# Appendix — Touche Ross & Co. v. Redington > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1582%3A04 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1978 - **Citation:** 439 U.S. 979 ## Text Supreme Court, U. S, ¥ ' | FILED JAN 28 1979 APPENDIX R., CLERK | in the Supreme Court of the United States OCTOBER TERM, 1978 No. 78-309 TOUCHE Ross & Co., Petitioner, —_—_vVv.— EDWARD S. REDINGTON, as Trustee for the liquidation of the business of Weis Securities, Inc., and SECURITIES INVESTOR PROTECTION CORPORATION, Respondents. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT PETITION FOR CERTIORARI FILED AUGUST 23, 1978 CERTIORARI GRANTED NOVEMBER 27, 1978 SP VIN isviptiisiepesaguitindidalinndachadenterhasammndarieeaaeenis Exhibit A to Complaint: Weis, Voisin & Co., Inc., Repo*t on Examination of Statement of Financia! Condition, May 26, 1972 ............... Exhibit B to Complaint: Weis, Voisin & Co., Inc., Answers to Financial Questionnaire and Additional Information, May 26, 1972 .. Exhibit C to Complaint: Weis, Voisin & Co., Inc. and Subsidiaries, Report on Exam- ination of Consolidated Financial State- ments, Year (52 Weeks) Ended May 26, DPT i aisisssnsvincss «ceaiisadaididaictaiehiadanldimnbastresibentes Exhibit D to Complaint: Weis, Voisin & Co., Inc. and Subsidiaries, Report on Exam- ination of Consolidated Financial State- ments, Five Years Ended May 26, 1972........ Defendant’s Notice of Motion to Dismiss, Filed IRE EE, Fe isinadeeiakicstcakeibertaeenearidindicinion Affidavit of Arnold I. Roth in Support of Motion to Dismiss, Filed September 22, 1976 ................000005 Exhibit 1 to Affidavit of Arnold I. Roth: Complaint in this Action, Filed April 30, 1976, Served May 12, 1976................cscccecerees Exhibit 2 to Affidavit of Arnold I. Roth: Summons in the State Court Action, pend- ing in the Supreme Court of the State of New York, County of New York, Served bE. > oC a eR PRS BE i DOD Exhibit 3 to Affidavit of Arnold I. Roth: Complaint in the State Court Action, pend- ing in the Supreme Court of the State of New York, County of New York, Served NE BE POD stsnnahtelcvlthsttapckaicdsbdidhdsageieqivscenanes 35 42 67 85 112 114 120 121 Affidavit of Wilfred R. Caron in Opposition to Motion to Dismiss, Filed January 10, 1977........... Affidavit of Clarence Fried in Opposition to Motion to Dismiss, Filed January 10, 1977.0... Affidavit of Bruce E. Baker in Opposition to Motion to Dismiss, Filed January 10, 1977..........0.....eee Exhibit A to Affidavit of Bruce E. Baker: Proof of Claim dated July 11, 1973 .................ccccceee Exhibit B to Affidavit of Bruce E. Baker: Proof of Claim dated July 11, 1973 0.0... Reply Affidavit of Arnold I. Roth in Support of Motion to Dismiss, Filed February 7, 1977 .......... Opinion of the United States District Court for the Southern District of New York, Filed March 1, EWP? 7 ovciscesischaipstaesescsndniaespasan oan, Order and Judgment of the United States District Court for the Southern District of New York, Pe PIE Be WIPE F vocantrcesccsintilcacdasecaeiinieeaeees Opinion of the United States Court of Appeals for the Second Circuit, Filed April 21, 1978............... Judgment of the United States Court of Appeals for the Second Circuit, Filed April 21, 1978 ......... Order of the United States Court of Appeals for the Second Circuit Denying Petition for Rehearing, FOS Fy Bi Pi ttesininnceinsieeninadadanasediic Order of the United States Court of Appeals for the Second Circuit Denying Rehearing En Banc, POG ONY 6 FID vrciserccccnsaviojioninsialintn pean 9-30 9-30 Relevant Docket Entries UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK PROCEEDINGS Filed complaint. Issued summons. Filed summons’ with marshals return. SERVED: TOUCHE ROSS & CO. on 5-12-76. Filed stp & order that the time of deft to answer etc, is extended to 6-23-76, Wyatt, J. Filed Notice that pltff will take deposition of Karl Brunhuber on 6-21-76 as indicated. Filed Stip & Order that the time for dft. to answer complaint is extended to 7-13-76... . Ward J. Filed Notice of Appearance of Rosenman Colin Freund Lewis & Cohen. as indicated. Filed pltffs first set of interrogatories. Filed stip & order that the time for deft to move etc, is extended to 9-15-76, etc, as indicated. Conner J. Filed defts objections and answers to inter- rogatories to pltff. Filed pltffs Affidavit & Notice of motion for an order striking defts blanket objections to pltffs, first set of interrogatories, etc, as indicated rtble before Mag. Schreiber on 9-21-76. Filed plitffs memorandum of law as indicated. Filed defts Affidavit & Notice of Motion for an order dismissing this action etc, as indicated rtble on 10-1-76. Filed memorandum of deft Touche Ross & Co. in support of motion to dismiss, etc, as indicated. Filed stip & order that the deposition of Karl Brunhuber is adjourned to 10-20-76, and pltffs motion is adjourned to a mutually convenient date to be determined after consultation with Mag. Schreiber. Wyatt, J. Filed defts Affidavit in opposition to the mo- tion of the pltffs etc, as indicated. Filed defts memorandum in opposition to pltffs motion to compel further discovery. DATE [1976] 11-15 1977 1-10 1-10 1-10 1-10 2-07 2-07 2-14 3-01 3-15 PROCEEDINGS Filed stip & order that pltffs shall have to 1-7- 77 to serve papers with respect to defts motion of 9-15-76 to dismiss or stay this action etc, as indicated, Wyatt, J. Filed affidavit in opposition to motion to dismiss. Filed plitffs memo in opposition to motion to dismiss. Filed memorandum of pltffs Securities In- vestor Protection Corp. in opposition to deft’s motion to dismiss. Filed pltffs Securities Investor Protection Corp. affdvt. in opposition to deft’s motion to dismiss complaint. Filed defts. reply affdvt. to dismiss the com- plaint and for related relief. Filed defts. reply memorandum of deft. Touche Ross & Co., in support of motion to dismiss and for related relief. Filed Pltffs. Redington, sur-reply memo- randum of law. Filed Opinion #45650 There can be no jurisdiction simply because SIPC was created by Act. of congress because there is no stock ownership in SIPC by the United States. Fi- nally, the Trustee is a citizen of New York and is a pltff. along with SIPC. Partners of Touch- e, the deft. are citizens of N.Y. Thus, there is no complete diversity of citizenship within the rule of Strawbridge v. Curtiss, 3 Cranch 267 (1806). The fifth, sixth, seventh, and eight[h] claims of SIPC must be dismissed for lack of jurisdiction over the subject matter..... So Ordered... WYATT, J. Settle order and judgment cn notice. m/n Filed Order & Judgment this action is dis- missed, and deft. have judgment against pltffs, and each of them, dismissing this action . . . So Ordered..... WYATT, J. Judgment Ent. on 3-15-77...m/n DATE [1977] 4-13 4-14 5-13 DATE 4-14-77 4-14-77 5-13-77 7-12-77 7-12-77 7-12-77 8-22-77 8-25-77 8-31-77 PROCEEDINGS Filed Pitffs. Edward S. Redington, notice of appeal to the U.S.C.A. from the order & Judgment Ent. in this action on the 15th day of March 1977. . Mailed All Copies. Filed Pitffs. Securities Investor Protection Corp. notice of appeal to the U.S.C.A. from ihe order & Judgment Ent. in this action on the 15th day of March 1977... Mailed all copies. Filed stipulation designating a copy of an originally filed document to become part of the record on appeal. UNITED STATES COURT OF APPEALS For THE SECOND CIRCUIT FILINGS— PROCEEDINGS Filed copies of docket entries and notice of appeal (Edward S. Redington ) Filed copies of docket entries and notice of appeal (Securities Investor Protection Corpo- ration ) Filed record (original papers of district court) Filed briefs, appellant, p/s ( Redington ) Filed briefs, appellant, p/s (SIPC) Filed joint appendix, appellants, p/s Filed motion for leave to file brief amicus curiae, p/s (S.E.C.) (& in 77-7186) Received stipulation consenting to the filing of the S.E.C. amicus brief and for a modified scheduling order, appellee, p/s (& in 77- 7186) Filed order granting motion for leave to file a brief as amicus curiae on consent. Further ordered that appellees shall file a brief by 9- 23-77, reply brief, if any, by 10-25-77, appeal ready to be heard during the week of 11-7-77. Appellees shall deliver to appellants copy of galley or page proof of its brief by 9-20-77 Filed brief, amicus curiae, p/s (SEC) Filed printed briefs, appellee, p/s DATE 10-25-77 10-25-77 11-14-77 4-21-78 4-21-78 4-21-78 4-21-78 5-5-78 7-7-78 7-71-78 7-13-78 7-17-78 7-21-78 7-24-78 8-23-78 9-25-78 9-29-78 12-4-78 4 FILINGS— PROCEEDINGS Filed reply briefs, appellant, p/s (& in 77- 7186) Filed reply brief, appellant, p/s (Sec. Investor etc.) (& in 77-7186) Argument heard (By: Lumbard, Mulligan, Timbers, CJJ) (& in 77-7186) Judgment reversed as to both plaintiffs and remanded-Lumbard, C.J. Concurring in separate opinion—Timbers, tat Dissenting in separate opinion—Mulligan, C.J. Filed judgment Filed petition for rehearing and rehearing en banc, appellee, pfs Filed order denying petition for rehearing Filed order denying petition for rehearing en banc Filed motion for leave to stay issuance of mandate, appellee, pfs Filed memorandum in opposition to motion for leave to stay mandate, appellant, pfs Filed reply to memorandum in opposition to motion for leave to stay mandate, appellee, pfs Filed order granting motion for leave to stay issuance of mandate Filed notice of filing petition for writ of cer- tiorari (S.C. #78-309 ) Filed notice of filing petition for writ of cer- tiorari (Redington ) S.C. #78-493 Filed notice of filing petition for writ of cer- tiorari (Securities Investor Protection Corp. ), S.C. #78-526 Filed certified copy of order granting petition for writ of certiorari (S.C. #78-309 ) 5 Complaint Filed April 30, 1976, Served May 12, 1976 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK EDWARD S. REDINGTON, as Trustee for the liquidation of the business of Weis Securities, Inc., and SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiffs, —against— TOUCHE Ross & Co., Defendant. 76 Civ. 1981 (IBW) COMPLAINT PLAINTIFFS DEMAND A TRIAL BY JURY Plaintiffs E>warpD S. REDINGTON, Trustee for the liquidation of the business of Weis Securities, Inc., and SECURITIES INVESTOR PROTECTION CORPORATION, by their respective attorneys, complaining of the Defendant, allege as follows: JURISDICTION AND VENUE 1. This action arises under the Securities Exchange Act of 1934 (15 U.S.C. Sections 78a et seg.) (hereinafter the “1934 Act’) and particularly under Section 17 thereof (15 U.S.C. Section 78q), the Securities Investor Protection Act of 1970 (15 U.S.C. Section 78aaa et seg.) (hereinafter the “1970 Act’), and the common law. 6 2. This Court has jurisdiction over Plaintiff Reding- ton’s claims by virtue of Section 27 of the 1934 Act (15 U.S.C. Section 78aa); Section 6 of the 1970 Act (15 U.S.C. Section 78fff); Sections 2a(7), 102 and 115 of the Bankruptcy Act (11 U.S.C. Sections 1la(7), 502 and 515); Sections 1331 and 1334 of the United States Judicial Code (28 U.S.C. Sections 1331 and 1334); and principles of pendent jurisdiction. The amount in controversy, exclusive of interest and costs, exceeds the sum of $10,000. 3. This Court has jurisdiction over the claims of Plaintiff Securities Investor Protection Corporation by virtue of Section 27 of the 1934 Act (15 U.S.C. Section 78aa), Sections 1331 and 1332 of the United States Judicial Code (28 U.S.C. Sections 1331 and 1332), and principles of pendent jurisdiction. The amount in con- troversy, exclusive of interest and costs, exceeds the sum of $10,000. 4. Defendant has its principal place of business in this District and most of the acts alleged herein occurred in this District. PARTIES 5. Plaintiff Edward S. Redington (hereinafter the “Trustee”), pursuant to the 1970 Act, was duly appointed by Order of this Court dated May 30, 1973 as Trustee for the liquidation of the business of Weis Securities, Inc. (“Weis”), has duly qualified, and is presently acting in such capacity. Section 6(b)(1) of the 1970 Act (15 U.S.C. Section 78fff(b)(1)) provides that a trustee appointed under the 1970 Act shall be vested, inter alia, with the same powers and title with respect to the debtor and the property of the debtor as a trustee in bankruptcy and a trustee under Chapter X of the Bankruptcy Act (11 U.S.C. Sections 501-676) have with respect to a bankrupt and a Chapter X debtor. ee ah 7 6. Plaintiff Securities Investor Protection Corporation (hereinafter “SIPC”) is a non-profit membership corpo- ration created by and organized under the 1970 Act whose members are, with certain statutory exceptions, all persons registered as broker-dealers under Section 15(b) of the 1934 Act (15 U.S.C. Section 780(b)) and, with certain Statutory exceptions, all persons who are members of a national securities exchange. SIPC has its principal place of business in the District of Columbia. At all relevant times Weis was a member of SIPC. 7. Defendant Touche Ross & Co. (“‘Touche Ross’’) is a partnership of certified public accountants with its principal place of business at 1633 Broadway in the City, County and State of New York. In or about 1969 Touche Ross was engaged by Weis as its independent certified public accounting firm, and Touche Ross continued to act in such capacity from about 1969 until about May 1973, when the forced liquidation of Weis commenced. COMMON ALLEGATIONS 8. At all relevant times prior to May 30, 1973, Weis was a corporation registered as a broker-dealer with the Securities and Exchange Commission (the “SEC”) and was engaged in the business of a broker-dealer in secu- rities. From June 1965 until May 1973, Weis was a member of the New York Stock Exchange, Inc. (the “Exchange’’), the self-regulatory organization designated by SIPC to examine Weis for compliance with the appli- cable financial responsibility rules which are imposed on broker-dealers pursuant to Section 6 of the 1934 Act (15 U.S.C. Section 78f) for the protection of the public as a minimum prerequisite for conducting a securities broker- age business. 9. For each of its four fiscal years 1968 through 1971 (ended May 31), Weis’ audited financial statements re- flected a profit. During early 1972 five of Weis’ officers 8 (the ““Weis Five”) became increasingly concerned that a fair and accurate presentation of Weis’ results of oper- ations for fiscal year 1972 would refiect that Weis was cperating at a loss. 10. The Weis Five misstated the financial condition and results of operations of Weis in financial reports prepared at fiscal year-end 1972. These reports were required to be filed with regulatory authorities pursuant to Section 17 of the 1934 Act (15 U.S.C. Section 78q) and were directly or indirectly submitted to Weis, its Board of Directors, the SEC, SIPC, the Exchange, and Weis’ cus- tomers, creditors, lenders and shareholders. Such mis- Statements were accomplished, by inter alia, materially Overstating assets, creating non-existent assets, under- stating liabilities, overstating income, and understating expenses. The purpose and effect of such material mis- Statements were, inter alia, to create a false impression that Weis’ earnings for the fiscal year ended May 26, 1972 were $1,700,000 before taxes whereas in truth and in fact Weis had actually suffered losses in that period in excess of $1,500,000. 11. Had Weis’ actual financial condition, its actual results of operations, and the misstatements in its books and records been truthfully reported at the end of Weis’ 1972 fiscal year, Weis’ 1973 forced liquidation under the 1970 Act would not have become necessary, and most if not all of Weis’ assets and its good will as a going concern could have been preserved by a number of means including, inter alia, change in Weis’ management, rever- sal of its policy of growth and expansion, curtailment or contraction of certain of its operations and business prac- tices, gradual liquidation of some or all of its operations, or merger with another securities firm. Moreover, if a liquidation of Weis had been necessary as the result of such truthful reporting, such liquidation could have 9 occurred at the end of Weis’ 1972 fiscal year, when its assets were greater and the aggregate of its liabilities was lower than a year later. 12. The incorrect and incomplete fiscal 1972 year- end reports prepared by or under the direction of the Weis Five were certified by Touche Ross as being correct and complete. Consequently, the doctoring of Weis’ books, records and required reports, the deterioration of its financial condition and the violations of financial responsi- bility rules could not be nipped in the bud at a time when a forced liquidation of Weis could still have been avoided. Instead, during Weis’ fiscal year 1973, Weis’ financial condition deteriorated further as the Weis policy of expansion continued unabated. Weis incurred substantial operating losses, depletion of its assets, and depletion of the property held by Weis in trust for its customers. The Weis Five continued to make false and fictitious entries in Weis’ books and records, and continued directly or indirectly to submit false reports to Weis, its Board of Directors, the SEC, SIPC, the Exchange, and Weis’ cus- tomers, creditors, lenders and shareholders in order to conceal Weis’ true financial condition. 13. Not until April and May of 1973, as a result of separate investigations by the Exchange and the SEC, did the misstatement of Weis’ financial condition come to light. These investigations gradually revealed violations of financial responsibility rules, Weis’ unsafe, unsatisfac- tory and deteriorating financial condition, and the lack of ' accuracy and reliability of any of its financial statements, including those certified by Touche Ross. These revela- tions and the resulting uncertainties with respect to Weis’ true financial condition prevented Weis from being saved as a going concern or being merged with another, finan- cially more secure, brokerage firm, and resulted in Weis’ forced liquidation under the 1970 Act. 10 . 14. On May 24, 1973, the SEC commenced an action in this Court (73 Civ. 2332) against Weis and the Weis Five for injunctive relief to prevent them from conducting the business of Weis in violation of the 1934 Act and the rules and regulations promulgated thereunder. Also on May 24, 1973 (the “Filing Date”), pursuant to Section 5(a)(2) of the 1970 Act (15 U.S.C. Section 78eee (a )(2)), SIPC applied in this Court for a decree adjudica- ting that the customers of Weis were in need of the protection of the 1970 Act. On May 30, 1973 (the “Date of Adjudication”) such a decree was granted, the liquida- tion of Weis was ordered, and Plaintiff Edward S. Reding- ton was appointed Trustee for the liquidation of the business of Weis. 15. Upon the entry of the decree referred to in the preceding paragraph, SIPC was required by the 1970 Act to provide, and did provide to the Trustee, funds for the payment of claims submitted by customers and certain other creditors of Weis and for certain administrative expenses of the liquidation. 16. At all relevant times, Defendant Touche Ross held itself out to Weis, the SEC, SIPC, the Exchange and the general public as possessing the ordinary skill, ability and expertise of certified public accountants in accounting and auditing matters, and as being qualified, inter alia, (i) to examine and audit the books, records and accounts of firms engaged in the securities business in accordance with generally accepted auditing standards, (ii) to express opinions with respect to the financial statements of such firms as fairly reflecting their financial condition and results of operations in accordance with generally accept- ed accounting principles, and (iii) to prepare and assist in the preparation of the reports concerning such books records, accounts and opinions required by Section 17 of the 1934 Act (15 U.S.C. Section 78q) and the rules and regulations promulgated thereunder. Touche Ross further ate me ne Sn on 11 held itself out as being familiar with accounting and auditing practices and standards required by the SEC and the Exchange for firms engaged in the securities business. 17. From approximately 1969 until the Date of Adjudication, Touche Ross was engaged by Weis for valuable consideration to serve as Weis’ independent certified public accounting firm. During this period Touche Ross agreed to conduct annual audits of the affairs of Weis and to issue opinions and prepare reports on its financial statements, all in accordance with Section 17 of the 1934 Act (15 U.S.C. Section 78q), generally accepted auditing standards, generally accepted account- ing principles, and the audit regulations of the SEC and the Exchange. In accepting said engagement, Touche Ross agreed to perform said services in a thorough, proper, skillful and diligent manner. 18. Weis and its Board of Directors, customers, creditors, lenders and shareholders, and the SEC, the Exchange and SIPC relied on Touche Ross to apply the standards and expertise, to express the opinions, to make the certifications and to prepare or assist in the prepara- tion of the reports discussed in paragraphs 16 and 17, supra, for the purposes, among others, of (i) protecting Weis from fraudulent activity of its officers, directors, agents, and employees; (ii) safeguarding the existence and use of Weis’ assets; (iii) assuring the accuracy of financial data submitted directly or indirectly to the Exchange, the SEC and SIPC, and generally made avail- able to the public; (iv) determining whether Weis could continue to engage in business as a broker-dealer in securities; (v) determining whether or not significant restrictions and alterations in the scope and nature of its operations would be required in order for Weis to contin- ue to engage in business as a broker-dealer; and (vi) making informed business decisions concerning the future operations of Weis on the basis of accurate financial information. 12 19. In or about late 1971 or early 1972, Touche Ross agreed with Weis to perform the aforementioned auditing ‘and accounting services for the year 1972. Among other things, Touche Ross agreed (a) to prepare, cause to be prepared, and assist in the preparation of financial state- ments of Weis and to issue opinion letters with respect to said statements; (b) to audit the affairs of Weis in accordance with generally accepted auditing standards, generally accepted accounting principles, and the audit regulations promulgated by the Exchange and the SEC pursuant to Sections 6 and 17 of the 1934 Act (15 U.S.C. Sections 78f and 78q); (c) to notify the Exchange promptly that such audit had been commenced; (d) To prepare an answer to the financial questionnaire (the “Answers to the Financial Questionnaire”) of the Exchange based upon said audit; (e) to submit to the Exchange (i) a copy of the Answers to the Financial Questionnaire, (ii) an attestation that the requirements of the audit regulations had been observed in the conduct of the audit, and (iii) a statement that Touche Ross had made a review of Weis’ accounting system, internal accounting control, and procedures for safeguarding secu- rities; (f) to furnish to the Exchange comments relative to any material inadequacies found to exist in Weis’ account- ing system, internal accounting control, and procedures for safeguarding securities; and (g) to indicate any corrective action taken or proposed. 20. Weis’ employment of Touche Ross as its inde- pendent certified public accounting firm was not merely a matter of private contract between Weis and Touche Ross, but was required by the Exchange pursuant to its duty under Section 6 of the 1934 Act (15 U.S.C. Section 78f) to regulate its members’ conduct of their businesses and supervise their financial condition for the benefit of the public. Touche Ross knew or should have known that Weis’ engagement of an independent certified public so dnt SO ately Dae eee e= 6 ek tt ee AD ia Da NAN EO iE a Ee ate te on ath toe 13 accounting firm was a requirement of the Exchange and that it was for the benefit both of Weis in making decisions with respect to the operation of its business and of persons other than Weis. 21. Touche Ross’ examination of and report on Weis’ financial condition were not intended solely for the benefit of Weis but were, pursuant to Section 17 of the 1934 Act (15 U.S.C. Section 78q) and the rules and regulations promulgated thereunder, intended for and submitted di- rectly or indirectly to, inter alia, the SEC, the Exchange, SIPC, and Weis’ customers, creditors, lenders and share- holders. The Exchange was the organization designated and relied upon by SIPC to examine Weis for compliance with the applicable financial responsibility rules and to alert SIPC of Weis’ financial difficulty. 22. Touche Ross knew or should have known that its examination of and report on Weis’ financial condition were a requirement of Section 17 of the 1934 Act (15 U.S.C. Section 78q) and the rules and regulations promul- gated thereunder, and were for the benefit both of Weis and of persons other than Weis. 23. In accordance with its engagement agreement, Touche Ross purported to conduct an audit of Weis’ books and records for the fiscal year ended May 26, 1972 and in connection therewith (a) certified, prepared, caused to be prepared, and assisted in the preparation of financial statements of Weis; (b) certified and prepared Weis’ Answers to the Financial Questionnaire; and (c) issued four opinion letters (the “1972 Opinion Letters”’) to the Board of Directors of Weis dated, respectively, July 7, 1972, July 7, 1972, July 21, 1972 and July 2i, 1972. 24. By means of the foregoing, Touche Ross repre- sented and certified that it had examined (1) the statement of Weis’ financial condition as of May 26, 1972, (ii) Weis’ Answers to the Financial Questionnaire as of May 26, 1972, (ili) Weis’ consolidated balance sheet for the 52 14 weeks ended May 26, 1972, and (iv) Weis’ consolidated statement of earnings for the five years ended May 26, 1972. The letter pertaining to the Answers to the Finan- cial Questionnaire stated that the Touche Ross exam- ination had been made “in accordance with generally accepted auditing standards, and accordingly included a review of the accounting system, internal accounting con- trol and the procedures for safeguarding securities in- cluding such tests thereof ... as [Touche Ross] consid- ered necessary in the circumstances, including the audit procedures prescribed by the New York Stock Exchange and the Securities and Exchange Commission.” The letter also stated that the Answers to the Financial Question- naire presented fairly the financial position of Weis at May 26, 1972 in the form prescribed by the Exchange and the SEC in conformity with generally accepted accounting principles applied on a consistent basis. Each of the other three 1972 Opinion Letters stated that the Touche Ross examination had been conducted in accordance with generally accepted auditing standards and that the aforementioned financial statements presented fairly the financial position of Weis and subsidiaries at May 26, 1972, and the results of operations and changes in their financial position for the year and the five years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. (The 1972 Opinion Letters and accompanying Answers to the Finan- cial Questionnaire and financial statements are annexed hereto as Exhibits A, B, C and D.) 25. Touche Ross knew, should have known and intended that Weis and its Board of Directors would rely on the 1972 Opinion Letters and accompanying Answers to the Financial Questionnaire and financial statements for various purposes, including those set forth in para- graph 18, supra. 26. Touche Ross knew, should have known and intended that the SEC, the Exchange and SIPC would rely on the 1972 Opinion Letters and accompanying Answers we Naas sete ee eles «erent 15 to the Financial Questionnaire and financial statements in carrying out their respective regulatory, supervisory and protective duties with respect to Weis, in determining whether Weis was in compliance with the applicable financial responsibility rules, and in determining whether Weis was in financial difficulty. 27. Touche Ross knew, should have known and intended that Weis’ customers, creditors, lenders and shareholders would rely directly or indirectly on the 1972 Opinion Letters and accompanying Answers to the Finan- cial Questionnaire and financial statements in making decisions whether to commence or continue their respec- tive relationships with Weis. 28. Touche Ross breached and failed to perform its agreement and obligation to render auditing and account- ing services with respect to Weis in a thorough, proper, skillful and diligent manner and performed said services in a negligent, reckless, careless, unskilled and grossly negligent manner in that, among other things, it: a. failed to audit, verify and examine the books, records, accounts and financial statements of Weis in accordance with generally accepted auditing standards, generally accepted accounting principles, and the audit regulations of the Exchange and the SEC; b. failed to prepare, cause to be prepared, and assist in the preparation of accurate financial statements of Weis and Weis’ Answers to the Financial Questionnaire; c. rendered the 1972 Opinion Letters, which were false, inaccurate and incomplete; d. failed properly to test, study and evaluate Weis’ system of internal accounting control; e. failed to obtain competent evidential matter sufficient to afford a proper basis for the 1972 Opinion Letters; : 16 f. falsely certified that it had examined Weis’ books and records in accordance with generally accepted audit- ing standards, generally accepted accounting principles, and the audit regulations of the Exchange and SEC; and g. failed to inform or otherwise alert Weis, its Board of Directors, the SEC and the Exchange (and, through the Exchange, SIPC) (i) of the material errors in Weis’ Answers to the Financial Questionnaire and in Weis’ financial statements prepared in connection with the 1972 Touche Ross audit; (ii) of the existence of inaccurate and unreliable books and records with respect to Weis; or (iii) of the possibility that Weis was facing financial difficulty. 29. Specifically, among other things, Touche Ross failed properly to audit, verify and examine: (a) the Scheinman Hochstin & Trotta liquidation omnibus account (the “SH&T Omnibus Account”), a claimed asset of $745,000. If Touche Ross had audited, verified and examined the SH&T Omnibus Account in accordance with generally accepted auditing standards, generally accepted accounting principles, and the audit regulations of the Exchange and the SEC, it would have discovered the following: (1) that in or about April 1972 the SH&T Omnibus Account had been debited in the amount of approximately $625,000; (2) that, contrary to generally accepted account- ing principles, the offsetting credits for this debit were to One Or more income accounts; (3) that the purpose and effect of these improper credits were to overstate Weis’ gross income by approximately $625,000 and its net income and net worth by approximately $312,500; and te it OTS Nth tat A BO A Mt vt te te tt 17 (4) that an overstatement by this amount wa: a material overstatement because it constituted over 30% of Weis’ claimed net income for the entire fiscal year ended May 26, 1972 and over 4% of Weis’ claimed net worth as of that date. (b) the Winslow, Cohu & Stetson (““WC&S”’) insur- ance claim receivable, a claimed asset of $1,285,000. If Touche Ross had audited, verified and examined the WC&S insurance claim receivable in accordance with generally accepted auditing standards, generally accepted accounting principles, and the audit regulations of the Exchange and the SEC, it would have discovered the following: (1) that, on or about May 8, 1972, the WC&S insurance claim receivable had improperly been in- creased in value (debited) from $600,000 to $785,000 because of interest purportedly payable on the claim; (2) that, on or about May 25, 1972, the WC&S insurance claim receivable had improperly been fur- ther increased in value (debited) to $1,285,000 be- cause of a purported increase in the value of the claim; (3) that, contrary to generally accepted account- ing principles, the offsetting credits for these two debits had been made to various income accounts; (4) that the purpose and effect of these improper transactions were to overstate Weis’ gross income by approximately $685,000 and its net income and net worth by approximately $342,500; (5) that an overstatement by this amount was a material overstatement because it constituted nearly 35% of Weis’ claimed net income for the entire fiscal 18 year ended May 26, 1972 and approximately 4.5% of Weis’ claimed net worth as of that date. (c) other false, fraudulent and improper entries, irregularities and accounting transactions in the books of Weis which included, inter alia, the following: (1) The re-depositing into income accounts of at least $800,000 worth of checks which were purport- edly drawn to pay vendors or other creditors, thus overstating Weis’ net income and net worth by at least $400,000; (2) The doubling (to approximately $432,000) of accrued commission income for May 22-26, 1972, thus overstating Weis’ net income, net worth, and net capital by approximately $108,000; (3) The improper crediting of income accounts with proceeds from a sale-leaseback transaction, thus overstating Weis’ net income and net worth; (4) The improper transfer of certain short secur- ity positions to dividend receivable accounts; (5) The improper failure to record certain liabil- ities of Weis on the books of Weis; (6) The manipulation of certain error accounts to reflect false credit balances of $100,000 to $200,000, which then were taken into income, thus overstating Weis’ net income, net worth and net capital by approximately $50,060 to $100,000; (7) The improper designation of up to $500,000 worth of miscellaneous receivables as “current” so that it was not necessary to deduct them from capital in computing Weis’ net capital ratio under Exchange ete es, eee. 19 Rule 325, with the result that Weis’ net capital ratio was made to appear to be below 10:1 and Weis thus was not precluded by Exchange Rule 326 from expanding its business. 30. Upon the discovery by Touche Ross of any one or more of the false entries or improper accounting transactions discussed in paragraph 29 above, Touche Ross would have had an obligation to report such dis- coveries, inter alia, to Weis, its Board of Directors, the SEC and the Exchange (and, through the Exchange, SIPC); and it would have had an obligation to report such discoveries in the 1972 Opinion Letters and to refrain from issuing the 1972 Opinion Letters in the form they actually took. 31. As a direct and proximate result of Touche Ross’ failure to conduct the 1972 audit of Weis in accordance with generally accepted auditing standards, generally ac- cepted accounting principles, and the audit regulations of the Exchange and the SEC: a. the acts of the Weis Five as set forth in paragraphs 10 through 13 herein were not promptly discovered, and the Weis Five were able to continue to make false and fictitious entries in Weis’ books, records and financial statements in order to conceal Weis’ true financial condi- tion during its fiscal year 1973; b. other misstatements and inaccuracies in Weis’ books, records and financial statements were not dis- covered; c. Weis, its Board of Directors, the Exchange, the SEC, SIPC, and Weis’ customers, creditors, lenders and shareholders were misled by Touche Ross into believing or assuming that as of May 26, 1972 Weis was in sound financial condition and in compliance with applicable financial responsibility rules; 20 d. Weis, its Board of Directors, the Exchange, the SEC and SIPC were prevented from (i) knowing the true financial condition of Weis, (ii) performing their respec- tive duties to safeguard the assets of Weis and the property Weis was holding in trust for its customers, (iii) taking and causing to be taken appropriate and immediate remedial action at a time when a forced liquidation of Weis under the 1970 Act could have been prevented, and (iv) taking or causing to be taken appropriate and immediate action to avoid or reduce the costs of satisfying the claims of Weis’ customers; e. the acts of the Weis Five as set forth in paragraphs 10 through 13 herein were not discovered by Weis, its Board of Directors, the SEC, SIPC or the Exchange until April and May 1973 at which time the only remedial action that could be taken was the forced liquidation of Weis under the 1970 Act, which caused and continues to cause substantial injury to Weis and SIPC as well as Weis’ customers, creditors, lenders and shareholders; f. the assets of Weis and the property Weis was holding in trust for its customers were not on the Filing Date or thereafter sufficient to satisfy the claims of Weis’ customers, creditors, lenders and shareholders; g. Weis was unable to comply with the minimum financial responsibility rules which would allow it to conduct its business as a broker-dealer in securities, was unable to restore itself to a condition in which it could remain in business, and lost the value of its business and assets as a going concern; h. the assets of Weis were wasted and mismanaged; and 21 i. Weis was caused to undertake financial obligations which it could not satisfy and which it would not or could not have undertaken had its true financial condition as of May 26, 1972 been known to Weis and its Board of Directors, the SEC, the Exchange and SIPC. As AND For PLAINTIFF TRUSTEE’S First CAUSE Or ACTION 32. Plaintiff Trustee repeats and realleges each and every allegation contained in paragraphs | through 31 herein as though here set forth in full. 33. Asa result of the errors and omissions of Touche Ross, including those set forth in paragraphs 28 through 30 herein, Touche Ross violated, and aided and abetted the Weis Five in violating, Section 17 of the 1934 Act (15 U.S.C. Section 78q) and the rules and regulations promul- gated thereunder, which require broker-dealers such as Weis to file with regulatory authorities accurate and truthful reports of their financial condition, including reports such as those certified by Touche Ross, in order to ensure the integrity and safety of the nation’s securities markets and of the brokers and dealers that participate therein. 34. Weis, its Board of Directors, its creditors, custom- ers, lenders and shareholders were among the class of persons which Section 17 of the 1934 Act was designed to protect and were among the beneficiaries of duties im- posed on Touche Ross by Section 17 of the 1934 Act. The - injuries which have occurred to Weis, its creditors, custom- ers, lenders and shareholders as a result of the liquidation of Weis were of the type that Section 17 of the 1934 Act was intended to prevent. 35. As a result of Touche Ross’ violation of Section 17 of the 1934 Act and the rules and regulations promul- gated thereunder, its aiding and abetting of the Weis 22 Five’s violation of Section 17 of the 1934 Act and the rules and regulations promulgated thereunder, and its breach of the duties imposed by Section 17 of the 1934 Act and the rules and regulations promulgated thereunder, Weis, its creditors, customers, lenders and shareholders have suf- fered and will continue to suffer damages in an amount which is presently estimated to be at least $51,000,000. As AND For PLAINTIFF TRUSTEE’S SECOND CAUSE OF ACTION 36. Plaintiff Trustee repeats and realleges each and every allegation contained in paragraphs | through 34 herein as though here set forth in full. 37. As a result of Touche Ross’ negligence per se in violating Section 17 of the 1934 Act (15 U.S.C. Section 78q), and not as the result of any negligence of the Trustee or Weis, Weis has suffered and will continue to suffer damages in an amount which is presently estimated to be at least $51,000,000. As AND For PLAINTIFF TRUSTEE’S THIRD CAUSE OF ACTION 38. Plaintiff Trustee repeats and realleges each and every allegation contained in paragraphs 1 through 31 herein as though here set forth in full. 39. As a result of the negligence and malpractice of Touche Ross, including that set forth in paragraphs 28 through 30 herein, and not as the result of any negligence of the Trustee or Weis, Weis has suffered and will continue to suffer damages in an amount which is present- ly estimated to be at least $51,000,000. do er 23 As AND For PLAINTIFF TRUSTEE’S FourTH CAUSE OF ACTION 40. Plaintiff Trustee repeats and realleges each and every allegation contained in paragraphs 1 through 31 herein as though here set forth in full. 41. The auditing and accounting services performed by Touche Ross with respect to Weis were performed in so reckless and grossly negligent a manner that Touche Ross knew or should have known that the 1972 Opinion Letters and the accompanying Answers to the Financial Question- naire and financial statements were false, inaccurate and incomplete. 42. By reason of the foregoing reckless and grossly negligent conduct of Touche Ross, and not as the result of any negligence of the Trustee or Weis, Weis has suffered and will continue to suffer damages in an amount which is presently estimated to be at least $51,000,000. As AND For PLAINTIFF TRUSTEE’S FIFTH CAUSE OF ACTION 43. Plaintiff Trustee repeats and realleges each and every allegation contained in paragraphs | through 31 herein as though here set forth in full. 44. In connection with the auditing and accounting services performed by Touche Ross and as compensation therefor, Weis paid Touche Ross a certain sum of money (the “Touche Ross Fee”), the amount of which is not presently known to Plaintiff Trustee. 45. By reason of Touche Ross’ breach of and failure to perform its agreement to render said auditing and accounting services in a thorough, proper, skillful and diligent manner, Weis is entitled to general damages in the amount of the Touche Ross Fee and to consequential damages in an amount which is presently estimated to be at least $51,000,000. 24 AS AND For PLAINTIFF TRUSTEE’S SIxTH CAUSE OF ACTION 46. Plaintiff Trustee repeats and realleges each and every allegation contained in paragraphs 1 through 31 herein as though here set forth in full. 47. In its engagement letter with Weis and other communications to Weis, Touche Ross expressly and impliedly warranted to Weis that its services to Weis would be of a certain quality (i.e. that, inter alia, they would comply with generally accepted auditing standards, generally accepted accounting principles, and the audit regulations of the Exchange and the SEC). 48. By reason of the breaches and failures of Touche Ross, including those set forth in paragraphs 28 through 30 herein, those services were not of the warranted quality and were wholly without value to Weis. 49. By reason of Touche Ross’ breach of warranty of the quality of its services to Weis, Weis is entitled to general damages in the amount of the difference between the actual and warranted values of the services rendered, and to consequential damages in an amount which is presently estimated to be at least $51,000,000. As AND For PLAINTIFF SIPC’s First Cause Or ACTION 50. Plaintiff SIPC repeats and realleges each and every allegation contained in paragraphs | through 31 herein as though here set forth in full. 51. Touche Ross’ audit of Weis failed to comply with the auditing standards and regulations piescribed by the 1934 Act and the rules and regulations promulgated thereunder, in that the 1972 Opinion Letters and the accompanying Answers to the Financial Questionnaire and financial statements prepared by Touche Ross were false, inaccurate and incomplete. sdentit 25 52. As a consequence of the liquidation of Weis, the SIPC fund has been or may be depleted in order to satisfy the claims of over 34,000 customers and certain other creditors of Weis and to pay for certain administrative expenses of the liquidation. 53. As a result of Touche Ross’ failure to comply with the auditing standards prescribed by the 1934 Act and the rules and regulations promulgated thereunder, and as a result of Touche Ross’ breach of the duties it owed to SIPC thereunder, SIPC has suffered and will continue to suffer damages in an amount which is present- iy estimated to be at least $14,000,000. As AND For PLAINTIFF SIPC’s SECOND CAUSE OF ACTION 54. Plaintiff SIPC repeats and realleges each and every allegation contained in paragraphs | through 31 herein as though here set forth in full. 55. As a result of Touche Ross’ failure to comply with the auditing standards prescribed by the 1934 Act and the rules and regulations promulgated thereunder, in that the 1972 Opinion Letters and accompanying Answers to the Financial Questionnaire and financial statements prepared by Touche Ross were false, inaccurate and incomplete, Touche Ross breached the duties it owed to the customers and certain other creditors of Weis by misleading them into believing or assuming that Weis was not in financial difficulty, and consequently over 34,000 of - said customers and creditors ultimately filed claims in the Weis liquidation proceeding. 56. The SIPC fund has been or may be depleted in order to satisfy the claims of the over 34,000 customers and certain other creditors of Weis, hereinabove men- tioned in paragraph 55, and to pay for certain adminis- trative expenses of the liquidation. 26 57. But for Touche Ross’ breach of the duties it owed to the customers and certain other creditors of Weis by its failure to comply with the auditing standards and regu- lations prescribed by the 1934 Act and the rules and regulations promulgated thereunder, the SIPC fund would not have been depleted to the extent that it has been, if at all, and consequently SIPC is subrogated to those claims which such customers and certain other creditors of Weis who have been paid out of the SIPC fund could have asserted against Touche Ross based on the auditing and accounting services performed by Touche Ross with re- spect to Weis. 58. The aggregate of the claims of Weis’ customers and certain other creditors which have been satisfied out of the SIPC fund and for which Touche Ross is liable to SIPC is presently estimated to be at least $14,000,000. As AND For PLAINTIFF SIPC’s THIRD CAUSE OF ACTION 59. Plaintiff SIPC repeats and realleges each and every allegation contained in paragraphs | through 31 herein as though here set forth in full. 60. Touche Ross had knowledge of or, but for its errors and omissions, should have had knowledge of the deception caused by the Weis Five, in violation of the 1934 Act and the rules and regulations promulgated thereunder, by means of the filing or dissemination of the 1972 Opinion Letters and accompanying Answers to the Financial Questionnaire and financial statements. 61. Touche Ross breached the duties it owed to SIPC by failing to inquire as to, and to disclose, the deception caused by the Weis Five, in violation of the 1934 Act and the rules and regulations promulgated thereunder, by means of the filing or dissemination of the 1972 Opinion Letters and the accompanying Answers to the Financial Questionnaire and financial statements. of the Weis Five’s violation 0 and regulations promuigat paragraphs 60 and 61 hereinabove, i PC uent depletion of the SI ™ pi 62 hereinabove, SIPC has suffered and wil continue to suffer da 27 62. The SIPC fund has been or may be depleted in i rs and order to satisfy the claims of over 34,000 oe aad certain other creditors of Weis and to pay administrative expenses of the liquidation. ’ aidi betting f Touche Ross’ aiding and a tia or F the 1934 Act and the rules lgated thereunder as discussed in and as a result of the fund as indicated in mages in an amount which is present- ly estimated to be at least $14,000,000. As AND For PLAINTIFF SIPC’s FouRTH CAUSE Or ACTION 64. Plaintiff SIPC repeats and realleges south every allegation contained in paragraphs 1 throug herein as though here set forth in full. 65. Touche Ross had knowledge of = “00 ow ‘errors and omissions, should have had — fied soloed deception caused by the Weis Five, in vio atl ooabe 1934 Act and the rules, an Ty dissemination ofthe r, by means of the hing Oe ane Letters and the rpremcrt gd sa to the Financial Questionnaire and financial state . 66. Touche Ross breached the pr it aye ‘gt , ‘1 other creditors of Weis DY customers and certain 0 Jn inquire as to, and to disclose, the aes hae is Five, in violati f the 1934 Act an Weis Five, in violation 0 Ayre regulations promulgated thereunder, by oppo oo filing or dissemination of the 1972 Opinion carretera accompanying Answers to the Financial Ques and financial statements. 28 67. The SIPC fund has been or may be depleted in order to satisfy the claims of over 34,000 customers and certain other creditors of Weis and to pay for certain administrative expenses of the liquidation. 68. But for Touche Ross’ aiding and abetting of the Weis Five’s violation of the 1934 Act and the rules and regulations promulgated thereunder, as discussed in para- graphs 65 and 66 hereinabove, the SIPC fund would not have been depleted to the extent that it has been, if at all, and consequently SIPC is subrogated to those claims which such customers and certain other creditors of Weis who have been paid out of the SIPC fund could have asserted against Touche Ross based on the auditing and accounting services performed by Touche Ross with re- spect to Weis. 69. The aggregate of the claims of Weis’ customers and certain other creditors which have been satisfied out of the SIPC fund and for which Touche Ross is liable to SIPC is presently estimated to be at least $14,000,000. As AND For PLAINTIFF SIPC’s FIFTH CAUSE OF ACTION 70. Plaintiff SIPC repeats and realleges each and every allegation contained in paragraphs 1 through 31 herein as though here set forth in full. 71. As a consequence of the liquidation of Weis, SIPC was required to satisfy the claims of over 34,000 customers and certain other creditors of Weis and to pay for certain administrative expenses of the liquidation. 72. As a result of the negligence and malpractice of Touche Ross, including that set forth in paragraphs 28 through 30 herein, and not as a result of any negligence of SIPC, SIPC has suffered and will continue to suffer damages in an amount which is presently estimated to be at least $14,000,000. ee Tse ee 29 As AND For PLAINTIFF SIPC’s SIXTH CAUSE OF ACTION 73. Plaintiff SIPC repeats and realleges each and every allegation contained in paragraphs | through 31 herein as though here set forth in full. 74. Asa result of the negligence and malpractice of Touche Ross, including that set forth in paragraphs 28 through 30 herein (and not as a result of any negligence of any customer or creditor of Weis), the customers and certain other creditors of Weis were misled into believing or assuming that Weis was not in financial difficulty, and consequently over 34,000 of said customers and creditors ultimately filed claims in the Weis liquidation proceeding. 75. The SIPC fund has been or may be depleted in | order to satisfy the claims of the over 34,000 customers and certain other creditors of Weis, hereinabove men- tioned in paragraph 74, and to pay for certain adminis- trative expenses of the liquidation. | 76. But for Touche Ross’ negligence and malpractice, the SIPC fund would not have been depleted to the extent that it has been, if at all, and consequently SIPC is subrogated to thcse claims which such customers and certain other creditors of Weis who have been paid out of the SIPC fund could have asserted against Touche Ross based on the auditing and accounting services performed by Touche Ross with respect to Weis. si 77. The aggregate of the claims of Weis customers and certain other creditors which have been satisfied out _of the SIPC fund and for which Touche Ross is liable to SIPC is presently estimated to be at least $14,000,000. AS AND For PLAINTIFF SIPC’s SEVENTH CAUSE OF ACTION 78. Plaintiff SIPC repeats and realleges each and every allegation contained in paragraphs | through 31 herein as though here set forth in full. 30 79. As a consequence of the liquidation of Weis, the SIPC fund has been or may be depleted in order to satisfy the claims of over 34,000 customers and certain other creditors of Weis and to pay for certain administrative expenses of the liquidation. 80. As a result of the malpractice of Touche Ross and its breach of the duties it owed to SIPC (and not as a result of any negligence of SIPC), in that the auditing and accounting services performed by Touche Ross were conducted in so reckless and grossly negligent a manner that Touche Ross knew or should have known that the 1972 Opinion Letters and the accompanying Answers to the Financial Questionnaire and financial statements were false, inaccurate and incomplete, SIPC has suffered and will continue to suffer damages in an amount which is presently estimated to be at least $14,000,000. As AND For PLAINTIFF SIPC’s EIGHTH CAusE OF ACTION 81. Plaintiff SIPC repeats and realleges each and every allegation contained in paragraphs | through 31 herein as though here set forth in full. 82. As a result of the malpractice of Touche Ross and its breach of the duties it owed to the customers and certain other creditors of Weis (and not as a result of any negligence of any customer or creditor of Weis), in that the auditing and accounting services performed by Touche Ross were conducted in so reckless and grossly negligent a mannér that Touche Ross knew or should have known that the 1972 Opinion Letters and the accompanying Answers to the Financial Questionnaire and financial statements were false, inaccurate and incomplete, the customers and certain other creditors of Weis were misled into believing or assuming that Weis was not in financial ee a ee 7 31 difficulty, and consequently over 34,000 of said customers and certain other creditors ultimately filed claims in the Weis liquidation proceeding. 83. The SIPC fund has been or may be depleted in order to satisfy the claims of the over 34,000 customers and certain other creditors of Weis, hereinabove men- tioned in paragraph 82, and to pay for certain adminis- trative expenses of the liquidation. 84. But for Touche Ross’ malpractice, recklessness and gross negligence, the SIPC fund would not have been depleted to the extent that it has been, if at all, and consequently SIPC is subrogated to those claims which such customers and certain other creditors of Weis who have been paid out of the SIPC fund could have asserted against Touche Ross based on the auditing and account- ing services performed by Touche Ross with respect to Weis. 85. The aggregate of the claims of Weis’ customers and certain other creditors which have been satisfied out of the SIPC fund and for which Touche Ross is liable to SIPC is presently estimated to be at least $14,000,000. WHEREFORE, plaintiffs demand judgment: a. for $51,000,000 on Plaintiff Trustee’s First Cause of Action; b. for $51,000,000 on Plaintiff Trustee’s Second Cause of Action; c. for $51,000,000 on Plaintiff Trustee’s Third Cause of Action; d. for $51,000,000 on Plaintiff Trustee’s Fourth Cause of Action; e. for the amount of the Touche Ross Fee plus $51,000,000 on Plaintiff Trustee’s Fifth Cause of Action; i 32 f. for an amount which is the difference between the actual and warranted values of Touche Ross’ services with respect to Weis, plus $51,000,000, on Plaintiff Trustee’s Sixth Cause of Action; g. for $14,000,000 on Plaintiff SIPC’s First Cause of Action; h. for $14,000,000 on Plaintiff SIPC’s Second Cause of Action; i. for $14,000,000 on Plaintiff SIPC’s Third Cause of Action; j. for $14,000,000 on Plaintiff SIPC’s Fourth Cause of Action; k. for $14,000,000 on Plaiatiff SIPC’s Fifth Cause of Action; l. for $14,000,000 on Plaintiff SIPC’s Sixth Cause of Action; m. for $14,000,000 on Plaintiff SIPC’s Seventh | Cause of Action; n. for $14,000,000 on Plaintiff SIPC’s Eighth Cause of Action; o. for interest on the amounts demanded herein; p. for the costs and disbursements of this action; and q. for such other, further and different relief as to the Court may seem just and proper. ee ne Eos © ee eee ee eee eb tle Ase ein a SLANT ste Bae Breet mh me oe er ae Dated: New York, New York April 30, 1976 33 ek SRI 6 oH 1 ee ee HUGHES HUBBARD & REED By _/s/ JOHN S. ALLEE _A Member of the Firm Attorneys for Edward S. Redington, as Trustee for the liquidation of the busi- ness of Weis Securities, Inc. One Wall Street New York, New York 10005 (212) WH 3-6500 HAWKINS, DELAFIELD & Woop By_/s/ CLARENCE FRIED A Member of the Firm Attorneys for Securities In- vestor Protection Corporation | 67 Wall Street New York, New York 10005 (212) 952-4700 34 [ This page left blank intentionally. ] ON Na AM RN ett ne na nl 35 Exhibit A to Complaint WEIS, VOISIN & CO., INC. REPORT ON EXAMINATION OF STATEMENT OF FINANCIAL CONDITION MAY 26, 1972 TOUCHE ROSS & CO. ——] am pleased to note that, in response to my concurring opinion, Judge Mulligan very commendably has disclaimed any intention to disparage the SEC amicus brief below, n.1, last paragraph. This reflects 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—MInisTER OF JUSTICE. 17 Fordham Law Review 38 (1948). 209 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 materially aided by the brief amicus curiae submitted on ety “ 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 1.27 (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. at, 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 right may assert a private right of action for violations of section 17 of the °34 Act. This pro ition was not only rejected below but was Pao te € majority in its footnote 13. _ 1 do not “disparage’’, as my Brother Timbers would have it, th 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 low 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, 422 210 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., 430 U.S. 1, 37 (1977) Chief Justice Burgers 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 US. 66 fl 975); 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 eg (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 Gony 1 J. Corp. Law 371 (1976); 30 Vand. L. Rev. 905, 908-10 211 (a), 15 US.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 statement 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. Thus, 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. 195,648 at p. 90,213 (S.D.N.Y. 1976); duPont v. Wyly, 61 F.R.D. 615, 628 b. Del. 1973); In re Penn Central Securities Litigation, 347 F.Supp. 1327, 1340 (E.D. Pa. 1972), 212 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), affd, 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. 213 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 mode.”. . . This principle of statutory construc- tion reflects an anvient 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. 214 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 41 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 did 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 — action for damages.” Id. at 874 (emphasis in original); see Piper v. Chris-Craft Industries, Inc., supra, at 24-25. Indeed, in this con- nection the —" 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 remedy should be judicially implied.” Id. at 875. This conciusion in Abrahamson is in fact strongly supportive of the analysis in this dissent. 215 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 intentional congres- sional limitation on the class for whom a private action would be available 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 sellers.* 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.). 216 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. Il 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). 217 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 responsi- bility 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 CER. § 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 requirements. This is because such broker-dealers are subject to Exchange Rule 325, which is deemed by the Commission to impose requirements more comprehensive than the requirements of the SEC. Id. Under Rule 325 Weis was required to maintain a minimum prescribed ratio of aggregate indebtedness to net capital. Com- pliance 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 examinations 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 218 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 219 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 as 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’ ey were also convicted of a criminal conspiracy to falsify eis’ books of account. See Rich v. Touche Ross & Co., supra, 415 F.Supp. at 101. 220 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. 221 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 or 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. 222 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 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.” Ill 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 223 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 224 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, 1 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. 225 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. 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 Secures INVESTO PROTECTION CORPORATION, Plaintiffs- Appellants, 77-7183 Vv. Toucue Ross & Co., Defendani- 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. 226 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 227 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. wih 77-7183 ToucHE 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 228 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, held at the United States Court House, in the Cjty of New York, on the seventh day of July, one thousar?d-pine hundred and seventy-eight. EpwWarbD S. REDINGTON, as Trustee for the liquidation of the business of Weis Se- curities, Inc., and Secures INVESTOR PROTECTION CORPORATION, Plaintiffs-Appellants,\, Docket No. . 77-7183 ToucHE Ross & Co., Defendant- Appellee. 4 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1582%3A04. Public record. Not legal advice.