Petition — Touche Ross & Co. v. Redington

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} | Supreme Court, U. S,

FILED

AUG 28 1978

“MICHABL RODAK, JR.. CLERK

IN THE

Supreme Court of the United States

OcTOBER TERM, 1978

No. @€8-309

TOUCHE ROSS & CO.,

Petitioner,

—against—

EDWARD S. REDINGTON, as Trustee for the liquida-

tion of the business of Weis Securities, Inc., and

| SECURITIES INVESTOR PROTECTION CORPO-

| RATION,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

ARNOLD I. ROTH

| Attorney for Petitioner

575 Madison Avenue

New York, New York 10022

(212) 644-7000

Of Counsel

ARTHUR S. LINKER

| RONALD Jay LitcHMAN

| ROSENMAN COLIN FREUND Lewis & COHEN

575 Madison Avenue

| New York, New York 10022

B. The Dismissal Of This Action By The District

PRT Sings PR eee os” yee

C. The Decision Of The Court Of Appeals ...

REASONS FOR GRANTING THE WRIT ...............

I. The Holding By The Court of Appeals Major-

ity That, Despite The Express Remedy In

Section 18(a), Section 17(a) Creates an Im-

plied Private Right Of Action Conflicts With

This Court’s Decisions That, Where An Ex-

press Remedy Is Provided For Violation Of A

Statute, The Statute Does Not, Absent Clear

Contrary Evidence Of Legislative Intent, Give

Rise To Another And Broader Implied

OE SA ea al. . on eh gind un dae te 4

A. The Statutory Scheme Of The 1934 Act,

Analyzed In Light Of This Court’s Deci-

sions In Amtrak, Barbour, Blue Chip

Stamps And Piper, Demonstrates a Clear

Congressional Intent That The Express

Remedy Provided By Section 18(a) Be The

Sole Remedy For Section 17(a) Violations

1. The Reporting Requirements of Section

17(a) and Rule 17a-5, And The Ex-

press Remedy Provided In Section

18(a) For Misleading Reports........

2. The Trustee And SIPC Can Assert No

Claim For Relief Under Section 18(a)

. The Statutory Scheme Whereby Section

18(a) Provides an Express And Limited

Damage Remedy For Misstatements In

Section 17(a) Reports Reflects A Con-

greens Intention That Such Remedy

e Exclusive And That No Additional

Remedy Be Implied From Section

RE POE bo be hare. vc BecaR Bee Ge.

This Court's Decisions In Amtrak, Bar-

bour And Blue Chip Stamps Compel

The Conclusion That Section 18(a)

PAGE

Provides the Exclusive Damage Rem- |

edy for Violations Of Section 17(a) ..

. Piper Bars Implication Of A Private

Damage Remedy Under Section 17(a)

- The Court Of Appeals Majority Misap-

ehends The Statutory Scheme, And Fails

0 Apply The Analysis Required By, And

Therefore Reaches A Result In Conflict

With, This Court’s Decisions

The Court Of Appeals Majority Errs In

ph To Apply The Analysis Re-

— By Amtrak, Barbour And Blue

hip Stamps

re? OC. 0 Oe 8 6 OO 64.8 8 6 O & 66

- The Court Of Appeals Majority Errs In

Finding Section 18(a) Irrelevant......

. The Court Of Appeals Majority Errs In

Its Application Of The Principles Of

COPE PIR ri ok cb bet te eee ds ws 6

- The Court Of Appeals Majority Errs In

Failing To Apply The Necessity Stand-

ard Of Piper ig ape

=e ee Oe CO 'S..0 OS. 8.6 Hae OSs 2s

PAGE

Il. The Holding By The Court of Appeals Major-

ity That, Despite The Express Remedy In

Section 18(a), Section 17(a) Creates An Im-

lied Private Right Of Action Conflicts With A

Decision Of The Third Circuit, And Numerous

District Court Decisions, Which Hold That No

Rights Of Action May Be Implied Under

Other Reporting Provisions Of The 1934 Act

III. The Holding Of The Court Of Appeals Major-

ity That The Trustee and SIPC Are Appro-

riate Parties to Seek Recovery Of Customers

Somnae Is Erroneous And Conflicts With

Applicable Decisions Of This Court ........

A. The Holding With Respect To The Trustee

Is Erroneous And Conflicts With This

Court’s Decision In Caplin v. Marine Mid-

land Grace Trust Co. .....eeeeeececeees

B. The Holding With Respect To SIPC Is

Erroneous And Conflicts With This Court's

Decisions In Amtrak And Barbour ......

IV. The Questions Raised By This Petition Are

Important To The Administration Of The

Federal Securities Laws And Should Be De-

cided By this Court ..........seeeeeeeeeees

A. The Question Of Whether Section 17(a)

Creates Any Implied Right Of Action

Should Be Decided By This Court ......

B. The Question Of Whether The Trustee

And SIPC May Assert Any Section 17(a)

Rights Should Be Decided By This Court

ee Be) ok. ota glee ba bh a Eble eo wn.e

TABLE OF AUTHORITIES

CASES: PAGE

Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

P 723 ( “— re 7,11-12, 14-16, 18-19, 30, 32, 34

aplin v. Marine Midland Grace Trust Co.

i SOR CONEY i ice ein cs : 06-27 35

Cort v. Ash, 422 U.S. 66 (1975) ......... 10, 20-21

Cramer v. General Telephone & Elec-

tronics, [1978] Fep.Sec.L.Rep. (CCH) 196,380

CERRA, Ps TEGO Bin Jocuskosk cede uberis 24-25

Daniel v. International Brotherhood of Teamsters

561 F.2d 1223 (7th Cir. 1977), cert.

S. CX. 1232 11978) 2... noe bganpavad 34

DeWitt v. American Stock Transfer Co., 433

F.Supp. 994 (S.D.N.Y.), mode on other

grounds, 440 F.Supp. 1084 (S.D.N.Y. 1977) . 25

duPont v. Wyly, 61 F.R.D. 615 (D. Del. 1973). 25

In re Equity Funding Corp. of America Securities

Litigation, 416 F.Supp. 161 (C.D. Cal. 1976). 25

Ernst & Ernst v. Hochfelder, 425 US. 185

P selon Pana cue h coneweeumepids 9, 12, 32-34

roquols Industries, Inc. v. Syracuse China Corp..,

417 F.2d 963 (2d Cir. 1969), cert. denied, 309

Up, POP (ISIE). cic ceentt oe ee. 19

J. I. Case Co. v. Borak, 377 U.S. 426

ti) Se ret Ptr Ee 21-22

Lank v. New York Stock Exchange, 548 F.2d 61

08 4... BFF lik 905 Gaedica baa, 28, 34

Levy v. Johnson, [1976-77 Transfer Binde

Fep.Sec.L.Rep. (CCH) 995,899 (SDNY.

AGTPY os cedex caches a le ee

Lewis v. Elam [1977-1978 Transfer Binde

imc (CCH) 496,013 (SDNY.

D ec nwd ve mensde ten ke see hot 25

Massachusetts v. Westcott, 431 U.S. 322 (1977). 31

McLaughlin v. Campbell, 410 F

men... De! eee 25

PAGE

Meer v. United Brands Co., {1976-77 Transfer

Binder] Fep.Sec.L.Rep. (CCH) { 95,648

(S.D.N.Y. 1976) ......cccccccccessecccscnce 25

Myers v. American Leisure Time Enterprises, Inc.,

402 F.Supp. 213 (S.D.N.Y. 1975), affd by oral

opinion, 538 F.2d 312 (2d Cir. 1976) ....... 24

National Railroad Passenger Corp. v. National

Ass’n of Railroad Passengers, 414 U.S. 453

CREE ck os vba Gee genpss 11, 14-16, 18, 28-30, 35

In re Penn Central Securities Litigation, 347

F.Supp. 1327 (E.D. Pa. 1972), decision as to

Section 13(a) adhered to on reargument, 357

F.Supp. 869 (E.D. Pa. 1973), affd, 494 F.2d

528 (bd EE ce whe f3 was oo 7, 23-25, 30, 32

Piper v. Chris-Craft Industries, Inc., 430 U.S. 1

CREE wav cake noms evesoae 7, 10-12, 17, 21-22, 30

Redington v. Touche Ross & Co. (Sup.Ct.N.Y.

County, Index No. 13996/76) ............+55

Rich v. Touche Ross & Co. (Sup. Ct. N.Y.

County, Index No. 23193/76) ..........5505: 33

Rogers v. National Surety Co., 116 Neb. 170, 216

SEG ME RROD hn cence ns cocvevepnseecccs 29

Rosen v. Touche Ross & Co. (Sup. Ct. N.Y.

County, Index No. 21572/77) .......++++555: 33

Rosen v. Touche Ross & Co. (S.D.N.Y. 78 Civ.

Senki kebdne chene ands hdeybecwn sé 31

Santa Fe Industries, Inc. v. Green, 430 U.S. 462

1: eee eee 82, 17, 4a, 90°92

Securities Investor Protection Corp. v. Barbour,

S28 the. S12 (3975) ...255.. 11, 14-16, 18, 29, 30

United Housing Foundation, Inc. v. Forman, 421

RUE MENON no oss ebb cecccsovessevcvece 34

STATUTES AND RULES:

Federal Rules of Civil Procedure

gcc Gh esc nsedecssese 34

Judicial Code (28 U.S.C.)

MMM MRGOEAOY Oo. ici. e eaves 2

Securities Exchange Act of 1934 (15 U.S.C.

§§ 78a et seq.)

Section 10, 15 U.S.C. $78} ............- 15, 24

Section 12, 15 U.S.C. § 781 ............. 12, 25

PAGE

section 13, 15 U.S.C. 78m ......... 12, 23-25

pectom 85,19 USC 6 98e. vc ces civic. 12, 25

Section 16, 15 U.S.C. § 78p ............. 16

Section 17, 15 U.S.C. § 78q ....... 2-26, 29-34

Section 18, 15 U.S.C. § 78r .. .2-3, 7-21, 23-25,

| 30, 32

Section 27, 15 U.S.C. § 78aa ............ 6

Securities and Exchange Commission Rules

Rule 10b-5, 17 C.F.R. § 240.10b-5 ....... 15

Rule 17a-5, 17 C.F.R. § 240.17a-5 (1972). 3,

: 11-12, 33

ecurities Investor Protection Act of 1970

(15 U.S.C. §§ 78aaa et seq.)

Section 6,.15 U.S.C. § 78fff ....... 2,3, 26-29

TEXTS:

O. Ho_mes, THE ComMMon Law (1963 ed.)..... 26

W. Prosser, Law or Torts (4th ed. Pera). ckuw oe

MISCELLANEOUS:

SIPC SEVENTH ANNUAL REPORT (1977) ...30, 31, 34

IN THE

Supreme Court of the United States

OctToBER TERM, 1978

No.

ToucHE Ross & Co.,

Petitioner,

—against—

Epwarb S. REDINGTON, as Trustee for the liquidation of

the business of Weis Securities, Inc., and SECURITIES

INVESTOR PROTECTION CORPORATION,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Petitioner Touche Ross & Co. (“Touche Ross’’),

defendant-appellee below, petitions for a writ of cer-

tiorari to review the judgment of the United States Court

of Appeals for the Second Circuit entered herein on

April 21, 1978.

OPINIONS BELOW

The opinion of the Court of Appeals (1a-35a') is not

yet officially reported, and is unofficially reported at

[Current Binder] Fep. Sec. L. Rep. (CCH) § 96,404.

The opinion of the District Court (40a-58a) is reported

at 428 F.Supp. 483.

‘Numerals followed by the letter “a” refer to pages of the

Appendix to this Petition.

JURISDICTION

The judgment of the Court of Appeals (36a-37a) was

entered on April 21, 1978. The Court of Appeals denied

Touche Ross’ timely petition for rehearing and sugges-

tion for rehearing en banc on July 7, 1978 (38a-39a).

The jurisdiction of this Court is invoked under 28 U.S.C.

§ 1254(1).

QUESTIONS PRESENTED

1. Does Section 17(a) of the Securities Exchange

Act of 1934, which requires the filing of certain reports

by a securities brokerage firm, create in favor of

customers of the brokerage firm an implied private right

of action against accountants who audited such reports

for damages resulting from misstatements therein, even

though Section 18(a) thereof already expressly provides

a limited private damage remedy for such misstatements,

and even though the implied remedy under Section 17(a)

would be broader than the limited express remedy of

Section 18(a)?

2. If (as the Court of Appeals held) Section 17(a)

does create such an implied right of action, is a Trustee

liquidating the business of the brokerage firm pursuant

to the Securities Investor Protection Act of 1970

empowered to assert such implied right of action on

behalf of customers whose property he is unable to

return in the course of the liquidation?

3. If (as the Court of Appeals held) Section 17(a)

does create such an implied right of action, is Securities

Investor Protection Corporation, upon advancing funds

to the Trustee for the payment of claims of customers

pursuant to the Securities Investor Protection Act of

1970, subrogated to such implied right of action of such

customers, even though the Act expressly provides (in

Section 6(f)(1)) only that Securities Investor Protection

Corporation is subrogated, upon the advancement of

such funds, to the customers’ rights against the estate of

the brokerage firm, and not to the customers’ rights

against third-parties such as accountants?

STATUTES AND RULES INVOLVED

Sections 17(a) and 18(a) of the Securities Exchange

Act of 1934 (the “1934 Act’), 15 U.S.C. §§ 78q(a).

78r(a), and Rule 17a-5 of the Securities and Exchange

Commission (the “SEC”’), 17 C.F.R. § 240.17a-5, and

Sections 6(b)(1) and 6(f)(1) of the Securities Investor

Protection Act of 1970 (‘“‘SIPA’’), 15 U.S.C.

§§ 78fff(b)(1), 78fff(f)(1), all as in effect in 1972, are set

forth in the Appendix hereto (59a-70a).

STATEMENT OF THE CASE

The federal claims on the basis of which respondents

(plaintiffs-appellants below) here seek access to the

federal courts are based solely upon Section 17(a) of the

1934 Act, which is one of the various reporting

provisions of the 1934 Act (see p. 12 n.7, infra) and

requires the filing by broker-dealers of “reports” pre-

scribed by the SEC. Consequently, since respondents

concededly are unable to assert the express remedy

provided in Section 18(a) of the 1934 Act for misstate-

ments in Section 17(a) reports, this action presents, In

the words of the Court of Appeals majority, the

“question whether [an implied] private cause of action

exists under section 17[a] ... against accountants who

prepare misleading statements of a broker's financial

affairs, and if so, who may maintain such an action

(2a-3a). Over a vigorous and scholarly dissent, the Court

of Appeals majority held, in the first such holding in the

44 years since enactment of Section 17(a), that it does

create such an implied private right of action.

A. The Facts

This action arises from the liquidation pursuant to

SIPA of the business of Weis Securities, Inc. (““ Weis’), a

defunct brokerage firm, and seeks to recover for respon-

dents from Touche Ross aggregate damages of

$65,000,000 allegedly resulting from the liquidation.

Respondent Edward S. Redington (the ‘“*Trustee”’) is the

Trustee appointed pursuant to SIPA for the liquidation.

Respondent Securities Investor Protection Corporation

(“SIPC”) advanced, in accordance with the provisions of

SIPA, by which it was created and pursuant to which it

acts, funds to the Trustee to pay the claims of certain

customers of Weis in the liquidation. Touche Ross is a

firm of certified public accountants which audited

financial reports (the 1972 Weis financial reports”) of

Weis for periods ending May 26, 1972, approximately a

year before the Weis collapse.

The Trustee and SIPC commenced this action in the

United States District Court for the Southern District of

New York in April 1976, nearly a year after they had

commenced an almost identical action (the “State Court

Action’) against Touche Ross in the New York state

courts. The State Court Action, which is presently

pending, is based upon the same factual allegations,

asserts essentially the same claims and seeks the same

aggregate damages of $65,000,000 as does this federal

action.”

?The State Court Action was commenced in July 1975, and is

entitled Edward S. Redington, as Trustee for the liquidation of the

business of Weis Securities, Inc., and Securities Investor Protection

Corporation v. Touche Ross & Co. (Sup. Ct. N.Y. County, Index

No. 13996/76). The only material difference in the two actions is the

addition in the complaint in this action of the few allegations

deemed by respondents to be necessary to assert their Section 17(a)

claims—i.e., the few allegations by which the Trustee and SIPC seek

to ‘‘federalize’’ what are essentially nothing more than common law

claims of accountants’ negligence and malpractice. As the Court of

Appeals majority put it, [t]he common allegations of the plaintiffs

in the state court complaint were the same as those in the instant

case, except that three paragraphs dealing with claims under section

17 of the Pioj34 Act were omitted. Five of the Trustee's six present

‘causes of action’ ms gto in identical form in the state action, as do

four of SIPC’s eight present claims. The additional claims in this

action are the federal securities law claims” (Sa).

According to the complaint, the allegations of which

are accepted for purposes of this Petition (see also

4ajn. 4]), Weis was a broker-dealer in securities regis-

tered with the SEC and a member of the New York

Stock Exchange (the “Exchange”’). As the result of

investigations by the SEC and the Exchange in April and

May 1973, and upon the application of the SEC and

SIPC, the United States District Court for the Southern

District of New York on May 30, 1973, ordered the

liquidation of Weis pursuant to SIPA, and appointed the

Trustee.

Certain officers of Weis had misstated the financial

condition and results of operations of Weis in the 1972

Weis financial reports, which were required to be filed

with regulatory authorities pursuant to Section 17(a) of

the 1934 Act, and had made it appear therein that Weis

had pre-tax earnings for the fiscal year of $1,700,000,

whereas Weis actually had suffered Josses in excess of

$1,500,000. According to the Trustee and SIPC, Touche

Ross performed its audit of the 1972 Weis financial

reports in a “negligent, reckless, careless, unskilled and

grossly negligent manner’, and therefore not only failed

to discover the misstatements but also improperly

certified that the 1972 Weis financial reports fairly and

accurately presented the financial condition of Weis in

accordance with generally accepted accounting princi-

ples. The Trustee and SIPC also contend that if Touche

Ross had discovered the misstatements in the 1972 Weis

financial reports, Weis’ declining financial position and

the waste of its assets would have been revealed earlier,

remedial action such as a change in the Weis manage-

ment or merger with another firm could have been

taken, the forced liquidation of Weis could have been

averted or its adverse consequences reduced, and the

losses here sued for would not have occurred.

On the basis of the foregoing, the Trustee seeks

(either on behalf of Weis itself or for the customers of

Weis) to recover damages of $51,000,000, alleging (i) a

federal claim that Touche Ross’ deficient audit of the

1972 Weis financial reports violated Section 17(a) of the

1934 Act, and (ii) common law claims of accountants’

negligence and malpractice, breach of contract and

breach of warranty. SIPC seeks to recover (either in its

own right on account of funds it advanced to the Trustee

or as subrogee of the customers for whose claims it

advanced such funds) damages of $14,000,000, alleging

(i) federal claims of violation of Section 17(a) by Touche

Ross, and (ii) common law claims of accountants’

negligence and malpractice. As noted (p. 4 n.2, supra),

the federal claims of both the Trustee and SIPC are

essentially nothing more than the restatement of their

common law claims—basically for accountants’ negli-

gence and malpractice—together with the additional

conclusory allegations that Touche Ross’ conduct also

violated Section 17(a).

B. The Dismissal of This Action By The District Court

In the District Court, Touche Ross moved to dismiss

this action on the grounds that (i) the federal claims of

the Trustee and SIPC, which are based solely on Section

17(a) of the 1934 Act, fail to state a claim upon which

relief can be granted because Section 17(a) does not

create any implied private right of action, and (ii) subject

matter jurisdiction of their common law claims is

lacking.’ The District Court granted the motion and

*The District Court had jurisdiction of the Section 17(a) claims

by virtue of Section 27 of the 1934 Act. Jurisdiction of the common

law claims was alleged to exist by reason of pendent jurisdiction, as

well as (for the Trustee) jurisdiction under SIPA and the Bank-

ruptcy Act and (for SIPC) Giversity jurisdiction. Touche Ross’

motion asserted, and the District Court held, that pendent jurisdic-

tion was lacking because the federal claims under Section i7(a) fail

to state a claim upon which relief can be granted, and that subject

matter jurisdiction of the common law claims did not exist on any of

the other alleged bases.

dismissed the action (40a-58a).*

In holding that no private right of action can be

implied under Section 17(a), the District Court reasoned

that, while there was no explicit statement of legislative

intent with respect thereto, the grant in Section 18(a) of

an express and carefully limited remedy for misstate-

ments in Section 17(a) reports, as well as for misstate-

ments in reports filed pursuant to other reporting

provisions of the 1934 Act, only to purchasers or sellers

of securities in reliance upon such misstatements,

“strongly suggest[s] a legislative intent that the only

private claim for a violation of Section 17 was the claim

created in Section 18” (49a-50a). The District Court

also concluded that it is not “necessary to imply a civil

liability under Section 17 in order to enforce its

provisions” (51a). The District Court explicitly followed

recent decisions of this Court which recognize that it

would be anamolous and improper to impute to Con-

gress an intention to permit an implied remedy under the

1934 Act which would be broader than the express

statutory remedies specifically provided, and which em-

phasize that creation by judicial interpretation of an

implied private damage remedy is proper only if it is

necessary to effectuate Congress’ goals. Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723, 734, 736

(1975); Piper v. Chris-Craft Industries, Inc., 430 U.S. 1,

25-26 (1977). The District Court also followed a

decision of the Court of Appeals for the Third Circuit, Jn

re Penn Central Securities Litigation, 494 F.2d 528 (3d

Cir. 1974), and other district court decisions, which hold

‘Touche Ross’ motion also sought dismissal of certain of the

common law claims for failure to state a claim upon which relief can

be granted. Alternatively, the motion sought a me of this action

pending determination of the State Court Action. it was unneces-

sary for the District Court to reach, and it did not consider, those

issues.

that other reporting provisions of the 1934 Act do not

themselves, in view of the express remedy provided by

Section 18(a) and its careful limitation by Congress to

certain purchasers or sellers of securities, create any

implied private rights of action.

C. The Decision Of The Court Of Appeals

A divided Court of Appeals (Lumbard and Timbers,

CJJ., constituting the majority), over a vigorous and

well-reasoned dissent (Mulligan, CJ.), reversed the Dis-

trict Court and remanded for further proceedings. The

Court of Appeals majority held that customers of a

brokerage firm have an implied private right of action

under Section 17(a) against accountants for misstate-

ments in audited reports filed pursuant thereto (6a-12a),

although it expressly declined to set forth “the appro-

priate standard for accountant liability in [such] actions”

(15).° Moreover, the majority, while recognizing that

neither the Trustee on behalf of Weis nor SIPC in its

own right has any right of action under Section 17(a)

because they are not within any class protected thereby,

also held that the Trustee, as ‘“‘bailee’” of certain

customers’ property, and SIPC, as ‘“‘subrogee”’ of cus-

tomers for the payment of whose claims it has advanced

funds, may assert such right of action (12a-15a).

Judge Mulligan, in dissent, would have affirmed the

order of the District Court. He concluded that there is

no implied private right of action under Section 17(a)

(20a-33a), and that, even if there were, the Trustee and

SIPC are not proper parties to assert such right of action

to recover customers’ damages (33a-3S5a).

‘The majority did not disturb, and expressed no opinion as to,

the District Court's holding that, absent pendent jurisdiction, there

is no other basis for subject matter jurisdiction of the common law

claims (3a (a3). The majority, even though it permitted the

Trustee and SIPC to assert federal claims under Section 17(a), also

expressly declined to determine whether pendent jurisdiction over

the common law claims should be exercised (15a).

REASONS FOR GRANTING THE WRIT

The holding of the Court of Appeals majority that

Section 17(a) provides an implied private right of action

for brokerage firm customers who are not purchasers or

sellers of securities, and to whom the express remedy set

forth in Section 18(a) thus is not available, is erroneous

and conflicts in principle with decisions of this Court and

the Third Circuit. As shown hereinbelow (pp. 10-25,

infra), that holding—which, as pointed out in Judge

Mulligan’s dissent, “‘goes beyond statutory construction;

it amounts instead to judicial legislation’ (27a)—{i) is

based upon the majority's misapprehension of the

significance of the statutory scheme which provides in

the 1934 Act both a reporting requirement (Section

17(a)) and a limited express remedy for violations

thereof (Section 18(a)), and (ii) conflicts with the

principles established in this Court’s decisions that,

where an express remedy is provided for violation of a

statute, the statute does not, in the absence of clear

evidence of contrary legislative intent, give rise to

another and broader implied remedy, and that under the

1934 Act specifically it is improper to imply remedies

which are broader than the express statutory remedies

provided therein or which are not necessary to effectuate

Congress’ goals, and (iii) conflicts in principle with a

decision of the Third Circuit that, by reason of the

express remedy in Section 18(a) for reporting violations,

other reporting provisions of the 1934 Act do not

themselves give rise to any implied rights of action.*

The majority's holding that the Trustee and SIPC

may assert, as “‘bailee’”’ and “‘subrogee’’, respectively, the

Section 17(a) claims of certain Weis customers against

Touche Ross also is erroneous. As shown hereinbeiow

(pp. 25-29, infra), that holding is based upon the

*As noted by the District Court (48a), the question of whether

there is an implied private right of action under Section 17({a)

expressly was left undecided in this Court's decision in Ernst &

Ernst v. Hochfelder, 425 U.S. 185, 194 n.13 (1976).

majority's misapprehension of the statutory context of

the grant of powers to the Trustee, and of subrogation

rights to SIPC, and conflicts in principle with decisions of

this Court.

Finally, it is shown hereinbelow (pp. 29-34, infra)

that the questions raised by the majority's decision and

by this Petition are important to the administration of

the federal securities laws and should be decided by this

Court.

The Holding By The Court of Appeals Majority

That, Despite The Express Remedy In Section 18(a),

Section 17(a) Creates An Implied Private Right Of

Action Conflicts With This Court’s Decisions That,

Where An Express Remedy Is Provided For Violation of

A Statute, The Statute Does Not, Absent Clear Contrary

Evidence Of Legislative Intent, Give Rise To Another

And Broader Implied Remedy

The Court of Appeals majority bases its conclusion

that a private right of action may be implied under

Section 17(a) upon a purported consideration of the

factors set forth in Cort v. Ash, 422 U.S. 66 (1975) (6a,

7a-11a). However, as Judge Mulligan notes in his dissent

(21a, 23a), Cort itself carefully restricted the application

of those factors to determination of ‘“‘whethér a private

remedy is implicit in a statute not expressly providing

one” (emphasis added), 422 U.S. at 78, a restriction

which was again emphasized in Piper v. Chris-Craft

Industries, Inc., supra, 430 U.S. at 37. As demonstrated

in this Point I, this action does not present a situation

where (as in Cort) a remedy is sought to be implied for

violation of a statute as to which no express private

remedy whatsoever is provided, but instead involves a

statutory scheme in which Congress already expressly

has provided both its desired statutory requirement

(Section 17(a)) and the remedy (Section 18(a)) it

thought necessary and appropriate for violations of that

requirement. Consequently, the controlling decisions are

National Railroad Passenger Corp. v. National Associa-

tion of Railroad Passengers, 414 U.S. 453 (1974)

(‘‘Amtrak’’), and Securities Investor Protection Corp. v.

Barbour, 421 U.S. 412 (1975), which establish the

principle that, absent clear contrary evidence of legisla-

tive intent, a remedy is not to be implied from a

statutory provision for which a limited express remedy

already is provided; Blue Chip Stamps v. Manor Drug

Stores, supra, which recognizes the impropriety of

implying broader remedies under the 1934 Act than the

express statutory remedies specifically provided therein;

and Piper v. Chris-Craft Industries, Inc., supra, which

holds that a private right of action is not to be implied

under the 1934 Act unless it is “‘necessary” to effectuate

Congress’ goals. Since there is, as even the Court of

Appeals majority concedes (9a), no evidence of any

Congressional intent to create an implied private right of

action under Section 17(a), Amtrak, Barbour, and Blue

Chip Stamps require a holding that Section 17(a) does

not create any implied private right of action, and the

contrary holding of the majority conflicts with those

decisions. Moreover, since implication of such a private

right of action is not, and was not considered by

Congress to be, ‘‘necessary”’ to effectuate the goals of

Section 17(a), Piper also requires a holding that there is

no such implied right of action, and the contrary holding

of the majority also conflicts therewith.

A. The Statutory Scheme Of The 1934 Act, Analyzed

In Light Of This Court’s Decisions In Amérak,

Barbour, Blue Chip Stamps And Piper, Demon-

strates A Clear Congressional Intent That The

Express Remedy Provided By Section 18(a) Be The

Sole Remedy For Section 17(a) Violations

1. THE REPORTING REQUIREMENTS OF SECTION 17(a)

AND RULE 17a-5, AND THE EXPRESS REMEDY PROVIDED IN

SECTION 18(a) FOR MISLEADING ReEports.—As this Court

recently has emphasized in cases arising under the 1934

Act, “[t]he starting point in every case involving con-

struction of a statute is the language itself’. Santa Fe

Industries, Inc. v. Green, 430 U.S. 462, 472 (1977);

Piper v. Chris-Craft Industries, Inc., supra, 430 U.S. at

24; Ernst & Ernst v. Hochfelder, supra, 425 U.S. at 197;

Blue Chip Stamps v. Manor Drug Stores, supra, 421 U.S.

at 756 (Powell, J., concurring).

Section 17(a), as in effect during 1972 when Touche

Ross audited the 1972 Weis financial reports, required

broker-dealers such as Weis to “‘make such reports as the

[SEC] by its rules and regulations may prescribe”

(emphasis added). 15 U.S.C. § 78q(a).? SEC Rule

17a-5, implementing Section 17(a), required that

broker-dealers ‘‘file reports of financial condition con-

taining the information required by Form X-17A-5 ...

within each calendar year”. 17 C.F.R. § 240.17a-5(a)(2)

(1972).

Section 18 is entitled ‘Liability For Misleading

Statements”. 15 U.S.C. § 78r. Section 18(a) provides an

express damage remedy for misstatements ‘“‘in any ...

report, Or document filed pursuant to [the 1934 Act] or

any rule or regulation thereunder” to persons ‘‘who, in

*Section 17(a) is only one of the sections of the 1934 Act which

require the filing of “reports’’ or similar material. Other such

provisions are found in Sections 12(b)(1), 13(a), 13(d), 13(f) and

15(d). Section 12(b)(1) requires every ‘issuer’ of a security

“registered on a national securities exchange” to file an ‘‘application

which shall contain . . . [s}uch information” as the SEC may require.

15 U.S.C. § 781(b)(1). Section 13(a) requires every ‘‘issuer” of a

registered security to file “‘such information and documents” and

“such annual ... and ... quarterly reports’ as the SEC may

poe 15 U.S.C. § 78m(a). Section 13(d) requires any person

coming the beneficial owner of more than 5% of certain classes of

equity securities to file “‘a statement containing such ... informa-

tion” as the SEC may prescribe. 15 U.S.C. § 78m(d). Section 13 (f)

requires every “institutional investment manager’ to file “reports”

as the SEC may prescribe. 15 U.S.C. § 78m/(f). Section 15(d)

requires certain issuers to file ‘‘supplementary and periodic informa-

tion, documents and reports” as may be required by Section 13. 15

U.S.C. § 780(d).

reliance upon such statement, shall have purchased or

sold a security at a price which was affected by such

statement” (emphasis added). 15 U.S.C. § 78r(a). As the

Court of Appeals majority and dissent agree (11la-12a,

2la-23a), as other courts have recognized, and as the

legislative history demonstrates, it is inescapable that the

remedy provided by Section 18(a), which uses the very

same word, ‘“‘report’’, as does Section 17(a), is applicable

to misstatements in Section 17(a) reports.

2. THE TRUSTEE AND SIPC Can Assert No CLAIM

FOR RELIEF UNDER SECTION 18(a).—Both the Court of

Appeals and the District Court recognize (11a, 49a), and

the Trustee and SIPC concede, that neither they nor

Weis’ customers can meet the purchaser-seller require-

ment of Section 18(a), and that they thus cannot assert

any claim for the express Section 18(a) remedy. Conse-

quently, in order to find some purported basis in the

1934 Act to ‘“federalize” their essentially common law

claims for accountants’ negligence and malpractice, they

assert alleged implied rights of action under Section

17(a) itself.

3. THe StatuToRY SCHEME WHEREBY SECTION 18(a)

PROVIDES AN EXPRESS AND LIMITED DAMAGE REMEDY FOR

MISSTATEMENTS IN SECTION 17(a) REPORTS REFLECTS A

CONGRESSIONAL INTENTION THAT SUCH REMEDY BE

ExcLusIVE AND THAT No ADDITIONAL REMEDY BE

IMPLIED FROM SECTION 17(a) ItsELF.—The express, and

carefully limited, damage remedy provided by Section

18(a) for misstatements in Section 17(a) reports neces-

sarily reflects a Congressional intention that a damage

remedy for such misstatements would be available only

as provided in Section 18(a)—i.e., where a person

purchased or sold a security in reliance thereon—and

that no other damage remedy for such misstatements

(e.g., a damage remedy for brokerage firm customers

who neither purchased nor sold securities in reliance

thereon) was intended or could be implied. As Judge

Mulligan’s dissent observes, ‘‘[the District Court] cor-

rectly found and, indeed, common sense would dictate,

that section 18(a) expressly provides the sole private

remedy which Congress intended to be available for a

violation of section 17(a) and the other reporting

sections of the [19]34 Act’ (emphasis added) (22a).

4. Tuts Court’s DEcISIONS IN AMTRAK, BARBOUR

AND BLUE Cuip STAMPS COMPEL THE CONCLUSION THAT

SECTION 18(a) PRoviDES THE ExcLustveE DAMAGE REMEDY

FOR VIOLATIONS OF SECTION 17(a).—As Judge Mulligan’s

dissent correctly observes (24a-25a), the conclusion that

Congress intended Section 18(a) to be the exclusive

damage remedy for Section 17(a) violations accords

with—indeed, is required by—decisions of this Court

explicitly directing that, where a remedy is sought to be

implied from a statutory provision for which a limited

express remedy already is provided, the doctrine

expressio unius est exclusio alterius is to be applied. For

example, this Court's decision in Amtrak, supra, une-

quivocally directs that

[When legislation expressly provides a particu-

lar remedy or remedies, courts should not expand

the coverage of the statute to subsume other

remedies. ‘When a statute limits a thing to be

done in a particular mode, it includes the negative

of any other mode.’ . . . This principle of statutory

construction reflects an ancient maxim—expressio

unius est exclusio alterius. Since the Act creates

. a private cause of action only under very

limited circumstances, this maxim would clearly

compel the conclusion that the remedies created

. .. are the exclusive means to enforce the duties

and obligations imposed by the Act”. 414 U.S. at

458.

See also Securities Investor Protection Corp. v. Barbour,

supra, 421 US. at 419 (reiterating the “observation [in

Amtrak] that express statutory provision for one form of

proceeding ordinarily implies that no other means of

enforcement was intended by the Legislature’).

While this Covwitt did state in Amtrak that the

expressio unius doctrine must “yield to clear contrary

evidence of legislative intent’, 414 U.S. at 458, even the

Court of Appeals majority here concedes that nothing in

the language or legislative history of the 1934 Act

indicates any Congressional intent to create a private

right of action under Section 17(a) (9a). Consequently,

Amtrak and Barbour require the conclusion that, in light

of the existence of the express remedy in Section 18(a),

Section 17(a) does not create any additional implied

remedy. The contrary conclusion of the Court of

Appeals majority thus conflicts with Amtrak and

Barbour.

Moreover, to hold, as does the Court of Appeals

majority, that Section 17(a) creates an implied right of

action in addition to the express remedy of Section 18(a)

also conflicts with the principles established by this Court

in Blue Chip Stamps v. Manor Drug Stores, supra. There,

in upholding the purchaser-seller requirement for claims

under Section 10(b) of the 1934 Act and Rule 10b-5,

this Court noted that ‘‘[t]he principal express nonderiva-

tive private civil remedies, created by Congress contem-

poraneously with the passage of § 10(b), for violations of

various provisions of the 1933 and 1934 Acts are by

their terms expressly limited to purchasers or sellers of

securities”, and then, specifically addressing itself to

Section 18(a) of the 1934 Act, stated that

“Section 18 of the 1934 Act, prohibiting false or

misleading statements in reports or other docu-

ments required to be filed by the 1934 Act, limits

the express remedy provided for its violation to

‘any person ...who.. . shall have purchased or

sold a security at a price which was affected by

such statement. .. .’ /t would indeed be anomalous

to impute to Congress an intention to expand the

plaintiff class for a judicially implied cause of

action beyond the bounds it delineated for com-

parable express causes of action’ (emphasis

added). 421 U.S. at 735-736.

Of course, as Judge Mulligan’s dissent notes, the

“anomalous” intention which Blue Chip Stamps said

could not properly be imputed to Congress “‘is precisely

what the majority is imputing to Congress in this case”

by its holding that there is an implied right of action

under Section 17(a) broader than (i.e., in favor of

brokerage firm customers who do not meet the

purchaser-seller requirement of) the express remedy

under Section 18(a) (26a).*

As aptly summed up by Judge Mulligan’s dissent,

“Amtrak, Barbour and Blue Chip compel the

conclusion that the omission [of a remedy for

Section 17(a) violations in favor of brokerage firm

customers] was studied and that the implication of

a damage action against accountants under this

section is totally unwarranted. The majority can-

not properly characterize this as a case where

there is no explicit private remedy provided by

Congress. Rather, it is a case in which the remedy

*This Court also observed in Blue Chip Stamps that “[w]Jhen

Congress wished to provide a remedy to those who neither purchase

nor sell securities, it had little trouble in doing so expressly”, citing

Section 16(b) of the 1934 Act, 15 U.S.C. § 78p(b). 421 U.S. at 734.

This reinforces the conclusion that the limitation to purchasers and

sellers of the express Section 18(a) remedy provided by Congress

for Section 17(a) violations, and the failure by Congress to provide

an express remedy for Section 17(a) violations in favor of brokerage

firm customers who are not purchasers or sellers, demonstrate a

Congressional intention and understanding that such brokerage firm

customers are to have no right of action, either express or implied,

for violations of Section 17(a) (see 25a-26a).

provided was designed to exclude the class which

is here seeking monetary relief.” (26a-27a)

5. Piper Bars IMPLICATION OF A PRIVATE DAMAGE

REMEDY UNDER SECTION 17(a).—In Piper v. Chris-Craft

Industries, Inc., supra, this Court emphasized that under

the 1934 Act a private right of action is to be implied

only where it is “necessary to effectuate Congress’

goals”. 430 U.S. at 26. Accord, Santa Fe Industries, Inc.

v. Green, supra, 430 U.S. at 477. As shown in Judge

Mulligan’s dissent, analysis of the scheme by which

brokerage firms are regulated demonstrates that, in

seeking to protect brokerage firm customers, “the

primary congressional intent obviously has ; been to

provide a system of reports and monitoring which would

prevent insolvency of broker-dealers[,] ‘fot to create

private law suits for damages after insolvency has

occurred’, and therefore that ‘‘the importance to this

scheme of implying a damage remedy after liquidation is

dubious” (30a). To enforce compliance with the report-

ing requirements of Section 17(a), private damage

actions thereunder in favor of persons not entitled to the

remedy of Section 18(a) are not necessary; as the District

Court here concluded, ‘‘criminal prosecutions and SEC

injunctive actions seem abundantly sufficient’ (53a) (see

also p. 19 n.9, infra). As Piper explicitly makes clear, an

“ever-present threat of damages” is not necessary,

because ‘(t]he deterrent value, if any” of a private right

of action is so speculative that it does not “provide

significant additional protection’. 430 U.S. 39-40.

B. The Court Of Appeals Majority Misapprehends The

Statutory Scheme, And Fails To Apply The Analysis

Required By, And Therefore Reaches A Result In

Conflict With, This Court’s Decisions

The Court of Appeals majority misapprehends the

foregoing statutory scheme and fails to follow the

controlling decisions of this Court. The following basic

errors are committed by the majority and, as Judge

Mulligan’s dissent demonstrates, leads the majority to a

decision which conflicts with this Court's decisions.

1. THe Court or AppeALS Masority Errs IN FAILING

TO APPLY THE ANALYSIS REQUIRED BY AMTRAK, BARBOUR

AND BLUE Cuip Stamps.—In holding that Section 17(a)

creates an implied private right of action, the Court of

Appeals majority plainly misapprehends the statutory

scheme of the 1934 Act. Its basic error is its failure to

apply the analysis required by Amtrak, Barbour and Blue

Chip Stamps to this case, where there already exists an

express remedy (Section 18(a)) for violations of the

Statutory provision (Section 17(a)) under which an

implied remedy is sought. That analysis requires the

Court of Appeals first to recognize the existence of the

express remedy of Section 18(a), then to consider

Sections 17(a) and 18(a) in light of the expressio unius

doctrine, and finally to apply the doctrine to bar an

implied remedy under Section 17(a) in the conceded

absence of ‘clear contrary evidence of legislative intent’.

However, the majority instead purports first to analyze

Section 17(a), and to determine whether it creates an

implied remedy, without any consideration of Section

18(a) (6a-11a). Only after concluding that there is such

an implied remedy does the majority finally give cursory

consideration to Section 18(a), and then only to assert

that it does not detract from the existence of such a

remedy (1la-12a). Of course, as Amtrak, Barbour and

Blue Chip Stamps make clear, that approach is based

upon the patently erroneous view that Section 18(a) is in

no way indicative of the Congressional intent as to

whether Section 17(a) creates an implied remedy—a

view which the majority acknowledges holding by its

Statement that “‘[w]e find no indication . . . in the statute

itself . . . of any congressional intent either to create a

private remedy under Section 17 or to deny one”

(emphasis added) (9a).

2. THE Court OF APPEALS Majority Errs IN FINDING

SECTION 18(a) IRRELEVANT.—The Court of Appeals ma-

jority finds that Section 18(a) is irrelevant because

brokerage firm customers are ‘“‘members of a class

peculiarly protected by Section 17°’ and “are favored

wards of Section 17”, that the express remedy of Section

18(a) will normally not be available to such customers,

and therefore that “[w]e cannot agree that Congress

simultaneously sought to protect a class and deprived the

class of the means of protection” (11a).° However, the

majority's conclusion simply does not follow from its

premises. Even if it be assumed that Section 17(a) was

specifically intended to protect brokerage customers,

whereas Section 18(a) “wholly independent[ly]’ was

intended to provide rights only to purchasers and sellers

(see 12a), the existence of Section 18(a) necessarily

demonstrates a further Congressional intent that the

purchasers and sellers referred to therein be the only

class with a damage remedy for misstatements in Section

°The Court of Appeals majority clearly overstates the issue when

it says that customers will be “deprived . . . of the means of

protection’ without an implied right of action under Section 17(a).

As Judge Mulligan’s dissent spells out in detail, brokerage customers

have many “protections”, including the preventive monitoring of

brokerage firms by the SEC and the Exchange, the existence of

SIPC (after 1970), the deterrent effect of criminal and injunctive

roceedings, and the availability of state law remedies. Cf. /roquois

ndustries, inc. v. Syracuse China Corp., 417 F.2d 963, 969 (2d Cir.

1969), cert. denied, 399 U.S. 909 (1970) (‘That the conduct averred

in any given case may be reprehensible does not mean that a federal

remedy must be furnished by judges. The remedy in many cases may

be found in the state courts... . If there is to be a federal ch goge It

is the Congress which must create it”), cited with approval in Blue

Chip Stamps v. Manor Drug Stores, supra, 421 U.S. at 738-739 n.9.

Thus, the real issue here is not whether to grant the customers a

Section 17(a) implied remedy or else to leave them without any

rotection, but rather whether to add to the protections on already

ave the additional [paere of a Section 17(a) implied remedy

which Congress itself intentionally refused to provide.

17(a) reports. If, in enacting the 1934 Act, Congress was

as aware of, and consciously concerned with protecting,

both brokerage firm customers (its “favored wards” in

Section 17(a), according to the majority) and purchasers

and sellers (to whom it provided the express damage

remedy in Section 18(a)), the withholding of an express

damage remedy from the customers, while at the same

time giving such a remedy to the purchasers and sellers,

can Only mean that Congress consciously intended that

the customers not have a damage remedy and that their

protection be provided in a different way. As Judge

Mulligan’s dissent correctly puts it,

“if the brokers’ customers were so clearly the

concern of the Congress when it enacted section

17(a), its failure to afford them a private damage

remedy in section 18(a), which was contem-

poraneously enacted and which provides a private

remedy for misleading statements in reports filed

pursuant to the mandate of the Act, leads to the

conclusion that Congress did not intend a private

damage remedy to be available to brokers’ cus-

tomers” (23a).

APPLICATION OF THE PRINCIPLES OF Cort v. ASH.—As

noted above (pp. 10-11, supra), the factors set forth in

Cort v. Ash, supra, upon which the Court of Appeals

majority relies to imply a. private right of action under

Section 17(a) (7a-11a), do not provide an appropriate

analytical framework here because Cort itself limits its

own relevance to “determining whether a private remedy

is implicit in a statute not expressly providing one”

(emphasis added). 422 U.S. at 78. However, even if the

Cort factors are assumed to be relevant, the majority’s

analysis in terms of those factors is unacceptable be-

cause, among other things, it does not at any point

consider the significance of Section 18(a), which clearly

bears on all four of the Cort factors.’°

4. THE Court oF AppeEALS Majority Errs IN FAILING

To Apply THE Necessity STANDARD OF PipER.—The

purported Cort analysis of the Court of Appeals majority

also is fatally flawed by the majority’s failure to apply the

requirement articulated in Piper v. Chris-Craft Indus-

tries, Inc., supra, that a private remedy is to be implied

only where it is ‘“‘necessary to effectuate Congress’ goals”

(emphasis added). 430 U.S. at 26. Application of that

requirement bars implication of a private right of action

under Section 17(a) (see p. 17, supra); and none of the

reasons advanced by the Court of Appeals majority to

support implication of such a right satisfies the require-

ment. For example, the majority’s conclusion, purport-

edly premised upon J. J. Case Co. v. Borak, 377 US.

426 (1964), that ‘a private remedy is an essential

supplement to the scheme of enforcement of section 17”

because the SEC “does not have the resources to

examine and audit all the documents that it receives”

‘First, Section 18(a) shows that insofar as substantive rights and

remedies may be derived from reporting obligations imposed by the

1934 Act, only purchasers and sellers, and not customers, are the

class for whose special benefit such rights and remedies are provided.

Second, it shows a Congressional intent to limit a damage remedy to

purchasers and sellers. Third, it shows that a Section 17(a) implied

right would be inconsistent with the legislative scheme since it

effectively would abolish the limitations placed on express civil

remedies. Finally, it shows a Congressional understanding that any

cause of action by customers for damages is one traditionally

relegated to state law, which, under “well established tort law

principles” discussed in Judge Mulligan’s dissent (30a-32a), pro-

vides appropriate remedies—remedies which are being pursued as

against Touche Ross not only by the Trustee and SIPC in the State

Court Action, but also as noted hereinbelow (p. 33 n.19, infra), by

Weis’ customers themselves.

(10a-11a),"' simply is unacceptable in light of this

Court’s recognition in Piper that “‘[e]ven though the SEC

operates in this context under the same practical re-

straints recognized by the Court in Borak, institutional

limitations alone do not lead to the conclusion that any

party interested . . . should have a cause of action for

damages”. 430 U.S. at 41.'? Similarly unacceptable is the

majority's reliance upon an asserted need for nationally

uniform standards for actions brought to recover losses

after a brokerage firm has failed (11a). Since the primary

legislative purpose in enacting Section 17(a) was to

provide a system of reports and monitoring to prevent

insolvency (see p. 17, supra), it is not necessary in order

to achieve that purpose that such standards for recovery

of losses resulting from liquidation be uniform. This

Court recently has restated the principle that where state

law remedies traditionally have been available federal

courts should be reluctant to intrude federal remedies

into the area to serve “ ‘at best a subsidiary purpose’ of

the federal legislation”, Santa Fe Industries, Inc. v.

Green, supra, 430 U.S. at 478, and has recognized that

relegation of plaintiffs to such state law remedies is

appropriate, e.g., Santa Fe Industries, Inc. v. Green,

supra, id. at 478 (state law appraisal remedy); Piper v.

Chris-Craft Industries, Inc., supra, 430 U.S. at 40-41

(common law tort remedy).

''As noted in the opinions of the Court of Appeals majority and

the District Court, the SEC, pursuant to Section 17(a), has its own

fee one of conducting audit examinations of the financial reports of

rokerage firms (10a [n.12], 48a, 53a).

'*As the District Court here stated, ‘‘the case at bar is not like

Borak. The pt gon required by Section 17 in 1972 were not for the

information of any ‘investors’ and were not sent to them but were

for the SEC, primarily for monitoring the net capital requirements

of the 1934 Act” (53a). Moreover, as Judge ulligan’s dissent

points out, the problem faced by the SEC in Borak of examining

—_ statements under demanding time limitations is not encoun-

tered with respect to its examination of Section 17(a) reports, and

the SEC’s burden also is lightened by examinations which are

performed by the Exchange (32a [n.11]}). As the dissent also notes,

the rationale of Borak has been significantly restricted by more

recent decisions of this Court (20a-21a).

The Holding By The Court Of Appeals Majority

That, Despite The Express Remedy In Section 18(a),

Section 17(a) Creates An Implied Private Right Of

Action Conflicts With A Decision Of The Third Circuit,

And Numerous District Court Decisions, Which Hold

That No Rights Of Action May Be Implied Under Other

Reporting Provisions Of The 1934 Act

The holding of the Court of Appeals majority that a

private right of action may be implied under Section

17(a) conflicts in principle with the decision of the Third

Circuit in In re Penn Central Securities Litigation, supra,

as well as a substantial number of district court decisions,

involving other reporting provisions of the 1934 Act.

Those decisions all hold—for reasons equally applicable

to the reporting provisions of Section 17(a)—that no

private rights of action can be implied from the reporting

provisions themselves, because Section 18(a) is the

exclusive remedy for reporting, violations, and because

the creation of additional implied remedies from the

reporting provisions themselves would ignore the Con-

gressional intent and this Court's controlling decisions

and distort the statutory scheme.

In re Penn Central Securities Litigation, supra, in-

volved actions arising out of the operations of the Penn

Central companies in which plaintiffs alleged that reports

filed under Section 13(a) were misleading and asserted

(because they were not purchasers or sellers of securities

and thus did not fall within Section 18(a)) that they had

an implied right of action for damages under Section

13(a) itself. The District Court dismissed the Section

13(a) claims, 347 F.Supp. 1327 (E.D.Pa. 1972), decision

as to Section 13(a) adhered to on reargument, 357

F.Supp. 869 (E.D.Pa. 1973), emphasizing that

“Section 13 is one of a number of provisions [of

the 1934 Act] that require the filing of .. .

reports. See §§. . . 17(a). Section 18(a) is the

‘catch-all civil liability provision for all of the

reporting requirements of the [1934] Act’’, 347

F.Supp. at 1340,

and then, although recognizing that “Courts have im-

plied civil remedies for violations of [certain] provisions

of the [1934 Act], held that Section 18(a) “‘is the

exclusive remedy for violation of § 13(a)’’ because

‘“‘when the legislature has specifically authorized

or withheld the right to recover damages arising

by reason of a violation of a statute, an implied

right of action does not exist... . Where Congress

has specifically authorized a remedy for violation

of an act, the courts should not nullify the

congressional scheme by implying a right of action

on behalf of those not otherwise entitled to

recover. . . . Given the express civil remedy for

§ 13(a) provided by § 18(a), we conclude that

§ 13(a) does not afford a private right of action’,

347 F. Supp. at 1339-1340.

The Third Circuit affirmed. 494 F.2d 528 (3d Cir. 1974).

It emphasized that a contrary holding “‘would result in

the elimination of the purchaser-seller requirement for

violations of § 13(a)’’, and that ‘‘the same considerations

[which require application of the purchaser-seller re-

quirement to section 10(b)] also apply to [require denial

of] the contention . . . that we should imply a private

right of action in section 13(a) to avoid the purchaser-

seller requirement of section 18.” Jd. at 540-541."

'*Numerous district court decisions have reached the same result

as did the Third Circuit in Jn re Penn Central Securities Litigation.

See, e.g., Myers v. American Leisure Time Enterprises, Inc., 402

fy 213 (S.D.N.Y. 1975), aff'd by oral opinion, 538 F.2d 312

(2d Cir. 1976) (Section 13(d)); Cramer v. General Telephone &

Electronics, [1978] Fep. Sec. L. Rep. (CCH) § 96,380 at pp.

The reasoning and holding of In re Penn Central

Securities Litigation, and of the other decisions reaching

the same result, are clearly applicable to Section 17(a).

Section 17(a), like the sections of the 1934 Act involved

in those decisions, is a reporting provision, and Section

18(a) is as applicable to misleading reports filed under

Section 17(a) as it is to such reports filed under those

other sections.

Thus, the decision of the Court of Appeals majority

creates a conflict between the Second Circuit and the

Third Circuit concerning whether private rights of action

may be implied under the reporting provisions of the

1934 Act, and this Court should grant certiorari to

resolve that conflict.

The Holding Of The Court Of Appeals Majority

That The Trustee And SIPC Are Appropriate Parties To

Seek Recovery Of Customers’ Damages Is Erroneous

And Conflicts With Applicable Decisions Of This Court

Both the Court of Appeals majority and Judge

Mulligan in dissent agree that, even if Section 17(a)

creates an implied right of action for brokerage firm

customers, neither the Trustee on behalf of Weis nor

93,326-93,327 (E.D. Pa. 1977) (Section 12(b)(1)); DeWitt v.

American Stock Transfer Co., 433 F.Supp. 994, 1004-1005

(S.D.N.Y.) (Sections 13(a) and 15(d)), modified on other grounds,

440 beg 3 1084 (S.D.N.Y. 1977); Levy v. Johnson, [1976-77

Transfer Binder] Fep. Sec. L. Rep. (CCH) { 95,899 at p. 91,324

(S.D.N.Y. 1977) (Section 13(a)); Lewis v. Elam, [1977-78 Transter

Binder] Fep. Sec. L.- Rep. (CCH) § 96,013 (S.D.N.Y. 1977)

Section 13(a)); Meer v. United Brands Co., [1976-77 Transfer

inder] Fer. Sec. L. Rep. (CCH) 495,648 (S.D.N.Y. 1976)

(Section 13(a)); In re Equity prs Corp. of America Securities

Litigation, 416 Spee 161, 190 (C.D. Cal. 1976) (Section 13(a));

McLaughlin v. > ell, 410 Ht9 3 1321, 1325 (D.Mass. 19733

Seeotiie 13(a)); duPont v. Wyly, 61 F.R.D. 615, 628 (D.Del. 1973

Section 13(a)).

SIPC in its own right is entitled to assert any right of

action under Section 17(a), because neither is a member

of any class protected thereby (12a [n. 13], 14a, 33a-

34a). However, misapprehending the controlling deci-

sions of this Court, the majority, again over Judge

Mulligan’s vigorous dissent, erroneously holds that the

Trustee as “‘bailee” and SIPC as “‘subrogee”’ are appro-

priate parties to assert the Section 17(a) rights of certain

customers of Weis (12a-13a).

A. The Holding With Respect To The Trustee Is

Erroneous And Conflicts With This Court’s Decision

In Caplin v. Marine Midland Grace Trust Co.

Contending that Touche Ross’ Section 17(a) viola-

tions caused the depletion of property held by Weis in

trust for its customers, the Trustee seeks to assert the

customers’ damage claims, on the ground that Weis was

the bailee of their property and thus had a sufficient

interest therein to sue third parties for loss or injury

thereto. However, any action by Weis itself (or by the

Trustee as its representative) as bailee of customers’

property would be an action to vindicate Weis’ own

possessory rights as bailee, and not the rights of the

customers, see generally W. Prosser, LAW oF Torts

94-95 (4th ed. 1971); O. Hotmes, THE Common Law

130-194 (1963 ed.), and even the Court of Appeals

majority concedes that Weis itself, and the Trustee on

behalf of Weis, have no right of action under Section

17(a) (14a). Nevertheless, the majority does find, in the

Trustee’s statutory duty to marshal and return custom-

ers’ property, authorization for the Trustee to sue on

behalf of customers whose property he is unable to

return, to the extent that they have not been reimbursed

by SIPC (13a-15a).

That holding of the Court of Appeals majority is

erroneous because under Section 6(b)(1) of SIPA, 15

U.S.C. § 78fff(b)(1), the Trustee has the same title to

property and powers as a bankruptcy or Chapter X

trustee. Caplin v. Marine Midland Grace Trust Co., 406

U.S. 416 (1972), establishes the principle that such a

trustee, and therefore the Trustee here, is not a proper

party to assert claims of customers. In Caplin, this Court

held that the Chapter X trustee of a corporation has no

standing to assert claims on behalf of any particular class

of creditors (there, holders of its debentures) against

third parties, because

fi] nowhere in the statutory scheme is there any

suggestion that the trustee . . . is to assume the

responsibility of suing third parties on behalf of

debenture holders . . . . [ii] [the corporation] could

[not] make any claim . . . [and thus] any suit by

debenture holders would not affect the interests of

other parties to the reorganization . . . [iii] a suit

by him on behalf of debenture holders may be

inconsistent with any independent actions that

they might bring themselves.” 406 U.S. at

428-432.

Caplin compels the conclusion here that the Trustee

may not sue on behalf of any particular class of creditors

of Weis, including the class specified by the Court of

Appeals majority, viz., those Weis customers whose

claims against Weis for their property have not been

satisfied. In the first place, as in Caplin, there is no

statutory authorization for any such suit. Second, any

recovery by the Trustee would be on behalf of the

customers only and would be of no benefit to other

general creditors, since, as in Caplin, payment by Touche

Ross of customers’ claims simply would subrogate

Touche Ross to the customers’ claims against the Weis

general estate. Third, there would be a proliferation of

litigation since Weis’ customers can sue—indeed, already

have sued (see pp. 31, 33 n.19, infra)—Touche Ross; the

Trustee may be unable to bind the customers to any

settlement; and the Trustee would be inappropriate as

the customers’ class representative, since he has no

common interest with them and may have conflicting

interests, in view of his obligatioms to general creditors

and others.'*

B. The Holding With Respect To SIPC Is Erroneous

And Conflicts With This Court’s Decisions In

Amtrak And Barbour

SIPC is created by, and its powers are specified in,

SIPA, which establishes a comprehensive statutory

scheme for brokerage firm liquidations. Section 6(f)(1)

of SIPA sets forth the subrogation rights of SIPC, as

follows:

‘To the extent that moneys are advanced by SIPC

to the trustee to pay the claims of customers,

SIPC shall be subrogated to the claims of such

customers with the rights and priorities provided in

this section’’ (emphasis added). 15 U.S.C.

§ 78fff(f)(1).

Both the Court of Appeals majority and Judge Mulligan

in dissent hold that under Section 6(f)(1) SIPC, upon

advancing funds to pay “claims” of customers, is

subrogated only to the ‘claims’ of such customers

against the Weis estate (12a-13a, 34a).

In light of the comprehensive statutory scheme of

SIPA, Congress clearly intended that SIPC’s express

Statutory subrogation to customer “‘claims” against the

“In failing to recognize that such proliferation of litigation also is

unnecessary, the Court of Appeals ignored the teaching of its own

earlier decision in Lank v. New York Stock Exchange, 548 F.2d 61,

67 (2d Cir. 1977), which held it impermissible for a receiver of a

brokerage firm to sue where the brokerage firm could not, even

though any recovery would be for the benefit of public investors,

because ‘‘those investors already have a cause of action in their own

right . . . and the receiver's suit would add nothing to their rights.”

brokerage firm’s estate be SIPC’s exclusive subrogation

remedy, and that SIPC’s subrogation rights not extend to

the claims of customers against third parties. See, e.g.,

Amtrak, supra, 414 U.S. at 458 (“when legislation

expressly provides a particular remedy or remedies,

courts should not expand the coverage of the statute to

subsume other remedies”); Securities Investor Protection

Corp. v. Barbour, supra; Rogers v. National Surety Co.,

116 Neb. 170, 216 N.W. 182 (1927) (under statute

establishing a “depositors guaranty fund’’, express pro-

vision subrogating such fund to the rights of creditors

paid by the fund to participate in the defunct bank’s

assets held, under expressio unius principle, to be the

fund’s exclusive subrogation remedy).

Nevertheless, the Court of Appeals majority, again

over Judge Mulligan’s vigorous dissent which emphasizes

that SIPC is “ta congressionally created corporation with

limited powers to litigate” (34a), erroneously holds that

SIPC has subrogation rights beyond those expressly

provided to it in Section 6(f)(1), and is thereby subro-

gated also to the alleged Section 17(a) claims of the

customers against Touche Ross. In so holding, the Court

of Appeals majority is in conflict with this Court's

decisions requiring application of the expressio unius

doctrine and circumvents the intent of Congress as

expressed in SIPA itself.

The Questions Raised By This Petition Are Import-

ant To The Administration of the Federal Securities

Laws And Should Be Decided By This Court

A. The Question of Whether Section 17(a) Creates Any

Implied Right Of Action Should Be Decided By This

Court

The holding of the Court of Appeals majority that

Section 17(a) creates an implied private right of action

for brokerage firm customers who are not purchasers or

sellers of securities as required by Section 18(a) should

be reviewed by this Court. That holding is not only

erroneous, and in conflict with this Court’s controlling

decisions in Amtrak, Barbour, Blue Chip Stamps and

Piper and with the Third Circuit’s decision in Jn re Penn

Central Securities Litigation, but also raises questions

which are important to the administration of the federal

securities laws, for the following reasons.

1. The majority's recognition of a new implied right

of action under Section 17(a)—a right of action not

heretofore perceived by any other court or litigant in the

44 years since enactment of the 1934 Act—has the

serious potential for greatly expanding the volume of

litigation under the 1934 Act in, and thereby further

burdening, the federal courts. All customers of failed or

failing brokerage firms now have, under the majority

holding, a potential Section 17(a) right of action against

third parties allegedly responsible for misstatements in

Section 17(a) reports. The resulting likelihood of pro-

liferating litigation is seen from the facts that (i) between

1970 and 1977, 128 brokerage firms have failed and

been placed in SIPA liquidation, (ii) such failures, seven

of which occurred in the last year alone, continue to be a

fact of life in today’s mercurial and often troubled

securities markets, and (iii) the total number of custom-

ers of such failed brokerage firms is huge, with more

than 104,000 customer claims already having been

satisfied in whole or in part in SIPA liquidations as of

December 31, 1977.'S That the prospect for a greatly-

expanded volume of 1934 Act litigation is real, and not

simply speculative, is demonstrated by the fact that on

April 27, 1978, only six days after the decision of the

Court of Appeals here, customers of Weis commenced in

the United States District Court for the Southern District

'SSIPC SEVENTH ANNUAL Report (1977) 5-6, 28.

of New York a class action against Touche Ross

asserting implied rights of action under, and seeking

damages for alleged violations of, Section 17(a). Rosen

v. Touche Ross & Co. (S.D.N.Y. 78 Civ. 1943).'°

Moreover, the satisfaction of customer claims in broker-

age firm liquidations does not remove—indeed, appears

even to increase—the potential for 1934 Act litigation,

in light of the majority's holding that SIPC, to the extent

that it advances funds for payment of such claims, is

subrogated to and may assert customers’ Section 17(a)

rights against third parties. As of December 31, 1977,

SIPC had advanced almost $54,000,000 for payment of

customers’ claims (i.e., almost $40,000,000 in excess of

the $14,000,000 advanced for payment of such claims in

the Weis liquidation)'’—advances so substantial as to

demonstrate a likelihood that SIPC will find itself

compelled to assert such Section 17(a) claims.

Of course, the potential for greatly-increased 1934

Act litigation is not limited to situations where the

brokerage firm involved is in liquidation. Under the

holding of the Court of Appeals majority, Section 17(a)

claims can be asserted by customers with respect to the

Section 17(a) reports of any of the over 5,000 brokers

and dealers registered with the SEC.

Finally, since Section 17(a) is a reporting provision,

the majority's holding is authority for implying rights of

action under all of the other reporting provisions of the

1934 Act in favor of persons who are not purchasers or

'6Since Rosen v. Touche Ross & Co. was commenced after, and

as the direct consequence of, the Court of Appeals decision,

reference thereto necessarily does not appear in the record on which

the decision was based. However, this Court may (and hereby is

requested to) take judicial notice thereof. See, e.g., Massachusetts v.

Westcott, 431 U.S. 322, 323 n.2 (1977).

‘SIPC SEVENTH ANNUAL Report (1977) 6, 28-29.

sellers and who therefore may not assert the express

remedy provided in Section 18(a). Numerous plaintiffs

already have sought to assert such implied rights in the

actions, including Jn re Penn Central Securities Litigation,

already cited herein (pp. 23-25, supra); and, although

the efforts of such plaintiffs heretofore have been

unsuccessful, the majority's holding here only can give

new impetus to such efforts.

2. The majority's holding, by eliminating the

purchaser-seller requirement of Section 18(a), defeats

the salutary purposes of that requirement which were

recognized by this Court in Blue Chip Stamps v. Manor

Drug Stores, supra, 421 U.S. at 737-749, and which led

it to uphold such a requirement as necessary to avoid the

‘danger of vexatious litigation which could result from a

widely expanded class of plaintiffs’. 421 U.S. at 740,

743-749; see also Santa Fe industries, Inc. v. Green,

supra, 430 U.S. at 478-479.

3. This Court has noted that serious problems arise

when a remedy which “would significantly broaden the

class of plaintiffs who may seek to impose liability upon

accountants and other experts who perform services or

express Opinions with respect to matters under the

[federal securities] Acts” is judicially implied, and has

emphasized that ‘“‘we are not the first court to express

concern that the inexorable broadening of the class of

plaintiff who may sue in this area of the law will

ultimately result in more harm than good”. Ernst &

Ernst v. Hochfelder, supra, 425 U.S. at 214 n.33; Blue

Chip Stamps v. Manor Drug Stores, supra, 421 U.S. at

747-748. The substantial consequences to the accounting

profession resulting from the majority's judicial creation

of a remedy under Section 17(a) raise precisely those

concerns of which this Court has expressed its awareness

33 t

and make this case an important one which merits this

Court’s review.'®

4. There is also a serious question as to the need for

the majority’s holding. The claims asserted here, and the

similar claims which might be asserted by any brokerage

firm customer for misstatements in Section 17(a) reports,

are essentially common law claims for accountants’

negligence and malpractice, which traditionally have

been a concern of state law and for which state law

provides appropriate remedies.'? The ‘‘federalizing” of

such common law claims by means of Section 17(a), and

the consequences which result therefrom, raise important

questions which should be decided by this Court.

5. The majority’s holding also raises important issues

of statutory construction, including whether the Court of

Appeals majority has usurped the legislative function by

'*This is particularly so since Section 17(a), which imposes

reporting obligations on every “national securities exchange”, every

“broker or dealer’ and every “registered securities association’,

does not even mention accountants. Rule 17a-5(b)(1) does call for

reports of financial condition required of broker-dealers to be

“certified by a certified public accountant or a public accountant

who shall be in fact independent”; but there is a serious question as

to whether any duty thereby is placed on accountants, and if it is,

whether any duty not set forth in Section 17(a) can be derived from

Rule 17a-5, because it is well-established that “the language of the

statute must control the interpretation of the Rule’. Santa Fe

Industries, Inc. v. Green, supra, 430 U.S. at 472; see also Ernst &

Ernst v. Hochfelder, supra, 425 U.S. at 214 (“[The] scope [of the

rule} cannot exceed the power granted the [SEC] by Congress”’).

'°The unnecessary nature of the burden placed upon the federal

courts by the Second Circuit's creation of a Section 17(a) implied

right of action is further demonstrated by the fact that not only do

the Trustee and SIPC have eg. the State Court Action (see p. 4

and n.2), but customers of Weis also have pending New York state

court actions against Touche Ross for damages allegedly resulting

from Touche Ross’ certification of the Weis financial reports, Rosen

v. Touche Ross & Co. (Sup. Ct. N.Y. County, Index No. 21572/77)

and Rich v. Touche Ross & Co. (Sup. Ct. N.Y. County, Index No.

23193/76).

substituting its own judgment for that of Congress with

respect to what federal damage remedies are necessary

and appropriate to effectuate the purposes of Section

17(a). Cf. Lank v. New York Stock Exchange, supra, 548

F.2d at 65 (“Even were we to agree . . . that granting

{plaintiff} a right of action against the Exchange would

‘accord’ with the purpose of the [1934] Act, our function

here is to discern the intent of Congress, not to legislate

in its place”), cited in the dissenting opinion below

(33a).

6. This case also is significant because the Weis

liquidation is the largest brokerage firm liquidation since

the enactment of SIPA, SIPC SEvENTH ANNUAL REPORT

(1977) 5-6; and, it is an important one for the litigants

since it involves claims for aggregate damages of

$65,000,000.”

B. The Question Of Whether The Trustee And SIPC

May Assert Any Section 17(a) Rights Should Be

Decided By This Court

The holding of the Court of Appeals majority that

the Trustee and SIPC may assert, as “bailee’ and

*In view of the importance of the questions raised by this

Petition, the fact that the judgment sought to be reviewed is nonfinal

(the Court of Appeals having reversed an order granting a Rule

12(b) motion to dismiss) should not impede the granting of

certiorari. This Petition raises clear-cut issues of law which are

fundamental to the further conduct of the case; reversal of the

judgment would in fact terminate the action. This Court has granted

certiorari in other cases which were at a similar procedural stage,

where those cases raised similarly important issues affecting the

administration of the federal securities laws. E.g., Blue Chip Stamps

v. Manor Drug Stores, supra; United Housing Foundation, Inc. v.

Forman, 421 U.S. 837 u 75); see Daniel v. International Brother-

hood of Teamsters, 561 F.2d 1223 (7th Cir. 1977) (affirming district

court’s denial of Rule 12(b) motion), cert. granted, 98 S. Ct. 1232

(1978); cf. Ernst & Ernst v. Hochfelder, supra (the Court of Appeals

had reversed an order granting summary judgment and had

remanded the action for trial).

“subrogee”, respectively, the Section 17(a) claims of

certain Weis customers against Touche Ross also should

be reviewed by this Court. That holding is erroneous, is

in conflict with this Court's decisions in Caplin and

Amtrak, and raises such important questions for the

administration of the federal securities laws as the

propriety of the assertion of customer claims against

third parties by a SIPA trustee and by SIPC, and the

appropriateness of permitting a SIPA trustee, SIPC and

customers of a brokerage firm in liquidation all to assert

simultaneously the same claims against a third party such

as Touche Ross.

CONCLUSION

For the foregoing reasons, this petition for a writ of

certiorari should be granted.

August 23, 1978

Respectfully submitted,

ARNOLD I. ROTH

Attorney for Petitioner

575 Madison Avenue

New York, New York 10022

(212) 644-7000

Of Counsel

ARTHUR S. LINKER

RONALD Jay LITCHMAN

4ROSENMAN COLIN FREUND LEWIS

& COHEN

575 Madison Avenue

New York, New York 10022

APPENDIX

Opinion of the Court of Appeals

UNITED STATES COURT OF APPEALS

For THE SECOND CIRCUIT

Nos. 136, 144—September Term, 1977.

(Argued November 14, 1977—Decided April 21, 1978.)

Docket Nos. 77-7183, 77-7186

Epwarb S. REDINGTON, as Trustee for the liquidation

of the business of Weis Securities, Inc., and SECURITIES

INVESTOR PROTECTION CORPORATION,

Plaintiffs- Appellants,

—_—V—

ToucHE Ross & Co.,

Defendant- Appellee.

Before:

LUMBARD, MULLIGAN, and TIMBERS,

Circuit Judges.

Appeal from order of the Southern District of New

York dismissing complaint. Inzer B. Wyatt, J.,

ruled that neither SIPC nor broker’s trustee in

liquidation could maintain suit against accountant

under section 17 of the Securities Exchange Act.

Reversed as to both plaintiffs and remanded.

James B. Kosak, Jr., New York, N. Y. (Hughes

Hubbard & Reed, John S. Allee, John W.

Schwartz and Harold L. Kaplan, New York,

New York, on the brief), for Plaintiff-Appellant

Edward S. Redington, as Trustee for the liquida-

tion of the business Weis Securities, Inc.

CLARENCE FRIED, New York, N. Y. (Hawkins,

Delafield & Wood, Philip R. Forlenza and

Rafael Pastor, New York, N. Y., on the brief),

for Plaintiff-Appellant Securities Investor Protec-

tion Corporation.

ARNOLD I. Rotu, New York, N. Y. (Rosenman

Colin Freund Lewis & Cohen, Eugene Zemp

DuBose, Jr. and Arthur S. Linker, New York,

N. Y., on the brief), for Defendant-Appellee.

PAUL Gonson, Associate General Counsel; James

H. Schropp, Assistant General Counsel; Theo-

dore S. Bloch, Attorney, Securities and Ex-

change Commission, Washington, D. C., on the

brief, Amicus Curiae.

LUMBARD, Circuit Judge:

In this appeal, rising out of the insolvency and

liquidation of the brokerage firm of Weis Securities, Inc.

[‘“Weis”’], we are presented with the question whether a

private cause of action exists under section 17 of the

Securities Exchange Act of 1934' against account-

'15 U.S.C. § 78q (1976). This section was amended in 1975: in

1972, the date relevant to the instant case, it read, in relevant part:

(a) Every national securities exchange, every member

thereof, every broker or dealer who transacts a business in

securities through the medium of any such member every

registered securities association, and every broker or dealer

registered pursuant to section 15 of this title, shall make, keep

and preserve for such periods, such accounts, correspondence,

memoranda, papers, books, and other records, and make such

reports, as the Commission by its rules and regulations may

prescribe as necessary or appropriate in the public interest or for

the protection of investors. Such accounts, correspondence,

memoranda, papers, books, and other records shall be subject at

any time or from time to time to such reasonable periodic

special, or other examinations by examiners or other representa-

tives of the Commission as the Commission may deem necessary

Or appropriate in the public interest or for the protection of

investors.

ants who prepare misleading statements of a broker's

financial affairs, and if so, who may maintain such an

action.

The district court dismissed the claims herein of the

Securities Investor Protection Corp. [““SIPC’)? and of

Edward S. Redington, Weis’ Trustee in Liquidation

(‘“Trustee’’], believing that no claim for relief was stated

because no cause of action could be implied from section

17.3 Redington v. Touche Ross & Co., 428 F. Supp. 483

(S.D.N.Y. 1977). We conclude that customers of a

broker have a right of action against an accountant

whose audits of the brokerage firm are false or mislead-

ing. Because we believe that SIPC and the Trustee are

appropriate parties to seek (between them) total recov-

ery of the customers’ damages, we reverse and remand.

Touche Ross & Co. [‘‘Touche Ross’’] served as Weis’

independent certified public accounting firm from 1969

to 1973. In that capacity, Touche Ross prepared annual

audits of Weis’ affairs as required by section 17 and

regulations thereunder.

The complaint herein alleged that during fiscal 1972,

certain of Weis’ officers conceived and executed a

scheme to conceal from the regulatory authorities and

2SIPC was created by the Securities Investor Protection Act of

1970, Pub. L. No. 91-598, 91st Cong., 2d Sess., 34 Stat. 1636,

codified at 15 U.S.C. §§ 78aaa-78lll (1976).

3Our decision in this case has been materially aided by the brief

amicus curiae submitted on — by the SEC. Judge Wyatt did not

have the advantage of the SEC's position in this matter.

Judge Wyatt also dismissed, for lack of subject matter jurisdic-

tion, five state common-law claims which the Trustee had sought to

bring under principles of plenary ers weg! or pendent jurisdic-

tion, and four state common-law claims by SIPC, with respect to

which diversity of citizenship had been alleged. Judge Wyatt ruled

that SIPC was not a District of Columbia corporation for purposes

of jurisdiction, and that complete diversity did not exist. Because of

the view we take of the case, we need express no opinion as to the

scope of bankruptcy jurisdiction in SIPA-receivership cases, nor as

to the citizenship of SIPC.

the public Weis’ dire financial condition.* The elements

of this scheme appear in great detail in the complaint;

for example, although Weis had suffered a loss for fiscal

1972 of greater than $1.5 million, its pre-tax earnings for

that year were stated as being around $1.7 million.

When Weis’ fiscal 1972 ended on May 26, 1972,

Touche Ross proceeded to prepare and certify Weis’

financial statements, and to answer the financial ques-

tionnaire required by the New York Stock Exchange of

its member firms. In four opinion letters, dated July 7,

July 7, July 21 and July 21 (all of 1972), Touche Ross

represented that it had examined (i) the statement of

Weis’ current financial condition; (ii) Weis’ answers to

the financial questionnaire; (iii) Weis’ consolidated bal!-

ance sheet for the past year; and (iv) Weis’ consolidated

statement of earnings for the past five years, and found

that each presented fairly and accurately the financial

picture of Weis, in conformity with generally accepted

accounting procedures.

In fact, Weis’ financial condition was not as stated in

the above four documents, but was far more precarious.

As no steps were taken to attempt to remedy Weis’

Situation, it continued to deteriorate.’ On May 24, 1973,

the SEC sought an injunction preventing Weis and its

officers from continuing to violate the ’34 Act, and SIPC

applied for a decree, pursuant to 15 U.S.C.

§ 78eee(a)(2), adjudging Weis’ customers in need of

protection under SIPA. Accordingly, Weis’ liquidation

was ordered by (then) District Judge Gurfein on May 30,

‘In this posture of the case, we take—as we must—that view of

Dy hopin — “yy 2 —— treating as true the allegations

e complaint. See Escalera v. New York Housing Auth., 4 ‘

853, 857 bd Cir. 1970). exedon ition

*Plaintiffs contend that the misleading statements certified by

Touche Ross were the direct cause of the failure to take an

remedial action, such as the infusion of capital or merger with

another firm. Thus, they assert, Touche Ross’ dereliction substan-

tially contributed to Weis’ forced liquidation and plaintiffs’ losses.

ae contentions will be discussed more thoroughly in the body of

€ opinion.

1973, and Edward Redington was appointed Trustee for

the liquidation.

SIPC and the Trustee jointly began an action against

Touche Ross in New York state court on July 3, 1975.

Redington v. Touche Ross & Co., No. 13996/76 (Sup.

Ct. N. Y. County). The common allegations of the

plaintiffs in the state court complaint were the same as

those in the instant case, except that three paragraphs

dealing with claims under section 17 of the °34 Act were

omitted. Five of the Trustee’s six present “causes of

action” appear in identical form in the state action, as do

four of SIPC’s eight present claims. The additional

claims in this action are the federal securities law claims.

The instant suit was commenced on April 30, 1976.

Under federal law and state common law, SIPC seeks to

recover $14 million, either as subrogee of Weis’ custom-

ers whose claims it has paid under SIPA, or as a member

of the group directly injured by Touche Ross’ delicts.

Likewise under federal law and state common law, the

Trustee is claiming $51 million; he contends that he may

recover either by standing in the shoes of Weis’

customers, since under SIPA, his is the responsibility to

marshal and return their property,° or by standing in the

shoes of Weis itself, since, he alleges, Weis—as an entity

distinct from its conniving officers—was directly dam-

aged by Touche Ross’ unsatisfactory audit.

SIPC and the Trustee appeal from Judge Wyatt's

order dismissing the complaint for failure to state a claim

on which relief could be granted (with respect to the

section 17 counts). Touche Ross asks us, in the event we

reverse, to stay the federal action in favor of the state

°Property. on hand when Weis was liquidated permitted the

Trustee to return to customers 67% of the property they should

have received. In addition, SIPC paid out some $14 million to

customers and other creditors. Since under 15 U.S.C. § 78fff (1976),

accounts are protected only up to $20,000 in cash and $50,000 in

cash and securities, there may remain customers with uncompen-

sated losses, who therefore retain claims against those who caused

their losses. It is these claims that we hold the Trustee may assert.

See part III B infra.

court suit.’ This last issue, evidently, is one which Judge

Wyatt has never had cause to consider.

The first question we address is whether customers of

a brokerage firm are given any remedy by the °34 Act

against accountants whose section 17 reports are false or

misleading. There are two major considerations involved

in this decision: the criteria laid down by the Supreme

Court in Cort v. Ash, 422 U.S. 66 (1975), for finding an

implied right of action in a statute which is silent on the

issue; and the ‘purchase or sale’’ requirement reaffirmed

by the Court in Blue Chip Stamps v. Manor Drug Stores,

421 U.S. 723 (1975).

One preliminary matter must be dealt with. Judge

Wyatt held that section 17 “was designed to supply

administrative guidance in the bookkeeping area and not

to create rights in anybody,’ and that it “‘does not

impose any duty on accountants.” 428 F. Supp. at 489,

491. We believe that, even if no right of action were

implied, to see nothing but “administrative guidance”’ in

a provision as crucial to the regulation of brokers as

section 17 is to take far too narrow a view of the statute.

Certified public accountants play a significant role in the

scheme created by the °34 Act for the regulation of

securities trading, as is recognized by the regulations

promulgated by the SEC.* See, eg., 17 C.F.R.

§ 240.17a-5(b), (f), (g), (h), (i), (m). It is well estab-

lished that section 10(b) of the ’*34 Act and rule 10b-5

’Plaintiffs aver that the state court action was commenced first

only in a highly technical sense. It was begun by service of a

summons without complaint (the complaint was not served uniil

after the filing of the federal complaint), and then apparently

ignored for some months by mutual consent. The parties agree that

the state suit has progressed to the extent of responses by each

plaintiff to one set of defendant’s interrogatories.

*For a discussion of the functions and duties of accountants in

this context, see In re Touche, Niven, Bailey & Smart, 37 S.E.C.

629, 5 Fed. Sec. L. Rep. (CCH 972,100, at 62,212 (1957); Note,

Accountants’ Liability for False and Misleading Financial Statements,

67 Colum. L. Rev. 1473 (1967).

thereunder impose a duty on accountants, for breach of

which they may be sued. See Ernst & Ernst v.

Hochfelder, 425 U.S. 185 (1976). We hold that section

17 of the ’34 Act likewise imposes a duty on account-

ants.

The factors cited in Cort v. Ash, supra, 422 US. at

78, familiar through much repetition, which bear on the

propriety of finding an implied right of action in a statute

are:

1) Whether plaintiffs belong to the class for

whose special benefit the statute was enacted;

2) Whether there is any indication of legislative

intent on the issue;

3) Whether implication of a right of action is

consistent with the policies behind the legislative

scheme; and

4) Whether the cause of action in question is one

traditionally relegated to state law.

A consideration of these four factors convinces us that

implication of a right of action in favor of Weis’

customers is appropriate.

1. The language of section 17, the SEC rules in the

17a-5 series, and an analysis of the role played by

accountants’ reports in the regulation of brokers make

clear the extent to which Weis’ customers are members

of a class peculiarily protected by section 17.

The documents and reports that the SEC is empow-

ered to require of brokers must be “necessary or

appropriate in the public interest or for the protection of

investors.” 15 U.S.C. § 78q(a) (emphasis added). The

same is true of the examinations that the SEC is

empowered to conduct. /d.°

In order to provide a complete and accurate picture

of a broker's financial condition, the SEC requires that

the broker enlist an independent accountant to audit and

certify its statements, list any matters to which the

accountant takes exception, and provide certain addi-

tional financial data. Rule 17a-5(b), (i) (k). Further-

more, a notice of any “material inadequacies” found by

the accountant in the broker’s procedures must be sent

to the broker’s customers. Rule 17a-5(m)(3).'°

The function of this arsenal of financial reports is to

protect the broker’s customers. One of the main methods

adopted by the SEC to shield customers is the net capital

rule, in either the form promulgated by the SEC, rule

15c3-1, or the stricter version enforced by the New York

Stock Exchange, Exchange Rule 325.

The net capital rule is a requirement that a broker

maintain a certain minimum ratio of liquid assets to

aggregate indebtedness; its ‘principal purpose . . . is to

require that the capital position of a broker .. . will

always be sufficiently liquid to cover his current indebt-

edness, in order to be able at all times to promptly meet

[sic] the demands of customers.” Exchange Act Release

No. 8024, 6 Fed. Sec. L. Rep. (CCH) § 72,129 (1967).

As amended in order to take into account the creation of

SIPC, the rule serves particularly to “protect customezs

prior to the time when the broker’s . . . assets would be

sufficient to satisfy customers in the event of liquida-

°In 1957, when the SEC expanded certification requirements for

section 17 reports,

that step represented the Commission’s considered view that

certification and —— requirements constituted a valuable

aggro tool for the protection of a customer in respect of the

risks involved in leaving his money and securities with his

broker-dealer.

SEC, Study of Unsafe and Unsound Practices of Brokers and

Dealers, H. Doc. No. 92-231, 92d Cong., 1st Sess., at 24 (1971).

'°Citations to rule 17a-5 are to 17 C.F.R. § 240.17a-5 as it

existed in 1972. Rule 17a-5(j)-(0) were adopted on June 30, 1972,

and appear in the Federal Register for July 21, 1972.

tion.” Exchange Act Release No. 11,497, [1975-76

Transfer Binder] Fed. Sec. L. Rep. (CCH) § 80,212.

It is the reporting system created by section 17 that

provides the SEC and other regulatory authorities with

the information needed te enforce the net capital rule.

Thus, a failure to supply accurate reports will leave the

customers without protection until the broker's insol-

vency can no longer be concealed, and liquidation

follows.

2. We find no indication, either in the statute itself

or in its legislative history, of any congressional intent

either to create a private remedy under section 17 or to

deny one."!

The legislative history of the section is mute on the

issue, leading to the conclusion that Congress never

explicitly considered the question. Nor can it be said that

Congress implicitly chose to deny a private right of

action; section 17 is distinctly different in an important

respect from statutes as to which such implicit intent has

been found.

In SIPC v. Barbour, 421 U.S. 412 (1975), the

Supreme Court noted that SIPA manifested a specific

legislative intent to restrict enforcement to the SEC. /d.

at 420, 425. In National Railroad Passenger Corp. v.

National Association of Railroad Passengers, 414 U.S.

453, 458 (1974), a similar exclusivity was found to rest

with the Attorney General; in Cort v. Ash itself, supra,

422 U.S. at 74-76, the Federal Election Commission was

held to be the agency charged with exclusive enforce-

ment.

We have recently indicated that an intent to commit

enforcement of the securities statutes exclusively to the

SEC will not readily be implied. Abrahamson v.

Fleschner, 568 F.2d 862, 874 n.19 (2d Cir. 1977).

"To the extent that the court below relied on the remedy

created by section 18 of the "34 Act as evidence of a legislative

intent to deny a private remedy for violations of section 17, its

concerns will be treated in part II B infra.

10a

Nothing in section 17 induces us to treat it as an

exception to this rule.

3. ‘“‘Absent specific statements of legislative intent,

we must examine the legislative purposes underlying the

Act.” Abrahamson v. Fleschner, supra, 568 F.2d at 874,

conclude that a private right of action under section 17 is

consistent with those purposes.

A partial list of the many sections of the securities

acts under which private remedies have been implied

appears in Franklin National Bank v. L. B. Meadows &

Co., 318 F. Supp. 1339, 1341-42 (E.D.N.Y. 1970). See

III L. Loss, Securities Regulation 1785 (2d ed. 1961). At

least since J. J. Case Co. v. Borak, 377 U.S. 426 (1964)

(section 14(a)), it has been accepted in securities law

that when a statutory provision imposes a duty on

someone in favor of a class of protected persons; those

persons may sue for the ‘statutory tort’ committed when

the duty is breached.

We have held that section 17 imposes a duty on

accountants in favor of brokers’ customers. We note

that—just as in Borak—the SEC was not meant to, and

does not have the resources to examine and audit all the

documents that it receives (in Borak, proxy statements;

here, section 17 reports).'? Both it and SIPC, as well as

the broker's customers must rely on the certification by

the accountants.

Neither SEC injunctive actions nor criminal prosecu-

tions will restore to customers the money they have lost.

Indeed, the cases cited by Judge Wyatt in support of the

proposition that there exists injunctive and criminal

relief for violations of section 17 do not involve

'2In its amicus brief, the SEC advises us that, in fiscal 1976, over

5000 brokers and dealers were registered with it; that each of the

approximately 750 broker-dealers that are not members of self-

regulating organizations must be audited annually, as must the 500

or sO against whom complaints are lodged; and that this leaves the

SEC able to examine each year the statements of only 5% of

broker-dealers who are apparently untroubled members of self-

regulatory organizations.

lla

accountants. See 428 F. Supp. at 490, and cases cited.

Accordingly, we rule that a private remedy is an essential

supplement to the scheme of enforcement of section 17.

4. Finally, it is evident that just as the problems

caused by insolvent brokers are national in scope, so

must be the standards governing their reporting. Section

17 is part of a statute as to which federal courts have

exclusive jurisdiction; state law protection of brokers’

customers varies widely. There is no reason to believe

that the remedy sought herein is one traditionally

relegated to state law.

The court below found a particularly high barrier to

plaintiffs in section 18 and the judicially created

purchaser-seller doctrine. 428 F. Supp. at 489-90.

Section 18 creates private remedy for “misleading

statements” in “any application, report, or document

filed pursuant to this chapter,” in favor of “‘any person

... Who... shall have purchased or sold a security at a

price which was affected by such statement... .” 15

U.S.C. § 78r.

Applying this language, and the holding of Blue Chip

Stamps, supra, 421 U.S. at 736, Judge Wyatt ruled that

the remedy provided by section 18 was exclusive, and

that thus no remedy existed for brokers’ customers

injured as a result of an accountant’s misleading state-

ments, absent a purchase or sale of an affected security.

We disagree.

Since any misstatement in a section 17 report would

not affect the price of the shares of the various issuers in

the hands of a broker’s customers, a strict application of

section 18’s limiting language would leave customers

without any remedy whatsoever, no matter how egregi-

ous the fraud or how grievous their loss. Yet it is plain

that brokers’ customers are favored wards of section 17.

We cannot agree that Congress simultaneously sought to

protect a class and deprived the class of the means of

protection.

12a

Our holding is not inconsistent with either the

purchaser-seller limitation or section 18, which will

continue to apply to all investors in market securities

who seek relief qua investors. That is, the Blue Chip

doctrine would bar a suit by an investor who claimed to

have been induced not to purchase or sell by a

misstatement. We do not believe, however, that the

doctrine applies to brokers’ customers, protection of

whom is wholly independent of protection of investors

per se.

Ill

In light of the foregoing analysis, we decide that

brokers’ customers have a right of action against accoun-

tants for certifications that violate the standard set by

section 17 and rule 17a-5. This does not, however,

resolve the question whether the plaintiffs in the instant

case, SIPC and the Trustee, are proper parties to bring

the action.

SIPC asserts a right to bring this action both in its

own right and as subrogee of the customers whose claims

it has paid. We hold that SIPC may maintain the action

as subrogee.'*

SIPA provides expressly that SIPC, upon reimbursing

a customer’s losses, shall be subrogated to that

customers claims against the debtor's (here Weis’)

'*We need not reach the question whether SIPC could ever have

a claim for damages other than on behalf of a broker’s customers;

we only note that as the creature of a 1970 statute, SIPC can hardly

claim to have been a specially protected beneficiary of the ’34 Act.

SIPC makes much of 15 U.S.C. § 78bbb (1976), which treats SIPA

as if it “constituted an amendment to, and was included as a section

of” the °34 Act. Nonetheless, it is indisputable that SIPC is not the

kind of entity Congress sought to protect either in 1934 or in 1970;

the cited omar of the 1970 statute appears to do no more than

indicate that, ry where specifically provided otherwise, any

prong ge by SIPA is supplemental to the preexisting remedies

of the ’ ct.

13a

estate. 15 U.S.C. § 78fff(f)(1). Touche Ross contends

that SIPC’s statutory right of subrogation against the

debtor’s estate is. its exclusive remedy, precluding any

rights against third parties such as Touche Ross. We

disagree.

Section 78fff is a detailed blueprint for the distribu-

tion of the liquidated debtor’s estate, and it is to be

expected that SIPC’s rights against the estate would be

included in that section. However, there is no reason to

believe that this was meant to destroy SIPC’s general

common-law right of equitable subrogation.

[T]he general rule is that upon payment of a loss the

insurer is entitled to be subrogated pro tanto to any

right of action which the insured may have against a

third person whose negligence or wrongful act caused

the loss.

31 N.Y. Jur., Insurance § 1620, at 510. See Ackerman v.

Motor Vehicle Accident Indemnification Corp., 18 App.

Div. 2d 307,.239 N.Y.S.2d 463 (1st Dept. 1963)

(explicit statutory provision did not destroy MVAIC’s

broader common-law right to subrogation).

Moreover, we believe that it is more in keeping with

the intent of Congress that wrongdoers not receive a

windfall benefit from the existence of SIPC, and that

SIPC be able to recoup its losses from solvent wrong-

doers. Accordingly, we find that SIPC is subrogated to

the right of action implied in section 17 in favor of

brokers’ customers against third parties such as account-

ants. See SEC v. Albert Maguire Securities Co., [Current]

Fed. Sec. L. Rep. (CCH) {| 96,129, at 92,076 (3d Cir.

July 27, 1977).

The Trustee contends that he is a proper plaintiff

herein, both as the representative of Weis’ estate and as

bailee of Weis’ customers’ property. We hold that he

may maintain this action on behalf of such customers as

have not been fully reimbursed by SIPC.

14a

The barriers to a right of action on Weis’ behalf are

insurmountable. It is apparent that brokers, such as

Weis, were not included in the class of those protected by

section 17; indeed, brokers are the very entities regulated

by section 17.

Two recent cases in point are Piper v. Chris-Craft

Industries, Inc., 430 U.S. 1 (1977), and Lank v. New

York Stock Exchange, 548 F.2d 61 (2d Cir. 1977). In

each, a member of the class sought to be regulated by

Congress attempted to claim the benefit of an implied

right of action under the very statute that regulated it.

Chris-Craft held that a defeated tender offeror could not

enforce the Williams Act, 15 U.S.C. § 780(e), against a

successful tender offeror, because ‘‘a party whose .. .

conduct was purposefully brought under federal control

by the statute . . . can scarcely lay claim to the status of

‘beneficiary whom Congress considered in need of

protection.” 430 U.S. at 37.

In Lank, we decided, in a case not unlike the instant

case, that the receiver of a liquidated brokerage firm

could not—because the firm itself could not—sue a

securities exchange for failure to force the firm to comply

with the exchange’s rules. We pointed out that the ’34

Act did not afford protection ‘‘to the very members of

the stock exchanges whose conduct was being regu-

lated.” 548 F.2d at 66. The extent to which Lank

parallels the instant case precludes our holding that the

Trustee may maintain this action on Weis’ behalf.

However, none of the above considerations apply to

an action brought by the Trustee as bailee of the

property of Weis’ customers. He is responsible for

marshalling and returning their property; to the extent

that he is unable to do so, he argues, he may sue on

behalf of the customer/bailors ony wrongdoer whom they

could sue themselves.

Rule 17(a) of the Federal Rules of Civil Procedure

reads, in part: “[A] ... bailee . . . may sue in his own

name without joining with him the party for whose

15a

benefit the action is brought. . . .’ The Advisory

Committee Notes to this section, added in 1966,'* point

out by way of illustration that the ‘‘owner of a warehouse

in which household furniture is stored is equally entitled

to sue on behalf of the numerous owners of the furniture

stored.” 39 F.R.D. 69, 85 (1966). See generally 5

N.Y.Jur., Bailments §§ 118, 119.

To the extent that customers have claims that have

not been satisfied either by Weis in liquidation, see note

6 supra, or by SIPC, they retain rights of action against

Touche Ross. We hold that the Trustee, as bailee, is an

appropriate real party in interest to maintain this action

on their behalf.

Since we hold that both SIPC and the Trustee may

maintain this action against Touche Ross, we remand to

the district court for further proceedings consistent with

this opinion. We leave to it in the first instance a number

of questions that will now arise: whether to stay the

federal action pending determination of the state

action;'* whether to exercise pendent jurisdiction over

the plaintiffs’ common-law claims; and what the appro-

priate standard is for accountant liability in actions under

section 17, cf. Ernst & Ernst v. Hochfelder, 425 U.S. 185

(1976).

Reversed and remanded.

“The purpose of the 1966 amendment was “‘[to] add to the

illustrative list of real parties in interest a bailee—meaning, of

course, a bailee suing on behalf of the bailor with respect to the

property bailed.” 39 F.R.D. 69, 84 (1966).

'SIn Weiner v. Shearson, Hammill & Co., 521 F.2d 817 (9th Cir.

1975), the court of ap als chose to remand the question of a stay

to the district court, despite its thorough discussion of the factors

involved in the determination of the question.

16a

TimBerS, Circuit Judge, concurring:

I concur in all respects in Judge Lumbard’s clear,

concise and, in my view, correct majority opinion.

In view of the characteristically thoughtful and

earnest dissent of our Brother Mulligan, however, I

should like to add a few words, partly to supplement

Judge Lumbard’s opinion, but chiefly to suggest that

Judge Mulligan’s dissent be read in the light of the

following observations.

First, in urging that customers of a broker-dealer in

liquidation have no implied right of action for damages

under Section 17 of the Exchange Act against accoun-

tants who prepare false or misleading reports required by

that statute, the dissent understandably is disturbed by

the unanimous opinion in Cort v. Ash, 422 U.S. 66, 78

(1975), as recently reaffirmed in Piper v. Chris-Craft

Industries, Inc., 430 U.S. 1, 37-45 (1977). Granted that

the dissent’s massive effort to distinguish or to apply a

gloss to Ash is an artful attempt to circumvent this key

decision, I fear that our dissenting colleague has misap-

prehended the essential purpose of Ash in stating certain

factors to be taken into consideration in determining

whether to imply a right of action under a given statute.

The dissent at the outset, post, at , emphasizes that

Ash is not relevant to a case which arises under a statute

which expressly provides for a private right of action.

This overlooks the fact that the Supreme Court

specifically applied the Ash analysis in Piper, supra, 430

U.S. at 37-41, in determining whether a private remedy

was implicit in Section 14(e) of the same statute with

which we are here concerned, i.e. the Exchange Act.

Assuming that what the dissent intends te emphasize,

post, at , is that Ash does not apply when an express

remedy is provided for the specific wrong complained of,

it must be remembered that the Court reaffirmed the

implication of a private fight of action under Section

10(b) of the Exchange Act and Rule 10b-5 promulgated

17a

thereunder in Blue Chip Stamps v. Manor Drug Stores,

421 U.S. 723, 730 (1975), despite the absence of

legislative history on the subject, id. at 737, much less

“clear contrary evidence of legislative intent.” Post,

at ;

Second, the dissent’s displeasure with J. J. Case Co.

v. Borak, 377 U.S. 426 (1964), likewise is understand-

able. This seminal opinion written by the late Mr. Justice

Tom Clark for a unanimous Supreme Court, in holding

that Section 27 of the Exchange Act provided the

jurisdictional underpinning for an implied private right

of action for damages (as well as for declaratory and

equitable relief) arising from violations of Section 14(a)

of the Exchange Act, id. at 430-35, expressly recognized

that “Private enforcement of [Commission rules] pro-

vides a necessary supplement to Commission action’, id.

at 432, and, that “‘[I]t is the duty of the courts to be alert

to provide such remedies as are necessary to make

effective the congressional purpose.” Jd. at 433. Despite

our Brother Mulligan’s herculean effort in dissent to

buttress his assertion that Borak ‘“‘has been significantly

restricted by more recent decisions of the Supreme

Court’, post, at , those decisions strike me as

expressly and emphatically reaffirming the Borak

rule'—as Mr. Justice Stevens stated in Piper, supra, 430

U.S. at 67, ““Borak remains a viable precedent.”

Third, the dissent speaks disparagingly of the SEC

amicus brief. Post, at 2725 n.1. As Judge Lumbard

correctly points out, ante, at 2707 n.3, we were aided

materially by the SEC brief, whereas the district court

did not have the advantage of knowing of the SEC's

position. Here again, our Brother Mulligan’s attempt to

disparage the SEC brief is understandable, for it urges

forcefully and cogently that SIPC should be permitted to

assert a private right of action under Section 17 of the

'For example, in Piper, supra, 430 U.S. at 25, Chief Justice

Burger stated:

“This Court has nonetheless held that in some circumstances

a private cause of action can be implied with respect to the

18a

Exchange Act under the circumstances of this case. But

far more basic than whether the SEC as amicus supports

Or opposes one side or the other in litigation under the

federal securities laws, is that the position of the SEC

should be known to the court. That is the point of Judge

Lumbard’s observation referred to above. And it is

especially important in a case of first impression such as

the instant one involving a statute under which Congress

has imposed on the Commission specific responsibilities.’

Wholly aside from the instant case—where I find the

1934 Act’s antifraud provisions, even though the relevant

peri are silent as to remedies. J. J. Case Co. v. Borak,

77 U.S. 426 (1964) (§14(a)); Superintendent of Ins. v.

Bankers Life & Cas. Co., 404 U.S. 6, 13 n. 9 (1971)

(410(b)).”

In SIPC v. Barbour, 421 U.S. 412, 417 (1975), referring to Borak,

Mr. Justice Marshall summarized its holding:

“In light of the ‘broad remedial purposes’ of the Act and the

SEC's representation that private enforcement was necessary

to effectuate those purposes, the Court held that the action

for damages could maintained.”

And in Blue Chip Stamps, supra, 421 U.S. at 730, after summarizing

the 25 year development of the decisional law that there is an

implied private right of action under Rule 10b-5, Mr. Justice

Rehnquist, referred to Borak as follows:

“Such a conclusion was, of course, entirely consistent with

the Court’s recognition in J. J. Case Co. v. Borak, 377 U.S.

426, 432 (1964), that private enforcement of Commission

rules may ‘[provide] a necessary supplement to Commission

action.’”’

These decisions do not strike me as significantly “restricting” Borak;

rather, they seem quite clearly to reaffirm Borak as a “viable

precedent’, each case turning of course on the particular statute or

rule under consideration.

*Section 7 of SIPA, 15 U.S.C. §78ggg (1976). See SIPC v.

Barbour, supra, 421 US. at 417.

The SEC cogently summarizes in its brief filed in our Court its

interest in the instant appeal as follows:

“The Commission ctfully submits this brief as amicus

curiae because this appeal raises significant issues which could

materially affect its administration of the federal securities

laws. We believe . . . that permitting a private right of action

under Section 17 of the Securities Exchange Act will provide

a necessary supplement to the Commission’s efforts to

enforce that section and the rules and regulations thereunder.

In addition, financial statements submitted by broker-dealers

19a

SEC amicus brief to measure up to the Commission’s

high standard of competence and fairness—I do hope

that our Brother Mulligan’s disparagement of the SEC

amicus brief will not be construed as a judicial signal,

even in dissent, that the Commission should retreat to its

position of a generation ago which drew sharp criticism

from our Court. Compare Blau v. Mission Corp., 212

F.2d 77, 81 (2 Cir.), cert. denied, 347 U.S. 1016 (1954),

and Roberts v. Eaton, 212 F.2d 82, 84 (2 Cir.), cert.

denied, 348 U.S. 827 (1954), with Studebaker v. Gittlin,

360 F.2d 692, 695 (2 Cir. 1966), and Greene v. Dietz,

247 F.2d 689, 695-98 (2 Cir. 1957) (concurring and

dissenting opinions; per curiam opinion on rehearing).

See Some Practical Aspects: The SEC and The Federal

Judiciary, 41 A.B.A.J. 1136, 1137-38 (1955).?

pursuant to the Act play a key role in the Commission’s

administration and enforcement of various statutory provi-

sions designed to protect against loss of the funds and

securities of customers of broker-dealers and to maintain

confidence in the securities markets at a high level. The

availability of a right of action under Section 17 will thus

have a direct bearing on the overall effectiveness of such

Statutory and regulatory provisions as those regarding

hypothecation and segregation of securities and cash, and the

net capital rule, designed to ensure the ability of brokers to

meet their financial obligations as custodians of customer

property. In addition, the Commission has ‘plenary authority’

with respect to the operations of the Securties Investor

Protection Corporation, and is therefore concerned that SIPC

have the ability to recover funds needlessly expended due to

the wrongful acts of others, thus ging the funds

available to compensate losses suffered by the customers of

brokers.” (footnotes omitted). SEC Amicus Curiae Brief,

filed August 31, 1977, at 3-4.

*I am pleased to note that, in response to my concurring opinion,

Judge Mulligan very commendably has disclaimed ary intention to

disparage the SEC amicus brief below, n.1, last paragraph. This

refiects the good judgment and fairness for which our distinguished

colleague is well known. As a former Dean of the Fordham Law

School, I think that Judge Mulligan would join in taking judicial

notice of one of the leading expositions of the history and functions

of the amicus curiae through centuries of development of the law.

Beckwith and Sobernheim, Amicus Curiae—MiInisTER OF JUSTICE.

17 Fordham Law Review 38 (1948).

20a

Accordingly, after carefully considering Judge

Mulligan’s dissenting opinion, especially in the light of

the observations set forth above, I concur without

qualification in Judge Lumbard’s majority opinion.

MULLIGAN, Circuit Judge (dissenting):

In my view this case was properly decided by Judge

Wyatt and the order and judgment dismissing the

complaint should be affirmed.' The majority announces

that “‘[a]t least since J. J. Case Co. v. Borak, 377 US.

426 (1964) .. . it has been accepted in securities law that

when a statutory provision imposes a duty on someone in

favor of a class of protected persons, those persons may

sue for the ‘statutory tort’ committed when the duty is

breached.” Majority opinion at 2715. The Borak rule,

which liberally implied private actions in federal regula-

tory acts on a statutory tort theory, has been significantly

restricted by more recent decisions of the Supreme Court

which are misapplied by the majority opinion.’

'The majority comments in footnote 3 that its decision has been

materially aided by the brief amicus curiae submitted on appeal by

the SEC and that Judge Wyatt did not have the advantage of the

SEC's position in this matter. The Supreme Court, however, in

Piper v. Chris-Craft Industries, Inc., 430 U.S. 1. 41 n.27 (1977)

observed that “. . . its [the SEC's] ‘expertise’ in the securities-law

field is of limited value when the narrow legal issue is one peculiarly

reserved for judicial resolution, namely whether a cause of action

should be implied by judicial interpretation in favor of a particular

class of litigants.” That, of course, is the principal issue in this case

as well. It should also be added that a substantial part of the SEC

brief is devoted to the argument that SIPC in its own me may

assert a private right of action for violations of section 17 of the °34

Act. This proposition was not only rejected below but was

repudiated by the majority in its footnote 13.

I do not “disparage”, as my Brother Timbers would have it, the

brief of the SEC. I simply do not agree with it—neither does the

majority, at least to the extent I have indicated. Nor do I dispute the

propriety of its submission. I cannot believe that disagreement with

the opinions of any agency can sensibly discourage the filing of a

brief expressing its views as amicus curiae (sed non parens curiae). It

remains the function of the bench to construe the law as best it can

even though that involves on occasion disagreement with one’s

colleagues or even an agency.

?These decisions discussed in the text, infra, include Piper v.

Chris-Craft Industries, Inc., 430 U.S. 1 (1977), Cort v. Ash, 422

21a

While the majority purports to consider the factors

set forth in Cort v. Ash, 422 U.S. 66 (1975), it must be

emphasized that Justice Brennan in his opinion in Cort

carefully restricted their application: “‘In determining

whether a private remedy is implicit in a statute not

expressly providing one, several factors are relevant.”

422 U.S. at 78 (emphasis supplied). In Piper v.

Chris-Craft Industries, Inc., -'30 U.S. 1, 37 (1977) Chief

Justice Burger's opinion similarly confined the Cort

factors, noting that they are “ ‘relevant’ in determining

whether a private remedy is implicit in a statute not

expressly providing one.” (Emphasis supplied).

In the instant case, however, we are confronted with

a statute for which Congress has clearly provided a

remedy in the event of certain violations. Admittedly,

section 17(a), set forth in footnote 1 of the majority

opinion, does not itself include any private remedy for an

infraction of its terms. It simply requires that brokers or

dealers such as Weis, make, keep and preserve records

and make such reports as the SEC may prescribe by its

rules and regulations in the interest of the public and for

the protection of investors. Other comparable sections of

the °34 Act (the Act) also provide for the filing of

reports. See sections 13(a), 15 U.S.C.§ 78m(a); 13(d),

15 U.S.C.§ 78m(d); 13(f), 15 U.S.C. § 78m(f); and 15

U.S. 66 (1975); Securities Investor Protection Corp. v. Barbour, 421

U.S. 412 (1975); National Railroad Passenger Corp. v. National

Association of Railroad Passengers, 414 U.S. 453 (1974) (Amtrak);

see Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).

Numerous commentators have acknowledged the substantial retreat

from Borak represented by these subsequent Supreme Court

rulings. E.g., Climan, Civil Liability Under the Credit-Regulation

Provisions of the Securities Exchange Act of 1934, 63 Cornell L.

Rev. 206, 261-69 (1978); Comment, Implying Private Causes of

Action From Federal Statutes: Amtrak and Cort Apply the Brakes,

17 B.C. Ind. & Com. L. Rev. 53, 64 (1975); Comment, Private

Rights of Action Under Amtrak and Ash: Some Implications for

Implication, 123 U. Pa. L. Rev. 1392, 1416 (1975); Note,

Implication of Private Actions from Federal Statutes: From Borak

G97T} 1 J. Corp. Law 371 (1976); 30 Vand. L. Rev. 905, 908-10

22a

(a), 15 U.S.C.§ 780(d). Like section 17(a), these

sections include in their text no provisions for a private

remedy.

Section 17 is immediately followed, however, by

section 18(a), 15 U.S.C. § 78r(a), entitled “Liability for

Misleading Statements” which does provide an express

private remedy for violation of the reporting provisions

of the Act. It states:

Any person who shall make or cause to be made

any statement in any application, report, or document

filed pursuant to [the *34 Act] or any rule or

regulation thereunder . . . , which statement was...

false or misleading with respect to any material fact,

shall be liable to any person (not knowing that such

statement was false or misleading) who, in reliance

upon such statement, shall have purchased or sold a

security at a price which was affected by such

statement, for damages caused by such reliance

unless the person sued shall prove that he acted in

good faith and had no knowledge that such statemen

was false or misleading.

(Emphasis supplied).

Section 18(a) follows upon the heels of section 17. Its

subject matter covers reports or documents filed pur-

suant to the ’34 Act and regulations promulgated

thereunder. ‘hus, Judge Wyatt correctly found and,

indeed, common sense would dictate, that section 18(a)

expressly provides the sole private remedy which Con-

gress intended to be available for a violation of section

17(a) and the other reporting sections of the ’34 Act.

Furthermore, most courts which have considered the

issue have found section 18(a) to contain the only

remedy for violation of the Act’s reporting sections.’

*Meer v. United Brands Co.,{1976-77 Transfer Binder] CCH

Fed. Sec. L. Rep. 995,648 at p. 90,213 (S.D.N.Y. 1976); duPont v.

Wyly, 61 F.R.D. 615, 628 (D. Del. 1973); In re Penn Central

Securities Litigation, 347 F.Supp. 1327, 1340 (E.D. Pa. 1972),

23a

It seems clear, then, that the Statutory scheme

enacted by Congress provides in section 18(a) an express

but limited remedy for violations of section 17(a). As

noted above, the Supreme Court has repeatedly limited

use of the Cort factors to instances in which no statutory

remedy whatsoever has been provided. Hence, it must

seriously be questioned whether the Cort factors are

even the appropriate analytical tool to determine

whether an implied private right of action should exist

for infractions of section 17(a). Nonetheless, using a Cort

analysis the majority finds an implied private damage

remedy because it determines that brokers’ customers

are “favored wards” of, and a class “peculiarly pro-

tected” by section 17. Therefore, states the majority, we

cannot assume that the Congress intended to deprive

them of “the means of protection.” Majority opinion at

2716.

I believe the majority reasoning is faulty in two

major respects. In the first place, if the brokers’

customers were so clearly the concern of the Congress

when it enacted section 17(a), its failure to afford them a

private damage remedy in section 18(a), which was

contemporaneously enacted and which provides a private

remedy for misleading statements in reports filed pur-

suant to the mandate of the Act, leads to the conclusion

that Congress did not intend a private damage remedy to

be available to brokers’ customers.

relevant point adhered to on reargument, 357 F.Supp. 869 (E.D.

Pa. 1973), aff d, 494 F.2d 528, 539-40 (3d Cir. 1974); see Myers v.

American Leisure Time Enterprises, Inc., 402 F.Supp. 213, 214

(S.D.N.Y. 1975), affd without opinion, 538 F.2d 312 (2d Cir.

1976). But see the district court cases discussed in In re Penn

Central Securities Litigation, supra, 494 F.2d at 540 n.18.

It should be noted that in a case related to that at bar the

customers of Weis brought a class action against Touche Ross

alleging, inter alia, that Touche Ross’ certification of the same

financial statements involved here was in violation of Rule 17a-5, 17

C.F.R. § 240.17a-5 and gave the customers a cause of action under

section 18(a). Rich v. Touche Ross & Co., 415 F.Supp. 95, 101-02

(S.D.N.Y. 1976). Judge Brieant dismissed the complaint, finding

that since the plaintiffs did not meet the purchaser-seller require-

ments of 18(a) they stated no claim for the alleged violation of Rule

17a-5. Id. at 102-04.

24a

The principle of statutory construction by which one

reaches this result is somewhat forbiddingly known as

“expressio unius est exclusio alterius’. This maxim was

recently emphasized and applied by the Supreme Court

in National Railroad Passenger Corp. v. National Associ-

ation of Railroad Passengers, 414 U.S. 453 (1974)

(Amtrak). There the Court held that the plaintiff

association of railroad passengers had no implied cause

of action as primary beneficiaries of the Rail Passenger

Service Act of 1970 since that Act expressly provided for

enforcement by the Justice Department. In its opinion,

the Court observed:

A frequently stated principle of statutory construc-

tion is that when legislation expressly provides a

particular remedy or remedies, courts should not

expand the coverage of the statute to subsume other

remedies. ‘‘When a statute limits a thing to be done

in a particular mode, it includes the negative of any

other moc«.”. . . This principle of statutory construc-

tion reflects an ancient maxim—expressio unius est

exclusio alterius. Since the Act creates .. . a private

cause of action only under very limited circums-

tances, this maxim would clearly compel the conclu-

sion that the remedies created are the exclusive

means to enforce the duties and obligations imposed

by the Act.

414 US. at 458.

Soon after its decision in Amtrak the Supreme Court

reaffirmed its reliance on the expressio unius principle in

Securities Investor Protection Corp. v. Barbour, 421 U.S.

412, 418-19 (1975). In finding that the express statutory

grant to the SEC of a right to seek injunctive relief to

enforce duties under the Securities Investor Protection

Act precluded an implied right in others to seek similar

relief, the Court reiterated its observation in Amtrak that

‘express statutory provision for one form of proceeding

ordinarily implies that no other means of enforcement

was intended by the Legislature.” Id. at 419.

25a

Similarly, in the instant case the provision by Con-

gress in section 18(a) of a narrow private cause of action

for section 17(a) infractions militates strongly against our

attributing to Congress a willingness to allow more

expensive enforcement of the duties and obligations

created by that section. Moreover, while the Court in

Amtrak acknowledged that the expressio unius principle

must “yield to clear contrary evidence of legislative

intent,” 414 U.S. at 458, the majority here concedes that

it finds nothing in the language or legislative history of

section 17(a) to indicate that Congress intended to

create a private cause of action under that section. In my

view appellants have failed to demonstrate the ‘‘clear

contrary evidence’ to rebut the conclusion that the

limited express right of action under section 18(a) is the

exclusive remedy for a breach of section 17(a).*

We find further support for the position that there is

no private right of action implied under section 17(a) in

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723

(1975). There the Court commented: **When Congress

wished to provide a remedy [under the ’34 Act] to those

who neither purchase nor sell securities, it had little

‘I do not overlook Judge Timbers’ recent opinion in

Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir. 1977), petition for

cert. filed, 46 U.S.L.W. 3588 (U.S. March 21, 1978) (No. 77-1279),

which the majority cites to distinguish Amtrak and Barbour on the

ground that those cases do not involve implication of private actions

under the securities acts. It is important to note that in Abrahamson,

where the court found a private right of action for damages implied

for violations of section 206 of the Investment Advisers Act, 15

U.S.C. § 80b-6, Judge Timbers, in his opinion for the majority,

repeatedly stressed that the Investment Advisers Act made

absolutely no provision for express private actions. Id. at 872, 874,

875. The opinion in Abrahamson contrasts this omission to those

other securities acts which contain “sections expressly granting

injured parties a private action for damages.” Id. at 874 (emphasis

in original); see Piper v. Chris-Craft Industries, Inc., supra, at 24-25.

Indeed, in this connection the opinion then refers specifically to

section 18 of the '34 Act. Id. at 874 n.20. Judge Timbers concluded:

‘““Had Congress provided explicitly for private damage actions it

would be unnecessary to consider whether the en should be

judicially implied.” Id. at 875. This conclusion in Abrahamson is in

fact strongly supportive of the analysis in this dissent.

26a

trouble in doing so expressly” 421 U.S. at 734. Judge

Wyatt’s opinion below reviews several such sections of

the °34 Act which impose liability on persons other than

purchasers or sellers. 428 F.Supp. at 490. The presence

of these provisions in the °34 Act reinforces the

conclusion that the framing of the section 18(a) remedy

in terms of purchasers and sellers of securities to the

exclusion of customers of broker-dealers was an inten-

tional congressional limitation on the class for whom a

private action would be avilable in the event of a section

17(a) violation.

The Supreme Court in Blue Chip also addressed itself

specifically to section 18:

Section 18 of the 1934 Act, prohibiting false or

misleading statements in reports or other documents

required to be filed by the 1934 Act, limits the

express remedy provided for its violation to “‘‘any

person... who... shall have purchased or sold a

security at a price which was affected by such

statement. . . . It would indeed be anomalous to

impute to Congess an intention to expand the

plaintiff class for a judicially implied cause of action

beyond the bounds it delineated for comparable

express causes of action.

421 US. at 736.

But that is precisely what the majority is imputing to

Congress in this case. The misleading reports which

create the basis for the claim here made were required to

be filed by section 17(a) of the 34 Act and the remedy

provided by section 18(a) concedely encompasses not

broker-dealer customers but only securities purchasers

or scllers.* I find that Amtrak, Barbour and Blue Chip

*It should be noted that in another suit arising out of the Weis

debacle Judge Wyatt has sustained a section 18(a) claim asserted by

a plaintiff bank which allegedly purchased securities of Weis in

reliance on the section 17(a) reports involved in this case. Exchange

National Bank v. Touche Ross & Co., 75 Civ. 916 (S.D.N.Y.).

27a

compel the conclusion that the omission was studied and

that the implication of a damage action against accoun-

tants under this section is totally unwarranted. The

majority cannot properly characterize this as a case

where there is no explicit private remedy provided by

Congress. Rather, it is a case in which the remedy

provided was designed to exclude the class which is here

seeking monetary relief. Thus, the majority's holding in

my view goes beyond statutory construction; it amounts

instead to judicial legislation.

The second flaw in the majority opinion is the failure

to consider the impact of Piper v. Chris-Craft Industries,

Inc., supra, in its discussion of the Cort factors. In Piper

the Court, while again carefully limiting its holding to

cases where the statute to be construed provides no

private remedy, id. at 24-25, emphasized that private

relief will be implied in favor of a particular class

intended to be protected by the statute only when it is

“necessary ”’ to effectuate Congress’ goals. 430 U.S. at

25.° The inquiry called for is to ascertain the congres-

sional purpose and to determine whether a private

damage action by brokers’ customers is a necessary

adjunct, id., to accomplish the primary congressional

goal embodied by the legislation. Cort v. Ash, supra, at

84.

The plain language of section 17 establishes the

congressional concern that the SEC be kept on notice of

the financial health and stability of registered broker-

dealers through whom public investors purchase and sell

securities.

°The underscoring of the element of necessity three times in the

Piper opinion, 430 U.S. at 25, indicates the emphasis the Court

wished to bring to this factor in determining whether a private

remedy should be implied. Piper, therefore, is not simply a

restatement or affirmation of Cort but adds a significant gloss.

Wilson v. First Houston Investment Corp., 556 F.2d 1235, 1239,

1240 (Sth Cir. 1978).

28a

The SEC itself has long recognized that the primary

protection for brokers’ customers lies in preventive

' monitoring: “customers do not open accounts with a

broker relying on suit, judgment and execution to collect

their claim—they are opened in the belief that a

customer can, on reasonable demand, liquidate his cash

or securities position.” Guy D. Marianette, 11 SEC 967,

971 (1942). Hence, the broker-dealer is required to file

reports which are subject to such examination as the

SEC may deem necessary or appropriate in the public

interest or for the protection of investors. As the

majority points out, a principal and, in fact, dominant

method of investor protection is the net capital rule.

Section 15(c)(3) of the ’34 Act, 15 U.S.C. § 780(c)(3),

authorizes the SEC to provide safeguards with respect to

the financial responsibility of broker-dealers including

their ‘acceptance of custody and use of customers’

securities, and the carrying and use of customers’

deposits or credit balances.’’ Pursuant to Rule

15c(3)(1)(b)(2), 17 C.F.R. § 240.15c3-1(b)(2), the SEC

exempts broker-dealers who are members in good

standing of the New York Stock Exchange (as was Weis)

from compliance with SEC net capital requirments. This

is because such broker-dealers are subjet to Exchange

Rule 325, which is deemed by the Commission to impose

requirements more comprehensive than the require-

ments of the SEC. Id. Under Rule 325 Weis was

required to maintain a minimum prescribed ratio of

aggregate indebtedness to net capital. Compliance by

broker-dealers with the net capital rule is ensured by the

filing of reports and monitoring by SEC as well as by the

Exchange, which is authorized to enforce its regulations,

see 15 U.S.C. § 78(f) and which, according to the SEC

brief submitted on this appeal, makes annual examina-

tions of each of its broker-dealer members to this end.

Congressional concern for the solvency of broker-

dealers was not limited to the reporting and monitoring

requirements of section 17. Following the boom of the

29a

1960’s a number of brokerage firms experienced

financial instability and even failure. Securities Investor

Protection Corp. v. Barbour, supra, at 415. The response

of Congress was the enactment in 1970 of the Securities

Investor Protection Act (SIPA), 15 U.S.C. §78aaa et

seq. aS an amendment to the ’34 Act. Under SIPA

Congress created the Securities Investor Protection

Corporation (SIPC), the function of which extends well

beyond providing protection to investors upon the

liquidation of their brokers. As the Court noted in

Securities Investor Protection Corp. v. Barbour, supra, at

421:

The SIPC properly treats an application for the

appointment of a receiver and liquidation of a

brokerage firm as a last resort. It maintains an

early-warning system and monitors the affairs of any

firm that it is given reason to believe may be in

danger of failure.

The SEC too has noted that the primary purpose of the

net capital requirements for broker-dealers is to give

“the [SEC], self-regulators and SIPC sufficient early

warning to take appropriate action to protect customers

prior to the time . . . of liquidation.” 1934 Act Release

No. 11497, June 26, 1975 [1975-76 Transfer Binder],

CCH Fed. Sec. L. Rep. 480,212.

The majority here finds that since section 18(a)

leaves broker-dealer customers without protection and

since brokers’ customers are the “favored wards’ of

section 17, it cannot agree that Congress simultaneously

sought to protect them and to deprive the class of the

means of protection. However, a review of section 17(a)

and the rules promulgated by the SEC as well as the

creation of SIPC, demonstrates that the means Congress

employed to ensure solvency of broker-dealers were to

require the keeping and filing of records, the mainte-

nance of certain net capital balances and the oversight of

30a

the SEC, SIPC and the Exchanges. Thus, the primary

congressional intent obviously has been to provide a

system of reports and monitoring which would prevent

insolvency of broker-dealers; not to create private law

suits for damages after insolvency has occurred.’

Since the filing requirements of section 17(a) are

designed to give early warning, the importance to this

scheme of implying a damage remedy after liquidation is

dubious. Congress made no suggestion either in 1934 or

in 1970, when it enacted SIPA, that a private damage

action was a necessary corollary of the section 17(a)

reporting provisions. The threat of liquidation under

SIPA as well as the criminal sanctions available for

violations of section 17(a) certainly present a greater

deterrent than private damage actions.* As the Supreme

Court noted in Piper, “Nor can we agree that an

ever-present threat of damages [beyond available injunc-

tive relief} . . . will provide significant additional

protection. . . . The deterrent value, if any, of such

awards can never be ascertained with precision.” 430

U.S. at 39-40.

Even more importantly, to the extent that a threat of

private damage actions might further induce compliance

with the reporting scheme of section 17 the majority has

discounted the effect of available state law remedies,

which arise not from state securities law protection of

brokers’ customers, but from well established tort law

"In fact SIPC’s preventive measures have been quite successful.

The vast majority of firms brought to SIPC’s attention have been

deterred from the necessity of undergoing a SIPC liquidation

through a variety of tactics including mergers and withdrawal from

the business of carrying customer accounts. See Securities Investor

Protection Corp. v. Barbour, supra, at 421 n.4.

*For example, in the instant situation the SEC initiated an action

for injunctive relief against Weis and its officers. SEC v. Weis

Securities, Inc., 73 Civ. 2332 (S.D.N.Y.). A number of Weis’

principals were also convicted of a criminal conspiracy to falsify

Weis’ books of account. See Rich v. Touche Ross & Co., supra, 415

F.Supp. at 101.

3la

principles. See, e.g., Restatement 2d of Torts

§§ 531,552 (1977). Common law actions for damages

against accountants have long been recognized. See, e.g.,

Note, Accountants’ Liabilities For False and Misleading

Financial Statements, 67 Colum. L. Rev. 1437 (1967).

Where, as in the instant case, fraud is arguably alleged, it

is important to note that should the actionable elements

of fraud be provable, the states have universally permit-

ted recovery to third parties who relied on the misrep-

resentations. Anno.: Liability of Public Accountant to

Third Parties, 46 A.L.R. 3d 979, 982-83 (1972). While

the state law treatment of actions based only on an

accountant’s negligence has not been so uniform, id. at

982, the trend in state law, based on generally recog-

nized tort principles, has been to expand the

accountant’s liability for negligence to those clearly

definable classes of third parties who the accountant

knew would rely on the statements in question. See, e.g.,

White v. Guarente, 43 N.Y.2d 356, 401 N.Y.S.2d 474

(1977); Restatements 2d of Torts § 552 (1977). In fact,

should scienter be held a required element of the action

found implied by the majority in section 17,'° see Ernst

& Ernst v. Hochfelder, 425 U.S. 185 (1976), it may well

be that a state law action would provide a broader basis

for accountant liability than the federal action implied

here under the *34 Act.

In any event, the very existence of these state law

remedies supplies that threat of liability which the

majority essentially is seeking in order to promote

adherence to the requirements under section 17(a).

*The same cannot be said of the appellants herein. In addition to

the state law class action against Touche Ross which has been filed

by Weis’ customers in the Supreme Court of New York County, see

Rich v. Touche Ross & Co., supra, 415 F.Supp. at 104, the

appellants have initiated a state law action based on the same

common law claims set forth in their complaint in this federal action.

Redington v. Touche Ross & Co., No. 13996/76 (Sup. Ct. N.Y. Co.).

'°The point was reached neither by the majority here nor by

Judge Wyatt below.

32a

Thus, the majority wrongly dismisses the significance of

availiable state law remedies on the ground that the

standard of liability for private damage actions in

connection with 17(a) violations must be national in

scope. Since, as demonstrated above, the primary

congressional purpose underlying the section 17 report-

ing scheme is prophylactic, uniformity of standards for

actions brought to recover losses after the brokerage firm

has failed simply is not necessary to achieving the

primary goals of that statute. See Santa Fe Industries,

Inc. v. Green, 430 U.S. 462, 477-78 (1977).

The SEC has also argued, and the majority has

accepted the position, that private damage actions are a

necessary supplement to commission action because the

SEC does not have the resources to audit the financial

statements submitted under section 17(a). Whatever

force this argument might once have had, see J. J. Case

Co. v. Borak, supra, 377 U.S. at 432, is seriously

undermined by the Court's observation in Piper that

“institutional limitations alone do not lead to the

conclusion that any party . . . should have a cause of

action for damages.” 430 U.S. at 41. The argument that

a regulatory agency is confessedly unable properly to

regulate broker-dealers as charged by Congress and

detailed by its own regulations, and that therefore the

federal courts should find a damage remedy implicit in

an act which studiously avoided giving one to the class

sought to be represented here, is simply unpersuasive.''

In sum, I conclude that since section 18(a) of the Act

does provide a damage remedy for the filing of mislead-

ing statements in section 17(a) reports, and since this

remedy excludes from its coverage the customers of

"'The problem faced by the SEC in Borak of examining prox

statements under demanding time limitations (10 days ov even

days, 17 C.F.R. §§ 240.14a-6(a), (b)), as pointed out by Judge

Wyatt, 428 F. Supp. at 491, is not encountered here. Moreover, the

SEC itself has stated that its burdens in this connection are lightened

by the Exchange, which makes annual examinations of net capital

statements by its members.

33a

broker-dealers, the Cort factors employed by the major-

ity afford an inappropriate analytical framework for this

case. Instead, under the reasoning of Amtrak and

Barbour it is apparent that by limiting actions under

section 18(a) to purchasers and sellers of securities

Congress expressed its intent to deny recovery for

section 17(a) violations to a broader class of plaintiffs.

Nor have the appellants here adduced the strong

contrary evidence of legislative intent regarding section

17(a) which would lead me to reach the conclusion,

embraced by the majority, that implication of such a

remedy is consistent with the legislative scheme.

Moreover, even if the Cort factors were the proper mode

of analysis in this case, they must be applied in

conjunction with the gloss of Piper. Yet there is no

showing here that a private damage remedy against

accountants is necessary to vindicate the primary con-

gressional purpose embodied in section 17(a). As Judge

Medina observed in Lank v. New York Stock Exchange,

548 F.2d 61, 65 (2d Cir. 1977) where we refused to

imply a private remedy in favor of the SIPC receiver of

an insolvent broker-dealer against the Exchange: “Even

were we to agree .. . that granting him a right of action

against the Fxchange would ‘accord’ with the purpose of

the [1934] Act, our function here is to discern the intent

of Congress, not to legislate in its place.”

Having found no implied cause of action arising

under section 17(a) in favor of customers of broker-

dealers, I could of course find no derivative rights in

either SIPC or the trustee. However, I also contest the

holding that appellants are proper parties to maintain the

action found by the majority to be implied in section

17(a). The majority has properly held that neither the

trustee nor SIPC in its own right can bring any action

under section 17(a) of the '34 Act. Neither can claim to

be an intended beneficiary of that act since both are the

34a

creatures of SIPA, enacted in 1970. Nor is either

appellant a public investor. Lank v. New York Stock

Exchange, supra, 548 F.2d at 64-66 is dispositive of this

issue.

Yet while denying to SIPC the right to bring a section

17(a) action on its own behalf, the majority also

transmutes that entity into a subrogee clothed with the

power in that capacity to bring a private damage action

under 17(a) (an action itself now implied by the majority

for the first time in the forty-four years section 17 has

been on the books). By what alchemy a congressionally

created corporation with limited powers to litigate, see

Securities Investor Protection Corp. v. Barbour, supra,

can now sue in a federal court for an alleged violation of

section 17(a) of the ’34 Act, is not made clear. When

Congress created SIPC, its express but limited rights of

subrogation were spelled out in SIPA: ‘To the extent

that moneys are advanced by SIPC to the trustee to pay

the claims of customers, SIPC shall be subrogated to the

claims of such customers with the rights and priorities

provided in this section.” 15 U.S.C. § 78fff(f)(1). As the

majority recognizes, those claims to which SIPC is

subrogated by statute are clearly against the debtor's

estate only and no rights against the accountant flow

therefrom. Since Congress has delineated the subroga-

tion rights of SIPC, its failure to provide for subrogation

against any third party would clearly dictate that none

exist under the previously discussed principle: expressio

unius est exclusio alterius. Rogers v. National Surety Co.,

116 Neb. 170, 216 N.W. 182 (1927). The effect of the

majority's extension of SIPC’s subrogation rights is to

circumvent the intent of Congress by ignoring the

directive of SIPA that SIPC be subrogated ‘with the

rights and priorities provided in this section.”” 15 U.S.C.

§ 78fff(f)(1) (emphasis supplied).

Similarly, the Trustee, held by the majority to have

no direct cause of action under section 17(a), is

35a

nonetheless found to have such capacity in his role as a

bailee. The majority finds that his responsibility to

marshal and return property to the customers of the

debtor broker-dealer authorizes him to bring this action.

But that responsibility of the Trustee is created by SIPA,

15 U.S.C. § 78fff(a)(1), and is inherent in his Trustee

function, see also 15 U.S.C. § 78fff(b)(1). Having re-

jected his right to sue as a Trustee of Weis under Lank v.

New York Stock Exchange, supra, | fail to see how

denominating him a bailee adds a jot or a tittle to his

Statutorily created status as the representative of

Weis—an entity regulated by, and precluded from suing

under, the Act. Furthermore, the customers on whose

behalf the Trustee seeks to maintain suit are not only

entitled to bring, but have already initiated their own

action against Touche Ross. See notes, 3, 9, supra. The

SEC understandably has expressed no view on this point.

For these reasons I respectfully dissent and would

affirm Judge Wyatt's decision below.

36a

Judgment of the Court of Appeals

United States Court of Appeals

FOR THE

SECOND CIRCUIT

At a stated Term of the United States Court of

Appeals for the Second Circuit held at the United States

Courthouse in the City of New York, on the twenty-first

day of April one thousand nine hundred and seventy-

eight.

Present:

Hon. J. E>warD LUMBARD

Hon. WILLIAM H. MULLIGAN

HON. WILLIAM H. TIMBERS

Circuit Judges,

EpwarbD S. REepINGTON, as Trustee for |

liquidation of the business of Weis Se-

curities, Inc., and Securities INVESTOR

PROTECTION CORPORATION,

Plaintiffs-A ppellants, 77-7183

ToucuE Ross & Co.,

De fendant- Appellee.

Appeal from the United States District Court for the

Southern District of New York.

This cause came on to be heard on the transcript of

record from the United States District Court for the

Southern District of New York, and was argued by

counsel,

37a

On CONSIDERATION WHEREOF, it is now hereby

ordered, adjudged, and decreed that the order of said

District Court be and it hereby is reversed and the action

be and it hereby is remanded to said district court for

further proceedings in accordance with the opinion of

this court with costs to be taxed against the appellee.

A. DANIEL FUSARO,

Clerk

By ARTHUR HELLER,

Deputy Clerk

38a

Order Denying Petition For Rehearing

United States Court of Appeals

SECOND CIRCUIT

At a Stated Term of the United States Court of

Appeals, in and for the Second Circuit, held at the

United States Court House, in the City of New York, on

the seventh day of July, one thousand nine hundred and

seventy-eight.

Present:

Hon. J. EDWARD LUMBARD

Hon. WILLIAM H. MULLIGAN

Hon. WILLIAM H. TIMBERS

Circuit Judges.

Epwarbp S. REDINGTON, as Trustee for the

liquidation of the business of Weis Se-

curities, Inc., and Securities INVEsTO

PROTECTION CORPORATION,

Plaintiffs-Appellants, Docket No.

os 77-7183

ToucuHE Ross & Co.,

Defendant-Appellee.

A petition for a rehearing having been filed herein by

counsel for the appellee, Touche Ross & Co.

Upon consideration thereof, it is Ordered that said

petition be and it hereby is DENIED

A. DANIEL FUSARO,

Clerk

39a

Order Denying Rehearing En Banc

United States Court of Appeals

SECOND CIRCUIT

At a stated term of the United States Court of

Appeals, in and for the Second Circuit, heid at the

United States Court House, in the City of New York, on

the seventh day of July, one thousand nine hundred and

seventy-eight.

Epwarp S. REDINGTON, as Trustee for the

liquidation of the business of Weis Se-

curities, Inc., and SecuriTIES INVESTOR

PROTECTION CORPORATION,

Plaintiffs-Appellants,\, Docket No.

77-7183

ToucHE Ross & Co.,

Defendant-Appellee.

A petition for rehearing containing a suggestion that

the’ action be reheard en banc having been filed herein

by counsel for the appellee, Touche Ross & Co., and no

active judge or judge who was a member of the panel

having requested that a vote be taken on said suggestion.

Upon consideration thereof, it is Ordered that said

petition be and it hereby is DENIED.

IRVING R. KAUFMAN

Irving R. Kaufman,

Chief Judge

_ 40a

[428 F. Supp. 483]

Opinion of the District Court

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

[March 1, 1977]

Epwarp S. REDINGTON, as Trustee for the

liquidation of the business of Weis Se-

curities, Inc., and SecuriTiES INVESTOR

PROTECTION CORPORATION,

Plaintiffs, 76 Civ. 1981

—against—

ToucHE Ross & Co.,

Defendant.

APPEARANCES:

HuGHes Huspsarp & REED, Esgs.

Attorneys for Plaintiff Edward S. Redington,

as Trustee for the liquidation of the business of

Weis Securities, Inc.

One Wall Street

New York, New York 10005

JOHN S. ALLEE, Eso.

JAMES B. Kosak, Jr., Eso.

WituiaM S. Barrett, Eso.

of Counsel

HAWKINS, DELAFIELD & Woop, Esas.

Attorneys for Plaintiff

Securities Investor Protection Corporation

67 Wall Street |

New York, New York 10005

4la

CLARENCE Friep, Esq.

WILFRED R. Caron, Eso.

MICHAEL S. Dow, Esa.

RAFAEL Pastor, Esq.

of Counsel

ROSENMAN COLIN FREUND Lewis & COHEN, Esas.

Attorneys for Defendant Touche Ross & Co.

575 Madison Avenue

New York, New York 10022

ARNOLD I. Rotu, Esa.

JAMES K. NEVLING, Jr., Esa.

ARTHUR LINKER, Esa.

Marc §S. Dreier, Eso.

STEVEN A. ASHER, Esa.

of Counsel

[428 F. Supp. 485]

Wyatt, District Judge.

This is a motion by defendant Touche Ross & Co.

(Touche) to dismiss the complaint pursuant to Rule

12(b) of the Federal Rules of Civil Procedure, on two

grounds: that the Court lacks subject matter jurisdiction,

and that the complaint fails to state a claim upon which

relief can be granted; in the alternative, it is sought to

stay this

[428 F. Supp. 486]

action pending

determination of an action between the same parties in

the New York Supreme Court, New York County.

Weis Securities, Inc. (Weis), was a large stock

brokerage house. Weis was a broker-dealer registered

with the Securities and Exchange Commission (SEC)

and was a member of the New York Stock Exchange and

of other stock exchanges. Weis is said to be a corpora-

tion, although where incorporated does not appear; its

principal place of business is said to have been in the

City of New York.

42a

Touche is a firm of certified public accountants and

acted as such for Weis.

In May 1973, Securities Investor Protection Corpora-

tion (SIPC) applied to this Court for a decree adjudicat-

ing, under the Securities Investor Protection Act of 1970

(15 U.S.C. §§78aaa and following; “SIPA”), that

customers of Weis were in need of protection under

SIPA, appointing a trustee for the liquidation of Weis,

and affording other relief. This Court granted the

application and appointed Edward S. Redington as

Trustee (referred to usually as the “Trustee”). The

proceedings in which the Trustee was appointed are

described in Exchange National Bank v. Wyatt, 517 F.2d

453 (2d Cir. 1975). The Trustee was appointed on May

30, 1973; the “filing date” (15 U.S.C. § 78eee(b)(4)(B))

was May 24, 1973. Weis has since been in liquidation

under SIPA.

On July 3, 1975, the Trustee and SIPC commenced

an action against Touche in New York Supreme Court,

New York County (Index No. 13996/76; the action has a

1976 number because the first paper filed in the action

was in 1976). The causes of action of each plaintiff were

separately stated but there were in the complaint 21

paragraphs of “common allegations” which were then

incorporated by reference in each claim of the Trustee

and in each claim of SIPC. There were five causes of

action by the Trustee and four causes of action by SIPC.

The case at bar was commenced in this Court on

April 30, 1976. The parties are the same as those in the

State action. The Trustee and SIPC are again suing

Touche. |

The complaint in the case at bar asserts exactly the

same claims as in the State action and adds claims by the

Trustee and SIPC based on alleged violations by Touche

43a

of the Securities Exchange Act of 1934 (15 U‘S.C.

§§ 78a and following; “the 1934 Act’), specifically of

Section 17 of the 1934 Act (15 U.S.C. § 78q).

The “common allegations” are the same in both

actions except that three paragraphs have been added

here to shore up the added Section 17 claims of the

Trustee and SIPC.

In this action, there are 6 claims by the Trustee and 8

claims by SIPC. (The claims are mistakenly called causes

of action in the complaint, ignoring Fed.R.Civ.P. 8 and

following the nomenclature in the State courts.)

The two plaintiffs have joined as such (presumably

under Fed.R.Civ.P. 20(a) and properly) but their claims

are several, not joint, and are stated in separate counts.

Counts two through six of the complaint in the case

at bar are exactly the same as the five causes of action of

the Trustee in the State action. Count one in the case at

bar is the added claim under Section 17 of the 1934 Act.

The first four claims of SIPC in the case at bar are

not in the State Action and are apparently intended to

be based on Section 17 of the 1934 Act although in the

first four counts there is no express reference to Section

17 (except as paragraphs 1, 16, 17, 21, and 22 of the

complaint are incorporated by reference in these counts).

The other four SIPC claims in the case at bar are exactly

the same as the four SIPC causes of action in the State

action.

[428 F. Supp. 487]

The claims in the case at bar are alleged to arise

under the 1934 Act and particularly under Section 17

thereof (15 U.S.C. § 78q), under Section 6 of SIPA (15

singh 78fff), and under the common law (complaint,

para 1).

44a

The complaint avers that the Court has jurisdiction

over the claims of the Trustee under Section 27 of the

1934 Act and under 28 U.S.C. § 1331. It further avers

(in effect) that the Court has jurisdiction in bankruptcy

by virtue of Section 6 of SIPA (15 U.S.C. § 78fff), under

Sections 2a(7), 102 and 115 of the Bankruptcy Act (11

U.S.C. §§ 11a(7), 502 and 515), and under 28 U.S.C.

§ 1334. The complaint also avers jurisdiction over the

common law claims of the Trustee under principles of

pendent jurisdiction (complaint, para 2).

Jurisdiction over SIPC’s claims is alleged to exist

under Section 27 of the 1934 Act and 28 U.S.C. § 1331,

under the diversity of citizenship statute (28 U.S.C.

§ 1332) and under principles of pendent jurisdiction

(complaint, para 3).

There then follows a series of “Common Allega-

tions” comprising 24 paragraphs of the complaint which

are incorporated by reference in both the six counts

pleaded by the Trustee and the eight counts pleaded by

SIPC.

The complaint avers that five of Weis’ officers

misstated the financial condition and results of operation

of Weis in financial reports prepared at the end of fiscal

year 1972, and that such reports were required to be

filed with regulatory authorities pursuant to Section 17

of the 1934 Act. It alleges that these reports were

directly or indirectly submitted to Weis, its Board of

Directors, the SEC, SIPC, the Exchange, and Weis’

customers, creditors, lenders and shareholders.

Plaintiffs aver that Touche breached duties it as-

sumed toward them under Section 17 of the 1934 Act

and under the common law when it became Weis’

auditor and undertook to perform all necessary auditing

and accounting services needed to audit the reports of

financial condition that Weis was required to submit to

the SEC. Essentially, these ““common allegations” charge

Touche with negligence and recklessness in the perform-

ance of its services (para 28); SIPC argues that they also

45a

charge wilful misconduct (Memorandum of Plaintiff

SIPC in Opposition to Defendant’s Motion to Dismiss, p.

5). The complaint also alleges that Touche falsely

certified that it had performed the necessary services and

made false representations with respect to the Answers

to Financial Questionnaire and other documents dated

May 26, 1972. The “common allegations’’ then state that

because of these failures and misrepresentations of

Touche, the Exchange, the SEC and SIPC were pre-

vented from knowing the true condition of Weis, and

were prevented from acting to safeguard the assets of

Weis and the property held by Weis for its custom

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