Petition — Transamerica Mortgage Advisors, Inc. v. Lewis
Supreme Court brief1979
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FILED
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In the Supreme Court _—
United States 9 tue caer
OcroBer TRM, 1977
No. 7789'7 = ] 645
TRANSAMERICA Mortaace Apvisors, Inc. (TAMA) ;
Kent L. Cotweii; J. WenveLt Coomss; JOHN
R. Jensen; Ratpo D. Wencer; JonHN Havens;
TRANSAMERICA CORPORATION ; TRANSAMERICA LAND
CapitaL, Inc.; and Morteace Trust or AMERICA,
~~
Petitioners,
vs.
Harry Lewis,
Respondent.
Petition for Writ of Certiorari
to the United States Court of Appeals
for the Ninth Circuit
Joun M. ANDERSON
Mary Beta Urrti
LANDELS, Riptey & DiaMonp
450 Pacific Avenue
San Francisco, California 94133
Counsel for Petitioners,
Transamerica Mortgage
Advisors, Ine, (TAMA)
Kent L. Colwell
J. Wendell Coombs
John R. Jensen
Ralph D. Wenger
(continued )
May 4, 1978
SORG PRINTING COMPANY OF CALIFORNIA, 345 FIRST STREET. SAN FRANCISCO 84105
TABLE OF CONTENTS
Page
Opinions Below 2
Jurisdiction 2
Question Presented 2
Statutes Involved 2
Statement of the Case 3
Reasons for Granting the Writ 5
Conclusion 7
Appendix Al
TABLE OF AUTHORITIES CITED
CasEs Pages
Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir. 1977)
and petition for cert. filed, Dkt. No. 77-1279 ................ 2, 5, 7
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723
(1975) baits aiesaltianladliaihen bipiciatbinsntintsanconnapeeinsenabiceenaeen 5
Cort v. Ash, 422 U.S. 66 (1975) ............. RS
Greenspan v. Continental Mortgage Investors, U.S.
D.C., D. Mass. No. 72-1160T 1 ilies Kiebaltian 6
Grecnapent v. First Mortgage Investors, U.S.D. C.,
TDD; Filmi, NO. TB-GOR OEY OD oncrnnssnscsscncsnencscsseccscsrsescose 6
Jones v. Equitable Life Assurance Society, CCH Fed.
See. L. Rep. 94,986, 97,402, U.S.D.C., S.D.N.Y.
(1975) rb 6
Kramer v. Massachusetts Mutual Mortgage & Realty
Investors, U.S.D.C., 8.D.N.Y., No. 73-CIV-1306 ........ 6
Kreindler v. Citizens Mortgage Investment Trust,
U.S.D.C., S.D.N.Y., No. 73-CIV-1628 ...............-..00--:0000- 6
Lerman v. ATICO Advisory Corp., U.S.D.C., S.D.
Es "oh | a are 6
Lewis v. Capital Mortgage Investments, U.S.D.C., D.
Md., No. N75-1094 .. 6
Lewis v. Diversified Mortars Investors, US.D.C,,
Its a, Ps PIT TUIIE, hncedetindencensssnnenesenciodeseinilenoess 6
Lewis v. Guardian Mortgage Investors, U.S.D.C., M.D.
Se EB ©. EES I CC 6
Mayer v. Chase Manhattan Mortgage and Realty
Trust, U.S.D.C., S.D.N.Y., No. 72-CIV-1628 .............. 6
Tasie or AutTHorITIEs Crrep lii
Palmer v. Massachusetts, 308 U.S. 79 (1939) ................ 7
Schreiber v. Northwestern Mutual Life Mortgage
Realty Investors, U.S.D.C., E.D. Wisc., No. 73-CIV-
1056 6
Uttrich v. Lomas & Nettleton Mortgage Investors, U.S.
D.C., D. Conn., No. CIV-15704 6
Wilson v. First Houston Investment Corp., 566 F.2d
1235 (5th Cir. 1978) 2,5, 7
STATUTES
Investment Advisors Act of 1940, 15 U.S.C. §§ 80b-1,
et seq.
15 U.S.C. § 80b-1, et seq. 3
15 U.S.C. § 80b-6 (Section 206) 2
15 U.S.C. § 80b-14 (Section 214) 2
MISCELLANEOUS
REITs Monthly, April 1978 at 1 (published by The
National Association of Real Estate Investment
Trusts, 1101 Seventeenth St., N.W., Washington,
SG SET seinshbesanaeiine ipcipiaisiaseadinontasasnen 6
In the Supreme Court of the
United States
Ocroser TERM, 1977
No. 77-
TRANSAMERICA MortGaGe Apvisors, Lyo. (TAMA) ;
Kent L. Cotweti; J. WENDELL Coomss; JoHN
R. Jensen; Ratpx D. Wencer; JoHN Havens;
TRANSAMERICA CORPORATION ; TRANSAMERICA LAND
Capita, Inc.; and Morreace Trust oF AMERICA,
Petitioners,
Vs.
Harry Lewis,
Respondent.
Petition for Writ of Certiorari
to the United States Court of Appeals
for the Ninth Circuit
Petitioners, Transamerica Mortgage Advisors, Inc.
(TAMA), Kent L. Colwell, J. Wendell Coombs, John R.
Jensen, Ralph D. Wenger, John Havens, Transamerica
Corporation, Transamerica Land Capital, Inc., and Mort-
gage Trust of America, respectfully pray that a writ of
certiorari issue to review the judgment and opinion of
the United States Court of Appeals for the Ninth Circuit
entered on April 19, 1978.
2
OPINIONS BELOW
The opinion of the Court of Appeals (A1-A5)* has not
yet been reported. The applicable orders of the District
Court (A6-A9) are not reported.
The majority and dissenting opinions of the Court of
Appeals adopt the majority and dissenting opinions of the
Court of Appeals for the Second and Fifth Circuits in
Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir. 1977), and
Wilson v. First Houston Investment Corp., 566 F.2d 1235
(5th Cir. 1978), respectively. The opinions in Abrahamson
are set forth in the appendix to this petition at A10-A57.
The opinions in Wilson are set forth at A58-A76.
A petition for certiorari has been filed in the Abrahamson
ease and is before this Court as Dkt. No. 77-1279.
JURISDICTION
The judgment of the Court of Appeals was entered on
April 19, 1978. This Court’s jurisdiction is invoked under
28 U.S.C. § 1254(1).
QUESTION PRESENTED
May a private right of action be implied under the
Investment Advisers Act of 1940?
STATUTES INVOLVED
Section 206 of the Investment Advisers Act of 1940,
54 Stat. 852, as amended, 74 Stat. 887, 15 U.S.C. §§ 80b-6;
and Section 214 of that Act, 54 Stat. 856, 15 U.S.C. § 80b-14.
are set forth in the appendix to this petition at A50-A51.
1. All “A...” page references are to the appendix to this
petition.
3
STATEMENT OF THE CASE
The petitioners include four corporate or trust entities—
Transamerica Mortgage Advisors, Inc. (TAMA); Trans-
america Corporation; Transamerica Land Capital, Inc.;
and Mortgage Trust of America.
The five individual petitioners are trustees of Mortgage
Trust of America, an independent real estate investment
trust. The Trust has nine trustees. A majority of the trus-
tees have always been independent of Transamerica and its
subsidiaries.
Mortgage Trust of America—Mortgage Trust of America
is qualified as a real estate investment trust under appli-
cable provisions of the Internal Revenue Code. The Trust’s
business is limited to investments in real estate—primarily
construction and development first mortgage loans. None
of the Trust investments have ever been listed on any
national or local securities exchange, or offered for trading
in any over-the-counter markets.
Transamerica Mortgage Advisors, Inc. (TAMA)—TAMA
is retained by Mortgage Trust of America as its adviser.
The Trust is TAMA’s only client. TAMA advises the Trust
on various real estate investments and administers the
Trust’s day-to-day operations. TAMA has never had
another client. TAMA has never advertised its services,
solicited additional clients, or held itself out in any way
as a public investment adviser.
‘The Litigation—The respondent filed suit in the United
States District Court for the Southern District of New
York in April, 1973. Jurisdiction was said te be based on
the Investment Advisers Act of 1940. (15 U.S.C. §§ 80b-1,
et seq.) The complaint sets forth six claims for relief.
The first three are derivative and the last three purport
to be class actions on behalf of Mortgage Trust of America’s
4
shareholders. The first (derivative) and fourth (class)
claims allege that defendants TAMA and Transamerica
Corporation failed to register in accord with the Invest-
ment Advisers Act, and that certain fees paid to TAMA
by the Trust were excessive. The second (derivative) and
fifth (class) claims allege unfairness and conflicts of inter-
est in the Trust’s purchase of its initial loan portfolio
from Transamerica Land Capital. The third (derivative)
and sixth (class) claims allege breach of fiduciary duty
and breach of trust by TAMA and Transamerica Corpora-
tion in rendering investment advice to Mortgage Trust of
America.
Pursuant to stipulation, the case was transferred to the
Northern District of California in December, 1973. In
March, 1974, the petitioners joined in asking that the case
be dismissed. They argued, inter alia, that the Investment
Advisers Act of 1940 did not afford a private right of
action. The district court agreed, and a formal order dis-
missing the complaint with leave to amend was entered
in October, 1974. (A6-A7). The respondent declined to
amend, and the case was dismissed with prejudice in
November 1974. (A8-A9). The respondent appealed.
On April 19, 1978, the Court of Appeals (2-1; Wallace, J.,
dissenting) held that “the implication of a private right
of action for injunctive relief and damages under the
[Investment Advisers Act] in favor of appropriate plain-
tiffs is necessary to achieve the goals of Congress in enact-
ing the legislation.” (A4).
In dissent, Judge Wallace stated: “This case presents
an issue of first impression in our eireuit on which
reasonable minds may differ. I recognize the strength
of the opinions and the articles cited by the majority.
I am persuaded, however, by the analysis of Judge Gurfein
in Abrahamson v. Fleschner, 568 F.2d 862, 879 (2d Cir.
5
1977) (concurring and dissenting) and therefore respect-
fully dissent.” (A5).
REASONS FOR GRANTING THE WRIT
This case presents the same important question of law
as that presented in Abrahamson v. Fleschner, 568 F.2d
862, 879 (2d Cir. 1977), now before this Court on petition
for certiorari as Fleschner v. Abrahamson, Dkt. Nc. 77-
1279. Rather than repeat the reasons why a writ should
issue here, we respectfully refer the Court to the petition
for certiorari filed in Abrahamson, and specifically pages
7-15.
In addition, we urge special attention to the following:
(1) No court of appeals has implied a right of action
under the Investment Advisers Act without forceful dis-
sent. Judge Gurfein’s dissent in the Abrahamson case,
adopted by Judge Wallace in the Court below and by Judge
Hill in Wilson v. First Houston Investment Corp., supra,
calls attention to the fact that implying a private right of
action “circumvents the scund policies behind restrictions on -
10b-5 claims.” (A51-A52). Indeed, implying a private right
of action under the Advisers Act scuttles the limitations on
securities law actions recognized in Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723 (1975). The Congress has
had four opportunities to provide a private right of action
under the Advisers Act and has declined to do so. See,
Fleschner v. Abrahamson, Dkt. No. 77-1279, Petition for a
Writ of Certiorari, dated March 14, 1978, at pages 11-14.
Nevertheless, the majority in the Second, Fifth and Ninth
Circuits have uncovered an unspoken private legal right—
an implied right that is neither necessary nor prudent.
(2) Implying a private right of action under the Invest-
ment Advisers Act imposes an unnecessary burden on the
federal courts. Actions such as this, alleging breach of
6
fiduciary duty and fraud, are a mainstay of state court
litigation—legal actions “traditionally relegated to state
law, in an area basically the concern of the States .. .”
Cort v. Ash, 422 U.S. 66, 78 (1975).
The burden on the federal courts is more than an abstract
possibility. There arc 218 real estate investment trusts in
the United States.? The respondent here is the plaintiff in at
least two other federal actions against real estate invest-
ment trusts and their advisers. See, Lewis v. Diversified
Mortgage Investors, U.S.D.C., S.D.N.Y., No. 75 Civ-1001;
Lewis v. Capital Mortgage Investments, U.S.D.C., D. Md.,
No. N75-1094. The complaint in the Diversified Mortgage
case is virtually identical to the complaint filed in this case.®
Other plaintiffs in complaints essentially identical to the
complaint filed in this case have alleged violation of the
Advisers Act against real estate investment trusts and
their advisers.*
2. REITs Monthly, April 1978, at 1 (published by the National
Association of Real Estate Investment Trusts, 1101 Seventeenth
St., N.W., Washington, D.C. 20036).
8. The respondent here was also the plaintiff in another action
against a real estate investment trust and its adviser. See, Lewis
v. Guardian Mortgage Investors, U.S.D.C., M.D. Fla., No. 73-851-
Civ-JT (settled).
4. See, Uttrich v. Lomas & Netileton Mortgage Investors, U.S.
D.C., D. Conn., No. Civ-15704 (case withdrawn) ; Lerman v. ATICO
Advisory Corp., U.S.D.C., S.D. Fla., No. 73-1172-Civ-JE (dismissal
affirmed on appeal); Greenspan v. First Mortgage Investors,
U.S.D.C., $.D. Fla., No. 73-638-Civ-JE (dismissed) ; Greenspan v.
Continental Mortgage Investors, U.S.D.C., D. Mass., No. 72-1160 T
(settled) ; Jones v. Equitable Life Assurance Society, CCH Fed.
Sec. L. Rep. 97,402, 7 94,986, U.S.D.C., S.D.N.Y. (1975) (dis-
missed) ; Kreindler v. Citizens Mortgage Investment Trust, U.S.
D.C., S.D.N.Y., No. 73-Civ-1623 (settled); Kramer v. Massachu-
setts Mutual Mortgage & Realty Investors, U.S.D.C., 8.D.N.Y., No.
73-Civ-1306 (settled); Mayer v. Chase Manhattan Mortgage and
Realty Trust, U.S.D.C., S.D.N.Y., No. 172-Civ-1623 (settled) ;
Schreiber v. Northwestern Mutual Life Mortgage Realty Investors,
U.S.D.C., E.D. Wise., No. 73-Civ-1056 (case withdrawn).
— ee
7
(3) Finally, interpretation of the Investment Advisers
Act has led to a classic confrontation between the express
words of a statute and the statute’s assumed purpose.
The Court of Appeals has adopted an assumed purpose,
and like the majority in Wilson v. First Houston Invest-
ment Corp., supra, has “found that a private right of
action exists where the United States Congress has failed
to provide for one.” (A73). This petition, then, pre-
sents a case in which the meaning of a statute has been
derived, not from specific language, but from an assump-
tion of what ought to be. “At best this is subtle business,”
Justice Frankfurter once warned, “calling for great wari-
ness lest what professes to be mere rendering becomes
creation and attempted interpretation of legislation becomes
legislation itself.” Palmer v. Massachusetts, 308 U.S. 79,
83 (1939).
CONCLUSION
For the reasons set forth in the petition for certiorari
filed in Fleschner v. Abrahamson, Dkt. No. 77-1279, and for
the foregoing reasons, a writ of certiorari should issue to
the United States Court of Appeals for the Ninth Circuit.
Respect*1lly submitted,
Joun M. ANDERSON
Mary Bets Urrtt
LanvELs, Rietey & Diamonp
Counsel for Petitioners,
Transamerica Mortgage
Advisors, Inc. (TAMA)
Kent L. Colwell
J. Wendell Coombs
John R. Jensen
Ralph D. Wenger
(continued )
May 4, 1978
8
R, Barry CourTON
New. L. Suarrro
Cooper, Wurre & Coorer
Counsel for Petitioner,
John Havens
JosEPH MARTIN, JR.
J. RonaLp PENGILLY
Louis E. WoLcHER
Pertit & Martin
Counsel for Petitioners,
Transamerica Corporation
Transamerica Land Capital,
Inc.
JEROME I. Braun
Jon F. Hartune
Fareuua, Braun & MartTeEL
Counsel for Petitioner,
Mortgage Trust of America
(Appendix follows)
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UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
FILED
April 19, 1978
EMIL E. MELFT, JR.
Clerk, U.S. Court of Appeals
No. 75-1285
OPINION
Harry Lewis,
Plaintiff-A ppellant,
v.
TRANSAMERICA Corp., et al.,
Defendants-Appellees.
Appeal from the United States District Court
For the Northern District of California
Before: BROWNING and WALLACE, Circuit Judges,
and EAST,* Senior District Judge
EAST, Senior District Judge:
The plaintiff-appellant Harry Lewis (Lewis) appeals
from an order entered by the District Court on November
21, 1974 dismissing the action with prejudice on the grounds
“Section 206 of the Investment Advisers Act of 1940 (15
U.S.C. § 80b-6) [Advisers Act] affords no private right of
action, and that consequently the Court has no jurisdiction
of the plaintiff’s claims .. . .” We vacate the order and
remand.
*Honorable William G. East, Senior United States District Judge
for the District of Oregon, sitting by designation.
2 Appendix
Lewis’ Complaint :
Lewis is a shareholder of the defendant-appellee Mort-
gage Trust of America (Trust), and his complaint presents
three shareholder derivative and three class actions for
violation of the Advisers Act and common law fiduciary
duties. He alleges in substance:
The Trust was organized as a California business trust
and is qualified as a real estate investment trust under the
Internal Revenue Code. It invests primarily in construction
and development first mortgage loans. None of its invest-
ments have been listed on any national or local securities
exchange or offered for trading in any over-the-counter
market. The original officers and employees of the Trust
were formerly associated with the defendant-appellee
‘Transamerica Land Capital, Inc. (TALC), a “first tier”
subsidiary of the defendant-appellee Transamerica Corp.
(Transamerica). The Trust purchased from TALC its
original portfolio of mortgages. The defendant-appellee
Transamerica Mortgage Advisors, Inc. (Mortgage Ad-
visors), a Delaware corporation and a “third tier” sub-
sidiary of Transamerica, is retained as the Trust’s
mortgage adviser. It advises the Trust on various real
estate investments and administers its day-to-day opera-
tions. The Trust is and always has been Mortgage Ad-
visors’ only client. Transamerica is the parent of Mortgage
Advisors and the sponsor of the Trust. Nine individual
defendants-appellees are trustees of the Trust.
Lewis’ Issue on Review:
Does the Advisers Act give rise’ to an implied private
right of action for injunctive relief and damages on behalf
of persons injured by violations of its provisions?
Appendix 3
Defendants-Appellees’ Issues on Review:
In view of the naked holding of a lack of jurisdiction,
the District Court did not reach the following issues which
the defendants present for review:
(1) Whether the several defendants fall within the scope
of the Advisers Act.
(2) Whether the class action claims are proper.
(3) Whether Lewis has standing to maintain a deriva-
tive action without having made a demand upon the trustees
to act.
Discussion:
Since the District Court did not first consider and
adjudicate those issues raised by the defendants, we decline
to now do so. Singleton v. Wulff, 428 U.S. 106, 120 (1976) ;
Hector v. Wiens, 533 F.2d 429, 483 (9th Cir. 1976).
At the time of the District Court’s consideration of its
ultimate order of dismissal of the action for lack of juris-
diction, the circuit case law on the issue was nil. At that
time only the following District Court decisions were avail-
able for consideration: Bolger v. Laventhol, Krekstein,
Horwarth & Horwarth, 381 F.Supp. 260, 263 (S.D.N.Y.
1974) (recognizing an implied private right of action).
Greenspan v. del Toro, No. 73-638 CIV JE (S.D. Fla. May
17, 1974), appeal dismissed for want of prosecution, No.
74-2943 (5th Cir. Sept. 5, 1974) ; and Gammage v. Roberts,
Scott & Co., [1974-1975 Transfer Binder] Fed. Sec. L. Rep.
(CCH) {94,761 (S.D. Cal. 1974) (no private right of
action).
We now have the benefit of the decisions of the Courts
of Appeals for the Fifth and Second Cireuits finding an
implied private right of action under the Advisers Act.
Wilson v, First Houston Investment Corp., [Current] Fed.
4 Appendix
See. L. Rep. (CCH) 96,311 (Feb. 2, 1978) ; Abrahamson v.
Fleschner, [1976-1977 Transfer Binder] Fed. Sec. L. Rep.
(CCH) {95,889 (2d Cir. Feb. 25, 1977).?
Without reiterating their able discussions, we adopt the
rationale of the majorities in Abrahamson and Wilson.
Accordingly, we hold that the implication of a private right
of action fer injunctive relief and damages under the Ad-
visers Act in favor of appropriate plaintiffs is necessary
to achieve the goals of Congress in enacting the legislation.
The District Court holds subject matter jurisdiction to en-
1. See the following for support of the majorities’ rationale in
Abrahamson and Wilson: J. I. Case Co. v. Borak, 377 U.S. 426
(1964) ; Cort v. Ash, 422 U.S. 66, 78 (1975) ; and Bolger’s clarify-
ing discussion of the goal of Congress in enacting the Advisers Act,
381 F.Supp. at 263.
The following District Courts have, since the entry of the order
of dismissal in this ease, held that an implied right of private action
exists under the Advisers Act: Jones v. Equitable Life Assurance
Society, 409 F.Supp. 370 (S.D.N.Y. 1975), accord, Angelakis v.
Churchill Management Corp., [1975-1976 Transfer Binder] Fed.
See. L. Rep. (CCH) 9 95,285 (N.D. Cal. 1975); and Sullivan v.
Chase Investment Services of Boston, Inc., |1977-1978 Transfer
Binder] Fed. Sec. L. Rep. (CCH) { 96,224 (N.D. Cal. 1977).
The Securities Exchange Commission has submitted to Congress
a proposed amendment to the Advisers Act which provides explic-
itly for a private right of action under the Advisers Act. See In-
vestment Advisers Act Release No. 491, 8 SEC Docket 744 (Dec.
15, 1975). In announcing its proposal, the SEC repeated its view
that the existing language was sufficient to imply a private right
of action. Its proposal was intended to put to rest those few deci-
sions which have found no implied right of action, “The commen-
tators who have reviewed these decisions agree that a private right
of action should be implied under the Advisers Act. Note, Private
Causes of Action Under Section 206 of the Investment Advisers
Act, 74 Mich. L. Rev. 308 (1975) ; Lybecker, Advisers Act Develop-
ments, 8 Review of Securities Regulations 927, 934 (April 23,
1975) ; Note, Bolger v. Laventhol, Krekstein, Horwarth & Hor-
warth: Private Rights of Action Under the Investment Advisers
Act, 48 Temple L.Q. 433 (1975).” Abrahamson at 91,282 n.17.
Appendix 5
tertain such actions and pendens state claims pursuant to
28 U.S.C. § 1331.2
The District Court’s order of dismissal is vacated and
the cause remanded to the District Court for further pro-
ceedings consistent herewith.
ORDER OF DISMISSAL VACATED AND CAUSE
REMANDED. |
Lewis v. Transamerica Corp.
No. 75-1285
WALLACE, Circuit Judge, Dissenting:
This case presents an issue of first impression in our
circuit on which reasonable minds may differ. I recognize
the strength of the opinions and the articles cited by the
majority. I am persuaded, however, by the analysis of
Judge Gurfein in Abrahamson v. Fleschner, 568 F.2d 862,
879 (2d Cir. 1977) (concurring and dissenting), and there-
fore respectfully dissent.
2. “The trial court stated that it was dismissing for lack of
subject matter jurisdiction. According to the district court’s analy-
sis, the complaint more properly should have been dismissed for
failure to state a claim upon which relief can be granted. See Mobil
Oil Corp. v. Kelley, 493 F.2d 784, 786 (CA5), cert. denied, 419
U.S. 1022, 95 S. Ct. 498, 42 L.Ed.2d 296 (1974). As pertains to the
asserted cause of action under the IAA, general federal question
jurisdiction is conferred by 28 U.S.C. § 1331 (1970). See Abra-
hamson v. Fleschner, No. 75-7208, ...... 5 ae , we n.5 (CA2
1977) (the dissent and majority agree on this point).” Wilson at
93,040 n.2.
6 Appendiz
ORIGINAL
FILED
OCT 7 1974
CLERK, U. 8S. DIST. COURT
SAN FRANCISCO
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
No. C 73-2180 RHS
ORDER
Harry Lewis,
Plaintiff,
vs.
TRANSAMERICA CORPORATION,
et al.,
Defendants.
The motion of defendants, Transamerica Mortgage Ad-
visors, Inc., et al., to dismiss; and the motions of defendants
Transamerica Corporation, Transamerica Land Capital,
Inc., and Mortgage Trust of America, to dismiss or, in the
alternative, for summary judgment and for a more defini-
tive statement, came on for hearing on Friday, September
27, 1974.
The plaintiff, Harry Lewis, was represented by Francis
J. MeTernan, Esq., and Messrs. Garry, Dreyfus, McTernan,
Brotsky, Herndon & Pesonen of San Francisco. The defend-
ants, Transamerica Mortgage Advisors, Inc., J. Wendell
Coombs, Ralph D. Wenge, Kent L. Colwell and John R.
Jensen, were represented by John M. Anderson, Esq., and
Appendix 7
Messrs. Landels, Ripley & Diamond of San Francisco. The
defendants, Transamerica Corporation and Transamerica
Land Capital, Inc., were represented by Joseph Martin, Jr.,
Esq., and Messrs. Pettit, Evers and Martin of San Fran-
cisco. The defendant, Mortgage Trust of America was repre-
sented by Jon F. Hartung, Esq., and Messrs. Farella, Braun
& Martel of San Francisco. Defendant, John F. Havens was
represented by Neil L. Shapiro, Esq., of Messrs. Cooper,
White & Cooper of San Francisco.
The Court having received and considered written memo-
randa from the parties in support of and in opposition to
the above-described motions; having heard oral argument,
and having considered the affidavits, pleadings and other
papers on file in this case, makes the following:
ORDER:
1. The Court having determined that since Section 206
of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-6)
affords no private right of action, and that consequently
the Court has no jurisdiction of the plaintiff’s claims, the
defendants’ motion to dismiss is granted.
2. The alternate motions of defendants Transamerica
Corporation, Transamerica Land Capital, Inc., and Mort-
gage Trust of America for summary judgment or for a
more definite statement, having become moot by reason
of the foregoing order, are denied without prejudice.
3. Plaintiff may have 45 days from September 27, 1974,
within which to file an amended complaint. If the plaintiff
does not file an amended complaint within the foregoing
period, then this case shall be dismissed pursuant to Rule
41(b) of the Federal Rules of Civil Procedue.
Dated : Oct 7 1974
ROBERT H. SCHNACKE
Unirep States District Jupce
8 Appendix
ORIGINAL
FILED
NOV 21 1974
CLERK, U. 8S. DIST. COURT
SAN FRANCISCO
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
No. C 73-2180 RHS
ORDER
Harry Lewis
Plaintiff,
vs.
TRANSAMERICA CORPORATION,
et al.,
Defendants,
Wueneas, the motion of defendants, Transamerica Mort-
gage Advisors, Inc., et al., to dismiss; and the motions of
defendants Transamerica Corporation, Transamerica Land
Capital, Inc., and Mortgage Trust of America, to dismiss,
or, in the alternative, for summary judgment and for a more
definite statement, came on for hearing on Friday, Septem-
ber 27, 1974; and
Wuereas, and pursuant to an order dated and filed
October 7, 1974, this Court granted the motion of defend-
ants, Transamerica Mortgage Advisors, et al., to dismiss,
but allowing the plaintiff 45 days from September 27, 1974,
within which to amend; and
Appendix 9
Wuereas, the plaintiff, Harry Lewis, has failed to amend
his complaint within the time allowed, or at all, the court
makes the following
ORDER
Pursuant to Fed. R. Civ. P. 41(b), this case is dismissed
with prejudice as against each and all of the defendants,
and each and all of the defendants are awarded their respec-
tive costs.
Dated: Nov 21 1974
ROBERT H. SCHNACKE
Unirep States District J uDGE
10 Appendix
Robert ABRAHAMSON and Marjorie
Abrahamson, Plaintiffs-Appellants,
Vv.
Malcolm K. FLESCHNER et al.,
Defendants-Appellees.
No. 212, Docket 75-7203.
United States Court of Appeals,
Second Circuit.
| Submitted Feb. 28, 1976*.
| Decided Feb. 25, 1977.
Rehearing En Bane Unanimously
Denied Jan. 6, 1978.
Ronald H. Alenstein, New York City (Kenneth A. Barry,
and Shea, Gould, Climenko, Kramer & Casey, New York
City, on the brief), for plaintiffs-appellants Robert Abra-
hamson and Marjorie Abrahamson.
Richard E. Carlton, New York City (Robert D. Owen,
James E. Tyrrell, and Sullivan & Cromwell, New York City,
on the brief), for defendants-appellees Malcolm K. Flesch-
ner, William J. Becker and Fleschner Becker Associates.
Richard G. McGahren, New York City (Kenneth A. Sagat,
and D’Amato, Costello & Shea, New York City, on the ergs );
for defendant-appellee Harry Goodkin & Co.
Mark M. Jaffe, New York City (Allan J. Berdon, Joseph
F. Aman, and Hill, Betts & Nash, New York City, on the
brief), for defendant-appellee Harold B. Ehrlich.
Harvey L. Pitt, Gen. Counsel, Paul Gonson, Associate
Gen. Counsel, David J. Romanski, Asst. Gen. Counsel, James
H. Schropp, Atty., SEC, Washington, D. C., for Securities
and Exchange Commission, amicus curiae.
Before MANSFIELD, TIMBERS and GURFEIN, Cir-
evit Judges.
*See our interim opinion in this ease. Abrahamson v. Fleschner,
537 F.2d 27 (2 Cir. 1975).
Appendix 11
TIMBERS, Circuit Judge:
Of the several questions presented under the antifraud
provisions of the federal securities laws, those under the
Investment Advisers Act of 1940 appear to be of first
impression at the appellate level.*
The appeal is from a judgment entered in the Southern
District of New York, Robert L. Carter, District Judge,
392 F.Supp. 740, dismissing the complaint, on cross-motions
for summary judgment, in an action to recover damages for
alleged violations of Section 10(b) of the Securities Ex-
change Act of 1934, 15 U.S.C. § 78j(b) (1970), and of Rule
10b-5 thereunder, 17 C.F.R. § 240-10b-5 (1976) ; and alleged
violations of Section 206 of the Investment Advisers Act
of 1940, 15 U.S.C. § 80b-6 (1970), and of Rule 206(4)-1
thereunder, 17 C.F.R. § 275.206(4) (1976).
The essential questions presented and our rulings thereon
are as follows:
(1) Whether the complaint states a claim upon which
relief can be granted under Section 10(b) of the 1906 Act
and Rule 10b-5.
We hold it does not.
(2) Whether defendants who are general partners of the
investment partnership are investment advisers within the
meaning of Section 202(a)(11) of the Advisers Act.
We hold they are.
(3) Whether there is an implied private right of action
for damages under the Advisers Act.
We hold there is.
*We note that about the time our Court unanimously denied re-
hearing en bane in the instant ease the Fifth Cireuit held that
there is an implied right of action for damages under § 206 of the
Advisers Act. Wilson v. First Houston Investment Corp., ...... F.2d
oan (5th Cir. 1978), 46 U.S.L.W. 2429 (U.S. Fed. 1978).
12 Appendix
(4) Whether the complaint alleges compensable damages
under the Advisers Act.
We hold it does,
(5) Whether the complaint states a claim upon which
relief can be granted under Section 206 of the Advisers Act
and Rule 206(4)-1.
We hold it does.
We affirm the dismissal of t the Exchange Act claim; but
as to the dismissal of the Advisers Act claim, we reverse
and remand for trial.
I. FACTS
The following summary of the essential facts is believed
necessary to an understanding of our rulings on the ques-
tions presented.’ The facts are not in dispute.
Plaintiffs Robert Abrahamson and Marjorie Abraham-
son, husband and wife, were limited partners of defendant
Fleschner Becker Associates (FBA), an investment part-
nership, from its inception on July 1, 1965 until they with-
drew on September 30, 1970.
Defendants Malcolm K. Fleschner (Fleschner) and Wil-
liam J. Becker (Becker) are general partners of FBA.
Fleschner was its founder and has been a general partner
since its inception. Becker became a general partner on
April 1, 1966, Defendant Harold B. Ehrlich (Ehrlich) was
a general partner from October 1, 1968 through September
30, 1969. Defendant Harry Goodkin & Company (Goodkin)
is a firm of certified public accountants which audited FBA’s
books and certified FBA’s financial reports for the fiscal
years 1966, 1967 and 1968.
In late 1964 and in 1965 plaintiffs had several conversa-
tions with Fleschner who expressed his intention of forming
1. We assume familiarity with our prior opinion in this case,
537 F.2d 27, and that of the district court, 392 F.Supp. 740.
Appendix 13
an investinent partnership. He told plaintiffs that the part-
nership would have a conservative investment policy. Plain-
tiffs expressed their concern for financial nano and con-
servatism in their investments.
By a partnership agreement dated July 1, 1965, FBA
began as a small partnership. The original partners con-
sisted of one general partner (Fleschner) and eight limited
partners (plaintiffs, four members of Fleschner’s family
and two others). Plaintiffs’ initial contribution was $150,000.
FBA grew rapidly. By April 1, 1966 it had two general
partners and thirty-five limited partners, and by October 1,
1968 it had three general partners and sixty-six limited
partners. Each partner had an account which represented
the appreciated value of his contributions to the pooled
funds, less withdrawals and certain fees. By October 1,
1968 FBA’s assets were approximately $60 million.
For managing the partnership investments, the general
partners received substantial fees. They were paid 20%
of FBA’s net profits and net capital gains for each fiscal
year. In addition, the partnership agreement of October 1,
1968 provided for an annual salary of $25,000 for each
general partner who managed the partnership’s invest-
ments.
The limited partners did not participate in managing the
partnership’s investments. A limited partner could with-
draw all or part of the balance in his capital account at the
end of any fiscal year (September 30), provided that he
gave the required advance notice. Prior to October 1, 1968,
30 days notice was required; thereafter, 60 days notice was
required. There were similar notice requirements for with-
drawal from membership in the partnership.
With the increase in the number of limited partners and
the concomitant increase in the size of the firm’s assets,
certain changes were made in the structure of the partner-
14 Appendiz
ship. The original July 1, 1965 partnership agreement was
superseded by a new agreement dated April 1, 1966 which
in turn was superseded by the October 1, 1968 agreement.
The principal change effected by the 1966 agreement was
the addition of Becker as a general and managing partner
_and the inclusion of additional limited partners. The 1968
agreement, in addition to authorizing salaries of $25,000
per year for those general partners who managed the part-
nership’s investments, included Ehrlich as a_ general
partner; added a large number of limited partners; ex-
panded and detailed the stated purposes of the partnership ;
and made a number of other changes referred to below.
During the period plaintiffs were limited partners of
FBA the general partners mailed monthly reports to all
of the firm’s limited partners. These reports were con-
cise, two paragraph statements which set forth the percent-
age increase or decrease in the value of the firm’s
investments for the year to date and compared this per-
formance with Standard & Poor’s 500 Stock Average.
The reports also included statements of the firm’s invest-
ment policy. Between November 1967 and April 1968 the
reports repeatedly represented that FBA was maintaining
a “low risk stance” and “a most conservative posture.”
In addition to the monthly reports, during 1967 and 1968
Goodkin mailed to the limited partners certified year end
financial reports. These financial reports included balance
sheets which showed the total of FBA’s investments in
securities, The balance sheets of September 30, 1967 and
September 30, 1968 did not disclose that the firm was invest-
ing in unregistered securities.* Investments in such securi-
2. For examples of these representations in the monthly reports,
see the district court opinion, 392 F.Sunn. at 742 n.2.
3. Unregistered securities are securities which are not registered
with the Securities and Exchange Commission. They have only a
limited market and are subject to restrictions as to further sale.
Appendix 15
ties were included in the aggregate of all portfolio
investments. The value of FBA’s total investments in
securities was denominated as the “market value” of the
securities.
Despite the representations in the monthly reports that
FBA’s investments were most conservative and of low
risk, between September 1967 and September 1968 the
firm increased its investments in unregistered securities
from approximately 15% to approximately 72% of its
portfolio. Between September 1968 and September 1969
the firm’s investments in unregistered securities fluctuated
from about 72% to 88% of its portfolio.* During this latter
period the monthly reports continued not to disclose the
firm’s sizable investments in unregistered securities.
In either December 1969 or January “1970 plaintiffs
received the financial report for the fiscal year ending Sep-
tember 30, 1969. This report was not prepared by Goodkin,
but by another accounting firm. A footnote to this report
disclosed that approximately 77% ($30,411,868) of FBA’s
total investments in securities ($39,355,310) consisted of
unregistered securities. The firm’s total assets as of Sep-
tember 30, 1969 were $51,747,995.
Plaintiffs first learned of FBA’s substantial investments
in unregistered securities from the September 30, 1969
report. Having received this report in December 1969 or
January 1970, it was too late for them to withdraw from
the firm, in accordance with the partnership agreement, at
the end of the fiscal year which ended September 30, 1969.
Plaintiffs did withdraw at the end of the following fiscal
4. In their complaint in the instant action, plaintiffs alleged tha
during the period they were limited partners the firm made be-
tween 40 and 80 separate purchases of unregistered securities, in-
eluding the securities of more than 40 different issuers. They al-
leged that most of these purchases took place after 1967.
16 Appendix
year, on September 30, 1970. This was the earliest they
could withdraw their investments or as partners under the
terms of the partnership agreement.
During the five year period they were limited partners,
both plaintiffs received substantial net profits.’ Robert
Abrahamson realized a net profit of $156,097; Marjorie
Abrahamson a net profit of $133,081.35.
Both plaintiffs claim that as of late 1968 their invest-
ments were worth considerably more than indicated by the
firm’s financial reports, and that the firm incurred substan-
tial losses on its investments in unregistered securities.
Without apportioning between losses sustained from in-
vestments in unregistered securities and other losses,®
Robert Abrahamson claims that between September 30,
1968 and the date of his withdrawal his capital account
sustained losses totalling $454,979. Marjorie Abrahamson
claims total losses of $799,821 during this period.
Plaintiffs commenced the instant action in the Southern
District of New York on January 25, 1971. Jurisdiction
was invoked under Section 27 of the Exchange Act, 15
U.S.C. § 78aa (1970), and Section 214 of the Advisers Act,
15 U.S.C. § 80b-14 (1970). The complaint embodies the
claims stated above and summarized in our prior opinion.
537 F.2d 27.
5. See the schedule set forth in the district court opinion, 392
F.Supp. at 743, showing plaintiffs’ capital ‘contributions, interim
withdrawals, final distributive shares and net profits.
6. Plaintiffs claim that they are entitled to recover the differ-
ence between what they received when they withdrew from the
partnership in 1970 and what they would have received had they
withdrawn as of September 30, 1968. Accordingly they did not
attempt an apportionment between losses attributable to excessive
investments in unregistered securities and losses from unchallenged
investments.
Appendix 17
Both sides having moved for summary judgment, Judge
Carter on March 4, 1975 filed an opinion, 392 F.Supp. 740,
granting defendants’ motions and denying plaintiffs’
motion. Without reaching the merits of plaintiffs’ claims
under either the Exchange Act or the Advisers Act, the
judge held that, since plaintiffs had realized a net profit
on their overall five-year investments in FBA, they had
failed to prove damages compensable under the federal
securities laws. From the judgment entered March 27, 1975
dismissing the compliant, the instant appeal has been taken.
II. EXCHANGE ACT CLAIM
We need not tarry with plaintiffs’ claim under Section
10(b) of the 1934 Act and Rule 10b-5 for we find that each
of the arguments urged by plaintiffs in support of that
claim is without merit.
[1, 2] First, in an effort to meet the requirement of
Section 10(b) and Rule 10b-5 that they must allege a fraud
“in connection with the purchase or sale of any security,’””
plaintiffs argue that their interest in FBA was a “security”
and that the modifications of the partnership agreement in
1968 constituted an exchange of one security for another.®
7. This is the familiar provision of both Section 10(b) and Rule
10b-5. Obviously, the fraud alleged by plaintiffs was not “in connec-
tion with” either their initial investment in the partnership on July
1, 1965 or their withdrawal from the firm on September 30, 1970.
8. The principal modifications relied on by plaintiffs in their
effort to show that the September 30, 1968 partnership agreement
fundamentally changed the nature of their investment were : expan-
sion of the general partners’ authority to invest in other businesses
and to make loans; authorization of $25,000 per year salaries for
managing partners; shortening of the notice requirement for year
end withdrawals of capital; provision for automatic termination
of the partnership after ten years; and authorization for amend-
ment of the partnership agreement by a vote of one-half of the
limited partnership interests and two-thirds of the general partner-
ship interests, rather than by the Executive Committee of the gen-
eral partners as before.
18 Appendix
In support of this theory, plaintiffs rely on cases which
have held that significant modifications in the rights of
security holders may constitute a “sale” of one security
and “purchase” of another under Section 10(b) and Rule
10b-5, Ingenito v. Bermec Corp., 376 F.Supp. 1154, 1179-82
(S.D.N.Y.1974) ; or a “sale” or “issue” of a security under
the Public Utility Holding Company Act of 1935, SEC v.
Associated Gas & Elec. Co., 24 F.Supp. 899 (S.D.N.Y.),
aff’d, 99 F.2d 795 (2 Cir. 1938) ; or an “issue” of stock under
the Interstate Commerce Act, United States v. New York,
New Haven & Hartford R. Co., 276 F.2d 525 (2 Cir. 1959),
cert. dented, 362 U.S. 961 (1960). We do not believe that
this line of cases supports plaintiffs’ claim in the instant
ease. Before changes in the rights of a security holder can
qualify as the “purchase” of a new security under Section
10(b) and Rule 10b-5, there must be such significant change
in the nature of the investment or in the investment risks
as to amount to a new investment. We hold that the modi-
fications effected by the adoption of a new partnership
agreement on September 30, 1968 did not constitute the
“purchase” and “sale” of new securities.
[3] Second, plaintiffs argue that they are entitled to
recover under Section 10(b) and Rule 10b-5 because they
were fraudulently induced not to sell their partnership
interests. They say that they would have withdrawn from
the firm in 1968 if defendants had not misrepresented the
true nature of the firm’s investments at that time. The
short answer to this branch of plaintiffs’ argument is that
the requirement of fraud in connection with the purchase
or sale of a security is not satisfied by an allegation that
plaintiffs were induced fraudulently not to sell their securi-
ties. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723,
737-38 (1975).
Appendix 19
We affirm the dismissal of plaintiffs’ Exchange Act
claim.’
Ill. ADVISERS ACT CLAIM
We come next to what we consider to be the chief ques-
tion presented on this appeal—whether the complaint states
a claim upon which relief can be granted under Section
206 of the Investment Advisers Act of 1940 (the Act)*® and
Rule 206(4)-1 thereunder.”
9. Our affirmance of the dismissal of the Exchange Act claim is
on the ground that the complaint fails to state a claim upon which
relief can be granted—not on the ground relied upon by the dis-
trict court for dismissal, namely, that, since plaintiffs had realized
a net profit on their overall limited partnership investment, they
had failed to pi ,ve damages compensable under the federal securi-
ties laws. We shall discuss this ground of the district court decision
under the Advisers Act claim, Section III, infra.
10. Section 206 of the Investment Advisers Act of 1940, 15
U.S.C. § 80b-6 (1970), in relevant part provides:
“Tt shall be unlawful for any investment adviser by use of
the mails or any means or instrumentality of interstate com-
merce, directly or indirectly—
(1) to employ any device, scheme, or artifice to defraud
any client or prospective client;
(2) to engage in any transaction, practice, or course of
business which operates as a fraud or deceit upon any client
or prospective client;
e * @
(4) to engage in any act, practice, or course of business
which is fraudulent, deceptive, or manipulative. The Commis-
sion shall, for the purposes of this paragraph (4), by rules
and regulations, define, and prescribe means reasonably de-
signed to prevent, such acts, practices, and courses of business
as are fraudulent, deceptive, or manipulative.”
11. Rule 206(4)-1, 17 C.F.R. § 275.206(4)-1 (1976), in relevant
part provides:
“(a) It shall constitute a fraudulent, deceptive, or manipu-
lative act, practice or course of business within the meaning
of section 206(4) of the Act, for any investment adviser, di-
rectly or indirectly, to publish, circulate or distribute any ad-
vertisement :
@ Ss €
20 Appendix
The subordinate questions which we must consider in
connection with this claim are (1) whether any of the
defendant general partners are “investment advisers”
within the meaning of Section 202(a)(11) of the Act, (2)
whether there is an implied private right of action for dam-
ages under the Act; and (3) whether plaintiffs have alleged
compensable damages under the Act.
For the reasons below, we answer each of these questions
in the affirmative. Accordingly, we reverse the dismissal of
the Advisers Act claim and remand the case for trial on
that claim.”
(5) Which contains any untrue statement of a material
fact, or which is otherwise false or misleading.
(b) For the purposes of this section the term ‘advertise-
ment’ shall include any notice, circular, letter or other written
communication addressed to more than one person, or any
notice or other announcement in any publication or by radio
or television, which offers (1) any analysis, report, or publi-
cation concerning securities, or which is to be used in making
any determination as to when to buy or sell any security, or
which security to buy or sell, or (2) any graph, chart, for-
mula, or other device to be used in making any determination
as to when to buy or sell any security, or which security to
buy or sell, or (3) any other investment advisory service with
regard to securities.”
12. Section 202(a)(11) of the Investment Advisers Act, 15
U.S.C. § 80b-2(a)(11) (1970), in relevant part provides:
““TInvestment adviser’ means any person who, for compen-
sation, engages in the business of advising others, either di-
rectly or through publications or writings, as to the value of
securities or as to the advisability of investing in, purchasing,
or selling securities, or who, for compensation and as part of
a regular business, issues or promulgates analyses or reports
concerning securities... .”
13. It was the Advisers Act claim to which we invited the par-
ties and the SEC as amicus curiae to address their supplemental
briefs when we filed our interim opinion following oral argument
of this appeal. 537 F.2d at 28. We express our appreciation for the
helpful briefs from counsel for all parties and the SEC in response
to our invitation.
Appendix 21
(1) “Investment Advisers” Under Section 202(a)(11)
[4] Turning first to the threshold question whether any
of the general partner defendants are “investment advis-
ers” within the meaning of Section 202(a)(11), we hold
that they are.
It is clear from the record that the general partners
received substantial compensation for managing the limited
partners’ investments. Each of the three partnership agree-
ments in effect between 1965 and 1970 provided that the
general partners would be paid for their services 20% of
the firm’s net profits and net capital gains for each fiscal
year. In addition, the partnership agreement of October 1,
1968 authorized an annual salary of $25,000 for each gen-
eral partner who managed investments.
Since the general partners received compensation for
their investment services, the only remaining inquiry under
the statute is whether they were “engage[d] in the business
of advising others” with respect to investments. On two
independent grounds, we believe they were.
First, the monthly reports which contained the alleged
fraudulent representations were reports which provided
investment advice to the limited partners. The general
partners’ compensation depended in part upon the firm’s
net profits and capital gains. These in turn were affected
by the size of the total funds under their control. The
monthly reports were an integral part of the general part-
ners’ business of managing the limited partners’ funds, In
Likewise we invited the parties and the SEC as amicus curiae,
in connection with appellees’ petitions for rehearing, to file further
supplemental briefs on the issue of whether the general partners of
defendants Fleschner Becker Associates were investment advisers
within the meaning of the Advisers Act (the issue dealt with below
in section III(1) of this opinion). Such further supplemental briefs
were filed and considered by us. The petitions for rehearing were
denied and the panel opinions were adhered to.
22 Appendix
deciding whether or not to withdraw their funds from the
pool, the limited partners necessarily relied heavily on the
reports they received from the general partners.
Second, wholly aside from the monthly reports, we be-
lieve that the general partners as persons who managed
the funds of others for compensation are “investment ad-
visers” within the meaning of the statute. This is borne
out by the plain language of Section 202(a)(11) and its
related provisions, by evidence of legislative intent and
by the broad remedial purposes of the Act.
[5] The Investment Companies Act of 1940 and the com-
panion Investment Advisers Act (Title II of the same
enactment) were among statutes designed to eliminate cer-
tain abuses in the securities industry which were found to
have contributed to the stock market crash of 1929 and
the depression of the 1930s. SEC v. Capital Gains Research
Bureau, Inc., 375 U.S. 180, 186 (1963). The 1940 legislation
was based upon exhaustive studies by the SEC which cul-
minated in a number of extensive reports on investment
trusts, investment companies and investment advisers. The
Investment Companies Act and the Advisers Act were
intended to cover important areas of the securities industry
which had not been covered by the earlier statutes. The
Investment Companies Act is concerned with investment
companies and other persons, including certain investment
advisers, who deal with investment companies. The Ad-
visers Act covers all investment advisers.
As stated in Section 201 of the Advisers Act, 15 U.S.C.
§ 80b-1 (1970), that Act was based upon the findings and
recommendations set forth in an SEC Report on investment
counsel and advisory services. Securities and Exchange
Commission, Investment Counsel, Investment Management,
Investment Supervisory and Investment Advisory Services,
Appendix 23
H.R.Doc. No. 477, 76th Cong., 2d Sess., 1 (1939) (herein-
after “SEC Report”). The SEC Report referred to two
types of investment advisers: (1) those with management
powers over their clients’ funds and the power to make
purchases and sales for their clients (“discretionary”), and
(2) those who merely made recommendations to their
clients (“advisory”). SEC Report at 13. It noted the con-
spicuous need for regulation of individuals “who may
solicit the funds of the public to be controlled, managed,
and supervised ... .” (emphasis added) SEC Report at
28. The report made it clear that its findings and recom-
mendations were intended to cover persons who made pur-
chases and sales of securities with their clients’ funds.
The House and Senate Committee reports also make
clear the intent of Congress. The Report of the Senate
Committee on Banking and Currency which accompanied
the bill to the Senate floor stated:
“The report of the Commission to the Congress and
the record before the committee is clear that the solu-
tion of the problems and abuses of investment advisory
services—individuals and companies which either han-
dle pools of liquid funds of the public or give advice
with respect to security transactions—cannot be
effected without Federal legislation.
Virtually no limitations or restrictions exist with
respect to the honesty and integrity of persons who
may solicit funds to be controlled, managed, and super-
vised.” (emphasis added) S.Rep. No. 1775, 76th Cong.,
3d Sess., 21 (1940).
14. In its general statement on the background to the Advisers
Act, the Senate Report stated:
“Similarly, it is difficult definitely to estimate the amount of
funds under the influence or control of investment advisers.
However, some idea of the size of the funds administered by
investment advisers may be deduced from the fact that 51
firms for which information was obtainable by the Commission
managed, supervised and gave investment advice with respect
to funds aggregating approximately $4,000,000,000.” (empha-
sis added) S.Rep., supra at 21.
i
24 Appendix
Similarly, the House Committee on Interstate and Foreign
Commerce noted in its report the need to regulate firms
which “managed, supervised, and gave investment advice”
with respect to clients’ funds. H.R.Rep. No. 2639, 76th
Cong., 3d Sess., 27 (1940).**
[6] In short, as for legislative intent, we believe that the
SEC Report, together with the House and Senate Reports,
make it clear that Congress intended to reach persons who
receive compensation for investing funds of their clients.
[7,8] Moreover the plain language of Section 202(a) (11)
and related provisions of the Act bear out this legislative
intent. Section 202(a)(11) includes any person who “ad-
vises” others with respect to investments. Section 203(c) (1)
(D), 15 U.S.C. § 80b-3(c)(1)(D) (1970), requires the in-
vestment adviser to disclose the nature and scope of his
“authority . . . with respect to clients’ funds and accounts”
in his registration statement. And Section 205, 15 U.S.C.
§ 80b-5 (1970), establishes certain standards for investment
advisers with respect to “investment advisory contracts”
which include contracts “to act as an investment adviser or
to manage any investment or trading account... .” These
provisions reflect the fact that many investment advisers
“advise” their customers by exercising control over what
purchases and sales are made with their clients’ funds,
15. In 1960 and again in 1970, Congress considerably broad-
ened the coverage of the Advisers Act. The Senate Report accom-
panying the bill which contained the 1960 amendments to the Act
stated, with particular application here:
“There are at present over 1214 million individuals in the
United States who own corporate securities, nearly double
those in 1952. It has been noted that this new group offers
strong temptation to confidence men and swindlers who may
give them biased advice or misuse their funds or securities.”
(emphasis added) S.Rep. No. 1760, 86th Cong., 2d Sess. 4
by? reprinted in [1960], U.S. Code Cong. & Admin.News,
at 3502.
Appendix 25
We hold that the defendant general partners of FBA are
investment advisers within the meaning of Section 202(a)
(11) of the Act.”*
(2) Private Right of Action Under Section 206
[9] As with other provisions of the federal securities
laws under which the courts have found implied private |
rights of action, Section 206 of the Advisers Act does not —
16. Defendant Harry Goodkin & Company argues that, since it
was not an “investment adviser” it cannot be held liable for aiding
and abetting a fraud committed by those who were investment ad-
visers. Goodkin points out that Section 206 applies only to an invest-
ment adviser and that Section 202(a)(11)(B) excludes from the
definition of an investment adviser an accountant acting in the
practice of his profession. We agree that the exemption excludes an
accountant’s usual activities from the scope of the Act and excludes
the accountant from coverage under the registration provisions and
many of the other regulatory provisions of the Act even if the ac-
countant is employed by an investment adviser. But the exemption
does not shield the accountant from liability under the antifraud
provisions of the Act if the accountant aids and abets an invest-
ment adviser with knowledge that his conduct is assisting an in-
vestment adviser in defrauding a client. Cf. Section 209(e) of the
Act, 15 U.S.C. § 80b-9(e) (1970), which authorizes the SEC to
seek injunctive relief and, if necessary, to recommend criminal
proceedings against those who “aid, abet [or] counsel” violations
of the Act. In view of the limitation of Section 206 to investment
advisers, however, we believe that before Goodkin can be held liable
as an aider and abetter, there must be a showing that Goodkin:
(a) knew of the investment adviser-client relationship; (b) had
knowledge of the fraud; and (c) acted in concert with the invest-
ment adviser. Cf. Ernst & Ernst v. Hochfelder, 425 U.S. 185
(1976).
Whether Goodkin is liable for aiding and abetting the investment
advisers is one of the issues to be determined at trial pursuant to
our remand.
As to whether FBA itself is a proper defendant with respect to
the Advisers Act claim, for aught that appears in the record before
us, we have serious doubts. The general partners as individuals, not
FBA as an entity, were the investment advisers. If upon remand,
and after a hearing, the district court finds no more than the record
now discloses with respect to the liability of FBA itself under the
Advisers Act claim, it should dismiss as against the firm.
26 Appendix
expressly authorize private actions. We therefore must
decide whether a private right of action is to be implied
under that section. For the reasons below, we hold that it
a
[10] The Supreme Court has recognized in a variety of
contexts that private rights of action may be implied in
favor of the intended beneficiaries of a statute where neces-
sary to implement the statute’s underlying purposes. Super-
intendent of Insurance v. Bankers Life & Casualty Co., 404
US. 6, 13 n.9 (1971); J. I. Case Co. v. Borak, 377 U.S. 426
(1964); Tunstall v. Brotherhood of Locomotive Firemen
and Enginemen, 323 U.S. 210 (1944); Texas & Pacific R.R.
v. Rigsby, 241 U.S. 33 (1916). Cf. Bivens v. Six Unknown
17. The SEC has submitted to Congress a number of proposed
amendments to the Advisers Act. One would provide explicitly for
private actions under the Advisers Act. See Investment Advisers
Act Release No. 491, 8 SEC Docket 744 (December 15, 1975). In
announcing its proposal, the SEC repeated its view that the exist-
ing language was sufficient to imply a private right of action. Its
proposal was intended to put to rest those few decisions which had
found no implied right of action.
In the two district court cases in this Cireuit in which the issue
has been considered, the court has held that an implied right of
action exists under the Advisers Act. Jones v. Equitable Life As-
surance Society, 409 F.Supp. 370 (S.D.N.Y. 1975) ; Bolger v. Lav-
enthol, Krekstein, Horwath & Horwath, 381 F.Supp. 260 (S.D.N.Y.
1975). Accord, Angelakis v. Churchill Management Corp., CCH
Fed.Sec.L.Rep. {95,285 (N.D.Cal. 1975). Contra, Gammage v.
Roberts, Scott & Co., CCH Fed.Sec.L.Rep. {| 94,761 (S.D.Cal.
1974) ; Greenspan v. Eugene Campos Del Toro, 73-638-Civ. (S.D.
Fla. May 17, 1974).
The commentators who have reviewed these decisions agree that
a private right of action should be implied under the Advisers Act.
Note, Private Causes of Action Under Section 206 of the Invest-
ment Advisers Act, 74 Mich.L.Rev. 308 (1975) ; Lybecker, Advisers
Act Developments, 8 Review of Securities Regulations 927, 934
(April 23, 1975) ; Note, Bolger v. Laventhol, Krekstein, Horwath
& Horwath: Private Rights of Action Under the Investment Ad-
visers Act, 48 Temple L.Q. 483 (1975).
Appendix 27
Named Agents, 403 U.S. 388 (1971) ; Bell v. Hood, 327 US.
678 (1946).
There are compelling reasons why the courts have been
particularly willing to recognize private rights of action
under the antifraud provisions of the federal securities
laws. Those provisions are designed to protect specific
classes of injured parties. Moreover the SEC—the agency
charged with administration and enforcement of the federal
securities laws—does not have sufficient resources alone
to enforce the many provisions of the statutes. Absent
judicial recognition of private rights of action, the federal
securities laws most assuredly would fail to provide the
effective regulation over the securities industry which Con-
gress intended. In finding an implied right of action under
Section 14(a) of the 1934 Act, the Supreme Court held in
J. I. Case Co. v. Borak, swpra, 377 U.S. at 432, that “Private
enforcement .. . provides a necessary supplement to Com-
mission action”, and went on to state: |
“TT]t is the duty of the courts to be alert to provide such
remedies as are necessary to make effective the congres- |
sional purpose.” Jd. at 433.
[11] Applying these principles, the courts of appeals
consistently have recognized an implied right of action
under the Investment Companies Act—the companion to
the Advisers Act. Moses v. Burgin, 445 F.2d 369 (1 Cir.),
cert. denied, 404 U.S. 994 (1971); Herpich v. Wallace, 430
F.2d 792, 815 (5 Cir. 1970) ; Esplin v. Hirschi, 402 F.2d 94,
103 (10 Cir. 1968), cert. denied, 394 U.S. 928 (1969) ; Taus-
sig v. Wellington Fumd, Inc., 313 F.2d 472, 476 (3 Cir.),
cert. denied, 374 U.S. 806 (1962); Brown v. Bullock, 194
F.Supp. 207 (S.D.N.Y.), aff’d, 294 F.2d 415, 420-21 (2 Cir.
1961) (en banc). It is well settled that implied rights of
action exist under Section 10(b) of the 1934 Act and Rule
28 Appendix
10b-5, which contain substantially the same language as
Section 206 of the Advisers Act. Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723, 730 (1975); Superin-
tendent of Insurance v. Bankers Life & Casualty Co., supra,
404 U.S. at 13 n.9; Fischman v. Raytheon Mfg. Co., 188 F.2d
783, 787 (2 Cir. 1951); Kardon v. National Gypsum Co.,
69 F.Supp. 512 (E.D.Pa.1946). Judicially implied rights of
action also have been found under Section 14(a) of the
1934 Act, J. I. Case Co. v. Borak, swpra, and under the
Publie Utility Holding Company Act of 1935, Goldstein v.
Groesbeck, 142 F.2d 422 (2 Cir.), cert. denied, 323 U.S. 737
(1944).
Against this background, we turn to the question whether
a private right of action should be implied under Section
206 of the Advisers Act.
In Cort v. Ash, 422 U.S. 66, 78 (1975), the Supreme
Court suggested that the following factors be considered
in determining “whether a private remedy is implicit in a
statute not expressly providing one”:
“First, is the plaintiff ‘one of the class for whose
especial benefit the statute was enacted’. . . —that is,
does the statute create a federal right in favor of the
plaintiff? Second, is there any indication of legislative
intent, explicit or implicit, either to create such a
remedy or to deny one?... Third, is it consistent with
the underlying purposes of the legislative scheme to
imply such a remedy for the plaintiff? ... And finally,
is the cause of action one traditionally relegated to
state law, in an area basically the concern of the States,
so that it would be inappropriate to infer a cause of
action based solely on federal law?” (emphasis in
original)
We believe that each of these factors point unmistakably
toward recognition of an implied right of action under
Appendix 29
Section 206 of the Advisers Act. See Piper v. Chris Craft
Industries, Inc., 430 U.S. 1, 37-45 (1977).
[12] The purpose of the Advisers Act was “to protect
the public and investors against malpractice by persons
paid for advising others about securities.”"* The Act was
designed for the “especial” benefit of persons relying upon
their investment advisers for advice. SEC v. Capital Gains
Research Bureau, Inc., 375 U.S. 180, 186-91 (1963).
Congress enacted the Advisers Act, as it had earlier
securities legislation, mindful of the need for federal regu-
lation of the securities industry. As the Senate Committee
Report emphasized :
“The nature of the functions of investment advisers,
their increasing widespread activities, their potential
influence on security markets and the dangerous poten-
tialities of steck market tipsters imposing upon un-
sophisticated investors, convinces the committee that
protection of investors requires the regulation of in-
vestment advisers on a national scale.
The report of the Commission to the Congress and
the record before the committee is clear that the solu-
tion of the problems and abuses of investment advis-
ory services ... cannot be effected without Federal
legislation.” (emphasis added) S.Rep. No. 1775, 76th
Cong., 3d Sess. 21 (1940).
18. S.Rep. No. 1760, 86th Cong., 2d Sess., 1 (1960).
The House Committee Report which accompanied the 1940 bill
stated :
“The essential purpose of title II of the bill is to protect the
public from the frauds and misrepresentations of unscrupu-
lous tipsters and touts and to safeguard the honest invest-
ment adviser against the stigma of the activities of these indi-
viduals by making fraudulent practices by investment advis-
ers unlawful.” H.R.Rep. No. 2639, 76th Cong., 3d Sess., at 28
(1940). '
30 Appendix
We are not aware of any statement indicating that
Congress considered the problem of private actions under
the Advisers Act at the time of its enactment. Nor is there
any indication that the SEC considered this matter when
it adopted Rule 206(4)-1. Absent specific statements of
legislative intent, we must examine the legislative purposes
underlying the Act.
As stated above, the courts consistently have recognized
that the Commission’s resources are inadequate to the task
of policing alone the federal securities laws. In enacting the
1940 legislation, Congress intended to provide effective
federal regulation of an important segment of the securities
industry. Failure to recognize a private right of action
under the Advisers Act would effectively frustrate that
purpose, We hesitate to reach such a result absent clear
evidence from the Act’s legislative history that private
actions were not intended.
Turning to related provisions of the Advisers Act, Sec-
tion 215(b), 15 U.S.C. § 80b-15(b) (1970), provides that any
contract in violation of the Act shall be void. As the courts
have held in construing nearly identical provisions of the
other securities acts, the language of Section 215(b)
strongly suggests that a private remedy should be implied
and that such a remedy would be consistent with the other
provisions of the Act. Fischman v. Raytheon Mfg. Co.,
supra, 188 F.2d at 787 n.4; Kardon v. National Gypsum,
Co., supra, 69 F.Supp. at 514; see Slavin v. Germantown
Fire Ins, Co., 174 F.2d 799, 815 (3 Cir. 1949).
[13] In arguing that a private right of action should not
be recognized under the Advisers Act, appellees point to the
difference between the language found in the jurisdictional
provision of the Advisers Act and similar provisions of
Appendix 31
other securities acts.2® Section 214 of the Advisers Act, 15
U.S.C. § 80b-14 (1970) in relevant part provides:
“The district courts of the United States . . . shall
have jurisdiction of violations of this subchapter or the
rules, regulations, or orders thereunder, and, con-
currently with State and Territorial courts, of all
suits in equity to enjoin any violation of this sub-
chapter or the rules, regulations or orders there-
under.”
By contrast, Section 22 of the 1933 Act, 15 U.S.C. § 77v
(1970), Section 27 of the 1934 Act, 15 U.S.C. § 78aa (1970),
and Section 44 of the Investment Companies Act, 15 U.S.C.
§ 80-a-43 (1970), provide that the district courts shall have
jurisdiction of “all suits in equity and actions at law
brought to enforce any liability or duty created by” those
Acts,
Appellees argue that the omission of any reference to
“actions at law” in Section 214 manifests a legislative in-
tent to preclude private rights of action under the Advisers
19. Appellees also argue that recognition of a private right of
action would be inconsistent with Section 209(e) of the Act and
other enforcement provisions which provide that the Commission
“may in its discretion bring an action” for injunctive relief. We
find no merit in this argument. The enforcement powers given the
Commission under the Advisers Act are virtually ident cal to those
of the other securities acts under which we have recognized implied
private rights of action. Unlike the Securities Investor Protection
Act, which was involved in Securities Investor Protection Corp. v.
Barbour, 421 U.S. 412 (1975), the Advisers Act in general, and the
antifraud provisions in particular, do not manifest a specific legis-
lative intent to restrict enforcement to the Commission. Here, pri-
vate suits would be consistent with Commission action. The provi-
sion allowing the Commission the usual discretion to sue simply
makes it clear that the SEC is not compelled to sue in every case.
Indeed it would be extraordinary for Congress to require an agency
to bring enforcement proceedings in every instance. The Court in
Barbour distinuished J. I. Case Co. v. Borak, where the Court had
found private suits a necessary supplement for—rather than a hin-
drance to—Commission action. 421 U.S. at 423.
32 Appendix
Act. We disagree. In our view, the reason for this omission
is that each of the other Acts whose jurisdictional provisions
refer to “actions at law” contains one or more sections
expressly granting injured parties a private right of action
for damages.” There is no provision in the Advisers Act
which expressly provides for private actions; since it is a
less complex statute, containing no express grants of right
of action to private parties, a reference to “actions at law”
would be superfluous.
There is not a shred of evidence in the legislative his-
tory of the Advisers Act to support the assertion that
Congress intentionally omitted the reference to “actions at
law” in order to preclude private actions by investors. Sec-
tion 214, like the jurisdictional provisions of the other
securities acts, was drawn to provide jurisdiction over
actions expressly authorized by the statute. Far from
indicating that Congress ever considered the matter of
private actions in drafting Section 214, the only legislative
history indicates that Congress attached no great import-
ance to its omission. In their only references to Section 214,
both the Senate and House Reports stated that the enforce-
ment provisions of the Advisers Act were “generally com-
parable” to those of the Investment Companies Act whose
jurisdictional provision contains the “actions at law”
language. S.Rep. No. 1775, 76th Cong., 3d Sess., at 23
20. See Sections 11 and 12 of the 1933 Act, 15 U.S.C. §§ 77k
and 771 (1970); Sections 9(e), 16(b) and 18 of the 1934 Act, 15
U.S.C. §§ 78i(e), 78p(b) and 78r (1970) ; Sections 16(a) and 17(b)
of the Public Utility Holding Company Act of 1935, 15 U.S.C.
§§ 79p(a) and 79q(b) (1970) ; Section 323(a) of the Trust Inden-
ture Act of 1939, 15 U.S.C. § 77www(a) (1970) ; and Section 30(f)
of the Investment Companies Act of 1940, 15 U.S.C. § 80a-29(f)
(1970).
Appendix 33
(1940); H.R.Rep. No. 2639, 76th Cong., 3d Sess., at 30
(1940) 72
In dealing with private rights of action under other
securities acts, courts have referred to the “actions at law”
language under the jurisdictional provisions to indicate
the overall structure of those acts, But the “actions at law”
language has never been relied upon as evidence that Con-
gress explicitly considered the matter of private damage
actions under the particular substantive provision in ques-
tion. Had Congress provided explicitly for private damage
actions it would be unnecessary to consider whether the
remedy should be judicially implied. Indeed, under the
anti-fraud provisions of other securities acts courts have
recognized the absence of any legislative intent either to
create or to deny private rights of action for damages. Here,
as under the other statutes, it is clear that Congress simply
did not consider the matter.”
21. As originally introduced in the House and Senate, the pro-
posed Advisers Act merely incorporated the jurisdictional provi-
sion of the Investment Companies Act. Section 203 of S. 3580 and
H.R. 8935. The Investment Companies Act, in turn, had adopted
the same language as found in Section 25 of the Public Utility
Holding Company Act of 1935, 15 U.S.C. § 79y. Section 40(a) (1)
of S. 3580 and H.R. 8935. As reported out of the committees, the
bills omitted all references to other statutes; and the Advisers Act
was given its own jurisdictional provision which did not contain
any reference to “actions at law brought to enforce any liability
22. We need not decide whether the language of Section 214
which grants to the district courts jurisdiction over “violations of
this subchapter or the rules, regulations, or orders thereunder”
might cover private damage actions. See Bolger v. Laventhol, Krek-
stein, Horwath & Horwath, supra, 381 F.Supp. at 264. Courts have
implied private rights of action under statutes which have no sep-
arate jurisdictional provision for civil damage suits, Texas & Pacific
R.R. Co. v. Rigsby, supra, 214 U.S. at 39; Odell v. Humble OW &
Refining Co., 201 F.2d 123, 126 (10 Cir. 1953); Narramore v.
Cleveland, C.C. & St.L. Ry. Co., 96 F. 298, 300 (6 Cir. 1899).
Moreover, the general federal question jurisdictional provision, 28
U.S.C. § 1831 (1970), would apply here. See Brown v, Bullock,
supra, 294 F.2d at 418.
34 Appendix
The Supreme Court, in considering a different issue
under the Advisers Act in SEC v. Capital Gains Research
Bureau, Inc., supra, 375 U.S. at 195, emphasized that the
Act should “be construed like other securities legislation
‘enacted for the purpose of avoiding frauds,’ not technically
and restrictively, but flexibly to effectuate its remedial
purposes.” (footnote omitted). We find that particularly
cogent here where we are asked to determine whether there
should be a private right of action to recover damages for
what may be clear violations of the Act. Moreover, mind-
ful of the Supreme Court’s admonition in J. I. Case Co. v.
Borak, swpra, 377 U.S. at 433, we believe that we should
provide “such remedies as are necessary to make effective
the congressional purpose”, rather than adopt a construc-
tion that would effectively defeat the purpose of providing
federal regulation over an important segment of the securi-
ties industry.
We hold that there is an implied private right of action
under Section 206 of the Advisers Act.
23. Our concurring-dissenting colleague, in a characteristically
thoughtful and innovative opinion, urges that a private right of
action for damages should not be implied under the Advisers Act.
We suggest that Judge Gurfein’s opinion be read in the light of
the following observations.
First, the basic premise of the dissent is the assumption that the
Advisers Act was intended to provide “a compulsory census of in-
vestment advisers, and not . . . a pervasive regulatory scheme.”
(emphasis added) Post, 879, 883. A careful reading of the Advisers
Act shows that, as enacted, it requives far more than a census, As
the last of the series of federal securities laws enacted between 1933
and 1940, it is an integral part of a comprehensive regulatory
scheme intended by Congress to eliminate certain abuses in the
securities industry. The Supreme Court in SEC v. Capital Gains
Research Bureau, Inc., supra, in referring to a fundamental pur-
pose of the Advisers Act and its relationship to the other federal
securities regulatory acts, stated :
“The Investment Advisers Act of 1940 was the last in a
series of Acts designed te eliminate certain abuses in the se-
Appendix 35
(3) Compensable Damages Under the Advisers Act
[14] Appeliees contend that plaintiffs have not alleged
compensable damages under the Advisers Act. They argue
that plaintiffs themselves were neither purchasers nor sell-
ers of securities and that their claims are speculative be-
cause they are based upon the assertion that plaintiffs
would have withdrawn from FBA earlier had they been
told the truth about the partnership’s investments, We
disagree.
At the outset, we find no basis for appellees’ assumption
that plaintiffs’ only alternative, had they learned the truth
curities industry, abuses which were found to have contributed
to the stock market crash of 1929 and the depression of the
1930’s. It was preceded by the Securities Act of 1933, the
Securities Exchange Act of 1934, the Public Utility Holding
Company Act of 1935, the Trust Indenture Act of 1939, and
the Investment Company Act of 1940. A fundamental pur-
pose, common to these statutes, was to substitute a philosophy
of full disclosure for the philosophy of caveat emptor and
thus to achieve a high standard of business ethics in the securi-
ties industry. As we recently said in a related context, ‘It
requires but little appreciation . . . of what happened in this
country during the 1920’s and 1930’s to realize how essential
it is that the highest ethical standards prevail’ in every facet
of the securities industry. Silver v. New York Stock Exchange,
373 U.S. 341, 366.” (footnotes omitted) 375 U.S. at 186-87.
Second, while we do not claim the expertise of our dissenting
colleague concerning hedge funds, post, 879, & n. 1, 884, we do sug-
gest that much of the speculation of the dissent with respect to the
investment policy of the general partners as managers of the fund
(e. g. whether the partnership “was going to operate in the most
speculative of investment activities”, post, 884) and the intentions
of plaintiffs in becoming limited partners, might better await the
trial on the merits to which we have held plaintiffs are entitled. For
after all, the posture of the case as it came to us from the district
court was the dismissal of the complaint on the ground that plain-
tiffs realized a net profit on their overall limited partnership invest-
ments and therefore failed to prove damages compensable under
the federal securities laws. 392 F.Supp. 740. While this holding of
the district court is rejected, all we hold with respect to plaintiffs’
Advisers Act claim is that they are entitled to their day in court
36 Appendiz
earlier about FBA’s high percentage of investments in un-
registered securities, was to withdraw their funds. Plain-
tiffs might have tried to persuade the general partners to
conform the firm’s investments to the conservative policy
they had represented. Failing that, plaintiffs might have
mobilized the other limited partners to exert pressure on
the general partners.
We find appellees’ reliance upon Blue Chip Stamps v.
Manor Drug Stores, swpra, on this aspect of the instant
case to be misplaced.
[15] The Blue Chip decision was based on the express
language of Section 16(b) and Rule 10b-5 requiring a fraud
and an opportunity to prove their claim. Post, 879. At that time,
when the credibility of witnesses can properly be determined, many
of the speculative factual issues suggested by the dissent appropri-
ately can be resolved.
Finally, and perhaps of chief significance, the dissent does not
dispute the eloquent absence of evidence that Congress ever consid-
ered allowing damages, as distinguished from injunctive relief,
under the Advisers Act. The question of damages was not consid-
ered because the matter of a private right of action was not con-
sidered. The dissent’s massive reliance upon the omission of the
“actions at law” language in the Advisers Act and its inclusion in
the jurisdictional provisions of other statutes, we think is mis-
placed. Judicially implied private rights of action have been recog-
nized under various sections of the securities laws even though
those sections, unlike other sections of the same statutes, contain no
explicit provision for private actions, Here likewise there is no evi-
dence that the omission was meant to exclude private actions. In
this respect the present case is plainly different in a significant legal
respect from National R. R. Passenger Corp. v. National Ass’n of
R. R. Passengers, 414 U.S. 453 (1974), relied upon by the dissent,
where “the legislative history of the Amtrack Act provide[d] a
clear and convincing expression of Congress’ intent to preclude
anyone except the Attorney General and in certain situations an
employee or his duly authorized representative from maintaining
an action under the Act against petitioners” (414 U.S. at 465 (Jus-
tice Brennan concurring) ), and transportation policies not perti-
nent here militated in favor of such a limitation. No such history or
policies are to be found here.
. —
Appendix 37
“in connection with the purchase or sale of any security.’™
Neither Section 206 of the Advisers Act nor Rule 206(4)-1
contains any such requirement. While the Court stated in
Blue Chip that the purchaser-seller limitation under Sec-
tion 10(b) protected against vexatious and speculative
claims, it did not say or suggest that any claim would be
too speculative for recovery under the other securities acts
unless the plaintiff was a purchaser or seller. Indeed the
Court acknowledged that provisions of the other securities
acts afford rights of action to persons who are not pur-
chasers or sellers. 421 U.S. at 733-34.
[16] Acceptance of appellees’ contention, moreover,
would lead to a construction of the Advisers Act clearly
inconsistent with the intent of Congress. As indicated
above, Congress intended to protect investors against
frauds committed by investment advisers who managed
their clients’ funds, as well as frauds committed by ad-
visers who did not make purchases and sales for their
clients. If the claims of a client whose adviser managed his
funds were to be held to be too speculative simply because
the client failed to allege that he would have taken some
remedial action if he had known the truth, a large segment
of those investors whom Congress meant to protect would
be excluded from the Act’s coverage. To accept appellees’
24. The holding in Blue Chip was that persons who claimed that
they had been fraudulently induced not to purchase securities were
not within the class of persons protected by Section 10(b) of the
1934 Act and Rule 10b-5, under which recovery is limited to funds
“in connection with the purchase or sale” of securities. In reaffirm-
ing the doctrine of Birnbaum v. Newport Steel Corp., 193 F.2d 461
(2 Cir.), cert denied, 343 U.S. 956 (1952), the Court also stated
that “actual shareholders in the issuer who allege that they decided
not to sell their shares because of an unduly rosy representation or
a failure to disclose unfavorable material” might not be able to sue
under Section 10(b) and Rule 10b-5. Blue Chip Stamps v. Manor
Drug Stores, supra, 421 U.S. at 737-38.
“a8
38 Appendix
contention would lead to the incongruous result that an
investor’s claims would be speculative even if the adviser
had made fraudulent statements to conceal the fact that he
was stealing his client’s funds.
[17] We believe that the differences in the language and
purposes of Section 10(b) of the 1934 Act and Section 206
of the Advisers Act distinguish the instant case from Blue
Chip. We also note that the policy considerations expressed
in Blue Chip lend no support to appellees’ arguments.*
Under Section 206, the plaintiff class ‘is limited to the
investment adviser’s own clients. Since the investment
adviser is compensated for his services, both client and
adviser understand that the client will rely upon the
adviser’s judgment and advice. To characterize the client’s
reliance as speculative is to ignore the essence of the
relationship. See Galfand v. Chestnutt Corp., 545 F.2d 807
(2 Cir. 1976). Plaintiffs here allege fraudulent representa-
tions relating to specific purchases and sales of unregis-
tered securities, thus providing a definable measure of
damages. And a defrauded client may be deprived of numer-
ous means of controlling his adviser’s conduct and the
management of his investments, only one of which is the
remedy of withdrawing his funds altogether. We believe
25. In interpreting the express language of Section 10(b) and
Rule 10b-5 in Blue Chip, the Court expressed concern about suits
by persons who neither purchased nor sold securities but who
claimed that they would have purchased or sold securities but for
false representations made by someone whom they might not even
have known. The Court noted that the “purchase or sale” require-
ment protected against vexatious suits by a potentially limitless
class of plaintiffs and avoided the difficult questions of determining
whether a plaintiff would or would not have purchased or sold se-
eurities but for the defendant’s representations. Jd. at 745-47.
Far from holding that claims of persons who were neither pur-
chasers nor sellers would be too speculative under the other securi-
ties acts, the Court interpreted the express language of Section
10(b) and Rule 10b-5. And the Court expressly noted that many of
the other securities acts have no “purchase or sale” requirement.
421 U.S. at 733-34.
Appendix 39
that the limited uncertainties involved in a case such as
this are not sufficient to bar recovery on an otherwise valid
claim; and they are adequately offset by requiring proof
that the misrepresentations were material and proof of
reliance.”
[18, 19] We hold that plaintiffs have alleged damages
compensable under Section 206 of the Advisers Act.”
IV. MEASURE OF DAMAGES
_ON REMAND
In view of our remand for trial on the Advisers Act
claim, we believe that the district court is entitled to some
guidance on the proper measure of damages.
26. Even the claims of a person who has purchased or sold se-
curities are not free of uncertainties. A purchaser or seller neces-
sarily alleges that he would not have made the purchase or sale had
he known the true facts.
Although the claims of persons who neither purchased nor sold
securities, in individual cases, may be less speculative than the
claims of actual purchasers or sellers, Blue Chip weeds out suits by
persons who may have had no interest in a security until discover-
ing that someone has made a fraudulent statement which may give
rise to a lawsuit. In view of the settlement value of a securities suit,
this is an important consideration. Obviously an investor who has
paid for the advice of his adviser is not the type of disinterested by-
stander at whom the Blue Chip decision was primarily aimed.
27. It is important to note that there is no issue in this case as
to whether an investor may recover for negligent misrepresentations
by his investment adviser. See Ernst & Ernst v. Hochfelder, supra;
Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1298-1301 (2 Cir.
1973) (distinguished in Ernst & Ernst v. Hochfelder, supra, 425
U.S. at 209 n. 28); SEC v. Capital Gains Research Bureau, Inc.,
supra, Plaintiffs here have alleged that defendants’ misrepresenta-
tions were intentional. Whether defendants thought that the price
of the unregistered securities would rise or not has no bearing on
the issue of scienter. Although the general partners’ own funds
were part of FBA’s pooled assets, they would be liable under Sec-
tion 206 if they intentionally deceived the limited partners to pre-
vent the limited partners from withdrawing their contributions or
for any other reason. Ernst & Ernst v. Hochfelder, supra. Scienter
does not require a showing of intent to cause a loss to a plaintiff.
SEC v. Capital Gains Research Bureau, Inc., supra, 375 U.S. at
192 n. 39.
las a ~
40 Appendix
We do not agree with the district court’s helding, 392
F.Supp. 740, that, since plaintiffs realized a net profit on
their overall limited partnership investment, they failed
to prove damages compensable under the federal securities
laws. ‘
[20] This is not to say, however, that a plaintiff may
recover for losses, but ignore his profits, where both result
from a single wrong. In determining on remand whether
plaintiffs have sustained any damages from the alleged
fraudulent investments, the district court should determine,
first, at what point defendants’ representations became
fraudulent due to the increasing proportion of portfolio
investments in unregistered securities. The court then
should compute the total net losses on all holdings of unreg-
istered securities due to changes in price after that date.
Finally, the court should determine what proportion of
FBA’s holdings was inconsistent with representations that
the partnership was in a “most conservative posture” and
the other representations made to the limited partners. The
proper measure of damages then would be that part of net
losses incurred on unregistered securities after the point
when the defendants’ representations became fraudulent
which stems from the portion of those investments incon-
sistent with defendants’ representations.”
We of course do not intimate any views as to whether
plaintiffs in fact have sustained any damage and, if so,
how much. All we hold is that they are entitled to their day
in court and an opportunity to prove, if they can, their
claim under the Advisers Act.
28. The cut-off price for such unregistered securities in the
portfolio at the time plaintiffs withdrew should be the value as-
signed to such securities by the general partners, since that pre-
sumably is what plaintiffs received. This would provide the closing
out price for loss-netting purposes with respect to securities remain-
ing in the portfolio at the time of plaintiffs’ wihdrawal.
Appendix 41
Affirmed as to the dismissal of the Securities Exchange
Act claim; as to the dismissal of the Investment Advisers
Act claim, reversed and remanded for trial.
GURFEIN, Circuit Judge, concurring and dissenting:
I concur in the affirmance of the dismissal of the § 10(b)
claim.
With great respect for my brother Timbers as a master
of securities law, I must respectfully dissent from the hold-
ing that, under this complaint, we should imply a private
right of action at law for damages for alleged violation of
§ 206 of the Investment Advisers Act, 15 U.S.C. § 80b—6
(“Advisers Act”) by these limited partners of a speculative
hedge fund.
According to the majority, the issue in this case is
whether to imply a private right of action. It therefore
draws an analogy to other securities act provisions under
1. The Hedge Fund partnership agreement gave the general
partners the following powers:
“(a) To purchase, hold and sell stocks, bonds and other
securities; (b) to sell stocks, bonds and other securities short
and to cover such sales; (¢) to purchase, hold, sell and other-
wise deal in put and call options and any combination or com-
binations thereof; (d) to purchase, hold, sell, sell short and
cover, and borrow from brokers for thet purpose, commodity
contracts and to purchase, hold, sell and otherwise deal in
commodities generally dealt in on commodity or produce ex-
changes, provided, however, that Partnership funds used for
the purpose of dealing in commodities and commodity con-
tracts shall not exceed at the time of any purchase or commit-
ment ten (10) percent of the net worth of the Parnership at
July 1, 1965 or at the beginning of any calendar year there-
after, as the case may be; (e) to conduct margin accounts
with brokers; (f) to open, maintain and close bank accounts;
(g) to sign checks; (h) to pledge securities for loans; (i) to
engage in the business of advising and counseling on invest-
ments and to enter into agreements therefor, and (j) gener-
ally, to act for the Partnership in all matters incidental to the
foregoing.”
The original partnership agreement was amended twice, but the
amendments did not affect the management’s broad discretionary
powers.
42 Appendix
which private rights of action have been implied. It seems
to me, however, that the issue is rather whether 2 private
action at law for damages should be implied. With refer-
ence to that issue, I think that the Investment Advisers Act
differs significantly from the securities statutes upon which
the majority draws for support.
The legislative history of the Advisers Act indicates that
it was a tentative attempt to effect a “coinpulsory census”
of investment advisers by requiring registration rather
than to provide a full regulatory scheme. David Schenker,
representing the SEC, testified in the Senate Hearings:
Therefore, our fundamental approach to this prob-
lem is in the first instance, before we could intelligently
make an appraisal of the economic function or of the
abuses which might exist in that type of organization,
to see if we could not get something which approxi-
mated a compulsory census. Fundamentally that is the
basic approach of title 2. [The Advisers Act]. We first
would like to find out how many people are engaged
in this business, what their connections are, what is
the extent of their authority, what is their background,
who they are, and how they handle the people’s funds”
(emphasis added).
Hearings on S. 3580 before the Subcomm. of the Senate
Comm. on Banking & Currency, 76 Cong., 3d Session 48.
See also S.Rep. No. 1760, 86th Cong., 2d Sess., U.S.Code
Cong. & Adm.News 1960, p. 3502. There are other indica-
tions that “as enacted, the Investment Advisers Act repre-
sented a compromise between the SEC and the investment
advisory industry.” See Note, Private Causes of Action
Under Section 206 of the Investment Advisers Act, 74
Mich.L. Kev. 308, 319-30 & n.69 (1975).? Tt is in light of
2. See p. 880 & n. 8 infra.
Appendix 43
this cautious approach taken by Congress in enacting the
Advisers Act as tentative legislation that Section 214, the
provision which appears to allow only suits in equity,
should be read.
Section 214 is unlike the corresponding sections in the
other Acts. As my Brother Timbers notes, the Advisers
Act gives the district courts jurisdiction, concurrently with
state courts, only “of all suits in equity to enjoin any viola-
tion of this subchapter or the rules, regulations, or orders
thereunder.” The other Acts, by contrast, provide jurisdic-
tion not merely over “all suits in equity,” but also over
“actions at law brought to enforce any liability or duty
created thereby, or to enjoin any violation of this subchap-
ter, or the rules, regulations or orders thereunder,” e.g.,
Investment Company Act of 1940, § 44, 15 U.S.C. § 80a—43,
an act passed together with the Advisers Act in a single
bill.2 For similar language in other Acts, see majority opin-
ion p. 874, n.20.4
3. It seems to me of some significance that early drafts of the
Advisers Act, including S. 3580 and H.R. 8935, filed on March 14,
1940, merely incorporated by reference § 40 of the Investment
Companies Act, which did include the reference to “actions at law.”
After the conclusion of four weeks of Senate hearings on April 26,
however, representatives of the industry met with the SEC to nego-
tiate changes in the proposed bill. See Hearings on H.R. 10065 Be-
fore a Subcomm. of the House Comm. on Interstate and Foreign
Commerce, 76th Cong., 3d Sess. 72 (1940); 86 Cong.Rec. 10069
(1940) (remarks of Senator Wagner). The result was a new draft,
which finally met the approval of the industry, see House Hearings
at 95; Jaretski, The Investment Company Act of 1940, 26 Wash.L.
Rev. 303, 309-10 (1941), and which for the first time contained a
separate jurisdictional provision referring to “suits in equity” but
omitting the reference to “actions at law” which the majority seeks
to restore to the statute.
4. While the majority opinion does not rely on the circumstance
that jurisdiction is conferred over “violations” of the statute and
rules thereunder to imply a cause of action for damages at law, a
district court has done so. See Bolger v. Laventhol, Krekstein, Hor-
< «ta
oer
44 Appendix
The attempted withholding of jurisdiction over actions
at law in the Advisers Act indicates that Congress was not
intending to provide for any liability beyond injunctive
relief.5 As Mr. Justice Powell noted in Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723, 756, 95 S.Ct. 1917, 1935,
44 L.Ed.2d 539 (concurring), “(t]he starting point in every
case involving construction of a statute is the language
itself.” The majority opinion explains that the language
of § 214 differs from the language of the jurisdictional
sections in every other Securities Act because “each of the
other Acts whose jurisdictional provisions refer to ‘actions
at law’ contains one or more sections expressly granting
injured parties a private right of action for damages,’ ”
wath & Horwath, 381 F.Supp. 260 (S.D.N.Y. 1974). I do not agree.
“Violations” in the context means criminal violations, and viola-
tions on the civil side are limited to suits in equity. This is made
clear by the venue provisions of § 214: (1) “any criminal proceed-
ing” may be brought in the district court wherein any act or trans-
action constituting the violation occurred; (2) “any suit or action
to enjoin any violation ... may be brought in... .” There is still
no reference to an “action at law.”
5. One might indeed argue that there is lack of subject-matter
jurisdiction to enforce actions at law for damages for violations of
the Advisers Act because of the lack of any specific statutory au-
thorization, but I do not urge that. There is jurisdiction under a
broad reading of the “arising under” clause of 28 U.S.C. § 1381.
Cf. Minois v. City of Milwaukee, 406 U.S. 91, 98, 92 S.Ct. 1385, 31
L.Ed.2d 712 (1972) ; Romero v. International Terminal Operating
Co., 358 U.S. 354, 398, 79 S.Ct. 468, 3 L.Ed.2d 368 (1959) (Bren-
nan, J., concurring and dissenting) ; Bell v. Hood, 327 U.S. 678,
66 S.Ct. 773, 90 L.Ed. 939 (1946). See also Tunstall v. Brotherhvod
of Firemen, 323 U.S. 210, 65 S.Ct. 235, 89 L.Ed. 187 (1944) (“aris-
ing under” 28 U.S.C. § 1337). The majority correctly states that
plaintiffs allege jurisdiction under § 214 of the Advisers Act, the
very section that does not provide for “actions at law,” but since
the pleading can be amended I make no point of the insufficiency
of a proper jurisdictional statement. Even if an implied claim for
a is judge-made, it may “arise under the laws of the United
tates.”
Appendix 45
and hence, required the jurisdictional provision for that
reason.®
6. The reason given by the majority is not persuasive, for it
fails to note that in every single case in which an express civil
liability is created in any of the Acts, the jurisdiction has already
been stated in the very section creating the express liability. Thus,
§ 11 of the 1933 Act, 15 U.S.C. § 77k, itself provides that “any
person acquiring such security . . . may, either at law or in equity,
in any court of competent jurisdiction, sue. . ..” Section 12 of the
1933 Act, 15 U.S.C. § 771, itself provides that the purchaser “may
sue either at law or in equity in any court of competent jurisdiction
..« To the same effect, see Section 9(e) of the 1934 Act, 15 U.S.C.
§ 78i(e); Section 16(b) of the 1934 Act, 15 U.S.C. § 78p(b); See-
tion 18 of the 1934 Act, 15 U.S.C. § 78r; Section 16(b) of the
Publie Utility Holding Company Act of 1935, 15 U.S.C. § 79p(b) ;
Section 17(b) of that Act, 15 U.S.C. § 79q(b); Section 323(a)
of the Trust Indentures Act, 15 U.S.C. § 77www(a) ; Section 30(f)
of the Investment Companies Act, 15 U.S.C. § 80a-29(f). The
better explanation, it seems to me, for the general jurisdictional
provision in each Act—“the District Courts of the United States
.. . Shall have jurisdiction” ete.—is Congress’ fear that general
federal question jurisdiction under 28 U.S.C. § 1331 might not
establish jurisdiction in the federal courts over securities law
claims, particularly when the jurisdictional amount was lacking.
The separate jurisdictional provisions associated with the several
sections of the securities acts creating substantive liability referred
only to “any court of competent jurisdiction,” and hence left open
the question of whether the federal courts were in fact courts of
“competent jurisdiction.” Thus, an independent jurisdiction was
conferred on the federal courts by the general provision of each
statute (and in the case of the Securities Exchange Act, exclusive
jurisdiction). In short, the internal sections conferred general
jurisdiction. The jurisdictional section was drawn as broadly as
possible to confer clear federal jurisdiction.
The majority opinion seeks to draw support from the fact that
the Senate and House Réports stated that the enforcement provi-
sions of the Advisers Act were “generally comparable” to those
of the Investment Companies Act. Ante at 875. Aside from the fact
that this begs the crucial question—whether the Acts were com-
parable in this particular respect—it ignores what was in my view
the more likely meaning of “generally comparable” as applied to
the enforcement provisions: that is, that the Advisers Act is “gen-
erally comparable” to the Investment Company Act in that both
provide for the coneurrent jurisdiction of state and federal courts,
as distinguished from the Exchange Act in which federal jurisdic-
tion is made exclusive.
a
46 Appendix
But the more cogent question is why the Advisers Act, as
distinguished from every other securities act, does not pro-
vide for any express civil liability in damages. The majority
offers no explanation for such an omission which must have
been a studied omission. I think it is highly relevant that
in each of the other Acts Congress itself did provide for
some express civil liability, yet under the Advisers Act
it failed to include a single section imposing liability for
damages. Congress, for example, could have provided an
express damage remedy for misrepresentations in the regis-
tration statement of the advisers as it did for misrepre-
sentations of the registration statement of the underwriter,
15 U.S.C. §77k(a)(5). This indicates rather that, in its
cautious approach to the regulation of investment advisers,
Congress was not yet ready to impose any civil liability
for damages.
The majority holds, nonetheless, that a private damage
action should be implied in this case “to implement the
statute’s underlying purposes.” It notes that persons rely-
ing upon investment advisers for advice, for whose “especial
benefit” the Act was adopted, see Cort v. Ash, 422 US. 66,
78, 95 S.Ct. 2080, 45 L.Ed.2d 416 (1975), will benefit from a
private damage action. Ante, pp. 872-873 citing SEC v.
Capital Gains Research Bureau, Inc., 375 U.S. 180, 186-91,
84 §.Ct. 275, 11 L.Ed.2d 237 (1963).7 Such reasoning it
seems to me has become somewhat outmoded in the light of
the current standards of interpretation announced in Cort
v. Ash, supra. The four factors mentioned in Cort v. Ash
are not mere surplusage to the theme that the beneficent
purpose of the legislation is, by itself, sufficient warrant for
7. That case was not, of course, a damage action, nor was it
brought by a private party.
Appendix 47
the implication of a claim for private relief.* Such a single
criterion is also inadequate because a statute can have more
than one “beneficent purpose”—here, to protect investors
but also to avoid undue disruption of the investment advis-
ory industry. To put it another way, Congress may intend
a statute to protect investors—but not necessarily without
limit. Countervailing considerations may result in some-
thing less than an imposition of civil liability for money
damages, The majority opinion ignores this problem of
statutory construction, in my view, because it gives insuffi-
cient weight to the second factor listed in Cort: “is there
any indication of legislative intent, explicit or implicit,
either to create such a remedy or to deny one?’® As shown
8. The majority reasons that Section 215(b) of the Advisers
Act, 15 U.S.C. § 80b-15(b) (1970), which provides that any contract
violating the Act shall be void, strongly suggests that a private
remedy should be implied. Ante, p. 874, supra. But it does violence
to the criteria enunciated in Cort to imply an action simply because
a contract is made void, or to recognize an actionable tort, simply
because a statute prohibits particular conduct. Cf. Note, Section
206 Private Actions. 74 Mich.L.Rev. 308, 312 n.19 (1975). Sig-
nificantly, the SEC in its amicus brief does not rely on § 215(b)
of the Act.
Even if the fact that a statute renders certain contracts void
were deemed ipso facto to create a private right of action, on the
theory that this provision could be vindicated only by the private
parties to the contract, it of course by no means follows that a
damage remedy is proper. Rescission or restitution are, aside from
damages, remedies ordinarily available when a contract is void.
Significantly, rescission is an equitable remedy. see 5 Corbin on
Contracts § 1103, so that implication of a private right of action
for rescission and restitution under § 215(b) would be well within
the jurisdictional grant of § 214, and consistent with the notion
that it is only actions at law which are inconsisent with the statu-
tory scheme.
9, Analytically, it would be equally proper to say that implica-
tion of a private action under the Advisers Act is not “consistent
with the underlying purposes of the legislative scheme.” Cort,
supra, 422 U.S. at 78, 95 S.Ct. at 2088. For though such a remedy
may be consistent with the goal of protecting customers of invest-
ment advisers, it is hardly consistent with the desire not to subject
advisers to monetary liability, at least, until further study by
Congress.
~diees
a
48 Appendix
above, there is implicit legislative intent to deny such a
remedy.”
The majority urges that there is no evidence that Con-
gress intentionally sought to preclude private damage ac-
tions, Ante, p. 874, But there is surely no “clear evidence”
that Congress affirmatively intended private actions for
damages to lie for violation of § 206. And we have been in-
structed recently in National Railroad Passenger Corp. v.
National Ass’n of Railroad Passengers, 414 U.S. 453, 458,
94 S.Ct. 690, 693, 38 L.Ed.2d 646 (1974) (“Amtrak”) that
“when a statute limits a thing to be done in a particular
mode, it includes the negative of any other mode,’ ” quoting
Botany Mills v. United States, 278 U.S. 282, 289, 49 S.Ct.
129, 72 L.Ed. 730 (1929). Section 214 expressly confers jur-
isdiction over suits in equity only, and the Act as a whole
does not provide anywhere for actions at law. Under the
Amtrak formulation, when Congress limits relief to equit-
able relief, “it includes the negative of any other mode”—
monetary liability. In Amtrak Mr. Justice Stewart observed
that, in determining whether a private action would lie, this
rule of statutory construction should yield only “to clear
contrary evidence of legislative intent,” 414 U.S. at 458, 94
S.Ct. at 693, a situation that does not exist in the case of
the Advisers Act.
Similarly, in Securities Investor Protection Corp, v. Bar-
bour (“SIPC”), 421 U.S. 412, 95 S.Ct. 1733, 44 L.Fd.2d 263
(1975), Mr. Justice Marshall noted that where there is ex-
10. The situation in which there is express statutory provision
for one form of proceeding, as here, for equitable but not legal
actions, should be distinguished from the situation in which Con-
gress gives broad but unspecified remedial scope to the statute,
see, e.g., §10(b) of the Securities Exchange Act, 15 U.S.C.
§ 78}(b). In the latter situation, implication of some private actions
may be not merely consistent with the legislative purpose, but
necessary in order fully to effectuate it.
Appendix 49
press statutory provision for one form of proceeding, this
“ordinarily implies that no other means of enforcement
was intended by the Legislature,” 421 U.S. at 419, 95 S.Ct.
at 1738, again emphasizing that the implication would yield
only to “clear contrary evidence of legislative intent.” I
think that my brothers turn this test backwards. And as we
have seen, there are strong reasons for believing that not
only is there no “clear contrary evidence of legislative
intent” but rather that whatever evidence exists looks the
other way.
That a statute explicitly provides for private rights of
actions in some sections does not, of course, preclude the
implication of other actions under different sections of the
same Act. J. J. Case Co, v. Borak, 377 U.S. 426, 84 S.Ct.
1555, 12 L.Ed.2d 423 (1964) ; see 6 L. Loss, Securities Regu-
lation, 3869-73 (Supp. 1969). Cf. 1 A, Bromberg, Securities
Law: Fraud § 2.4(1) (1975); Nute, Private Rights of Action
Under Amtrak and Ash: Some Implications for Implication,
123 U.Pa.L.Rev. 1392, 1419-20 (1975)." But the Advisers
Act is a statute which completely omits any damage actions
whatever, even though otherwise analogous statutes do not.
To find a negative implication in such a case is more than a
mechanical rule of construction, For while under the Securi-
ties Act the failure to include express remedies for each
substantive section probably is due to considerations not
relevant to the implication question, see Note, supra, 123
11. In Borak, the Court relied not only on § 27’s provision for
“actions at law” but also on its language “brought to enforce any
liability or duty created” under the Act. The Court specifically
referred to Deckert v. Independence Shares Corp., 311 U.S. 282,
61 S.Ct. 229, 85 L.Ed. 189 (1940), which had emphasized the same
language in Section 22(a) of the 1933 Act, 15 U.S.C. § 77v(a),
“to enforce any liability or duty created by this subchapter.” The
Deckert Court added: “The power to enforce implies the power to
make effective the right of recovery afforded by the Act.” 311 US.
at 288, 61 S.Ct. at 233. (Emphasis added).
50 Appendiz
U.Pa.L.Rev. at 1419-20, the failure to include any provision
for damage remedies in the Advisers Act is best explained
by reasons of policy which Congress deemed sound, and
which would actually be undermined by the implication of a
private damage action.
The Advisers Act was passed in 1940, almost four decades
ago. It was designed as a threshold attempt to effect a com-
pulsory census of investment advisers, and not as a per-
vasive regulatory scheme, In all these years no litigant has
urged to a Court of Appeals that Section 206 of the Act is
a basis for a private damage action.” The majority opinion
suggests that when the Act first became law in 1940, Con-
gress gave no thought to the possibility of a private right
of action against investment advisers, and finds this to be
an argument in favor of implication, as we have seen. The
court ignores the circumstance, however, that when Con-
gress passed the 1970 amendments, Public Law No. 91-547,
84 Stat. 1413, it specifically addressed itself to the civil lia-
bility of investment advisers. When it did, it limited that
liability (a) to investment advisers who advise investment
companies and no others, and (b) only to the extent of a
breach of fiduciary duty concerning compensation for serv-
ices or like payments. Investment Company Act § 36, 15
U.S.C. § 80a-35. See Galfand v. Chestnutt Corp., 545 F.2d
807 (2d Cir. 1976). The implication is clear that Congress
did give specific attention to investment advisers, but de-
12. The issue was tendered but not passed upon in Brouk v.
Managed Funds, Inc., 286 F.2d 901 (8th Cir. 1961), vacated as
moot, 369 U.S. 424, 82 S.Ct. 878, 8 L.Ed.2d 6 (1962). In his monu-
mental treatise, Professor Loss does not even mention the possibility
of a private damage action under § 206. He does indicate that
§ 215(b) is “relevant” to the question of civil liability, but con-
cludes that there has been “no significant litigation.” See L. Loss,
Securities Regulation 1757 (1961 ed.) ; id. at 3864-65 (Supp. 1969).
Appendiz 51
cided not to impose civil liability on those investment advis-
ers who were not advisers to investment companies.
It is significant also, I think, that when Congress made
a thoroughgoing revision of the Advisers Act in 1960, it
failed to create a single express liability nor did it amend
Section 214 to include actions at law.** And in the 1970
amendments, Congress indicated that when it wanted to do
so, it expanded the statutory relief available in the com-
panion Investment Company Act, § 36, 15 U.S.C. § 80a-35,
by providing that a court may “award such injunctive or
other relief.” “Other relief” was added. See Moses v. Burgin,
1 Cir., 445 F.2d 369, 373 n.7. In addition, the recently con-
cluded Congress had before it an amendment proposed by
the Securities and Exchange Commission providing for a
private damage action under the Advisers Act, It does not
appear seemly to me, unless we are under an absolute
compulsion to do so, suddenly to create such a claim for
relief by judicial legislation, without the ability to define
the outer limits of such a claim.
Congress is uniquely able to set the limits of any civil
action for damages. That this is so is emphasized by the
majority opinion on this very appeal. It holds that the
10b-5 claim is without merit, yet on the same factual
allegations it supports a § 206 claim. In so doing, it circum-
13. When Congress expanded the scope of the Act in 1960, it
did not alter the statutory scheme. Instead, it strengthened the
enforcement powers of the SEC, see S.Rep. No. 1760, 86th Cong.,
2d Sess. 2, 4 (1960). Pub.L. No. 86-750, §§ 2-6, 74 Stat. 885,
amending §§ 203-04, 15 U.S.C. § 80b-3, -4. Moreover, the Commis-
sion was given the power to obtain injunctive relief against aiders
and abettors as well as principal violators. Id. at § 12. Section 206
itself was amended to apply to unregistered as well as registered
advisers. Id. at § 8. Suffice it to say that Congress was aware of
the problems of enforcement and that it dealt with the problem
as it saw fit. It is not for the courts to decide that this remedial
scheme is still insufficient.
:
+H
*i
52 Appendix
vents the sound policies behind the restrictions on 10b-5
claims.
Thus, for example, the 10b claim is held to have been
properly dismissed because, as my brother Timbers tells us:
“They [plaintiffs] say that they would have with-
drawn from the firm in 1968 if defendants had not
misrepresented the true nature of the firm’s investment
at that time. The short answer to this branch of plain-
tiff’s argument is that the requirement of fraud in
connection with the purchase or sale of a security is
not satisfied by an allegation that plaintiffs were in-
duced fraudulently not to sell their securities. Blue
Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737-
38, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975)” page 868
(emphasis in original).
I am not sure that Blue Chip is so limited in its armlication.
I think that the underlying concern in Blue Chip, though
standing was involved, was not the lack of a technical “pur-
chase or sale,” which ingenuity might have supplied, see 9
Cir., 492 F.2d 136, but, perhaps, the sheer inability to dis-
prove what a plaintiff says he would have done if he had
but known the truth. This problem is as acute in suing
investment advisers as in suing offerors, perhaps even more
acute in the former situation. There is a distinct danger
that, by implying an open-ended private right of action,
the court is giving the clients of investment advisers carte
blanche to convert themselves from victims to defrauders.
Judge Hufstedler said it well in her excellent dissenting
opinion below in Blue Chip Stamps, 492 F.2d at 148:
“The passive investor could always await market de-
velopments without any risk, claiming deception
caused nonbuying if the value of the securities proved
more promising than the offeror’s glum predictions
and deception caused nonselling if a rosier prospectus
was followed by a market decline.”
Appendix 53
In this very case the plaintiffs received profits from the
restricted letter stock and waited almost a full year until
the market became unfavorable before seeking redemption
of their shares. They deliberately entered into a partner-
ship that was going to operate in the most speculative of
investment activities. They gave the general partners the
power to invest in any kind of security, to sell short and
cover both securities and commodities, to buy and sell
options and to cover, to play the commodities market, to
buy on margin, to lend money to partners without security,
and to pledge partnership assets for loans. See note 1,
supra. Even a babe in the woods would know that he was
giving his money to the general partners for discretionary
speculation. The purchase of unregistered stock, far from
being unforeseeable, fits quite well into this plan. For, in
a rising market, well-selected investment letter stock can
prove profitable, and established investment bankers
handle such securities on an “investment letter” basis.
Given the purposes ef the hedge fund and the broad powers
vested in the general partners, it is hardly likely that the
plaintiffs were interested in evaluating the portfolio them-
selves. Indeed, the plaintiffs never asked for a list of the
securities held by the partnership.
The complaint does not allege self-dealing, conflict of
interest, or conversion of assets, any of which would be
actionable under § 10(b), if in connection with the purchase
or sale of securities. See, e. g., Bird v. Ferry, 497 F.2d 112
(5th Cir. 1974) (conversion by salesman). To the contrary,
it shows that defendants themselves invested thei> own
14. Between the end of 1969 and September 30, 1970, the New
York Stock Exchange composite index fell over 10%; the Dow
Jones industrial average fell over 5%. Even if the hedge fund had
invested in the most conservative blue-chip portfolios, therefore,
plaintiffs would have suffered losses for the period.
ee
54 Appendix
money and the money of their families, and there is no
allegation that they withdrew it. The plaintiffs prospered
under this management for a considerable time when the
market was good, reaping profits from the investment of
unregistered securities — letter stock as well as other se-
curitics in the common portfolio. Having joined the part-
nership as early as 1965, they undoubtedly basked in the
euphoria of the bull market described by Judge Friendly
in Levine v. Seilon, Inc., 439 F.2d 328, 335 (2d Cir. 1971).
Conversely, however, when the market turned down, it
turned down for all including the defendants.”®
This practical consideration indicates to me, not, as it is
suggested in the majority opinion, that the plaintiffs should
not be given a chance to prove their case, see footnote 22a,
but that, in the absence of a legislative determination of
the policy questions involved, we are treading on dangerous
ground in implying a private action under § 206 on the
fact pattern alleged here, and ought instead to leave the
issue to Congress. To create an analogue to Section 10(b)
without the requirement that the “fraud” be “in connection
with the purchase or sale” of a security hardly gives broad
effect to the policy considerations so clearly expressed in
15. The majority opinion assumes that when plaintiffs dis-
covered the “misrepresentation” they could wait until the following
year to see how the market would go, because their redemption
right was restricted to redemption at particular stated times. But
with all respect that simply does not follow. When a person dis-
covers that he has been defrauded, he may sue at once for rescission
or damages, regardless of the contractual restriction. See Prosser
on Torts § 105, at 689 (4th ed. 1971) ; Restatement [First] of Torts
§ 549 note e (1938). The contrary rule would substantially under-
mine congressional policy. As the court said in Royal Air Proper-
ties, Inc. v. Smith, 312 F.2d 210, 213-14 (9th Cir. 1962): “The
purpose of the Securities Exchange Act is to protect the innecent
investor, not one who loses his innocence and then waits to see
how his investment turns out before he decides to invoke the pro-
visions of the Act.”
Appendix 55
the majority opinion of the Supreme Court in Blue Chip
Stamps and in Mr. Justice Powell’s concurring opinion, as
well as Judge Hufstedler’s dissent in the Court of Appeals.
The majority specifies no limits to the civil liability under
§ 206 which it is in the process of creating over this dissent.
Yet, it is simply extending 10b-5 by resort to a different
statute. As the Court said in Ernst & Ernst v. Hochfelder,
425 U.S. 185, 96 S.Ct. 1375, 1389, 47 L.Ed.2d 668 (1976),
“We would be unwilling to bring about this result absent
substantial support in the legislative history, and there is
none.” We do not know, if Congress creates an express
private cause of action for damages under § 206, that it
will not limit the right as it did with respect to § 10(b), by
imposing a purchase or sale requirement, and perhaps also
by defining the measure of damages and enacting a separate
statute of limitations.”
The Commission, in its amicus brief, argues for an im-
plied civil right of action for damages, on the ground that
“the claim asserted by plaintiffs herein is not one that
would test the outer limits of the cause of action created by
the antifraud provisions of the federal securities laws.”
(Emphasis added). But what are the limits to what is
essentially a Rule 10b-5 action, if not the prerequisite that
the claim relate to the “purchase or sale of a security’?
Implying a claim for relief without limitation will en-
courage actions against investment advisers for poor judg-
16. The SEC, for whose excellent work I have the highest
admiration, has been rebuffed by the Supreme Court in its attempt
to repeal the requirement of “in connection with the purchase or
sale of a security.” See Blue Chip Stamps, supra, 421 U.S. at 732,
95 S.Ct. 1917. It has also been rebuffed by this court, see Levine
v. Seilon, 439 F.2d 328, 329 (2d Cir. 1971). And in the Blue Chips
Stamps case, Mr. Justice Powell commented that the SEC had
“joined, surprisingly” in urging expansion of the statute. 421 U.S.
at 759, 95 S.Ct. 1917.
2 aw
peste
56 Appendix
ment, disguised by pleadings subtly implying fraud and
deceit. The unfounded allegation itself, contrary to the
solicitude originally expressed by the SEC itself, will spell
grief for the investment adviser, and the expense of de-
fending the action will often compel settlement.’ Each
consideration is a policy ground that should be weighed.
See Blue Chip Stamps, SIPC, and Amtrak. Indeed, in its
early days the SEC itself was vitally concerned with these
considerations militating against public disclosure.** This
17. Mr. Justice Rehnquist in Blue Chip Stamps, 321 US. at
740, 95 S.Ct. at 1927, stated that it was a policy concern that “even
a complaint which by objective standards has very little chance
of success at trial has a settlement value to the plaintiff out of
any proportion to its prospect of success at trial so long as he may
prevent the suit from being resolved against him by dismissal or
summary judgment.” And Mr. Justice Powell considered that
“allowing this type of open-ended litigation would itself be an
invitation to fraud.” 421 U.S. at 761, 95 S.Ct. at 1937.
Similarly, in Securities Investor Protection Corp. v. Barbour,
421 U.S. 412, 95 S.Ct. 1733, 44 L.Ed.2d 263 (1975), Mr. Justice
Marshall noted that “except with respect to the solidest of houses,
the mere filing of an action predicated upon allegations of financial
insecurity might often prove fatal.” 421 U.S. at 422, 95 S.Ct. at
1739. He added: “These consequences are too grave, and when
unnecessary, too inimical to the purposes of the Act, for the Court
to impute to Congress an intent to grant to every member of the
investing public control over their occurrence.” Id. at 423, 95
S.Ct. at 1740.
18. How strikingly similar was the explanation by the SEC
representative to the House of the provisions of § 210:
“The only other provision of consequence is section 210, which
in our opinion will have a very salutary effect. The investment
counsels were a little concerned about the effect on their business
if it got around that the Securities and Exchange Commission
was conducting an investigation. In order to safeguard against
this danger section 210(a) and (b) provide that there shall not
be any disclosure of any investigation by the Securities and
Exchange Commission until it has made up its mind that a
public hearing is to be held. Then in order to safeguard them
further, subsection (c), provides that the Commission can not
ask these investment counsellors to disclose their clients, and
what their investments are, except if there is some indication of
Appendix 57
belies any intention by Congress to open wide private civil
complaints which, in the nature of our adversary proceed-
ings, become public property at once.
The blackmail effect of allowing customers to sue invest-
ment advisers for damages for what the customer might
have done if he had but known, seems obvious for the
reasons so well stated by Mr. Justice Marshall. The custo-
mer has ample relief under § 10(b), for misrepresentations
made by the investment advisers in the process of getting
him into the adviser’s fund.’® And if Congress wishes to go
further, it can do so.
Since my brethren wish to create a new implied right of
action, I have given my reasons for dissenting from their
view. As indicated, I concur in the dismissal of the § 10(b)
claim, but would carry over some of the reasoning to dis-
miss the asserted claim under § 206 as well.
wrongdoing. Thereafter, in connection with the investigation,
they have to make the disclosure.”
Hearings on H.R. 10065 before the Subcomm. of the House Comm.
on Interstate and Foreign Commerce, 76th Cong., 3d Sess. 138
(1940) ; see also Senate Hearings, supra, at 713, 715.
19. The Commission in its amicus brief asserts that “this private
action undeniably could be maintained [on the basis of § 10(b) ]
alone.” This is contrary to our unanimous holding on this appeal.
But we all agree that in proper circumstances, investment advisers
are as liable as any other persons under § 10(b). Cf. Superintend-
ent of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6, 92 S.Ct.
165, 30 L.Ed.2d 128 (1971); Herzfeld v. Laventhol, Krekstein,
Horwath & Horwath, CCH Fed.Sec.L.Rptr. 95,660 (2d Cir.,
July 15, 1976) ; Shapiro v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 495 F.2d 228 (2d Cir. 1974). This fortifies the argument that
there is no need for an additional judicially created remedy against
advisers where the purchase or sale of securities is involved.
a ee
58 Appendix
John M. WILSON, Plaintiff-Appellant,
Vv.
FIRST HOUSTON INVESTMENT
CORPORATION et al.,
Defendants-Appellees.
No. 75-3422.
United States Court of Appeals,
Fifth Circuit.
Feb. 2, 1978.
Joel H. Pullen, San Antonio, Tex., for plaintiff-appellant.
Brice A, Tondre, Houston, Tex., for First Houston In-
vestment, Walser, Allgood and Barker.
Appeal from the United States District Court for the
Western District of Texas.
Before GODBOLD, TJOFLAT and HILL, Circuit
Judges.
GODBOLD, Circuit Judge:
This is an appeal from the dismissal of plaintiff’s suit
against his investment adviser, which plaintiff sought to
bring under the Investment Advisers Act of 1940, § 214, 15
U.S.C. § 80b-14 (1970) (the “IAA”), as well as Rule 10b-5,
17 C.F.R. 240.10b-5 (1977). The district court dismissed
plaintiff’s complaint and first amended complaint, and
plaintiff appealed.
The plaintiff alleged the following facts, drawn largely
from his amended complaint. For a number of years he had
maintained a stock portfolio. He became dissatisfied with his
investment advisers. He became interested in First Hous-
ton Investment Corporation’ after reading two magazine
1. The defendants are First Houston Investment and three of
its employees.
Appendix 59
articles which purported to describe its investment manage-
ment techniques. In particular the articles represented that
First Houston utilized a system of computer analysis of the
market and promptly eliminated stocks not meeting certain
performance standards,
Plaintiff met with a representative of First Houston who
stated that the magazine articles were accurate. As a result
of these representations plaintiff executed a power of attor-
ney giving First Houston full discretionary authority to
manage plaintiff’s stock portfolio, then valued at $104,358.
First Houston assumed management of plaintiff’s portfolio
in March of 1972 and immediately converted all of his stocks
into securities of its own choosing. In September 1973 First
Houston notified plaintiff that it was resigning from man-
agement of the account because the account had become too
small, The account was then worth $5,441 and included 1000
shares of Teleprompter stock, trading of which had been
suspended. At no time did First Houston reveal to the
plaintiff that the computer analysis system was no longer
being used or that it had never been fully utilized.
[1] In his original complaint plaintiff sought to assert
an implied right of action for damages under the IAA and a
Rule 10b-5 claim as well. Motion to dismiss for lack of sub-
ject matter jurisdiction was granted. The trial court rea-
soned that a private right of action should not be implied
under the IAA and that the complaint failed to allege a
valid 10b-5 claim.?
2. The trial court stated that it was dismissing for lack of
subject matter jurisdiction. According to the district court’s
analysis, the complaint more properly should have been dismissed
for failure to state a claim upon which relief can be granted. See
Mobil Oil Corp. v. Kelley, 493 F.2d 784, 786 (CA5), cert. denied,
419 U.S. 1022, 95 S.Ct. 498, 42 L.Ed.2d 296 (1974). As pertains
to the asserted cause of action under the IAA, general federal
question jurisdiction is conferred by 28 U.S.C. § 1331 (1970). See
60 Appendix
Plaintiff was given leave to file an amended complaint,
and he did so, again attempting to state a 10b-5 claim. iiow-
ever, he did not reassert his claim under the IAA, nor did
he incorporate by reference the allegations of the original
comp!aint. First Houston’s motion to dismiss the amended
complaint was granted.
1
[2,3] Plaintiff did not waive his right to appeal the order
dismissing his claim under the [AA by filing an amended
complaint which failed to make reference to that alleged
cause of action. As a general rule an amended complaint
supersedes and replaces the original complaint, unless the
amendment specifically refers to or adopts the earlier plead-
ing. La Batt v. Twomey, 513 F.2d 641, 651 (CA7 1975);
Cedillo v. Standard Oil Co. of Texas, 261 F.2d 448 (CA5
1958). See also 6 Wright & Miller, Federal Practice and
Procedure: Civil § 1476 (1971) ; 3 Moore’s Federal Practice
q 15.08[7] (1974). But we hold that plaintiff, by filing an
amended complaint after a dismissal with leave to amend,
was not barred from raising on appeal the correctness of
the dismissal order.
A rule that a party waives his objections to the
court’s dismissal if he elects to amend is too mechanical
and seems to be a rigid application of the concept that
a rule 15(a) amendment completely replaces the plead-
ing it amends, Without more, the action of the amend-
ing party should not result in completely denying him
the right to appeal the court’s ruling. By way of con-
trast, if the motion to dismiss is denied and defendant
Abrahamson v. Fleschner, No. 75-7203, ...... J ee Ses. n. 5
(CA2 1977) (the dissent and majority agree on this point). See
generally Note, Implying Civil Remedies from Federal Regulatory
Statutes, 77 Harv.L.Rev. 285, 287 (1963) (two possible theories
of jurisdiction).
Appendix 61
answers and defends on the merits, he still retains the
right to object to the denial of his motion to dismiss
on an appeal from the ultimate judgment. Similar
principles apply to plaintiff when he unsuccessfully
moves to strike a defense as legally insufficient and
later serves a reply by order of the court. It therefore
is not logical to deny a party the right to appeal simply
because he decides to abide by the court’s order and
amend his pleading rather than allowing judgment to
be entered against him and taking an immediate ap-
peal.
6 Wright & Miller, Federal Practice and Procedure: Civil
§ 1476, at 393 (1971) (footnotes omitted). The authors refer
with approval to the approach suggested in Blazer v. Llack,
196 F.2d 139, 143-44 (CA10 1952) (citation omitted) :
[While the pleader who amends or pleads over,
waives his objections to the ruling of the court on
indefiniteness, incompleteness or insufficiency, or mere
technical defects in pleadings, he does not waive his
exception to the ruling which strikes “a ,ital blow to
a substantial part” of his cause of action.
There is authority to the contrary,® but such an approach
spawns piecemeal appeals. We hold that the question wheth-
er a private right of action should be implied under the
TAA is properly before us on appeal.
II.
[4] The broad antifraud provision of the IAA. § 206,4
makes no express provision for a private right of action for
3. Loux v. Rhay, 375 F.2d 55, 57 (CA9 1967). See also Sacra-
mento Coca-Cola Bot. Co. v. Chauffeurs Local 150, 440 F.2d 1096,
1098 (CAQ), cert. denied, 404 U.S. 826, 92 S.Ct. 57, 30 L.Ed.2d 54
(1971).
4. 15 U.S.C. § 80b-6 (1970) provides:
“Tt shall be unlawful for any investment adviser, by use of
62 Appendix
damages. But this alone does not preclude the recognition
of a private right of action. See, e. g., Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723, 730, 95 S.Ct. 1917, 1922,
44 L.Ed.2d 539, 546 (1975) ; J. J. Case Co. v. Borak, 377 US.
426, 432, 84 S.Ct. 1555, 1559, 12 L.Ed.2d 423, 427 (1964).
The question is whether the implication of the cause of
action is necessary to achieve the goals of Congress in
enacting the legislation. Piper v. Chris-Craft Industries,
Inc., 430 U.S. 1, 26, 97 S.Ct. 927, 941, 51 L.Ed.2d 124, 143
(1977). In Abrahamson v. Fleschner, No. 75-7203, ...... F.2d
gb was (CA2 1977), a majority of the panel held that a
private cause of action for damages should be implied under
the IAA. Judge Gurfein filed a strong dissent. Prior to
Abrahamson this question had been considered by several
district courts. Angelakis v. Churchill Management Corp.,
the mails or any means or instrumentality of interstate com-
merce, directly or indirectly—
“(1) to employ any device, scheme, or artifice to defraud
any client or prospective client;
“(2) to engage in any transaction, practice, or course of
business which operates as a fraud or deceit upon any client
or prospective client;
“(3) acting as principal for his own account, knowingly to
sell any security to or purchase any security from a client,
or acting as broker for a person other than such client, know-
ingly to effect any sale or purchase of any security for the
account of such client, without disclosing to such client in
writing before the completion of such transaction the capacity
in which he is acting and obtaining the consent of the client
to such transaction. The prohibitions of this paragraph shall
not apply to any transaction with a customer of a broker
or dealer if such broker or dealer is not acting as an invest-
ment adviser in relation to such transaction;
“(4) to engage in any act, practice, or course of business
which is fraudulent, deceptive, or manipulative. The Com-
mission shall, for the purposes of this paragraph (4) by
rules and regulations define, and prescribe means reasonably
designed to prevent, such acts, practices, and courses of busi-
ness as are fraudulent, deceptive, or manipulative.”
Appendix 63
[1975-1976 Transfer Binder] Fed.Sec.L.Rep. (CCH)
7 95,285 (N.D.Cal.1975) (cause of action implied) ; Bolger v.
Laventhol, Krekstein, Horwath & Horwath, 381 F.Supp. 260
(S.D.N.Y.1974) (cause of action implied) ; Greenspan v. del
Toro, No, 73-638 CIV JE (S8.D.Fla. May 17, 1974) (no right
of action), appeal dismissed for want of prosecution, No.
74-2943 (CA5 Sept. 5, 1974) ; Gammage v. Roberts, Scott &
Co., [1974-1975 Transfer Binder] Fed.Sec.L.Rep. (CCH)
q 94,760 (S.D.Cal.1974) (no right of action). See also Note,
Private Causes of Action Under Section 206 of the Invest-
ment Advisers Act, 74 Mich.L.Rev, 308 (1975).
In Piper v. Chris-Craft Industries, Inc., the Supreme
Court was presented with the question whether a cause of
action for damages should be implied under § 14(e) of the
Securities Exchange Act of 1934, as amended by the Wil-
liams Act of 1968, 15 U.S.C. § 78n(e) (1970), in favor of an
unsuccessful tender offeror who alleged that his bid for
corporate control failed as a result of fraud on the part of
the successful tender offeror and various other individuals.
Chief Justice Burger, writing for the majority, noted that:
[W]here congressional purposes are likely to be under-
mined absent private enforcement, private remedies
may be implied in favor of the particular class intend-
ed to be protected by the statute.
430 U.S. 1, 25, 97 S.Ct. 927, 941, 51 L.Ed.2d 124, 143 (1977).
Having so stated the Court applied the following methodol-
ogy in deciding the question:
Once we identify the legislative purpose, we must then
determine whether the creation by judicial interpreta-
tion of the implied cause of action asserted by Chris-
Craft is necessary to effectuate Congress’ goals.
Id. The Court examined the legislative history of the Wil-
liams Act and determined that Congress had intended to
ii
64 Appendix
protect the shareholders of target companies by regulating
takeover bidders. Chris-Craft, the defeated tender offeror,
was not a member of the class Congress sought to protect.
Consequently an implied right of action in favor of Chris-
Craft was not necessary to effectuate Congress’ goals.
The Court confirmed this conclusion by applying the
analysis of Cort v. Ash, 422 U.S. 66, 95 ‘S.Ct. 2080, 45
L.Ed.2d 26 (1975). Cort set out four relevant factors to be
considered in deciding whether to infer a private remedy:
First, is the plaintiff “one of the class for whose
especial benefit the statute was enacted,” Tezas &
Pacific R. Co. v. Rigsby, 241 U.S. 33, 39, 36 S.Ct. 482,
60 L.Ed. 874 (1916) (emphasis supplied )—that is, does
the statute create a federal right in favor of the plain-
tiff? Second, is there any indication of legislative in-
tent, explicit or implicit, either to create such a remedy
or to deny one? See, e. g., National Railroad Passenger
Corp. v. National Assn. of Ratlroad Passengers, 414
U.S. 453, 458, 460, 94 S.Ct. 690, 38 L.Ed.2d 646 (1974)
(Amtrak). Third, is it consistent with the underlying
purposes of the legislative scheme to imply such a
remedy for the plaintiff? See, e. g., Amtrak, supra;
Securities Invesior Protection Corp. v. Barbour, 421
U.S. 412, 423, 95 S.Ct. 1733, 44 L.Ed.2d 263 (1975);
Calhoon v. Harvey, 379 U.S. 134, 85 S.Ct. 292, 13 L.Ed.
2d 190 (1964). And finally, is the cause of action one
traditionally relegated to state law, in an area basically
the concern of the States, so that it would be inappro-
priate to infer a cause of action based solely on federal
law? See Wheeldin v. Wheeler, 373 U.S. 647, 652, 83
S.Ct. 1441, 10 L.Ed.2d 605 (1963); ef. J. I. Case Co.
v. Borak, 377 U.S. 426, 434, 84 S.Ct. 1555, 12 L.Ed.2d
423 (1964); Bivens v. Six Unknown Federal Narcotics
Agents, 403 U.S. 388, 394-395, 91 S.Ct. 1999, 29 L.Ed.
2d 619 (1971); id., at 400, 91 S.Ct. 1999 (Harlan, J.,
concurring in judgment).
Appendiz 65
Id. at 78, 95 S.Ct. at 2088, 45 L.Ed.2d at 36-37. The Court
in Piper found that: (1) the plaintiff was not a member of
the class “for whose especial benefit the statute was enacted
. .”; (2) the legislative history supported the conclusion
that Congress did not intend to imply a private right of
action in favor of tender offerors; (3) it was not consistent
with the underlying legislative purpose to imply such a
right in favor of Chris-Craft; and (4) it was appropriate
to relegate the plaintiff to whatever remedy is created by
state law. 430 U.S. at 37-41, 97 S.Ct. at 947-949, 51 L.Ed.2d
at 150-53.
In addition to applying the Cort factors the Court con-
sidered whether, in view of potential impact on sharehold-
ers, there was a less drastic means available for achieving
the congressional goal.
In short, we conclude that shareholder protection, if
enhanced at all by damages awards such as Chris-
Craft contends for, can more directly be achieved with
other, less drastic means more closely tailored to the
precise congressional goal underlying the Williams
Act.
Id. at 40, 97 S.Ct. at 949, 51 L.Ed.2d at 152-53.
Nor can we agree that an ever-present threat of
demages against a successful contestant in a battle
for control will provide significant additional protec-
tion for shareholders in general. The deterrent value,
if any, of such awards can never be ascertained with
precision. More likely, however, is the prospect that
shareholders may be prejudiced because some tender
offers may never be made if there is a possibility of
massive damages claims for what courts subsequently
hold to be an actionable violation of § 14(e). Even a
contestant who “wins the battle” for control may well
wind up exposed to a costly “war” in a later and suc-
cessful defense of its victory. Or at worst—on Chris-
i
|
66 Appendix
Craft’s damage theory—the victorious tender offeror
or the target corporation might be subject to a large
substantive judgment, plus high costs of litigation.
Id. at 39, 97 S.Ct. at 948, 51 L.Ed.2d at 152 (footnote
omitted).
We turn to consideration of the Cort factors with the
gloss of Piper, as they apply to the present case.
A. “Class for whose especial benefit the statute was
enacted ....”
The crucial shortcoming of the plaintiff’s case in Piper
was that plaintiff was not a member of the protected class.
In the instant case, the plaintiff is a member of the class
of intended beneficiaries of the LAA.
In the opinion of the committee, the Securities and
Exchange Commission, and the industry itself, this
legislation is needed to protect small investors from
breaches of trust upon the part of unscrupulous man-
agements and to provide such investors with a regu-
lated institution for the investment of their savings.
H.R.Rep.No. 2639, 76th Cong., 3d Sess. 10 (1940). This
same theme appears in 8.Rep.No. 1775, 76th Cong., 3d Sess.
21 (1940) :
The nature of the functions of investment advisers,
their increasing widespread activities, their potential
influence on security markets and the dangerous po-
tentialities of stock market tipsters imposing upon
unsophisticated investors, convinces this committee
that protection of investors requires the regulation of
investment advisers on a national scale.
B. “Legislative intent ...to create such a remedy... .”
Our understanding of the iegislative purpose is consis-
tent with the reading given it by the Supreme Court in
Appendia 67
S. E. C. v. Capital Gains Research Bureau, 375 U.S. 180,
186-92, 84 S.Ct. 275, 279-283, 11 L.Ed.2d 237, 243-46 (1963) :
Although certain changes were made in the bill fol-
lowing the hearings, there is nothing to indicate an
intent to alter the fundamental purposes of the legisla-
tion. The broad proscription against “any ... practice
... Which operates ... as a fraud or deceit upon any
client or prospective client” remained in the bill from
beginning to end.
Id. at 191, 84 S.Ct. at 282, 11 L.Ed.2d at 246.
The appellees argue that the omission of the phrase
“actions at law” from the jurisdictional section of the Act
is strong evidence that Congress did not intend to authorize
federal jurisdiction over a private cause of action for
damages.® The jurisdictional provisions of other securities
acts specifically provide for jurisdiction over “actions at
5. Section 214 of the Act states:
“The district courts of the United States and the United
States courts of any Territory or other place subject to the
jurisdiction of the United States shall have jurisdiction of
violations of this subchapter or the rules, regulations, or
orders thereunder, and, concurrently with State and Ter-
ritorial courts, of all suits in equity to enjoin any violation
of this subchapter or the rules, regulations, or orders there-
under. Any criminal proceeding may be brought in the dis-
trict wherein any act or transaction constituting the violation
occurred. Any suit or action to enjoin any violation of this
subchapter or rules, regulations, or orders thereunder, may
be brought in any such district or in the district wherein the
defendant is an inhabitant or transacts business, and process
in such cases may be served in any district of which the
defendant is an inhabitant or transacts business or wherever
the defendant may be found. Judgments and decrees so
rendered shall be subject to review as provided in sections
225 and 347 of Title 28, and section 7, as amended, of the
Act entitled “An Act to establish a court of appeals for the
District of Columbia”, approved February 9, 1893. No costs
shall be assessed for or against the Commission in any pro-
ceeding under this subchapter brought by or against the
Commission in any court.”
15 U.S.C. § 80b-14 (1970) (emphasis added).
68 Appendix
law”. Judge Gurfein emphasized this point in his dissent
in Abrahamson.
But the more cogent question is why the Advisers
Act as distinguished from every other securities act,
does not provide for any express civil liability in dam-
ages. The majority offers no explanation for such an
omission which must have been a studied omission. I
think it is highly relevant that in each of the other
Acts Congress itself did provide for some express civil
liability, yet under the Advisers Act it failed to include
a single section imposing liability for damages. Con-
gress, for example, could have provided an express
damage remedy for misrepresentations in the i
tion statement of the advisers as it did for misrepre-
sentations of the registration statement of the under-
writer, 15 U.S.C. § 77k(a)(5). This ‘ndicates rather
that, in its cautious approach to the regulation of
investment advisers, Congress was not yet ready to
impose any civil liability for damages.
inane F.2d at ........ (emphasis in original), An equally per-
suasive argument can be made that Congress omitted the
“actions at law” language from the general jurisdictional
section because the Act does not contain any express pro-
vision authorizing a private party to bring a civil action
for damages. This rationale was accepted by the majority
in Abrahamson and in Bolger v. Laventhol, Krekstein,
Horwath & Horwath, 381 F.Supp. 260, 264-65 (S.D.N.Y
1974). The court in Bolger stated :
6. The “actions at law” language is found in the following
provisions: §§ 11 and 12 of the 1933 Securities Act, 15 U.S.C.
§§ 77k and 771 (1970); §§ 9(e), 16(b) and 18 of the 1934 Securities
Exchange Act. 15 U.S.C. §§ 78i(e), 78p(b), 78r (1970); §§ 16(a)
and 17b of the Publie Utility Holding Co. Act of 1935, 15 U.S.C.
§§ 79p, 79q (1970); §30(f) of the Investment Company Act of
1940, 15 U.S.C. § 80a-29(f) (.'970).
Appendix 69
[A] plausible explanation exists for the hiatus in
the language in this statute. Unlike each of the other
securities laws, the Advisers Act does not contain any
provision expressly authorizing a civil action by a
private person injured by a violation of one of the
provisions of the Act. Accordingly, it was necessary
in those statutes to make reference to “actions at law”
in the jurisdictional sections, Such a provision was
unnecessary in the Advisers Act.
Id. at 264-65 (footnote omitted). Judge Gurfein’s dissent
in Abrahamson took exception to this analysis:
The reason given by the majority is not persuasive,
for it fails to’note that in every single case in which
an express civil liability is created in any of the Acts,
the jurisdiction has already been stated in the very
section creating the express liability. . . . The better
explanation, it seems to me, for the general jurisdic-
tional provision in each Act ... is Congress’ fear that
general federal question jurisdiction under 28 U.S.C.
§ 1331 might not establish jurisdiction in the federal
courts over securities law claims, particularly when
the jurisdictional amount was lacking.
och F.2d at ........ 0.6 (emphasis in original).
The dissent in Abrahamson also attached significance to
the absence of any section of the [AA that imposes liability
for damages. Jd. ........ F.2d at. ...... The dissent reasoned
that the omission of a section imposing liability for damages
suggested that Congress, in a cautious approach to the
regulation of investment advisers, was not yet ready to
impose civil liability for damages. Jd. ........ ae Ot...
While this presentation of the former of our two choices
is plausible it is no more persuasive than the reading given
_this matter by the majority in Abrahamson. We get no
substantial assistance from the legislative history with re-
spect to Congress’ intentions.
70 Appendix
C. “Consistent with the underlying purposes of the legis-
lative scheme... .”
As we have previously stated, Congress sought to protect
investors from the “problems and abuses of investment ad-
visory services” by regulation of the industry. S.Rep. No.
1775, 76th Cong., 3d Sess. 21 (1940). The concept of imply-
ing a private right of action for damages in favor of in-
vestors injured by violations of the Act is consistent with
the remedial purposes contemplated by Congress.
In Piper the Supreme Court reasoned that “the Williams
Act cannot consistently be interpreted as conferring a
monetary remedy upon regulated) parties .. ,.” 430 U.S.
at 39, 97 S.Ct. at 948, 51 L.Ed at 152. Again the reasoning
of Piper simply does not apply to the instant case where
plaintiff is a member of the protected class.
D. “The cause of action [is] one traditionally relegated
to state law... .”
The area of activity in question is not one, in the lan-
guage of Cort, “[so] basically the concern of the States...
that it would be inappropriate to infer a cause of action
based solely on federal law.” 422 U.S. at 78, 95 S.Ct. at
2088, 45 L.Ed.2d at 36. Federal regulation of the securities
industry is very broad. An investor had little common law
protection against his adviser. ;
The Investment Advisers Act of 1940 was the last
in a series of Acts designed to eliminate certain abuses
in the securities industry, abuses which were found to
have contributed to the stock market crash of 1929
and the depression of the 1930’s. . . . A fundamental
purpose, common to these statutes, was to substitute
a philosophy of full disclosure for the philosophy of
caveat emptor and thus to achieve a high standard of
business ethics in the securities industry.
Appendix 71
S. E. C. v. Capital Gains Research Bureau, 375 U.S. 180,
186, 84 S.Ct. 275, 280, 11 L.Ed.2d 237, 243 (1963). In that
case the Court examined the relation between its interpre-
tation of the IAA and common law of fraud. The Court
pointed out that its conclusion—that injunctive relief was
available without proof of intent to injure or evidence of
actual injury—was not in derogation of the common law.
Id. at 192, 84 S.Ct. at 283, 11 L.Ed.2d at 246. As pertains
to our inquiry, the Court went on to note:
There has also been a growing recognition by common-
law courts that the doctrines of fraud and deceit which
developed around transactions involving land and other
tangible items of wealth are ill-suited to the sale of
such intangibles as advice and securities, and that,
accordingly, the doctrines must be adapted to the mer-
chandise in issue.
Id. at 194, 84 S.Ct. at 284, 11 L.Ed.2d at 248.
E. The factors applied.
We do not fird in the present case the less drastic and
more closely tailored means for achieving the congressional
goal which the Court found in Piper. Nor do we foresee
that recognition of a private right of action for damages
is likely to cause investment advisers not to offer their
services to the public.
[5] Thus we arrive at the ultimate question whether it
is necessary to imply the cause of action to achieve the goals
of Congress. We conclude that it is. Plaintiff is a member
of the benefited class; the recognition of an aggrieved in-
vestor’s private right of action for damages is consistent
with the underlying purposes of the legislative scheme; the
cause of action is not one traditionally within the province
of state courts; and legislative intent either to create or
deny such a cause of action is a neutral factor. Congress
72 Appendix
sought to protect investors such as the plaintiff who have
relied on the advice of investment advisers, from the pos-
sibility of overreaching and fraudulent conduct on the part
of investment advisers. To deny investors a right of action
for damages incurred as a direct result of fraudulent ad-
visory practices would undermine this purpose. We find
additional support in the language of the Supreme Court
in 8. E. C. v. Capital Gains Research Bureau:
Congress intended the Investment Advisers Act of
1940 to be construed like other securities legislation
“enacted for the purpose of avoiding frauds,” not
technically and restrictively, but flexibly to effectuate
its remedial purposes.
375 U.S. at 195, 84 S.Ct. at 284, 11 L.Ed.2d at 248. Finally,
we perceive neither a less stringent means to achieve the
congressional goal nor serious adverse impact on investors
by implying the cause of action.
Til.
[6] The trial court was correct in dismissing plaintiff’s
Rule 10b-5 claims. Plaintiff advances two theories to this
court. The first is that transfer of control over his stock
portfolio somehow satisfied the requirement that the alleged
fraud be “in connection with the purchase and sale of se-
curities.”” We believe that any purchase and sale which
took place incident tv this »rrangement was too remote to
satisfy the “in connection with the purchase and sale”
requirement as contemplated by Blue Chip Stamps v. Manor
7. On appeal plaintiff contends that the right to make purchases
and sales was secured as a result of the fraud. In his complaint he
pursued a slightly different approach, arguing that the purchase
and sale requirement was satisfied when the defendants immedi-
ately sold all of his securities upon assuming monagement of his
portfolio.
Appendix 73
Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539
(1975).
[7] Plaintiff’s second theory is that the contractual ar-
rangement with First Houston constituted an investment
contract and therefore was a security under 9. EH. C. v.
Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1102-1103,
90 L.Ed. 1244, 1249-50 (1946). This contention was made in
a proposed second amended complaint which was never
filed. It was not properly before the trial court and conse-
quently is beyond the scope of this appeal.®
The judgment of the trial court is AFFIRMED in part
and REVERSED in part and the cause is REMANDED.
HILL, Cireuit Judge, dissenting:
My brothers in the majority today have found that a
private right of action exists where the United States Con-
gress has failed to provide for one. Finding this inappro-
priate for several reasons, I dissent.
The Act here under investigation is the last of a series
of measures designed to provide seme regulation in the
field of securities and similar investments. It differs notice-
ably from the others. The Investment Advisers Act of 1940
was designed, largely, to provide a mechanism for the Con-
gress to obtain information about what was, at the time of
enactment, a relatively new industry. 15 U.S.C.A. §§ 80b-
1—80b-21. Implicit in a measure calculated to gather in-
formation is the intention of the Congress, when equipped
with full information, to legislate\further if the information
thus obtained indicated a need for regulation. The Congress
may have concluded that mandating a code of conduct and
dealing which would be enforced by the Securities and
8. Whether on remand plaintiff can amend to raise this is in
the diseretion of the district court. Fed.R.Civ.P. 15(a).
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74 Appendix
Exchange Commission through penalties, injunctions, and
the like, would be sufficient. The Congress may yet conclude
that the industry would be better policed if those dealing
with members of that industry have a private right of
action against advisers violating the law. In any event, it
is appropriate that the legislative branch make such a de-
cision.
No legislation states that a person shall have a right of
action in the federal courts under these circumstances. Yet,
eminent jurists of the United States Court of Appeals for
the Second Circuit have, like my brothers today, discovered
the need for a private cause of action and, in a gesture
somewhat patronizing of the Congress, have determined
to complete the work of that body by reading one into the
Act. Abrahamson v. Fleschner, ........ P28 kn. SO skein (2d
Cir. 1977)
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