-64, 1124) 12 David Schenker, chief counsel to the SEC’s study of investment trusts and investment companies, testified in the Senate hearings: “Therefore, our fundamental approach to this problem is in the first instance, before we could intelligently make an a praisal of the economic function or of the abuses which might exist in that type of organization, to see if we could not get something which approximated a compulsory census. Funda- mentally that is the basic approach of title 2 [the Advisers Act]. We first would like to find out how many people are engaged in this business, what their connections are, what is the extent of their authority, what is their background, who they are, and how they handle the people’s funds?” Senate Hearings at 48 (emphasis added). 12 SEC was given customary enforcement powers, and a gen- eral antifraud provision, § 206, was included, but in con- trast to every other federal securities statute the Advisers Act was enacted without any provision for civil liability. The original draft bill would have conferred district court jurisdiction over “actions at law”; early drafts and committee prints incorporated by reference the jurisdictional section (§ 25) of the Public Utility Holding Company Act of 1935, which includes the “actions at law” language.” However, the industry voiced strong opposition to the early drafts and, after a three-week hiatus in the hearings during which SEC and industry representatives met and negotiated, the industry submitted a draft of its own. That draft,“* which was accepted by the SEC and enacted by Congress,” for 18 See, e.g., S. 3580, 76th Cong., 3d Sess 98 (introduced by Sen. Wagner on March 14, 1940) ; H.R. 8935, 76th Cong., 3d Sess. 98 (introduced by Cong. Lea on March 14, 1940). 14 The industry draft was incorporated into a committee print: STAFF OF SENATE COMM. ON BANKING AND CuRRENCY, 76TH Conc., 3p Sess., S. 3580 at 135-36 (Comm. Print, May 24, 1940). 15 Although the industry had cooperated with the SEC throughout the SEC study (Senate Hearings at 41), there was no agreement on the first draft bill submitted by the SEC to Congress (id. at 41-42, 175, 345) ; there was, in fact, vehement industry sition (House Hearings at 88-90, 92; Senate Hearings at 712-23, 737-54). ring a three-week period (86 Conc. Rec. 10069 (remarks of Senator Wagner) ) following the April hearings, representatives of industry negotiated changes in the proposed bill (House Hearings at 88-90, 92; S. Rep. No. 1775, 76th Cong., 3d Sess. 21 (1940). Finally, it was the industry draft of Title II, the Advisers Act, that Congress enacted. The chief counsel to the SEC study testified at the conclusion of the Senate Hearings: “In connection with the investment advisers, I think that Robert Page who represented Scudder, Stevens & Clark .. . submitted a draft of the bill to us, which is the draft that is included in this new bill.” Senate Hearings at 1124. See D. Rogers, A Brief History of the Investment Counsel Associa- tion ( ty 1975) (unpublished draft at Investment Counsel Associa- tion, 127 East 59th Street, New York, New York). a ° 13 the first time omitted the critical language conferring on the district courts jurisdiction to hear “actions at law brought to enforce any liability or duty created by” the Act. B. 1960 After consideration of “[e]xtensive proposals” submitted by the SEC in 1960,"* Congress amended the Advisers Act, but only to strengthen the Commission’s enforcement powers. No change was proposed or effected in § 214.” C. 1970 Again in 1970, while amending the Advisers Act and while adding to the Investment Company Act a strictly limited, express right of action against investment advisers to mutual funds (§ 36(b) ), Congress refrained from adding a right of action under the Advisers Act against other invest- ment advisers generally. D. 1975 Finally, in 1975, just three weeks after the Court of Appeals requested the parties to this case, and the SEC as 16S. Rep. No. 1760, 86th Cong., 2d Sess. 2 (1960). The amend- ments to the Advisers Act effected 19 changes in 11 of the Act’s 21 sections. The Senate report emphasized once again the extremely limited scope of the Advisers Act: “The Investment Advisers Act of 1940 was passed as title II of the bill of which title I was the Investment Company Act. Unlike other Federal securities statutes, it has few substantive or regulatory provisions. Modeled somewhat on the broker- dealer registration provisions of the Securities Exchange Act of 1934, it resembles a continuing census of the Nation’s in- (1900). advisers.” S. Rep. No. 1760, 86th Cong., 2d Sess. 2 17 Even though the question of jurisdiction had been raised in 1957 in an action in which the SEC had filed an amicus brief supporting recognition of private actions. Hu/! v. Newman, Kennedy & Co., - (1988). (S.D.N.Y. 1957) (settled) ; see 24 SEC Ann. Rep. 14 amicus, to file briefs on the Advisers Act questions raised in this action (A75-78), the SEC proposed to Congress that it reinsert the very words, “actions at law brought to enforce any liability or duty created by”, that were deleted from early drafts of the bill in 1940. Investment Advisers Act Release No. 491 (December 15, 1975), [1975-1976 Transfer Binder] Fep. Sec. L. Rep. (CCH) 4 80,341. Al- though hearings were held on the SEC’s proposals, and testimony was received on the proposed amendment to § 214,"* Congress failed to act on the proposals. The proposals have not been resubmitted by the SEC. * * * The majority below attempted to explain the deletion from § 214 as follows: “Appellees argue that the omission of any refer- ence to ‘actions at law’ in Section 214 manifests a legislative intent to preclude private rights of action under the Advisers Act. We disagree. In our view, the reason for this omission is that each of the other Acts whose jurisdictional provisions refer to ‘actions at law’ contains one or more sections expressly granting injured parties a private right of action for damages. There is no provision in the Advisers Act 18 Investment Advisers Act Amendments: Hearings on S. 2849 Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing and Urban Affairs, 94th Cong., 2d Sess. (1976) ; Invest- ment Advisers Act Amendments: Hearings on H.R. 13737 Before the Subcomm. on Consumer Protection and Finance of the House 1976) on Interstate and Foreign Commerce, 94th Cong., 2d Sess. In his testimony before the Senate committee, Mr. John I. Casey, chairman of the Investment Counsel Association, objected to the enactment of a private right of action without limits similar to those in § 36(b) of the Investment Company Act of 1940. Mr. Casey submitted to the Senate committee certain legislative history materials showing the deletion of the “actions at law” language from early drafts of the bill in 1940. ae Prey ee 15 which expressly provides for private actions; since it is a less complex statute, containing no express grants of right of action to private parties, a refer- ence to ‘actions at law’ would be superfluous.” (A25) (footnote omitted) With all due respect to the majority below, that is no ex- planation. The intentional omission of express rights of action and of a jurisdictional grant for actions at law is no basis for implying both such provisions in the statute. The holding of the Court of Appeals that an action for money damages should be implied is directly contrary to this Court’s instruction in National Railroad Passenger Corp. v. National Ass’n of Railroad Passengers, 414 U.S. 453, 458 (1974) that “ ‘[w]hen a statute limits a thing to be done in a particular mode, it includes the negative of any other mode,’” quoting Botany Mills v. United States, 278 U.S. 282, 289 (1929). When Congress limited relief under the Advisers Act to equitable relief, “it include[d] the negative of any other mode”, monetary liability. This rule of statutory construction should yield only “to clear contrary evidence of legislative intent.” 414 U.S. at 458. In the case of the Advisers Act, no contrary legislative intent whatever is found, either in 1940 or in the 38 succeeding years. Compounding the majority’s error in misreading legis- lative history * is its failure to heed the recent decisions 19 The panel below employed the same method of legislative history analysis it had adopted in Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341 (2d Cir. 1973), rev'd, Piper v. Chris- Craft Industries, Inc., 430 U.S. 1 (1977). (footnote continued on following page) 16 of this Court that counsel caution and restraint in the creation and application of implied rights of action. See Blue Chip Stamps, supra (reaffirms “purchase or sale” re- quirement to prevent the “danger of vexatious litigation which could result from a widely expanded class of plain- tiffs under Rule 10b-5”); Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) (dismisses Rule 10b-5 claim alleging negligent failure to discover and disclose in light of legis- lative history indicating requirement of some element of scienter); Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977) (refuses to “federalize” state corporation law that deals with transactions in securities to serve “what is ‘at best a subsidiary putpose’ of the federal legislations”); Piper v. Chris-Craft Industries, Inc., 430 U.S. 1 (1977) (analysis of the four factors enunciated in Cort v. Ash leads to conclusion that private right of action under § 14(e) of 1934 Act not necessary to effectuate Congress’ goals); Securities Investor Protection Corp. v. Barbour, 421 U.S. 412 (1975) (express statutory provision for one form of proceeding “ordinarily implied that no other means of enforcement was intended by the Legislature”). Al- though the majority cites Cort v. Ash in passing, it totally (footnote continued from preceding page) In Chris-Craft, it wrote: “We will not infer from the silence of the statute that Congress intended to deny a federal remedy ... .” 480 F.2d at 360-61. Two days after this Court issued its opinion in Chris-Craft re- versing the Court of Appeals, the same panel, this time with Judge Gurfein in dissent, wrote in this action: “We hesitate to reach such a result [failure to recognize a right of action] absent clear evidence from the Act’s legislative history that private actions were not intended.” (A23) 17 omits any point-by-point discussion of its four criteria,” as Judge Gurfein points out in dissent (A39-40). As this Court stated recently in Piper v. Chris-Craft In- dustries, Inc., 430 U.S. at 26, the courts “must be wary against interpolating [their] notions of policy in the inter- stices of legislative provisions,” quoting Scripps-Howard Radio v. FCC, 316 US. 4, 11 (1942). 20 Cort v. Ash, 422 U.S. 66, 78 (1975), cites four specific factors “relevant” to the determination “whether a private remedy is implicit in a statute not expressly providing one” : “First, is the plaintiff ‘one of the class for whose especial benefit the statute was enacted’?” While the clients of investment advisers were intended to be protected by the Act, the legislative history, see Point II, supra, also demonstrates that the Act was drafted to protect the advisers themselves from the abuses of unbridled regulatory oe. See, e.g., H.R. Rep. No. 2639, 76th Cong., 3d Sess. 28, 30 (1940). “Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one?” The dis- cussion in Point II and Judge Gurfein’s dissent show that “there is implicit legislative intent to deny such a remedy” (A40). “Third, is it consistent with the underlying purposes of the legisla- tive scheme to imply such a remedy for the plaintiff?’ As Judge Gurfein stated “Analytically, it would be equally proper to say that impli- cation of a private action under the Advisers Act is not ‘con- sistent with the underlying — of the legislative scheme.’ Cort, supra, at 78. For though such a remedy may be con- sistent with the goal of protecting customers of investment advisers, it is hardly consistent with the desire not to subject advisers to a liability, at least, until further study by Congress.” (A40 n.9) Fourth, “is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law?” ‘There is of course nothing uniquely federal about an action based in fraud, such as an action under § 206 would be. 18 IV Persons who, like the petitioner general partners, manage private and family investments in the partnership form in- volving a substantial portion of their personal assets have never been considered to be engaged in the “business of advising others” so as to render them “investment advisers” subject to the Advisers Act.”* Under partnership law, gen- eral partners of a limited partnership are vested with full title to the partnership estate, assume the risks of all liabili- ties of the partnership and are legally charged with the management of the partnership assets. As to the manage- ment of the partnership estate, the general partners cannot 21 Early rulings of the full Commission and subsequent judicial decisions citing those rulings have firmly established the rule. See, e.g.: In the Matter of Roosevelt & Son, Investment Advisers Re- lease No. 54 (September 2, 1949), 29 S.E.C. 879, [1948-1952 Transfer Binder] Fep. Sec. L. Rep. (CCH) { 76,016 (general partners of non-public, predominantly family investment advice vehicle, who had own assets under management and who would serve as trustees of advised trusts not advisers under the Act) ; In the Matter of the Pitcairn Company, Investment Advisers Act Release No. 52 (March 7, 1949), 29 S.E.C. 186, [1948-1952 Transfer Binder] Fev. Sec. L. Rep. (CCH) § 75, (private, family investment manager that never solicited public “clients” not adviser under the Act) ; In the Matter of Loring, Investment Advisers Act Release No. 33 (July 22, 1942), 11 S.E.C. ores toe Transfer Binder] Fep. Sec. L. Rep. (CCH) § 75, (trustee “holds legal title to the property and acts as principal” ; compensated trustee not investment adviser under the Act) ; In the Matter of Donner Estates, Inc., Investment Advisers Act Release No. 21 (November 3, 1941), 10 S.E.C. 400, [1941- 1944 Transfer Binder] Fev. Sec. L. Rep. (CCH) {75,216 (private, predominantly family investment vehicle ; corporation, which was owned by and advised separate trusts established for family and non-family trusts, not adviser under the Act) ; Selzer v. Bank of Bermuda Ltd., 385 F. Supp. 415, 420 (S.D.N.Y. 1974) (a “trustee acts himself as principal,” he “does not advise the trust corpus, which then takes action pursuant to his advice” ; compensated trustee not investment adviser under the Act, citing Loring, supra). 19 as a matter of law be construed as being “in the business of advising others”. Under the rationale of the majority opinion below, not only general partners of investment partnerships but every compensated trustee, executor and other fiduciary with discretionary investment powers would be deemed an “in- vestment adviser.” Such a momentous result would be worked in the complete absence of any evidence of con- gressional intent to regulate with so broad a sweep, and in derogation of the SEC’s own rulings, which have consistently interpreted “investment adviser” to exclude persons, like FBA’s general partners, who do not solicit funds of the public, do not hold themselves out to the general public as offering investment advice, and limit their activities to man- aging private investment entities for themselves, their fami- lies and friends. V The measure of damages fashioned by the Court of Ap- peals conflicts with the basic rule of damages under the federal securities laws.” 22 See, e.g., Harris v. American Investment Company, 523 F.2d 220 (8th Cir. 1975), cert. denied, 423 U.S. 1054 (1976); Wolf v. Frank, 477 F.2d 467 (5th Cir.), cert. denied, 414 U.S. 975 (1973) ; Levine v. Seilon, 439 F.2d 328 (2d Cir. 1971) ; Janigan v. Taylor, 344 F.2d 781 (1st Cir.), cert. denied, 382 U.S. 879 (1965) ; Kohler v. Kohler Co., 208 F.Supp. 808 (E.D. Wisc. 1962), aff'd, 319 F.2d 634 (7th Cir. 1963); Estate Counseling Service, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 303 F.2d 527, 533 (10th Cir. 1962). Even those courts which have held that a private right of action for exists under Section 206 of the Advisers Act have never implied that the measure of damages under that section would be different from the measure of damages applicable in other antifraud provisions of the federal securities laws. See discus- sion of Judge Carter in Abrahamson v. Fleschner (A65-74). See also ia) v. Walston & Co., Inc., 340 F.Supp. 1076, 1093 (S.D.N.Y. 1 , 20 The measure of damages adopted by the Court of Appeals in this case will permit plaintiffs to select or “frac- tionate” their investments, i.e., to isolate securities on which profits are reaped from those on which there are losses, in calculating damages—a procedure which another panel of the same Court of Appeals expressly condemned. Byrnes V. Faulkner, Dawkins & Sullivan, 550 F.2d 1303 (2d Cir. 1977).* Courts in other circuits hold that any losses suf- fered by a plaintiff on an investment must be offset by any gains realized. Esplin v. Hirschi, 402 F.2d 94, 105 (10th Cir, 1968), cert. denied, 394 U.S. 928 (1969); Schaefer v. First National Bank, 326 F.Supp. 1186 (N.D. Ill. 1970), appeal dismissed, 465 F.2d 234 (7th Cir. 1972); Richard- son V. MacArthur, 451 F.2d 35, 44 (10th Cir. 1971); Garnatz V. Stifel, Nicolaus & Co., 559 F.2d 1357 (8th Cir. 1977). If the result is a net profit, a claimant should have no actionable claim for damages under the federal securities laws. Wolf v. Frank, 477 F.2d (Sth Cir.), cert. denied, 414 U.S. 975 (1973); Levine v. Seilon, 439 F.2d 328, 334-35 (2d Cir. 1971); Ferschtman v. Schectman, 450 F.2d 1357, 1361 (2d Cir. 1971). *8 The irreconcilable conflict which exists between the decision of the Court of Appeals in the Abrahamson case and the decisions of other courts involving the measure of damages under the antifraud provisions of the federal securities laws is best illustrated by a com- parison of the decisions of the Second Circuit in Abrahamson and Byrnes, supra. Abrahamson was decided on February 25, 1977, Byrnes, on March 1, 1977. In Byrnes, the Court of Appeals, citing the District Court’s opinion in this case, denied a claim for s under the federal securities laws where the claimant attempted to isolate prospective losses from prospective gains: “Thus, far from suffering a proximate loss from the acts of ts, see Herpich v. Wallace, 430 F.2d 792, 810 (5th ir. 1970), Faulkner was benefitted overall by them. For damages purposes under the Exchange Act, the transaction cannot be fractionated, since otherwise ‘actual s on account of the act complained of’ would be exceeded. See Abrahamson v. Fleschner, 392 F.Supp. 740, 746-47 (S.D.N.Y. 1975).” 550 F.2d at 1314. 21 The novel measure of damages fashioned by the Court of Appeals here can only assure a flood of claims under the Advisers Act by claimants who, as respondents do here, allege in hindsight that they “would have” made more money had they withdrawn at the height of the market. CONCLUSION For the foregoing reasons, a writ of certiorari should issue to the United States Court of Appeals for the Second Circuit. Respectfully submitted, RICHARD E. CARLTON 125 Broad Street New York, New York 10004 Counsel for Petitioners Fleschner, Becker and Fleschner Becker Associates Davip M. OLASOV ROBERT D. OWEN SULLIVAN & CROMWELL Of Counsel MARK M. JAFFE One World Trade Center New York, New York 10048 Counsel for Petitioner Ehrlich ALLAN J. GRAF HILL, Betts & NASH Of Counsel March 14, 1978 Text of Statutes Involved Section 206 of the Investment Advisers Act of 1940, 54 Stat. 852, as amended, 74 Stat. 887, 15 U.S.C. § 80b-6, provides: PROHIBITED TRANSACTIONS By REGISTERED INVESTMENT ADVISERS Sec. 206. It shall be unlawful for any investment adviser, by use of the mails or any means or instru- mentality of interstate commerce, directly or indi- rectly— (1) to employ any device, scheme, or artifice to defraud any client or prospective client; (2) to engage in any transaction, practice, or course of business which operates as a fraud or ° A P P E N D I Xx | deceit upon any client or prospective client; (3) acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph (3) shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction; (4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipu- lative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to pre- vent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulati¥e A2 Text of Statutes Involved Section 214 of the Investment Advisers Act of 1940, 54 Stat. 856, 15 U.S.C. § 80b-14, provides: JURISDICTION OF OFFENSES AND SUITS SEC. 214. The district courts of the United States and the United States courts of any Territory or other place subject to the jurisdiction of the United States shall have jurisdiction of violations of this title or the rules, regulations, or orders thereunder, and, con- currently with State and Territorial courts, of all suits in equity to enjoin any violation of this title or the rules, regulations, or orders thereunder. Any criminal proceeding may be brought in the district wherein any act or transaction constituting the violation oc- curred. Any suit or action to enjoin any violation of this title or rules, regulations, or orders thereunder, may be brought in any such district or in the district wherein the defendant is an inhabitant or transacts business, and process in such cases may be served in any district of which the defendant is an inhabitant or transacts business or wherever the defendant may be found. Judgments and decrees so rendered shall be subject to review as provided in sections 128 and 240 of the Judicial Code, as amended, and section 7, as amended, of the Act entitled “An Act to establish a court of appeals for the District of Columbia”, approved February 9, 1893. No costs shall be as- sessed for or against the Commission in any pro- ceeding under this title brought by or against the Commission in any court. A3 UNITED STATES COURT OF APPEALS For tHe Seconp Circuit wow = No. 212—September Term, 1975. (Submitted February 28, 1976* Decided February 25, 1977.) Docket No. 75-7203 -_ == ee Rosert ABRAHAMSON and MarJorizE ABRAHAMSON, Plaintiff s-A ppellants, v. Matcotm K. FLescHner, WituiAm J. Becker, Harowp B. Exruicn, Leon Pomerance, FLescHNER Becker Asso- crates, and Harry Goopkin & Company, Defendants-A ppellees. Before: MANSFIELD, TIMBEs and GuURFEIN, Circuit Judges. -—_ = ew Appeal from judgment entered in the Southern District of New York, Robert L. Carter, District Judge, 392 F. Supp. 740, dismissing complaint, on cross-motions for sum- mary judgment, in action to recover damages for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; and of ° See our interim opinion in this case. Abrahamson v. Fleschner, 537 F.2d 27 (2 Cir. 1975). A4 Section 206 of the Investment Advisers Act of 1940 and Rule 206(4)-1 promulgated thereunder. Affirmed as to dismissal of the Securities Act claim; as to dismissal of the Investment Advisers Act claim, re- versed and remanded for trial. wow we Ronatp H. Atensterx, New York, N.Y. (Ken- neth A. Barry, and Shea Gould Climenko Kramer & Casey, New York, N.Y., on the brief), for Plaintiffs-Appellants Robert Abrahamson and Marjorie Abrahamson. Ricwarp E. Carttox, New York, N.Y. (Robert D. Owen, James E. Tyrrell, and Sullivan & Cromwell, New York, N.Y., on the brief), for Defendants-Anpellees Malcolm K. Fleschner, William J. Becker and Fleschner Becker Associates. Ricuarp G. McGanrenx, New York, N.Y. (Ken- neth A. Sagat, and D’Amato, Costello & Shea, New York, N.Y., on the brief), for Defendant-Appellee Harry Goodkin & Com- pany. Marx M. Jarre, New York, N.Y. (Allan J. Berdon, Joseph F. Aman, and Hill, Betts & Nash, New York, N.Y., on the brief), for Defendant-Appellee Harold B. Ehrlich. Harvey L. Pitt, General Counsel, Paul Gonson, Associate General Counsel, David J. Ro- manski, Assistant General Counsel, James H. Schropp, Attorney, SEC, Washington, D.C., for Securities and Exchange Commis- sion, Amicus Curiae. eer AS Timbers, Circuit Judge: Of the several questions presented under the antifraud provisions of the federal securities laws, those under the Investment Advisers Act of 1940 appear to be of first impression at the appellate level. The appeal is from a judgment entered in the Southern District of New York, Robert L. Carter, District Judge, 392 F.Supp. 740, dismissing the complaint, on cross-motions for summary judgment, in an action to recover damages for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b)(1970), and of Rule 10b-5 thereunder, 17 C.F.R. §240.10b-5 (1976); and alleged violations of Section 206 of the Investment Ad- visers Act of 1940, 15 U.S.C. §80b-6 (1970), and of Rule 206(4)-1 thereunder, 17 C.F.R. §275.206(4) (1976). The essential questions presented and our rulings there- on are as follows: (1) Whether the complaint states a claim upon which relief can be granted under Section 10(b) of the 1934 Act and Rule 10b-5. We hold it does not. (2) Whether defendants who are general partners of the investment partnership are investment ad- visers within the meaning of Section 202(a) (11) of the Advisers Act. We hold they are. (3) Whether there is an implied private right of ac- tion for damages under the Advisers Act. We hold there is. (4) Whether the complaint alleges compensable dam- ages under the Advisers Act. We hold it does. A6 (5) Whether the complaint states a claim upon which relief can be granted under Section 206 of the Ad- visers Act and Rule 206(4)-1. We hold it does. We affirm the dismissal of the Exchange Act claim; but as to the dismissal of the Advisers Act claim, we reverse and remand for trial. I. Facts The following summary of the essential facts is believed necessary to an understanding of our rulings on the ques- tions presented. The facts are not in dispute. Plaintiffs Robert Abrahamson and Marjorie Abraham- son, husband and wife, were limited partners of defendant Fleschner Becker Associates (FBA), an investment part- nership, from its inception on July 1, 1965 until they with- drew on September 30, 1970. Defendants Malcolm K. Fleschner (Fleschner) and Wil- liam J. Becker (Becker) are general partners of FBA. Fleschner was its founder and has been a general partner since its inception. Becker became a general partner on April 1, 1966. Defendant Harold B. Ehrlich (Ehrlich) was a general partner from October 1, 1968 through September 30, 1969. Defendant Harry Goodkin & Company (Good- kin) is a firm of certified public accountants which audited FBA’s books and certified FBA’s financial reports for the fiscal years 1966, 1967 and 1968. In late 1964 and in 1965 plaintiffs had several conversa- tions with Fleschner who expressed his intention of form- ing an investment partnership. He told plaintiffs that the partnership would have a conservative investment policy. ! We assume familiarity with our prior opinion in this case, 537 F.2d 27, and that of the district court, 392 F.Supp. 740. A7 Plaintiffs expressed their concern for financial security and conservatism in their investments. By a partnership agreement dated July 1, 1965, FBA began as a small partnership. The original partners con- sisted of one general partner (Fleschner) and eight lim- ited partners (plaintiffs, four members of Fleschner’s family and two others). Plaintiffs’ initial contribution was $150,000. FBA grew rapidly. By April 1, 1966 it had two general partners and thirty-five limited partners; and by October 1, 1968 it had three general partners and sixty-six limited partners. Each partner had an account which represented the appreciated value of his contributions to the pooled funds, less withdrawals and certain fees. By October 1, 1968 FBA’s assets were approximately $60 million. For managing the partnership investments, the general partners received substantial fees. They were paid 20% of FBA’s net profits and net capital gains for each fiscal year. In addition, the partnership agreement of October 1, 1968 provided for an annual salary of $25,000 for each general partner who managed the partnership’s investments. The limited partners did not participate in managing the partnership’s investments. A limited partner could with- draw all or part of the balance in his capital account at the end of any fiscal year (September 30), provided that he gave the required advance notice. Prior to October 1, 1968, 30 days notice was required; thereafter, 60 days no- tice was required. There were similar notice requirements for withdrawal from membership in the partnership. With the increase in the number of limited partners and the concomitant increase in the size of the firm’s assets, certain changes were made in the structure of the partner- ship. The original July 1, 1965 partnership agreement was superseded by a new agreement dated April 1, 1966 which in turn was superseded by the October 1, 1968 agreement. A8 The principal change effected by the 1966 agreement was the addition of Becker as a general and managing partner and the inclusion of additional limited partners. The 1968 agreement, in addition to authorizing salaries of $25,000 per year for those general partners who managed the partnership’s investments, included Ehrlich as a general partner; added a large number of limited partners; ex- panded and detailed the stated purposes of the partner- ship; and made a number of other changes referred to below. During the period plaintiffs were limited partners of FBA the general partners mailed monthly reports to all of the firm’s limited partners. These reports Were concise, two paragraph statements which set forth the percentage increase or decrease in the value of the firm’s investments for the year to date and compared this performance with Standard & Poors 500 Stock Average. The reports also included statements of the firm’s in- vestment policy. Between November 1967 and April 1968 the reports repeatedly represented that FBA was maintain- ing a “low risk stance” and “a most conservative posture.” ? In addition to the monthly reports, during 1967 and 1968 Goodkin mailed to the limited partners certified year end financial reports. These financial reports included balance sheets which showed the total of FBA’s investments in securities. The balance sheets of September 30, 1967 and September 30, 1968 did not disclose that the firm was in- vesting in unregistered securities.* Investments in such securities were included in the aggregate of all portfolio investments. The value of FBA’s total investments in se- 2 For examples of these representations in the monthly reports, see the district court opinion, 392 F.Supp. at 742 n. 2. 3 Unregistered securities are securities which are not registered with the Securities and Exchange Commission. They have only a limited market and are subject to restrictions as to further sale. A9 curities was denominated as the “market value” of the securities. Despite the representations in the monthly reports that F'BA’s investments were most conservative and of low risk, between September 1967 and September 1968 the firm in- creased its investments in unregistered securities from approximately 15% to approximately 72% of its portfolio. Between September 1968 and September 1969 the firm’s investments in unregistered securities fluctuated from about 72% to 88% of its portfolio. During this latter period the monthly reports continued not to disclose the firm’s sizable investments in unregistered securities. In either December 1969 or January 1970 plaintiffs re- ceived the financial report for the fiscal year ending Sep- tember 30, 1969. This report was not prepared by Goodkin, but by another accounting firm. A footnote to this report disclosed that approximately 77% ($30,411,868) of FBA’s total investments in securities ($39,355,310) consisted of unregistered securities. The firm’s total assets as of Sep- tember 30, 1969 were $51,747,995. Plaintiffs first learned of FBA’s substantial investments in unregistered securities from the September 30, 1969 re- port. Having received this report in December 1969 or January 1970, it was too late for them to withdraw from the firm, in accordance with the partnership agreement, at the end of the fiscal year which ended September 30, 1969. Plaintiffs did withdraw at the end of the following fiscal vear, on September 30, 1970. This was the earliest they could withdraw their investments or as partners under the terms of the partnership agreement. 4 In their complaint in the instant action, plaintiffs alleged that during the period they were limited partners the firm made between 40 and 80 separate purchases of unregistered securities, including the securities of more than 40 different issuers. They alleged that most of these purchases took place after 1967. Al0 During the five year period they were limited partners, both plaintiffs received substantial net profits.’ Robert Abrahamson realized a net profit of $156,097; Marjorie Abrahamson a net profit of $133,081.35. Both plaintiffs claim that as of late 1968 their invest- ments were worth considerably more than indicated by the firm’s financial reports, and that the firm incurred sub- stantial losses on its investments in unregistered securi- ties. Without apportioning between losses sustained from investments in unregistered securities and other losses,‘ Robert Abrahamson claims that between September 30, 1968 and the date of his withdrawal his capital account sustained losses totalling $454,979. Marjorie Abrahamson claims total losses of $799,821 during this period. Plaintiffs commenced the instant action in the Southern District of New York on January 25, 1971. Jurisdiction was invoked under Section 37 of the Exchange Act, 15 U.S.C. §78aa (1970), and Section 214 of the Advisers Act, 15 U.S.C. §80b-14 (1970). The complaint embodies the claims stated above and summarized in our prior opinion. 537 F.2d 27. Both sides having moved for summary judgment, Judge Carter on March 4, 1975 filed an opinion, 392 F.Supp. 740, granting defendants’ motions and denying plaintiffs’ mo- tion. Without reaching the merits of plaintiffs’ claims under either the Exchange Act or the Advisers Act, the judge held that, since plaintiffs had realized a net profit 5 See the schedule set forth in the district court opinion, 392 F.Supp. at 743, showing plaintiffs’ capital contributions, interim withdrawals, final distributive shares and net profits. 6 Plaintiffs claim that they are entitled to recover the difference be- tween what they received when they withdrew from the partnership in 1970 and what they would have received had they withdrawn as of Sep- tember 30, 1968. Accordingly they did not attempt an apportionment between losses attributable to excessive investments in unregistered se- curities and losses from unchallenged .avestments. All on their overall five-year investments in FBA, they had failed to prove damages compensable under the federal securities laws. From the judgment entered March 27, 1975 dismissing the complaint, the instant appeal has been taken. Il. Exocnanoce Act CLam We need not tarry with plaintiffs’ claim under Section 10(b) of the 1934 Act and Rule 10b-5 for we find that each of the arguments urged by plaintiffs in support of that claim is without merit. First, in an effort to meet the requirement of Section 10(b) and Rule 10b-5 that they must allege a fraud “in connection with the purchase or sale of any security,” ’ plaintiffs argue that their interest in FBA was a “secu- rity” and that the modifications of the partnership agree- ment in 1968 constituted an exchange of one security for another.' In support of this theory, plaintiffs rely on cases which have held that significant modifications in the rights of security holders may constitute a “sale” of one security and “purchase” of another under Section 10(b) and Rule 10b-5, Ingenito v. Bermec Corp., 376 F.Supp. 1154, 1179- 82 (S.D.N.Y. 1974); or a “sale” or “issue” of a security under the Public Utility Holding Company Act of 1935, 7 This is the familiar provision of both Section 10(b) and Rule 10b-5. Obviously, the fraud alleged by plaintiffs was not “in connection with” either their initial investment in the partnership on July 1, 1965 or their withdrawal from the firm on September 30, 1970. 8 The principal modifications relied on by plaintiffs in their effort to show that the September 30, 1968 partnership agreement fundamentally changed the nature of their investment were: expansion of the general partners’ authority to invest in other businesses and to make loans; authorization of $25,000 per year salaries for managing partners; short- ening of the notice requirement for year end withdrawals of capital; provision for automatic termination of the partnership after ten years; and authorization for amendment of the partnership agreement by a vote of one-half of the limited partnership interests and two-thirds of the general partnership interests, rather than by the Executive Com- mittee of the general partners as before. Al2 SEC v. Associated Gas & Elec. Co., 24 F.Supp. 899 (S.D. N.Y.), aff'd, 99 F.2d 795 (2 Cir. 1938); or an “issue” of stock under the Interstate Cormmerce Act, United States v. New York, New Haven & Hartford R. Co., 276 F.2d 525 (2 Cir. 1959), cert. denied, 362 U.S. 961 (1960). We do not believe that this line of cases supports plaintiffs’ claim in the instant case. Before changes in the rights of a security holder can qualify as the “purchase” of a new security under Section 10(b) and Rule 10b-5, there must be such significant change in the nature of the investment or in the investment risks as to amount to a new investment. We hold that the modifications effected by the adoption of a new partnership agreement on September 30, 1968 did not constitute the “purchase” and “sale” of new securities. Second, plaintiffs argue that they are entitled to recover under Section 10(b) and Rule 10b-5 because they were fraudulently induced not to sell their partnership interests. They say that they would have withdrawn from the firm in 1968 if defendants had not misrepresented the true nature of the firm’s investments at that time. The short answer to this branch of plaintiffs’ argument is that the requirement of fraud in connection with the purchase or sale of a security is not satisfied by an allegation that plaintiffs were induced fraudulently mot to sell their securities. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737-38 (1975). We affirm the dismissal of plaintiffs’ Exchange Act claim.’ 9 Our affirmance of the dismissal of the Exchange Act claim is on the ground that the complaint fails to state a claim upon which relief can be granted—not on the ground relied upon by the district court for dismissal, namely, that, since plaintiffs had realized a net profit on their overall limited partnership investment, they had failed to prove dam- ages compensable under the federal securities laws. We shall discuss this ground of the district court decision under the Adiveers Act claim, Sec- tion TIT, infra. Sr eer lg ie ei —_ a -_ ~ Sf a een Sa mae tae . SE ee amt —— ene agr—P GP Pree face L Al3 III. Apvisers Act CLam . We come next to what we consider to be the chief ques- tion presented on this appeal—whether the complaint states a claim upon which relief can be granted under Section 206 of the Investment Advisers Act of 1940 (the Act)*® and Rule 206(4)-1 thereunder." 10 Section 206 of the Investment Advisers Act of 1940, 15 U.S.C. $80b-6 (4970), im relevant part provides: “It shall be unlawful for any investment adviser by use of the mails or any means or instrumentality of interstate commerce, di- rectly or indirectly— Q) to employ any device, scheme, or artifice to defraud any client or prospective client; (2) hes a in apy transaction, practice, or course of busi- ness Ww operates as a fraud or deceit upon any client - pective client; , ess . * . ; (4) to engage in any act, practice, or course of business which is fraudulent. deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, decep- tive, or manipulative.” ll Rule 206(4)-1, 17 C. - Pe (4)-1, 17 C.F.R. §275.206(4)-1 (1976), in relevant part pro- “(a) It shall constitute a fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of section 206(4) of the Act, for any investment adviser, directly or indirectly to publish, circulate or distribute any advertisement: (5) Which contains any untrue statement of a material fact, or which is otherwise false or misleading. (b) For the purposes of this section the term ‘advertisement’ shall include any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announce- ment in any publication or by radio or television, which offers (1) any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (2) any graph chart, formula, or other device to be used in making any deter. mination as to when to buy or sell any security, or which security pehine Pperbrinn Ang any other investment advisory service with Al4 ; The subordinate questions which we must consider in connection with this claim are (1) whether any of the defendant general partners are “investment advisers” within the meaning of Section 202(a)(11) of the Act;"* (2) whether there is an implied private right of action for damages under the Act; and (3) whether plaintiffs have alleged compensable damages under the Act. For the reasons below, we answer each of these questions in the affirmative. Accordingly, we reverse the dismissal of the Advisers Act claim and remand the case for trial on that claim.” (1) “Investment Advisers” Under Section 202(a)(11) Turning first to the threshold question whether any of the general partner defendants are “investment advisers” within the meaning of Section 202(a)(11), we hold that they are. It is clear from the record that the general partners received substantial compensation for managing the limited partners’ investments. Each of the three partnership agreements in effect between 1965 and 1970 provided that the general partners would be paid for their services 20% of the firm’s net profits and net capital gains for each fiscal year. In addition, the partnership agreement of 12 Section 202(a)(11) of the Investment Advisers Act, 15 U.S.C. §80b-2 (a)(11) (1970), in relevant part provides: “ ‘Investment adviser’ means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or pro- mulgates analyses or reports concerning securities. .. ." 13 It was the Advisers Act claim to which we invited the parties and the SEC as amicus curiae to address their supplemental briefs when we filed our interim opinion following oral argument of this appeal. 537 F.2d at 28. We express our appreciation for the helpful briefs from counsel for all parties and the SEC in response to our invitation. AIS October 1, 1968 authorized an annual salary of $25,000 for each general partner who managed investments. Since the general partners received compensation for their investment services, the only remaining inquiry under the statute is whether they were “engage[d] in the busi- ness of advising others” with respect to investments. On two independent grounds, we believe they were. First, the monthly reports which contained the alleged fraudulent representations were reports which provided investment advice to the limited partners. The general partners’ compensation depended in part upon the firm’s net profits and capital gains. These in turn were affected by the size of the total funds under their control. The monthly reports were an integral part of the general part- ners’ business of managing the limited partners’ funds. In deciding whether or not to withdraw their funds from the pool, the limited partners necessarily relied heavily on the reports they received from the general partners. Second, wholly aside from the monthly reports, we be- lieve that the general partners as persons who managed the funds of others for compensation are “investment ad- visers” within the meaning of the statute. This is borne out by the plain language of Section 202(a)(11) and its related provisions, by evidence of legislative intent and by the broad remedial purposes of the Act. The Investment Companies Act of 1940 and the compan- ion Investment Advisers Act (Title II of the same enact- ment) were among statutes designed to eliminate certain abuses in the securities industry which were found to have contributed to the stock market crash of 1929 and the depression of the 1930s. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963). The 1940 legisla- tion was based upon exhaustive studies by the SEC which culminated in a number of extensive reports on invest- ment trusts, investment companies and investment advis- Al6 ers. The Investment Companies Act and the Advisers Act were intended to cover important areas of the securities industry which had not been covered by the earlier stat- utes. The Investment Companies Act is concerned with investment companies and other persons, including certain investment advisers, who deal with investment companies. The Advisers Act covers all investment advisers. As stated in Section 201 of the Advisers Act, 15 U.S.C. §80b-1 (1970), that Act was based upon the findings and recommendations set forth in an SEC Report on invest- ment counsel and advisory services. Securities and Ex- change Commission, Investment Counsel, Investment Man- agement, Investment Supervisory and Investment Advi- sory Services, H.R. Doc. No. 477, 76th Cong., 2d Sess., 1 (1939) (hereinafter “SEC Report”). The SEC Report referred to two types of investment advisers: (1) those with management powers over their clients’ funds and the power to make purchases and sales for their clients (“dis- cretionary”), and (2) those who merely made recommen- dations to their clients (“advisory”). SEC Report at 13. It noted the conspicuous need for regulation of individuals “who may solicit the funds of the public to be controlled, managed, and supervised ....” SEC Report at 28 (em- phasis added). The report made it clear that its findings and recommendations were intended to cover persons who made purchases and sales of securities with their clients’ funds. The House and Senate Committee reports also make clear the intent of Congress. The Report of the Senate Committee on Banking and Currency which accompanied the bill to the Senate floor stated: “The report of the Commission to the Congress and the record before the committee is clear that the solu- tion of the problems and abuses of investment advi- Al? sory services—individuals and companies which either handle pools of liquid funds of the public or give advice with respect to security transactions—cannot be effected without Federal legislation. Virtually no limitations or restrictions exist with respect to the honesty and integrity of persons who may solicit funds to be controlled, managed, and super- vised.” (emphasis added) S. Rep. No. 1775, 76th Cong., od Sess., 21 (1940).™ Similarly, the House Committee on Interstate and Foreign Commerce noted in its report the need to regulate firms which “inanaged, supervised, and gave investment advice” with respect to clients’ funds. H.R. Rep. No. 2639, 76th Cong., 3d Sess., 27 (1940).** In short, as for legislative intent, we believe that the SEC Report, together with the House and Senate Reports, make it clear that Congress intended to reach persons who receive compensation for investing funds of their clients. 14 In its general statement on the background to the Advisers Act, the Senate Report stated: “Similarly, it is difficult definitely to estimate the amount of funds under the influence or control of investment advisers. However, some idea of the size of the funds administered by investment advisers may be deduced from the fact that 51 firms for which information was obtainable by the Commission managed, supervised and gave investment advice with respect to funds aggregating approximately $4,000,000,000." (emphasis added). S. Rep., supra at 21. . 15 In 1960 and again in 1970, Congress considerably broadened the cov- erage of the Advisers Act. The Senate Report accompanying the bill which contained the 1960 amendments to the Act stated, with particular application here: “There are at present over 1214 million individuals in the United States who own corporate securities, nearly double those in 1952. It has been noted that this new group offers strong temptation to confidence men and swindlers who may give them biased advice or misuse their funds or securities.” (emphasis added). 8. Rep. No. 1760, 86th Cong., 2d Sess. 4 (1960). Al8 Moreover the plain language of Section 202(a)(11) and related provisions of the Act bear out this legislative in- tent. Section 202(a)(11) includes any person who “ad- vises” others with respect to investments. Section 203(c) (1)(D), 15 U.S.C. §80b-3(c)(1)(D) (1970), requires the in- vestment adviser to disclose the nature and scope of his “authority ... with respect to clients’ funds and accounts” in his registration statement. And Section 205, 15 U.S.C. §80b-5 (1970), establishes certain standards for investment advisers with respect to “investment advisory contracts” which include contracts “to act as an investment adviser or to manage any investment or trading account... .” These provisions reflect the fact that many investment ad- visers “advise” their customers by exercising control over what purchases and sales are made with their clients’ funds. We hold that the defendant general partners of FBA are investment advisers within the meaning of Section 202(a) (11) of the Act."* 16 Defendant Harry Goodkin & Company argues that, since it was not an “investment adviser”, it cannot be held liable for aiding and abetting a fraud committed by those who were investment advisers. Goodkin points out that Section 206 applies only to an investment adviser and that Section 202(a)(11)(B) excludes from the definition of an invest- ment adviser an accountant acting in the practice of his profession. We agree that the exemption excludes an accountant’s usual activities from the scope of the Act and excludes the accountant from coverage under the registration provisions and many of the other regulatory provisions of the Act even if the accountant is employed by an investment adviser. But the exemption does not shield the accountant from liability under the antifraud provisions of the Act if the accountant aids and abets an investment adviser with knowledge that his conduct is assisting an in- vestment adviser in defrauding a client. Cf. Section 209(e) of the Act, 15 U.S.C. §80b-9(e) (1970), which authorizes the SEC to seek injunctive relief and, if necessary, to recommend criminal proceedings against those who “aid, abet [or] counsel” violations of the Act. In view of the limi- tation of Section 206 to investment advisers, however, we believe that before Goodkin can be held liable as an aider and abetter, there must ag ee ee — Al9 (2) Private Right of Action Under Section 206 As with other provisions of the federal securities laws under which the courts have found implied private rights of action, Section 206 of the Advisers Act does not ex- pressly authorize private actions. We therefore must de- cide whether a private right of action is to be implied under that section. For the reasons below, we hold that it is.’” be a showing that Goodkin: (a) knew of the investment adviser-client relationship; (b) had knowledge of the fraud; and (c) acted in concert with the investment adviser. Cf. Ernst ¢ Ernst v. Hochfelder, 425 U.S. 185 (1976). Whether Goodkin is liable for aiding and abetting the investment advisers is one of the issues to be determined at trial pursuant to our remand. As to whether FBA itself is a proper defendant with respect to the Advisers Act claim, for aught that appears in the record before us, we have serious doubts. The general partners as individuals, not FBA as an entity, were the investment advisers to the limited partners. If upon remand, and after a hearing, the district court finds no more than the record now discloses with respect to the liability of FBA itself under the Advisers Act claim, it should dismiss as against the firm. 17 The SEC has submitted to Congress a number of proposed amend- ments to the Advisers Act. One would provide explicitly for private actions under the Advisers Act. See Investment Advisers Act Release No. 491, 8 SEC Docket 744 (December 15, 1975). In announcing its proposal, the SEC repeated its view that the existing language was sufficient to imply a private right of action. Its proposal was intended to put to rest those few decisions which had found no implied right of action. In the two district court cases in this Circuit in which the issue has been considered, the court has held that an implied right of action exists under the Advisers Act. Jones v. Equitable Life Assurance Society, 409 F.Supp. 370 (8.D.N.Y. 1975), accord, Angelakis v. Churchill Manage- ment Corp., CCH Fed. Sec. L. Rep. 95,285 (N.D.Cal. 1975); Bolger v. Laventhol, Krekstein, Horwath ¢ Horwath, 381 F.Supp. 260 (S.D.N.Y. 1975). Contra, Gammage v. Roberts, Scott § Co., CCH Fed. Sec. L. Rep. 994,761 (S.D.Cal. 1974); Greenspan v. Eugene Campos Del Toro, 73- 638-Civ. (S.D.Fla. May 17, 1974). The commentators who have reviewe: these decisions agree that a private right of action should be implied under the Advisers Act. Note, Private Causes of Action Under Section 206 of the Investment Advisers A20 The Supreme Court has recognized in a variety of con- texts that private rights of action may be implied in favor of the intended beneficiaries of a statute where necessary to implement the statute’s underlying purposes. Super- intendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 13 n.9 (1971); J. I. Case Co. v. Borak, 377 U.S. 426 (1964); Tunstall v. Brotherhood of Locomotive Fire- men and Enginemen, 323 U.S. 210 (1944); Texas & Pacific R.R. v. Rigsby, 241 U.S. 33 (1916). Cf. Bivens v. Sia Un- known Named Agents, 403 U.S. 388 (1971); Bell v. Hood, 327 U.S. 678 (1946). There are compelling reasons why the courts have been particularly willing to recognize private rights of action under the antifraud provisions of the federal securities laws. Those provisions are designed to protect specific classes of injured parties. Moreover the SEC—the agency charged with administration and enforcement of the fed- eral securities laws—does not have sufficient resources alone to enforce the many provisions of the statutes. Ab- sent judicial recognition of private rights of action, the federal securities laws most assuredly would fail to pro- vide the effective regulation over the securities industry which Congress intended. In finding an implied right of action under Section 14(a) of the 1934 Act, the Supreme Court held in J. I. Case Co. v. Borak, supra, 377 U.S. at 432, that “Private enforcement .. . provides a necessary supplement to Commission action”, and went on to state: “(I]t is the duty of the courts to be alert to provide such remedies as are necessary to make effective the congressional purpose.” Id. at 433. Act, 74 Mich. L. Rev. 308 (1975); Lybecker, Advisers Act Developments, 8 Review of Securities Regulations 927, 934 (April 23, 1975); Note, Bolaer v. Laventhol, Krekstein, Horwath ¢ Horwath: Private Rights of Action Under the Investment Advisers Act, 48 Temple L.Q. 433 (1975). A21 Applying these principles, the courts of appeals con- sistently have recognized an implied right of action under the Investment Companies Act—the companion to the Ad- visers Act. Moses v. Burgin, 445 F.2d 369 (1 Cir.), cert. denied, 404 U.S. 994 (1971); Herpich v. Wallace, 430 F.2d 792, 815 (5 Cir. 1970); Esplin v. Hirschi, 402 F.2d 94, 103 (10 Cir. 1968), cert. denied, 394 U.S. 928 (1969); Taussig v. Wellington Fund, Inc., 313 F.2d 472, 476 (3 Cir.), cert. denied, 374 U.S. 806 (1963) ; Brown v. Bullock, 194 F.Supp. 207 (S.D.N.Y.), aff'd, 294 F.2d 415, 420-21 (2 Cir. 1961) (en banc). It is well settled that implied rights of action exist under Section 10(b) of the 1934 Act and Rule 10b-5, which contain substantially the same language as Section 206 of the Advisers Act. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730 (1975) ; Superintendent of Insur- ance v. Bankers Life & Casualty Co., supra, 404 U.S. at 13 n.9; Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 787 (2 Cir. 1951) ; Kardon v. National Gypsum Co., 69 F.Supp. 512 (E.D.Pa. 1946). Judicially implied rights of action also have been found under Section 14(a) of the 1934 Act, J. I. Case Co. v. Borak, supra, and under the Public Utility Holding Company Act of 1935, Goldstein v. Greesbeck, 142 F.2d 422 (2 Cir.), cert. denied, 323 U.S. 737 (1944). Against this background, we turn to the question whether a private right of action should be implied under Section 206 of the Advisers Act. In Cort v. Ash, 422 U.S. 66, 78 (1975), the Supreme Court suggested that the following factors be considered in determining “whether a private remedy is implicit in a statute not expressly providing one”: “First, is the plaintiff ‘one of the class for whose especial benefit the statute was enacted’ . . . —that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative A22 intent, explicit or implicit, either to create such a remedy or to deny one? . .. Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? .. . And finally, is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law?” We believe that each of these factors point unmistakably toward recognition of an implied right of action under Section 206 of the Advisers Act. See Piper v. Chris Craft Industries, Inc. —— U.S. ——, 45 U.S.L.W. 4182, 4192-93 (U.S. Sup. Ct. Feb. 22, 1977). The purpose of the Advisers Act was “to protect the public and investors against malpractice by persons paid for advising others about securities.”"* The Act was de- signed for the “especial” benefit of persons relying upon their investment advisers for advice. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186-91 (1963). Congress enacted the Advisers Act, as it had earlier securities legislation, mindful of the need for federal regu- lation of the securities industry. As the Senate Committee Report emphasized : “The nature of the functions of investment advisers, their increasing widespread activities, their potential influence on security markets and the dangerous poten- tialities of stock market tipsters imposing upon 18 S. Rep. No. 1760, 86th Cong., 2d Sess., 1 (1960). The House Committee Report which accompanied the 1940 bill stated: “The essential purpose of title II of the bill is to protect the public from the frauds and misrepresentations of unscrupulous tip- sters and touts and to safeguard the honest investirent adviser against the stigma of the activities of these individuals by making fraudulent practices by investment advisers unlawful.” H.R. Rep. No. 2639, 76th Cong., 3d Sess., at 28 (1940). ee ee) A23 unsophisticated investors, convinces the committee that protection of investors requires the regulation of investment advisers on a national scale. The report of the Commission to the Congress and the record before the committee is clear that the solution of the problems and abuses of investment advisory services ... cannot be effected without Fed- eral legislation.” (emphasis added) S. Rep. No. 1775, 76th Cong., 3d Sess. 21 (1940). We are not aware of any statement indicating that Congress considered the problem of private actions under the Advisers Act at the time of its enactment. Nor is there any indication that the SEC considered this matter when it adopted Rule 206(4)-1. Absent specific statements of legislative intent, we must examine the legislative purposes underlying the Act. As stated above, the courts consistently have recognized that the Commission’s resources are inadequate to the task of policing alone the federal securities laws. In enacting the 1940 legislation, Congress intended to provide effective federal regulation of an important segment of the securi- ties industry. Failure to recognize a private right of action under the Advisers Act would effectively frustrate that purpose. We hesitate to reach such a result absent clear evidence from the Act’s legislative history that private actions were not intended. Turning to related provisions of the Advisers Act, See- tion 215(b), 15 U.S.C. §80b-15(b) (1970), provides that any contract in violation of the Act shall be void. As the courts have held in construing nearly identical provisions of the other securities acts, the language of Section 215(b) strongly suggests that a private remedy should be implied and that such a remedy would be consistent with the other provisions of the Act. Fischman v. Raytheon Mfg. Co.. A24 supra, 188 F.2d at 787 n. 4; Kardon v. National Gypsum, supra, 69 F.Supp. at 514; see Slavin v. Germantown Fire Ins. Co., 174 F.2d 799, 815 (3 Cir. 1949). In arguing that a private right of action should not be recognized under the Advisers Act, appellees point to ‘the difference between the language found in the jurisdictional provision of the Advisers Act and similar provisions of other securities acts.’® Section 214 of the Advisers Act, 15 U.S.C. §80b-14 (1970) in relevant part provides: “The district courts of the United States . . . shall have jurisdiction of violations of this subchapter or the rules, regulations, or orders thereunder, and, con- currently with State and Territorial courts, of all suits in equity to enjoin any violation of this subchapter or the rules, regulations or orders thereunder.” By contrast, Section 22 of the 1933 Act, 15 U.S.C. §77v (1970), Section 27 of the 1934 Act, 15 U.S.C. §78aa (1970), and Section 44 of the Investment Companies Act, 15 U.S.C. §80-a-43 (1970), provide that the district courts shall have 19 Appellees also argue that recognition of a private right of action would be inconsistent with Section 209(e) of the Act and other enforcement provisions which provide that the Commission “may in its discretion bring an action” for injunctive relief. We find no merit in this argument. The enforcement powers given the Commission under the Advisers Act are virtually identical to those of the other securities acts under which we have recognized implied private rights of action. Unlike the Securities Investor Protection Act, which was involved in Securities Investor Pro- tection Corp. v. Barbour, 421 U.8. 412 (1975), the Advisers Act is gen- eral, and the antifraud provisions in particular, do not manifest 4 specific legislative intent to restrict enforcement to the Commission. Here, private suits would be consistent with Commission action. The provision allowing the Commission the usual discretion to sue simply makes it clear that the SEC is not compelled to sue in every case. Indeed it would be extraordinary for Congress to require an agency to bring enforcement proceedings in every instance. The Court in Barbour dis- tinguished J. I. Case v. Borak, where the Court had found private suits a necessary supplement for—rather than a hindrance to—Commission action. 421 U.S. at 423. -_.— eh eet ee + A25 jurisdiction of “all suits in equity and actions at law brought to enforce any liability or duty created by” those Acts. Appellees argue that the omission of any reference to “actions at law” in Section 214 manifests a legislative intent to preclude private rights of action under the Ad- visers Act. We disagree. In our view, the reason for this omission is that each of the other Acts whose jurisdictional provisions refer to “actions at law” contains one or more sections expressly granting injured parties a private right of action for damages.” There is no provision in the Advisers Act which expressly provides for private actions; since it is a less complex statute, containing no express grants of right of action to private parties, a reference to ‘actions at law’ would be superfluous. There is not a shred of evidence in the legislative history of the Advisers Act to support the assertion that Congress intentionally omitted the reference to “actions at law” in order to preclude private actions by investors. Section 215, like the jurisdictional provisions of the other securities acts, was drawn to provide jurisdiction over actions ex- pressly authorized by the statute. Far from indicating that Congress ever considered the matter of private actions in drafting Section 214, the only legislative history indi- cates that Congress attached no great importance to its omission. In their only references to Section 214, both the Senate and House Reports stated that the enforcement provisions of the Advisers Act were “generally compa- rable” to those of the Investment Companies Act, whose 20 See Sections 1] and 12 of the 1933 Act, 15 U.S.C. §§77k and 771 (1970) ; Sections 9(e), 16(b) and 18 of the 1934 Act, 15 U.S.C. §478i(e), 78p(b) and 78r (1970); Sections 16(a) and 17(b) of the Publie Utility Holding Company Act of 1935, 15 U.S.C. §$§79p(a) and 79(q)(b) (1970); Section 323(a) of the Trust Indenture Act of 1939, 15 U.S.C. §77www(a) (1970); and Section 30(f) of the Investment Companies Act of 1940, 15 U.S.C. §80a-29(f) (1970). A26 jurisdictional provision contains the “actions at law” lan- guage. S, Rep. No. 1775, 76th Cong., 3d Sess., at 23 (1940) ; H. R. Rep. No. 2639, 76th Cong., 3d Sess., at 30 (1940).™ In dealing with private rights of action under other secu- rities acts, courts have referred to the “actions at law” language under the jurisdictional provisions to indicate the overall structure of those acts. But the “actions at law” language has never been relied upon as evidence that Congress explicitly considered the matter of private dam- age actions under the particular substantive provision in question. Had Congress provided explicitly for private damage actions it would be unnecessary to consider whether the remedy should be judicially implied. Indeed, under the antifraud provisions of other securities acts courts have recognized the absence of any legislstive intent either to create or to deny private rights of action for damages. Here, as under the other statutes, it is clear that Con- gress simply did not consider the matter.” 21 As originally introduced in the House and Senate, the proposed Ad- visers Act merely incorporated the jurisdictional provision of the Invest- ment Companies Act. Section 203 of 8. 3580 and H. R. 8935. The Investment Companies Act, in turn, had adopted the same language as found in Section 25 of the Publie Utility Holding Company Act of 1935, 15 U.S.C. §79y. Section 40(a)(1) of S. 3580 and H.R. 8935. As re- ported out of the committees, the bills omitted all references to other statutes; and the Advisers Act was given its own jurisdictional provi- sion which did not contain ary reference to “actions at law brought to enforce any liability ....” 22 We need not decide whether the language of Section 214 which grants to the district courts jurisdiction over “violations of this subchapter or the rules, regulations, or orders thereunder” might cover private damage actions. See Bolger v. Laventhol, Krekstein, Horwath ¢ Horwath, supra, 381 F.Supp. at 264. Courts have implied private rights of action under statutes which have no separate jurisdictional provision for civil damage suits. Texas ¢ Pacific R.R. Co. v. Rigsby, supra, 214 U.S. at 39; Odell v. Humble Oil $ Refining Co., 201 F.2d 123, 126 (10 Cir. 1953); Nar- ramore v. Cleveland, C.C. $ St. L. Ry. Co., 96 F. 298, 300 (6 Cir. 1899). Moreover, the general federal question jurisdictional provision, 28 U.S.C. $1331 (1970), would apply here. See Brown v. Bullock, supra. 294 F.2d at 418. A279 The Supreme Court, in considering a different issue under the Advisers Act in SEC v. Capital Gains Research Bureau, Inc., supra, 375 U.S. at 195, emphasized that the Act should “be construed like other securities legislation ‘enacted for the purpose of avoiding frauds,’ not technically and restrictively, but flexibly to effectuate its remedial pur- poses.” (footnote omitted). We find that particularly cogent here where we are asked to determine whether there should be a private right of action to recover damages for what may be clear violations of the Act. Moreover, mind- ful of the Supreme Court’s admonition in J. I. Case v. Borak, supra, 377 U.S. at 433, we believe that we should provide “such remedies as are necessary to make effective the congressional purpose”, rather than adopt a construc- tion that would effectively defeat the purpose of provid- ing federal regulation over an important segment of the securities industry. We hold that there is an implied private right of action under Section 206 of the Advisers Act.?** 22a Our concurring-dissenting colleague, in a characteristically thoughtful and innovative opinion, urges that a private right of action for damages should not be implied under the Advisers Act. We suggest that Judge Gurfein’s opinion be read in the light of the following observations. First, the basic premise of the dissent is the assumption that the Advisers Act was intended to provide “a compulsory census of invest- ment advisers, and not . . . a pervasive regulatory scheme.” (emphasis added). Post, p. 6250. A careful reading of the Advisers Act shows that, as enacted, it requires far more than a census. As the last of tie series of federal securities laws enacted between 1933 and 1940, it is an integra] part of a comprehensive regulatory scheme intended by Congress to eliminate certain abuses in the securities industry. The Supreme Court in SEC v. Capital Gains Research Bureau, Inc., supra, in referring to a fundamental purpose of the Advisers Act and its relationship to the other federal securities regulatory acts, stated: “The Investment Advisers Act of 1940 was the last in a series of Acts designed to eliminate certain abuses in the securities industry, abuses which were found to have contributed to the stock market erash of 1929 and the depression of the 1930's. It was preceded by the Securities Act of 1933, the Securities Exchange Act of 1934, A28 (3) Compensable Damages Under the Advisers Act Appellees contend that plaintiffs have not alleged com- pensable damages under the Advisers Act. They argue the Public Utility Holding Company Act of 1935, the Trust Inden- ture Act of 1939, and the Investment Company Act of 1940. A fundamental purpose, common to these statutes, was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securi- ties industry. As we recently said in a related context, ‘It requires but little appreciation . . . of what happened in this country during the 1920's and 1930's to realize how essential it is that the highest ethical standards prevail’ in every facet of the securities industry. Silver v. New York Stock Exchange, 373 U.S. 341, 366." (footnotes omitted). 375 U.S. at 186-87. Second, while we do not claim the expertise of our dissenting colleague concerning hedge funds, pp. 6253-6254 & n. 1, we do suggest that much of the speculation of the dissent with respect to the investment policy of the general partners as managers of the fund (e.g. whether the part- nership “was going to operate in the most speculative of investment activities”, post, p. 2653) and the intentions of plaintiffs in becoming limited partners, might better await the trial on the merits to which we have held plaintiffs are entitled. For after all, the posture of the case as it came to us from the district court was the dismissal of the com- plaint on the ground that plaintiffs realized a net profit on their overall limited partnership investments and therefore failed to prove damages compensable under the federal securities laws. 392 F.Supp. 740. While this holding of the district court is rejected, all we hold with respect to plaintiffs’ Advisers Act claim is that they are entitled to their day in court and an opportunity to prove their claim. Post, pp. 2653-2654. At that time, when the credibility of witnesses can properly be determined, many of the speculative factual issues suggested by the dissent appropri- ately can be resolved. Finally, and perhaps of chief significance, the dissent does not dispute the eloquent absence of evidence that Congress ever considered allowing damages, as distinguished from injunctive relief, under the Advisers Act. The question of damages was not considered because the matter of a private right of action was not considered. The dissent’s massive reliance upon the omission of the “actions at law” language in the Advisers Act and its inclusion in the jurisdictional provisions of other statutes, we think is misplaced. Judicially implied private rights of action have been recognized under various sections of the securities laws even though those sections, unlike other sections of the same statutes, contain no explicit provision for private actions. Here likewise there is no evidence that the omission was meant to exelude private actions. In this respect the present A29 that plaintiffs themselves were neither purchasers nor sellers of securities and that their claims are speculative because they are based upon the assertion that plaintiffs would heve withdrawn from FBA earlier had they been told the truth about the partnership’s investments. We disagree. At the outset, we find no basis for appellees’ assumption that plaintiffs’ only alternative, had they learned the truth earlier about FBA’s high percentage of investments in un- registered securities, was to withdraw their funds. Plain- tiffs might have tried to persuade the general partners to conform the firm’s investments to the conservative policy they had represented. Failing that, plaintiffs might have mobilized the other limited partners to exert pressure on the general partners. We find appellees’ reliance upon Blue Chip Stamps v. Manor Drug Stores, supra, on this aspect of the instant case to be misplaced. The Blue Chip decision was based on the express lan- guage of Section 10(b) and Rule 10b-5 requiring a fraud “in connection with the purchase or sale of any security.” ** case is plainly different in a significant legal respect from National R.R. Passenger Corp. v. National Ase’n of R.R. Passengers, 414 U.S. 453 (1974), relied upon by the dissent, where “the legislative history of the Amtrack Act provide[d] a clear and convincing expression of Congress’ intent to preclude anyone except the Attorney General and in certain situations an employee or his duly authorized representative from main- taining an action under the Act against petitioners” (414 U.S. at 465 (Justice Brennan concurring) ), and transportation policies not pertinent here militated in favor of such a limitation. No such history or policies are to be found here. 23 The holding in Blue Chip was that persons who claimed that they had been fraudulently induced not to purchase securities were not within the class of persons protected by Section 10(b) of the 1934 Act and Rule 10b-5, under which recovery is limited to funds “in connection with the purchase or sale” of securities. In reaffirming the doctrine of Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2 Cir.), cert. denied, 343 U.S. 956 (1952), the Court also stated that “actual shareholders in the issuer A30 Neither Section 206 of the Advisers Act nor Rule 206 (4)-1 contains any such requirement. While the Court stated in Blue Chip that the purchaser-seller limitation under Section 10(b) protected against vexatious and spec- ulative claims, it did not say or suggest that any claim would be too speculative for recovery under the other secu- rities acts unless the plaintiff was a purchaser or seller. Indeed the Court acknowledged that provisions of the other securities acts afford rights of action to persons who are not purchasers or sellers. 421 U.S. at 733-34. Acceptance of appellees’ contention, moreover, would lead to a construction of the Advisers Act clearly incon- sistent with the intent of Congress. As indicated above, Congress intended to protect investors against frauds committed by investment advisers who managed their cli- ents’ funds, as well as frauds committed by advisers who did not make purchases and sales for their clients. If the claims of a client whose adviser managed his funds were to be held to be too speculative simply because the client failed to allege that he would have taken some remedial action if he had known the truth, a large segment of those investors whom Congress meant to protect would be ex- eluded from the Act’s coverage. To accept appellees’ con- tention would lead to the incongruous result that an in- vestor’s claims would be speculative even if the adviser had made fraudulent statements to conceal the fact that he was stealing his client’s funds. We believe that the differences in the language and pur- poses of Section 10(b) of the 1934 Act and Section 206 of the Advisers Act distinguish the instant case from Blue who allege that they decided not to sell their shares because of an unduly rosy representation or a failure to disclose unfavorable material” might not be able to sue under Section 10(b) and Rule 10b-5. Blue Chip Stamps v. Manor Drug Stores, supra, 421 U.S. at 737-38. A31 Chip. We also note that the policy considerations expressed in Blue Chip lend no support to appellees’ arguments.” Under Section 206, the plaintiff class is limited to the investment adviser’s own clients. Since the investment adviser is compensated for his services, both client and adviser understand that the client will rely upon the ad- viser’s judgment and advice. To characterize the client’s reliance as speculative is to ignore the essence of the rela- tionship. See Galfand v. Chestnutt Corp., 545 F.2d 807 (2 Cir. 1976). Plaintiffs here allege fraudulent representa- tions relating to specific purchases and sales of unregis- tered securities, thus providing a definable measure of damages. And a defrauded client may be deprived of numerous means of controlling his adviser’s conduct and the management of his investments, only one of which is the remedy of withdrawing his funds altogether. We be- lieve that the limited uncertainties involved in a case such as this are not sufficient to bar recovery on an otherwise valid claim; and they are adequately offset by requiring proof that the misrepresentations were material and proof of reliance.*® 24 In interpreting the express language of Section 10(b) and Rule 10b-5 in Blue Chip, the Court expressed concern about suits by persons who neither purchased nor sold securities but who claimed that they would have purchased or sold securities but for false representations made by someone whom they might not even have known. The Court noted that the “purchase or sale” requirement protected against vexatious suits by a potentially limitless class of plaintiffs and avoided the diffecult ques- tions of determining whether a plaintiff would or would not have pur- chased or sold securities but for the defendant's representations. Id. at 745-47. Far from holding that claims of persons who were neither purchasers or sellers would te too speculative under the other securities acts, the Court interpreted the express language of Section 10(b) and Rule 10b-5. And the Court expressly noted that many of the other securities acts have no “purchase or sale” requirement. 421 U.S. at 733-34. 25 Even the claims of a person who has purchased or sold securities are not free of uncertainties. A purchaser or seller necessarily alleges that he would not have made the purchase or sale had he known the true facts. A32 We hold that plaintiffs have alleged damages compen- sable under Section 206 of the Advisers Act.” IV. Measure or Damaces on REMAND In view of our remand for trial on the Advisers Act claim, we believe that the district court is entitled to some guidance on the proper measure of damages. We do not agree with the district court’s holding, 392 F.Supp. 740, that, since plaintiffs realized a net profit on their overall limited partnership investment, they failed to prove damages compensable under the federal securities laws. This is not to say, however, that a plaintiff may recover for losses, but ignore his profits, where both result from a single wrong. In determining on remand whether plain- Although the claims of persons who neither purchased nor sold secu- rities, in individual cases, may be less speculative than the claims of actual purchasers or sellers, Blue Chip weeds out suits by persons who may have had no interest in a security until discovering that someone has made a fraudulent statement which may give rise to a lawsuit. In view of the settlement value of a securities suit, this is an important consideration. Obviously an investor who has paid for the advice of his adviser is not the type of disinterested by-stander at whom the Blue Chip decision was primarily aimed. 26 It is important to note that there is no issue in this case as to whether an investor may recover for negligent misrepresentations by his invest- ment adviser. See Ernst ¢ Ernst v. Hochfelder, supra; Gerstle v. Gamble. Skogmo, Inc., 478 F.2d 1281, 1298-1301 (2 Cir. 1973) (distinguished in Ernst & Ernst v. Hochfelder, supra, 425 U.S. at 209; SEC v. Capital Gains Research Bureau, supra. Plaintiffs here have alleged that de- fendants’ misrepresentations were intentional. Whether defendants thought that the price of the unregistered securities would rise or not has no bearing on the issue of scienter. Although the general] partners’ own funds were part of FBA’s pooled assets, they would be liable under Section 206 if they intentionally deceived the limited partners to prevent the limited partners from withdrawing their contributions or for any other reason. Ernst ¢ Ernst v. Hochfelder, supra. Scienter does not require a showing of intent to cause a loss to a plaintiff. SEC v. Capital Gains Research Bureau, supra, 375 U.S. at 192 n. 39. A33 tiffs have sustained any damages from the alleged fraudu- lent investments, the district court should determine, first, at what point defendants’ representations became fraudu- lent due to the increasing proportion of portfolio invest- ments in unregistered securities. The court then should compute the total net losses on all holdings of unregistered securities due to changes in price after that date. Finally, the court should determine what proportion of FBA’s holdings was’ inconsistent with representations that the partnership was in a “most conservative posture” and the other representations made to the limited partners. The proper measure of damages then would be that part of net losses incurred on unregistered securities after the point when the defendants’ representations became fraudulent which stems from the portion of those investments incon- sistent with defendants’ representations.*" We of course do not intimate any views as to whether plaintiffs in fact have sustained any damage and, if so, how much. All we hold is that they are entitled to their day in court and an opportunity to prove, if they can, their claim under the Advisers Act. Affirmed as to the dismissal of the Securities Exchange Act claim; as to the dismissal of the Investment Advisers Act claim, reversed and remanded for trial. —-— 27 The cut-off price for such unregistered securities in the portfolio at the time plaintiffs withdrew should be the value assigned to such securities by the general partners, since that presumably is what plain- tiffs received. This would provide the closing out price for loss-netting purposes with respect to securities remaining in the portfolio at the time of plaintiffs’ withdrawal. A34 Gurrein, Circuit Judge, concurring and dissenting: I concur in the affirmance of the dismissal of the § 10(b) claim. With great respect for my brother Timbers as a master of securities law, I must respectfully dissent from the hold- ing that, under this complaint, we should imply a private right of action at law for damages for alleged violation of § 206 of the Investment Advisers Act, 15 U.S.C. § 80b-6 (“Advisers Act”) by these limited partners of a specula- tive hedge fund.’ According to the majority, the issue in this case is whether to imply a private right of action. It therefore draws an analogy to other securities act provisions under which private rights of action have been implied. It seems to me, however, that the issue is rather whether a private action at law for damages should be implied. With refer- 1 The Hedge Fund partnership agreement gave the general partners the following powers: “(a) To purchase, hold and sell stocks, bonds and other securi- ties; (b) to sell stocks, bonds and other securities short and to cover such sales; (¢) to purchase, hold, sell and otherwise deal in put and call options and any combination or combinations thereof ; (ad) to purchase, hold, sell, sell short and cover, and borrow from brokers for that purpose, commodity contracts and to purchase, hold, sell and otherwise deal in commodities generally dealt in on commodity or produce exchanges, provided, however, that Partner- ship funds used for the purpose of dealing in commodities and commodity contracts shall not exceed at the time of any purchase or commitment ten (10) percent of the net worth of the Partner- ship at July 1, 1965 or at the beginning of any calendar year there- after, as the case may be; (e) to conduct margin accounts with brokers; (f) to open, maintain and close bank accounts; (g) to sign checks; (h) to pledge securities for loans; (i) to engage in the business of advising and counselling on investments and to enter into agreements therefor; and (j) generally, to act for the Partnership in all matters incidental to the foregoing.” The original partnership agreement was amended twice, but the amend- ments did not affect the management's broad discretionary powers. A35 ence to that issue, I think that the Investment Advisers Act differs significanty from the securities statutes upon which the majority draws for support. The legislative history of the Advisers Act indicates that it was a tentative attempt to effect a “compulsory census” of investment advisers by requiring registration rather than to provide a full regulatory scheme. David Schenker, representing the SEC, testified in the Senate Hearings: Therefore, our fundamental approach to this problem is in the first instance, before we could intelligently make an appraisal of the economic function or of the abuses which might exist in that type of organization, to see if we could not get something which approx- imated a compulsory census. Fundamentally that is the basic approach of title 2. [The Advisers Act]. We first would like to find out how many people are en- gaged in this business, what their connections are, what is the extent of their authority, what is their background, who they are, and how they handle the people’s funds” (emphasis added). Hearings on S. 3580 before the Subcomm. of the Senate Comm. on Banking & Currency, 76 Cong., 3d Session 48. See also 8S. Rep. No. 1760, 86th Cong., 2d Sess., U.S. Code Cong. & Adm. News 3502. There are other indications that “as enacted, the Investment Advisers Act represented a compromise between the SEC and the investment advisory industry.” See Note, Private Causes of Action Under Sec- tion 206 of the Investment Advisers Act, 74 Mich. L. Rev. 308, 319-20 & n.69 (1975).* It is in light of this cautious approach taken by Congress in enacting the Advisers Act as tentative legislation that Section 214, the provision which appears to allow only suits in equity, should be read. 2 See p. 6232 & n. 5 infra. A36 Section 214 is unlike the corresponding sections in the other Acts. As my Brother Timbers notes, the Advisers Act gives the district courts jurisdiction, concurrently with state courts, only “of all suits in equity to enjoin any vio- lation of this subchapter or the rules, regulations, or orders thereunder.” The other Acts, by contrast, provide juris- diction not merely over “all suits in equity,” but also over “actions at law brought to enforce any liability or duty created thereby, or to enjoin any violation of this sub- chapter, or the rules, regulations or orders thereunder,” e.g., Investment Company Act of 1940, 444, 15 U.S.C. § 80a-43, an act passed together with the Advisers Act in a single bill. For similar language in other Acts, see majority opinion p. 6233, n.20.* 3 It seems to me of some significance that early drafts of the Advisers Act, ineluding 8. 3580 and H.R. 8935, filed on March 14, 1940, merely incorporated by reference § 40 of the Investment Companies Act, which did include the reference to “actions at law.” After the conclusion of four weeks of Senate hearings on April 26, however, representatives of the industry met with the SEC to negotiate changes in the proposed bill. See Hearings on H.R. 10065 Before a Subcomm. of the House Comm. on Interstate and Foreign Commerce, 76th Cong., 3d Sess. 72 (1940); 86 Cong. Rec. 10069 (1940) (remarks of Senator Wagner). The result was a new draft, which finally met the approval of the in- dustry, see House Hearings at 95; Jaretski, The Investment Company Act of 1940, 26 Wash. L. Rev. 303, 309-10 (1941), and which for the first time contained a separate jurisdictional provision referring to “suits in equity” but omitting the reference to “actions at law” which the majority seeks to restore to the statute. 4 While the majority opinion does not rely on the circumstance that jurisdiction is conferred over “violations” of the statute and rules thereunder to imply a cause of action for damages at law, a district court has done so. See Bolger v. Laventhol, Krekstein, Horwath ¢ Horwath, 381 F. Supp. 260 (S.D.N.Y. 1974). I do not agree. “Viola- tions” in the context means criminal violations, and violations on the civil side are limited to suits in equity. This is made clear by the venue provisions of §214: (1) “any criminal proceeding” may be brought in the district court wherein any act or transaction constituting the violation oceurred; (2) “any suit or action to enjoin any violation may be brought in... .” There is still no reference to an “action at A334 The attempted withholding of jurisdiction over actions at law in the Advisers Act indicates that Congress was not intending to provide for any liability beyond injunctive relief.’ As Mr. Justice Powell noted in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756 (concurring), “(t]he starting point in every case involving construction of a statute is the language itself.” The majority opinion explains that the language of § 214 differs from the lan- guage of the jurisdictional sections in every other Securi- ties Act because “each of the other Acts whose jurisdic- tional provisions refer to ‘actions at law’ contains one or more sections expressly granting injured parties a private right of action for damages,’” and hence, required the jurisdictional provision for that reason.‘ 5 One might indeed argue that there is lack of subject-matter jurisdic- tion to enforce actions at law for damages for violations of the Advisers Act because of the lack of any specific statutory authorization, but I do not urge that. There is jurisdiction under a broad reading of the “arising under” clause of 28 U.S.C. § 1331. Cf. Illinois v. City of Mil- waukee, 406 U.S. 91, 98 (1972); Romero v. International Terminal Operating Co., 358 U.S. 354, 393 (1959) (Brennan, J., concurring and dissenting); Bell v. Hood, 327 U.S. 678 (1946). See also Tunstall v. Brotherhood of Firemen, 323 U.S. 210 (1944) (“arising under” 28 U.S.C. § 1337). The majority correctly states that plaintiffs allege jurisdiction under § 214 of the Advisers Act, the very section that does not provide for “actions at law,” but since the pleading can be amended I make no point of the insufficiency of a proper jurisdictional statement. Even if an implied claim for relief is judge-made, it may “arise under the laws of the United States.” 6 The reason given by the majority is not persuasive, for it fails to note that in every single case in which an express civil liability is created in any of the Acts, the jurisdiction has already been stated in the very section creating the express liability. Thus, §11 of the 1933 Act, 15 U.S.C. § 77k, itself provides that “any person acquiring such security . . . may, either at law or in equity, in any court of competent jurisdiction, sue .. . .” Section 12 of the 1933 Act, 15 U.S.C. § 771, itself provides that the purchaser “may sue either at law or in equity in any court of competent jurisdiction ....” To the same effect, see Section 9(e) of the 1934 Act, 15 U.S.C. § 78i(e); Section 16(b) of the 1934 Act, 15 U.S.C. § 78p(b); Section 18 of the 1934 Act, 15 U.S.C. § 78r; Section 16(b) of the Publie Utility Holding Company Act of 1935, 15 A38 But the more cogent question is why the Advisers Act, as distinguished from every other securities act, does not provide for any express civil liability in damages. The majority offers no explanation for such an omission which must have been a studied omission. I think it is highly relevant that in each of the other Acts Congress itself did provide for some express civil liability, yet under the Ad- visers Act it failed to include a single section imposing liability for damages. Congress, for example, could have provided an express damage remedy for misrepresenta- tions in the registration statement of the advisers as it did for misrepresentations of the registration statement of the underwriter, 15 U.S.C. § 77k(a)(5). This indicates U.S.C. § 79p(b); Section 17(b) of that Act, 15 U.S.C. § 79q(b); Sec- tion 323(a) of the Trust Indentures Act, 15 U.S.C. § 77www(a) ; Section 30(f) of the Investment Companies Act, 15 U.S.C. § 80a-29(f). The better explanation, it seems to me, for the general jurisdictional provi- sion in each Act—"the District Courts of the United States . . . shall have jurisdiction” ete.—is Congress’ fear that general federal question jurisdiction under 28 U.S.C. § 1331 might not establish jurisdiction in the federal courts over securities law claims, particularly when the jurisdictional amount was lacking. The separate jurisdictional provi- sions associated with the several sections of the securities acts creating substantive liability referred only to “any court of competent jurisdic- tion,” and hence left open the question of whether the federal courts were in fact courts of “competent jurisdiction.” Thus, an independent jurisdiction was conferred on the federal courts by the general provision of each statute (and in the case of the Securities Exchange Act, exclu- sive jurisdiction). In short, the internal sections ¢ nferred general jurisdiction. The jurisdictional section was drawn as broadly as pos- sible to confer clear federal jurisdiction. The majority opinion seeks to draw support from the fact that the Senate and House Reports stated that the enforcement provisions of the Advisers Act were “generally comparable” to those of the Investment Companies Act. Ante at 6233. Aside from the fact that this begs the crucial question—whether the Acts were comparable in this particular respect—it ignores what was in my view the more likely meaning of “generally comparable” as applied to the enforcement provisions: that is, that the Advisers Act is “generally comparable” to the Investment Company Act in that both provide for the concurrent jurisdiction of state and feders! courts, as distinguished from the Exchange Act in which federal jurisdiction is made exclusive. a A39 rather that, in its cautious approach to the regulation of investment advisers, Congress was not yet ready to impose any civil liability for damages. The majority holds, nonetheless, that a private damage action should be implied in this case “to implement the statute’s underlying purposes.” It notes that persons rely- ing upon investment advisers for advice, for whose “espe- cial benefit” the Act was adopted, see Cort v. Ash, 422 U.S. 66, 78 (1975), will benefit from a private damage action. Ante, pp. 6229-6230, citing SEC v. Gapital Gains Research Bureau, Inc., 375 U.S. 180, 186-91 (1963).7 Such reasoning it seems to me has become somewhat outmoded in the light of the current standards of interpretation announced in Cort v. Ash, supra. The four factors mentioned in Cort v. Ash are not mere surplusage to the theme that the benefi- cent purpose of the legislation is, by itself, sufficient war- rant for the implication of a claim for private relief.* Such 7 That case was not, of course, a damage action, nor was it brought by a private party. & The majority reasons that Section 215(b) of the Advisers Act, 1£ U.S.C. § 80(b)-15(b) (1970), which provides that any contract violating the Act shall be void, strongly suggests that a private remedy should be implied. Ante, p. 6231, supra. But it does violence to the criteria enunciated in Cort to imply an action simply because a contract is made void, or to recognize an actionable tort, simply because a statute prohibits particular conduct. Cf. Note, Section 906 Private Actions 74 Mich. L. Rev. 308, 312 n.19 (1975). Significantly, the SEC in its amicus brief does not rely on § 215(b) of the Act. Even if the fact that a statute renders certain contracts void were deemed ipso facto to create a private right of action, on the theory that this provision could be vindicated only by the private parties to the contract, it of course hy no means follows that a damage Temedy is proper. Rescission or restitution are, aside from damages, remedies ordinarily available when a contract is void. Significantly, rescission is an equitable remedy, see 5 Corbin on Contracts § 1103, so that im- plication of a private right of action for rescission and restitution under § 215(b) would be well within the jurisdictional grant of § 214, and consistent with the notion that it is only actions at law which ane in- consistent with the statutory scheme. A40 a single criterion is also inadequate because a statute can have more than one “beneficient purpose”—here, to protect investors but also to avoid undue disruption of the invest- ment advisory industry. To put it another way, Congress may intend a statute to protect investors—but not neces- sarily without limit. Countervailing considerations may result in something less than an imposition of civil liabil- ity for money damages. The majority opinion ignores this problem of statutory construction, in my view, because it gives insufficient weight to the second factor listed in Cort: “is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one?” * As shown above, there is implicit legislative intent to deny such a remedy.’® The majority urges that there is no evidence that Con- gress intentionally sought to preclude private damage ac- tions. Ante, p. 6233. But there is surely no “clear evi- dence” that Congress affirmatively intended private actions for damages to lie for violation of 4206. And we have been instructed recently in National Railroad Passenger Corp. v. National Ass’n of Railroad Passengers, 414 U.S. 453, 458 (1974) (“Amtrak”) that “‘when a statute limits a thing to be done in a particular mode, it includes the 9 Analytically, it would be equally proper to say that implication of a private action under the Advisers Act is not “consistent with the under- lying purposes of the legislative scheme.” Cort, supra, at 78. For though such a remedy may be consistent with the goal of protecting customers of investment advisers, it is hardly consistent with the desire not to subject advisers to monetary liability, at least, until further study by Congress. 10 The situation in which there is express statutory provision for one form of proceeding, as here, for equitable but not legal actions, should be distinguished from the situation in which Congress gives broad but unspecified remedial scope to the statute, see, ¢.g., §10(b) of the Securities Exchange Act, 15 U.S.C. §78j(b). In the latter situation, implication of some private actions may be not merely consistent with the legislative purpose, but necessary in order fully to effectuate it. A44 negative of any other mode,’” quoting Botany Mills v. United States, 278 U.S. 282, 289 (1929). Section 214 ex- pressly confers jurisdiction over suits in equity only, and the Act as a whole does not provide anywhere for actions at law. Under the Amtrak formulation, when Congress limits relief to equitable relief, “it includes the negative of any other mode”—monetary liability. In Amtrak Mr. Justice Stewart observed that, in determining whether a private action would lie, this rule of statutory construc- tion should yield only “to clear contrary evidence of legis- lative intent,” 414 U.S. at 458, a situation that does not exist in the case of the Advisers Act. Similarly, in Securities Investor Protection Corp. v. Bar- bour (“SIPC”), 421 U.S. 412 (1975), Mr. Justice Marshall noted that where there is expre [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_0595%3A1. Public record. Not legal advice.