Petition — First Houston Investment Corp. v. Wilson
Supreme Court brief1979
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BNA, Was, 127 JUN 1 1978
| MICHAEL RODAK, JR., CLER
Supreme Court of the United States
October Term 1977
NO._@F- 171%
FIRST HOUSTON INVESTMENT CORPORATION,
WILLIAM A. WALSER, JERRY ALLGOOD
and MICHAEL BARKER,
Petitioners,
V.
JOHN M. WILSON,
Respondent.
PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
Brice A. TONDRE
2684 South Tower
Pennzoil Place |
Houston, Texas 77002
(713) 225-9471
Attorney for the Petitioners
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Alpha Law Brief Co., One Main Plaza, No. 1 Main Si., Houston, Texas 77002
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QUESTIONS PRESENTED ................000ceeeeee
STATUTES INVOLVED ...............0.ccccccceees-
STATEMENT OF THE CASE ...............--00000:
REASONS FOR GRANTING THE WRIT ............
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CERTIFICATE OF SERVICE .......................
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CITATIONS
CASES
Abrahamson v. Fleschner, 1976-77 Transfer Binder F. Sec.
L. Rpt. (C.C.H.) {95,889 (2nd Cir. 1977) Supreme
rrr Tre rer TTT er
Blazer v. Black, 196 F.2d 139 (10th Cir. 1952) .........
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723
6 ERR Se eR Ey ya Re ee ere ee ee
ee i ED cei basccanesdasesvssss
Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) .....
Lewis v. Transamerica Corp., No. 75-1285 9th Cir., Decided
4/19/78, Supreme Court Docket No. 77-_____........
S.E.C. v. Capital Gains Research Bureau, 375 U.S. 180
RP Ch UU eNGUO Wedediny si cache bh ceWus ees cen ces
Sacramento Coca-Cola Bot. Co. v. Chauffeurs Local 150,
440 F.2d 1096 (9th Cir. 1971), cert. den’d. 404 U.S. 826
CE Beas Seba acts 04006 hdd be sb) 6c 6n4 50 nses
Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977)
17
Page
16
12
Supreme Court of the United States
October Term 1977
|
FIRST HOUSTON INVESTMENT CORPORATION,
WILLIAM A. WALSER, JERRY ALLGOOD
and MICHAEL BARKER,
Petitioners,
Vv.
JOHN M. WILSON,
Respondent.
PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
Petitioners First Houston Investment Corporation,
William A. Walser, Jerry Allgood and Michael Barker’
respectfully pray that a writ of certiorari issue to review
the judgment and opinion of the United States Court of
Appeals for the Fifth Circuit entered in the above
entitled case on February 2, 1978.
1. These Petitioners and Merrill, Lynch, Pierce, Fenner & Smith
and Charles Hundley were Defendants in the District Court.
2
OPINIONS BELOW
The opinion of the Court of Appeals (A 4-24)? is
reported at 566 F.2d 1235 (Sth Cir. 1978). The decision
of the District Court dismissing the claim under the
Investment Advisers Act of 1940, and the Securities
Exchange Act of 1934 (A 25-27), and its decision grant-
ing judgment on the pleadings with respect to the claim
under the Securities Exchange Act of 1934 (A 28)
are unreported.
JURISDICTION
The judgment of the Court of Appeals was entered on
February 2, 1978 (A 31-32). A timely petition for rehear-
ing was denied on March 7, 1978, and this petition for
writ of certiorari is filed within 90 days of that date.
The jurisdiction of this Court is invoked under 28 U.S.C.
§ 1254(1).
QUESTIONS PRESENTED
Respondent, a former client of Petitioner First Hous-
ton Investment Corporation (“First Houston”), a regis-
tered investment adviser, seeks damages from First Hous-
ton and three of its employees (the other Petitioners
herein) on the grounds that (i) he was fraudulently
induced by Petitioners to enter into a contract with
First Houston for the management of his funds; and
(ii) during the course of said management activity, he
was not fully informed of the methods utilized in con-
nection wita the management of the funds. The claim
2. The opinion below is reproduced in the appendix to this petition
and “A ” page references are to that appendix.
3
is made under the Investment Advisers Act of 1940
(15 U.S.C. § 80b-1, et seq.).
Two important questions are presented:
I,
May a private right of action for damages be implied
under the Investment Advisers Act of 1940 even though
(i) the Act contains no express provision for any damage
actions and confers no jurisdiction on the federal courts
to hear actions at law; (ii) the legislative history evi-
dences a clear congressional intention not to create pri-
vate rights of action and Congress has consistently de-
clined opportunities to do so; and (iii) the cause of
action sought to be advanced is one traditionally relegated
to state law?
II.
Did the Court of Appeals have jurisdiction to consider
Respondent’s Investment Advisers Act claim when the
notice of appeal appealed only from the judgment of the
District Court with respect to Plaintiffs First Amended
Original Complaint (“amended complaint”) and does
not appeal from the order of the District Court dismiss-
ing Plaintiffs Original Complaint which is the only
pleading which alleges a cause of action under the In-
vestment Advisers Act of 1940?
STATUTES INVOLVED
Section 206 of the Investment Advisers Act of 1940
(15 U.S.C. § 80b-6) and Section 214 of that Act (15
. U.S.C. § 80b-14) are set forth in the appendix to this
petition (A 1-3).
4
STATEMENT OF THE CASE
This case arises out of a contractural relationship
between Respondent and First Houston. Under the con-
tractural relationship, Respondent entrusted the manage-
ment of certain funds to First Houston which was regis-
tered as an investment adviser under the Investment Ad-
visers Act of 1940. It is alleged that during the course
of the management of the funds by First Houston—a
period commencing in March 1972, and ending in Sep-
tember 1973—the value thereof decreased from $104,358
to $5,441 plus an unknown amount for 1,000 shares of
Teleprompter stock upon which trading had _ been
suspended by the Securities and Exchange Commission
ty ®t aca 2
The action was commenced in February 1974, against
First Houston, William A. Walser (“Walser”), Jerry
Allgood (“Allgood”), Michael Barker (“Barker”) (the
Petitioners here), Merrill, Lynch, Pierce, Fenner &
Smith (“Merrill Lynch”) and Charles Hundley (“Hund-
ley”). The claims against Merrill, Lynch and Hundley
were dismissed by the District Court and the appeal from
the dismissal thereof was dismissed by the Court of
Appeals.
Respondent contends that he was induced to enter
into a contract with First Houston for the management
of his money by deceptive and misleading representations
made by First Houston personnel. Respondent further
contends that he was injured as a result of the failure
to be advised by personnel of First Houston that First
Houston had discontinued the utilization of certain com-
puter programs which they had previously utilized in
the management of his and other clients’ funds.
5
In his original complaint, Respondent sued under Sec-
tion 10(b) of the Securities Exchange Act of 1934
(15 U.S.C. § 78j(b) ), and Section 206 of the Investment
Advisers Act of 1940 (15 U.S.C. § 80b-6), as well as
advancing certain pendent state law claims. Petitioners
filed a motion to dismiss the claims under Section 10(b)
of the Securities Exchange Act of 1934 and Section 206
of the Investment Advisers Act of 1940. The motion was
granted with leave given Respondent to amend his com-
plaint and attempt to state a claim under Section 10(b)
of the Securities Exchange Act of 1934.
Respondent filed an amended complaint attempting
to state a cause of action under Section 10(b) of the
Securities Exchange Act of 1934. The amended com-
plaint did not contain any allegation of a cause of action
under the Investment Advisers Act of 1940. Respondents
then moved for judgment on the pleadings which was
granted.
It was this judgment on the pleadings to which Re-
spondent addressed his notice of appeal to the United
States Court of Appeals for the Fifth Circuit. No notice
of appeal was ever filed with respect to the order dismiss-
ing the claim under the Investment Advisers Act.
On appeal, the Court of Appeals unanimously af-
firmed the judgment on the pleadings with respect to
Respondent’s claim under Section 10(b) of the Securities
Exchange Act of 1934, for the reason that it failed to
allege fraud in connection with the purchase or sale of
a security. .
After holding that it did have jurisdiction to consider
the Investment Advisers Act question, the Court of Ap-
6
peals (2-1; Hill, J., dissenting on this point) held that
Respondent had an implied right of action for damages
under Section 206 of the Investment Advisers Act.
In his vigorous dissent (A __), Judge Hill makes an
observation which is totally consistent with the recent
decisions of this Court with respect to federal regulation
of securities. Judge Hill, in addressing himself to the
implication of a cause of action under a federal statute,
states as follows:
It may be that sovereignty, like nature, abhors a
vacuum. In nature, molecules of gases mindlessly
rush in to fill and destroy any vacuum that occurs.
But in the political sciences and the governing arts,
those of us who might be tempted to fill a vacuum
are not mindless. We are given reason by which we
may determine, for ourselves, whether one branch
of the Government should rush into the province
of another when the inaction of the other seems
to create a vacuum. More than one hundred and
eighty years ago, Alexander Hamilton labeled the
judiciary “the least dangerous branch” of government
because it “. . . has no influence over either the
sword or the purse, no direction of either the
strength or of the wealth of the society, and can
take no active resolution whatever. It may be truly
said to have neither Force nor Will, but merely
judgment; and must ultimately depend upon the aid
of the executive arm even for the efficacy of its
judgments.” Cooke, J. (ed.), The Federalist 522-23
(1961). As for me, I should rather leave the abhor-
rent vacuum than to breach the separation of powers
so wisely mandated in our Constitution. I have no
yearning to be patronizing of the distinguished men
and women who serve in the United States House
of Representatives and the United States Senate.
If the need exists for a private right of action so
7
that “private attorneys general” may help enforce
the Investment Advisers Act of 1940, our Congress
is quite sufficient to the task of meeting it. Even
were it to be found that the Congress has attempted
to abdicate this part of its legislative function to the
courts, I feel that proper concern for the Constitu-
tion requires that we decline the invitation to assist
in such an inappropriate way.
A timely petition for rehearing and suggestion that
rehearing be had en banc was filed. The petition was
denied on March 7, 1978.
REASONS FOR GRANTING THE WRIT
z.
This case, which has been in the federal courts since
1974, raises questions that the lower federal courts,
the S.E.C. and the investment community have all recog-
nized to be novel and important. The issue of implied
right of action under Section 206 of the Investment
Advisers Act has now been considered by sharply di-
vided panels of three courts of appeals. On April 19,
1978, the Ninth Circuit handed down its opinion in
Lewis v. Transamerica Corp., No. 75-1285. To date,
the undersigned counsel has not received a copy of
the opinion. However, he is informed that it was a two
to one decision and that petition for certiorari is being
filed with this Court and probably will be docketed
shortly. The other case decided by a court of appeals,
Abrahamson v. Fleschner, 1976-77 Transfer Binder F.
Sec.L.Rpt. (C.C.H.) § 95,889 (2nd Cir. 1977), is the
subject of a petition for writ of certiorari filed with this
Court in March 1978, which bears Docket No. 77-1279.
8
There are numerous district court opinions on the issue
holding both that there is and that there is not a private
cause of action under the Investment Advisers Act.
(There is a complete discussion of these numerous opin-
ions in the Petition for Writ of Certiorari filed in Flesch-
ner, et al v. Abrahamson, et al, No. 77-1279, to which
the Court is respectfully referred.)
The decision below implied a right of action under
the Investment Advisers Act, despite the nolicy considera-
tions enunciated by this Court in Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723 (1975). In implying
the cause of action under the Investment Advisers Act,
the Court of Appeals bases its decision almost exclusively
upon Cort v. Ash, 422 U.S. 66 (1975). As is pointed
out by the Court of Appeals, this Court in Cort v. Ash
set forth the four relevant factors which must be con-
sidered in deciding whether to infer a private remedy.
The factors are:
A. Is the plaintiff one of the class for whose
especial benefit the statute was enacted?
B. Is there any indication of legislative intent
explici® or implicit, either to create such a remedy
or deny one?
C. Is it consistent with the underlying purposes
of the legislative scheme to imply such a remedy for
the plaintiff?
D. Is the cause of action one traditionally rele-
gated to state law?
The Court of Appeals concluded that three of the fac-
tors indicate that a cause of action should be implied
and that one was neutral.
9
Petitioners believe that the Court of Appeals mis-
applied the factors set forth in Cort v. Ash and that a
clear reading of the case dictates that no private right
of action should be implied under the Investment Ad-
visers Act.
A.
Class for Whose Especial Benefit the Statute
Was Enacted
There can be no doubt that Congress intended to
benefit the clients of investment advisers through the
enactment of the Investment Advisers Act. Thus, one of
the factors of Cort v. Ash is met.
Legislative Intent to Create Such a Remedy
The Court of Appeals found that there is no assistance
to be gained from the legislative history. This flies in
the face of the clear and unequivocal omission by Con-
gress of the words “actions at law” from Section 214
of the Investment Advisers Act. Section 214 of the bill
finally enacted by Congress in 1940, unlike the earlier
drafts submitted by the S.E.C. and others, and unlike
every other federal securities act*, does not confer juris-
diction on the district courts to hear “actions at law
brought to enforce any liability or duty created by
the Act”. The district courts are granted only jurisdic-
tion to hear criminal prosecutions and suits in equity
to enjoin any “violation” of the Act. The deliberate
3. Including the Investment Company Act which was enacted
on the same day as the Investment Advisers Act.
10
omission of the words “actions at law” and the use of
the word “violation” rather than “liability” can only be
construed as limiting the jurisdiction of the federal courts
under Section 214 to criminal prosecutions and S.E.C.
enforcement proceedings.
As pointed out in the dissent by Judge Hill, the In-
vestment Advisers Act was the last in a series of measures
designed to provide some regulation in the field of
securities and similar investments. The Investment Ad-
visers Act was designed largely to provide a mechanism
for the Congress to obtain information about what was, in
1940, a relatively new industry. Implicit in a measure
calculated to gather information is the intention of
Congress, when equipped with full information, to legis-
late further if the information thus obtained indicated
a need for further legislation (A 21).
Since 1940, Congress has twice amended the Invest-
ment Advisers Act and has on neither occasion seen fit
to provide a private right of action under the Act. In
1975, the S.E.C. proposed to Congress that it add to
Section 214 of the Investment Advisers Act the words
“actions at law brought to enforce any liability or duty
created by” that were deleted from early drafts of the
bill in 1940. Though hearings were held on the S.E.C.
proposals, Congress failed to act on the proposals.
For a more in depth discussion of the background of
the legislative history pertinent to the Investment Ad-
visers Act, and a complete citation to the legislative
history and relevant authorities, the Court is respect-
fully referred to the petition for writ of certiorari filed
in this Court in the case of Fleschner, et al v. Abrahamson,
et al, No. 77-1279.
11
From a review of the legislative history, it is difficult
to conclude, as the Court of Appeals did, that said history
is neutral on the question of a private right of action.
It appears clear that Congress intended not to provide a
private right of action.
C.
Consistent with the Underlying Purposes of
the Legislative Scheme
The majority of the Court of Appeals weakly reasons
that implying a cause of action under the Investment
Advisers Act is consistent with the underlying purposes .
of the legislative scheme because Respondent is a mem-
ber of the protected class. If this approach were valid, it
would mean that two of the factors specified in Cort v.
Ash are identical, i.e., the factors discussed in A and C
of this section. This Court certainly believed the two
factors to encompass different things when it handed
down its opinion. Furthermore, this reasoning flies in the
face of what Congress intended the Investment Advisers
Act to accomplish. Congress intended a twofold purpose
(A 21):
(1) To gather information; and
(2) To afford the S.E.C. regulatory authority.
As was pointed out above, Congress specifically declined
to provide language which would supply a basis for
jurisdiction over a private right of action. The purpose
of the legislation and the deletion of the “actions at law”
language seems to rather clearly indicate that Congress
did not have the purpose to provide for enforcement of
12
the Investment Advisers Act through “private attorneys
general” but only through the S.E.C.
D.
The Cause of Action is One Traditionally
Relegated to State Law
In light of this Court’s recent pronouncements in the
field of securities regulation, particularly Blue Chip
Stamps v. Manor Drug Stores, supra; Ernst & Ernst v.
Hochfelder, 425 U.S. 185 (1976); and Santa Fe Indus-
tries, Inc. v. Green, 430 U.S. 462 (1977), it would ap-
pear that the factor of whether the cause of action is one
traditionally relegated to state law is of great import.
The Court of Appeals seems to be saying in its considera-
tion of this issue that the cause of action is one not tra-
ditionally relegated to state law because scienter needs to
be plead and proven under state law, but not under the
Investment Advisers Act. This may be true when the
question is whether or not injunctive relief should be given
in an S.E.C. enforcement action. S.E.C. v. Capital Gains
Research Bureau, 375 U.S. 180 (1963). However, on the
recent occasion this Court was faced with the question
of whether scienter must be plead and proven in connec-
tion with a cause of action under federal securities law
for damages, it concluded that it must. Ernst & Ernst v.
Hochfelder, supra. In that case at footnote 12, this Court
specifically refers to S.E.C. v. Capital Gains Research
Bureau, Inc., supra, and confines its holding therein
that scienter is not a necessary element to actions for
injunctive relief. This Court also states in the same foot-
note that scienter refers to a mental state embracing in-
tent to deceive, manipulate or defraud. While Ernst &
13
Ernst v. Hochfelder addresses itself to Section 10(b) of
the Securities Exchange Act of 1934, the reasoning
should be equally applicable to causes of action under
other federal securities laws in general and Section 206
of the Investment Advisers Act in particular since the
wording is so similar.
Thus, it would appear, under the state of the law as
announced in Ernst & Ernst v. Hochfelder, supra, that
scienter would need be plead and proven in order to
support an implied cause of action against an investment
adviser. This being the case, the reasoning of the Court
of Appeals falls of its own weight. Furthermore, the
necessity to prove scienter places this case in the spectrum
of issues identical to those presented in common law
fraud and breach of fiduciary duty. The arrangement
between an investment adviser and his client, particularly
the one had here, was simply an agency for hire. The
laws of the various states provide remedies more than
sufficient to redress principals for the transgressions of
their agents.
E.
Summary
From the foregoing discussion, it can be seen that
only one of the factors of Cort v. Ash is satisfied. That
factor is that Respondent is within the class of people
to be benefited by the Investment Advisers Act. How-
ever, no other factor is met. The legislative history tips,
on balance, against the implication of a private cause
of action. The underlying purpose of the statute was
not to provide redress to private litigants, but to provide
?
14
a vehicle for the gathering of information and an enforce-
ment tool for the S.E.C. Finally, and of highest import-
ance, the laws of the several states more than adequately
provide remedies to redress any grievances that a client
may have against his investment adviser.
The foregoing analysis clearly points out that there
are substantial questions of national import with respect
to the implication of a cause of action under the Invest-
ment Advisers Act. Accordingly, the writ of certiorari
should be granted so that this complex and troublesome
issue can be resolved once and for all nationwide.
II.
The question of whether the Court of Appeals had
jurisdiction to consider the Investment Advisers Act in this
case is an issue on which Courts of Appeals of different
circuits have reached diametrically opposite conclusions.
The facts are simple. Respondent filed his original
complaint and included therein claims under Section
10(b) of the Securities Exchange Act of 1934, and Sec-
tion 206 of the Investment Advisers Act of 1940.
Petitioners filed a motion to dismiss both claims. The
District Court dismissed the claims contained in the
original complaint, but granted Respondent leave to
amend with respect to the claims asserted under Section
10(b) of the Securities Exchange Act of 1934 (A 25-27).
Respondent filed his amended complaint in which he
attempted to allege a claim under Section 10(b) of the
Securities Exchange Act of 1934. The amended com-
plaint did not contain a claim based upon Section 206
of the Investment Advisers Act of 1940.
15
Petitioners filed a motion for judgment on the plead-
ings with respect to the amended complaint. The motion
was granted (A 28).
Respondent filed a notice of appeal which addressed
itself solely to the District Court’s order granting judg-
ment on the pleadings (A 29-30). There was not a no-
tice of appeal which addressed itself to the order dis-
missing the original complaint.
Petitioners argued in the Court of Appeals that Re-
spondent abandoned his claim under the Investment Ad-
visers Act of 1940, when he filed his amended com-
plaint and did not include such a claim therein, and then
appealed only from the order granting judgment on the
pleadings with respect to the amended complaint. The
Court of Appeals held that Respondent had not abandoned
the claim and, therefore, held that the Investment Ad-
visers Act issue was before it for decision.
In so holding, the Court of Appeals chose to follow
Blazer v. Black, 196 F.2d 139 (10th Cir. 1952) which,
at 143-4 states:
. . . It has long been the rule of Federal practice,
even despite the Conformity Act, that while the
pleader who amends or pleads over, waives his ob-
jections 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 vital blow to a sub-
stantial part” of his cause of action.
The Court of Appeals quoted the above language with
approval. It, however, recognized that the Court of Ap-
peals for the Ninth Circuit had help precisely opposite
16
in Sacramento Coca-Cola Bot. Co. v. Chauffeurs Local
150, 440 F.2d 1096 (9th Cir. 1971), cert. den’d. 404
U.S. 826 (1971).
The Ninth Circuit, after referring to the rule quoted
above, states at 1098 of the Coca-Cola case that:
Although this may state the general rule, it is not
the rule which has been enunciated in this cir-
ee
There could be no clearer conflict among the circuits
than that which has developed between the Fifth and
Tenth Circuits on the one hand, and the Ninth Circuit
on the other. The conflict cries for resolution by this
Court.
CONCLUSION
For the foregoing reasons, a writ of certiorari should
issue to the United States Court of Appeals for the
Fifth Circuit.
ully submitted,
BRICE A. TONDRE
Counsel for Petitioners
2684 South Tower
Pennzoil Piace
Houston, Texas 77002
(713) 225-9471
17
CERTIFICATE OF SERVICE
I hereby certify that three true and correct copies of
the foregoing Petition for Writ of Certiorari to the United
States Court of Appeals for the Fifth Circuit and the
following Appendix thereto have been served upon Re-
spondent’s ,counsel by mail, postage prepaid, on this
the day of May, 1978, addressed as follows:
Joel H. Pullen, Esq.
Tinsman & Houser
1900 National Bank of Commerce Building
San Antonio, Texas 78205
cA phodbh
BrRICE A. TONDRE
Al
APPENDIX
Text of Statutes Involved
Section 206 of the Investment Advisers Act of 1940,
54 Stat. 852, as amended, 74 Stat. 887, 15 U.S.C. § 80b-
6, provides:
PROHIBITED TRANSACTIONS By
REGISTERED INVESTMENT ADVISERS
Sec. 206. It shall be unlawful for any investment
adviser, by use of the mails or any means or instru-
mentality of interstate commerce, directly or indi-
rectly —
(1) to employ any device, scheme, or artifice
to defraud any client or prospective client;
(2) to engage in any transaction, practice, or
course of business which operates as a fraud or
deceit upon any client or prospective client;
(3) acting as principal for his own account,
knowingly to sell any security to or purchase any
security from a client, or acting as broker for a
person other than such client, knowingly to effect
any sale or purchase of any security for the account
of such client, without disclosing to such client in
writing before the completion of such transaction
the capacity in which he is acting and obtaining
the consent of the client to such transaction. The
prohibitions of this paragraph (3) shall not apply
to any transaction with a customer of a broker or
dealer if such broker or dealer is not acting as an
investment adviser in relation to such transaction;
A2 A3
(4) to engage in any act, practice, or course of provided in sections 128 and 240 of the Judicial
business which is fraudulent, deceptive, or manipu- Code, as amended, and section 7, as amended, of the
lative. The Commission shail, for the purposes of Act entitled “An Act to establish a court of appeals
this paragraph (4) by rules and regulations define, for the District of Columbia”, approved February 9,
and prescribe means reasonably designed to pre- 1893. No costs shall be assessed for or against the
vent, such acts, practices, and courses of business ‘ Commission in any proceeding under this title brought
as are fraudulent, deceptive, or manipulative. by or against the Commission in any court.
TEXT OF STATUTES INVOLVED
Section 214 of the Investment Advisers Act of 1940,
54 Stat. 856, 15 U.S.C. § 80b-14, provides:
JURISDICTION OF OFFENSES AND SUITS
Sec. 214. The district courts of the United States
and the United States courts of any Territory or
other place subject to the jurisdiction of the United
States shall have jurisdiction of violations of this
title or the rules, regulations, or orders thereunder,
and, concurrently with State and Territorial courts,
of all suits in equity to enjoin any violation of this
title or the rules, regulations, or orders thereunder.
Any criminal proceeding may be brought in the dis-
trict wherein any act or transaction constituting the
violation occurred. Any suit or action to enjoin any
violation of this title or rules, regulations, or orders
thereunder, may be brought in any such district
or in the district wherein the defendant is an in-
habitant 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
A4
John M. WILSON, Plaintiff-Appellant,
v.
FIRST HOUSTON INVESTMENT CORPORATION
et al., Defendants-Appellees.
No. 75-3422
UNITED STATES COURT OF APPEALS
Fifth C’zvuit
Feb. 2, 1978.
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 Houston Investment Corporation’ after reading two
1. The defendants are First Houston Investment and three of
its employees.
AS
magazine articles which purported to describe its invest-
ment management techniques. In particular the articles
represented that First Houston utilized a system of com-
puter 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 attorney giving First Houston full discretionary au-
thority to manage plaiutiff’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 management of the
account because the account had become tov 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 subject matter jurisdiction was granted. The trial
court reasoned 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 (CA 5), cert. denied, 419 US.
54 (1971).
A6
Plaintiff was given leave to file an amended complaint,
and he did so, again attempting to state a 10b-5 claim.
However, he did not reassert his claim under the IAA,
nor did he incorporate by reference the allegations of
the original complaint. First Houston’s motion to dismiss
the amended complaint was granted.
I.
[2, 3] Plaintiff did not waive his right to appeal the
order dismissing his claim under the IAA by filing an
amended complaint which failed to make reference to
that alleged cause of action. As a general rule an amended
complaint suspersedes and replaces the original com-
plaint, unless the amendment specifically refers to or
adopts the earlier pleading. La Batt v. Twomey, 513
F.2d 641, 651 (CA 7 1975); Cedillo v. Standard Oil
Co. of Texas, 261 F.2d 443 (CA 5 1958). See also
6 Wright & Miller, Federal Practice and Procedure: Civil
§ 1476 (1971); 3 Moore’s Federal Practice ¥ 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 mechani-
cal and seems to be a rigid application of the con-
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 Abraham-
son v. Fleschner, No. 75-7203, F.2d , at n. 5 (CA
2 1977) (the dissent and majority agree on this point). See generally
Note, /mplying Civil Remedies from Federal Regulatory Statutes,
77 Harv. L. Rev. 285, 287 (1963) (two possible theories of juris-
diction).
A7
cept that a Rule 15(a) amendment completely
replaces the pleading it amends. Without more, the
action of the amending party should not result in
completely denying him the right to appeal the
court’s ruling. By way of contrast, if the motion
to dismiss is denied and defendant answers and de-
fends 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 prin-
ciples 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 appeal.
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. Black, 196 F.2d 139, 143-44 (CA 10 1952) (citation
omitted) :
[W]hile 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 vital 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
3. Loux v. Rhay, 375 F.2d 55, 57 (CA 9 1967). See also Sacra-
mento Coca-Cola Bot. Co. v. Chauffeurs Local 150, 440 F.2d 1096,
1098 (CA 9), cert. denied, 404 U.S. 826, 92 S.Ct. 57, 30 L.Ed.2d
A8
whether a private right of action should be implied under
the IAA is properly before us on appeal.
Il.
[4] The broad antifraud provision of the IAA, § 206,*
makes no express provision for a private right of action
for damages. But this alone does not preclude the recog-
nition 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. I.
Case Co. v. Borak, 377 U.S. 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 neces-
4. 15 U.S.C. § 80b-6 (1970) provides:
“Tt shall be unlawful for any investment adviser, by use of the
mails or any means or instrumentality of interstate commerce,
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, knowingly
to effect any sale or purchase of any security for the account
of such client, without disclosing to such client in writing before
the completion of such transaction the capacity in which he is
acting and obtaining the consent of the client to such trans-
action. 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 investment adviser in rela-
tion to such transaction;
“(4) to engage in any act, practice, or course of business
which is fraudulent, deceptive, or manipulative. The Commission
shall, for the purposes of this paragraph (4) by rules and
regulations define, and prescribe means reasonably designed to
prevent, such acts, practices, and courses of business as are
fraudulent, deceptive, or manipulative.”
A9
sary 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 y. Fleschner, No. 75-7203, —__ F.2d
at ___. (CA 2 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 Manage-
ment Corp. [1975-1976 Transfer Binder] Fed. Sec. L.
Rep. (CCH) 4 95,285 (N.D. Cal. 1975) (cause of ac-
tion 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 (S.D. Fla. May 17, 1974) (no right of action),
appeal dismissed for want of prosecution, No. 74-2943
(CA 5 Sept. 5, 1974); Gammage v. Roberts, Scott &
Co., [1974-1975 Transfer Binder] Fed. Sec. L. Rep.
(CCH) 4 94,760 (S.D. Cal. 1974) (no right of action).
See also Note, Private Causes of Action Under Section
206 of the Investment 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 Williams 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:
Al10
[W]here congressional purposes are likely to be
undermined absent private enforcement, private rem-
edies may be implied in favor of the particular class
intended to be protected by the statute.
430 US. 1, 25, 97 S.Ct. 927, 941, 51 L.Ed.2d 124, 143
(1977). Having so stated the Court applied the follow-
ing methodology in deciding the question:
Once we identify the legislative purpose, we must
then determine whether the creation by judicial
interpretation of the implied cause of action as-
serted by Chris-Craft is necessary to effectuate Con-
gress’ goals.
Id. The Court examined the legislative history of the
Williams Act and determined that Congress had intended
to protect the shareholders of target companies by regu-
lating 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,” Texas &
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 plaintiff? Second, is there any indication
of legislative intent, explicit or implicit, either to
All
create such a remedy or to deny one? See, e.g.,
National Railroad Passenger Corp. v. National Assn.
of Railroad 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
Investor Protection Corp. v. Barbour, 421 USS.
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 inappropriate 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); cf. J. I. Case Co. v. Borak,
377 US. 426, 434, 84 S.Ct. 1555, 12 L.Ed.2d
423 (1964); Bivens v. Six Unknown Federal Nar-
cotics Agents, 403 U.S. 388, 394-395, 91 S.Ct.
1999, 29 L.Ed.2d 619 (1971); Zd., at 400, 91
S.Ct. 1999 (Harlan, J., concurring in judgment).
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 en-
acted . . .”; (2) the legislative history supported the
conclusion that Congress did not intend to imply a pri-
vate 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 reme-
dy 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
considered whether, in view of potential impact on share-
Al2
holders, there was a less drastic means available for
achieving the congressional goal.
In short, we conclude that shareholder protec-
tion, 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
damages against a successful contestant in a battle
for control will provide significant additional pro-
tection for shareholders in general. The deterrent
value, if any, of such awards can never be ascer-
tained with precision. More likely, however, is the
prospect that shareholders may be prejudiced be-
cause 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 successful defense of
its victory. Or at worst — on Chris-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.
ne saminianin inion =
Al3
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 IAA.
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 unscrupu-
lous managements and to provide such investors
with a regulated institution for the investment of
their savings.
H.R.Rep. No. 2639, 76 Cong., 3d Sess. 10 (1940). This
same theme appears in S.Rep.No. 1775, 76th Cong., 3d
Sess. 21 (1940):
The nature of the functions of investment ad-
visers, their increasing widespread activities, their
potential influence on security markets and the
dangerous potentialities of stock market tipsters im-
posing upon unsophisticated investors, convinces
this committee that protection of investors requires
the regulation of investment advisers on a national
scale.
B. “Legislative intent .
he ara
Our understanding of the legislative purpose is con-
sistent with the reading given it by the Supreme Court in
S. E. C. v. Capital Gains Research Bureau, 375 U.S.
. to create such a reme-
Al4
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
following the hearings, there is nothing to indicate
an intent to alter the fundamental purposes of the
legislation. 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 au-
thorize federal jurisdiction over a private cause of action
for damages.® The jurisdictional provisions of other se-
. 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 Territorial courts, of all suits in
equity to enjoin any violation of this subchapter or the rules,
regulations, or orders thereunder. Any criminal proceeding may
be brought in the district wherein any act or transaction con-
stituting 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 de-
crees sc 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 proceed-
eiaiticeincsiiesaranerivncnicaesee as itensinion a8
Al5
curities acts specifically provide for jurisdiction over
“actions at 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
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 pro-
vided an express damage remedy for misrepresenta-
tions in the registration statement of the advisers
as it did for misrepresentations of the registration
statement of the underwriter, 15 U.S.C. § 77k(a) (5).
This indicates rather that, in its cautious approach
to the regulation of investment advisers, Congress
was not yet ready to impose any civil liability for
damages.
at (emphasis in original). An equally persuasive
argument can be made that Congress omitted the “ac-
ing under this subchapter brought by or against the Commission
in any court.”
15 U.S.C. § 80b-14 (1970) (emphasis added).
6. The “actions at law” language is found in the following pro-
visions: §§ 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 Ex-
change Act. 15 U.S.C. §§ 78i(e), 78p(b), 78r (1970); §§ 16(a) and
17(b) of the Public 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) (1970).
Al16
tions at law” language from the general jurisdictional
section because the Act does not contain any express
provision 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:
[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
jurisdictional 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,
Al7
particularly when the jurisdictional amount was
lacking.
at n. (emphasis in original).
The dissent in Abrahamson also attached significance
to the absence of any section of the IAA that imposes
liability for damages. Jd. 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. at ,
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.
C. “Consistent with the underlying purposes of the
legislative scheme. . . .”
As we have previously stated, Congress sought to pro-
tect investors from the “problems and abuses of invest-
ment advisory services” by regulation of the industry.
S.Rep. No. 1775, 76th Cong., 3d Sess. 21 (1940). The
concept of implying a private right of action for dam-
ages in favor of investors 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 USS.
at 39, 97 S.Ct. at 948, 51 L.Ed.2d at 152. Again the
reasoning of Piper simply does not apply to the instant
case where plaintiff is a member of the protected class.
Al8
D. “The cause of action [is] one traditionally rele-
gated to state law.
The area of activity in question is not one, in the
language 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 USS.
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 tov 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.
S. E. C. v. Capital Gains Research Bureau, 375 USS.
180, 186, 84 S.Ct. 275, 280, 11 L.Ed.2d 237, 243
(1963). In that case the Court examined the relation
between its interpretation 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 deroga-
tion of the common law. Jd. 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
ee ee pneta .
Al9
deceit which developed around transactions involv-
ing land and other tangible items of wealth are ill-
Suited to the sale of such intangibles as advice
and securities, and that, accordinglly, the doctrines
must be adapted to the merchandise in issue.
Id, at 194, 84 S.Ct. at 284, 11 L.Ed.2d at 248.
E. The factors applied
We do not find in the present case the less drastic and
more closely tailored means for achieving the con-
gressional 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 investor’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 sought to protect investors such as the
plaintiff who have relied on the advice of investment
advisers, from the possibility of overreaching and fraudu-
lent conduct on the part of investment advisers. To deny
investors a right of action for damages incurred as a
direct result of fraudulent advisory practices would under-
mine this purpose. We find additional support in the
language of the Supreme Court in S. E. C. v. Capital
Gains Research Bureau:
A20
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.
Il.
[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 trausfer of control over his stock
portfolio somehow satisfied the requirement that the al-
leged fraud be “in connection with the purchase and sale
of securities.”" We believe that any purchase and sale
which took place incident to this arrangement was too
remote to satisfy the “in connection with the purchase and
sale” requirement as contemplated by Blue Chip Stamps
v. Manor 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
arrangement with First Houston constitued an investment
contract and therefore was a security under §. E. 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
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 immediately
sold all of his securities upon assuming management of his portfolio.
A21
which was never filed. It was not properly before the
trial court and consequently 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, Circuit Judge, dissenting:
My brothers in the majority today have found that
a private right uf action exists where the United States
Congress has failed to provide for one. Finding this
inappropriate for several reasons, I dissent.
The Act here under investigation is the last of a series
of measures designed to provide some regulation in the
field of securities and similar investments. It differs
noticeably from the others. The Investment Advisers
Act of 1940 was designed, largely, to provide a mecha-
nism for the Congress to obtain information about what
was, at the time of enactment, a relatively new industry.
iS U.S.C.A. §§ 80-b-1-80-b-21. Implicit in a measure
calculated to gather information is the intention of the
Congress, when equipped with full information, to legis-
late 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 Exchange Com-
mission 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
8. Whether on remand plaintiff can amend to raise this is in the
discretion of the district court. Fed. R. Civ. P. 15(a).
ee ee ae ee =~
A22
against advisers violating the law. In any event, it is ap-
propriate that the legislative branch make such a decision.
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, dis-
covered the need for a private cause of action and, in a
gesture somewhat patronizing of the Congress, have de-
termined to complete the work of that body by reading
one into the Act. Abrahamson v. Fleschner, F.2d
—___, at ___._ (2d Cir. 1977). Perhaps the Congress
should pass a law providing what my brothers find to be
needed. If so, and if the inaction of the Congress leaves a
void, that is regrettable.
It may be that sovereignty, like nature, abhors a
vacuum. In nature, molecules of gasses mindlessly rush
in to fill and destroy any vacuum that occurs. But in the
political sciences and the governing arts, those of us who
might be tempted to fill a vacuum are not mindless. We
are given reason by which we may determine, for our-
selves, whether one branch of the Government should
rush into the province of another when the inaction of
the other seems to create a vacuum. More than one-
hundred and eighty years ago, Alexander Hamilton labeled
the judiciary “the least dangerous branch” of government
because it “. . . has no influence over either the sword
or the purse, no direction of either the strength or of the
wealth of the society, and can take no active resolution
whatever. It may be truly said to have neither Force nor
Will, but merely judgment; and must ultimately depend
upon the aid of the executive arm even for the effiacy
of its judgments.” Cooke, J. (ed.), The Federalist 522-23
A23
(1961). As for me, I should rather leave the abhorrent
vacuum than to breach the separation of powers so wisely
mandated in our Constitution. I have no yearning to be
patronizing of the distinguished men and women who
serve in the United States House of Representatives: and
the United States Senate. If the need exists for a private
right of action so that “private attorneys general” may
help enforce the Investment Advisers Act of 1940, our
Congress is quite sufficient to the task of meeting it.
Even were it to be found that the Congress has attempted
to abdicate this part of its legislative function to the
courts, I feel that proper concern for the Constitution
requires that we decline the invitation to assist in such
an inappropriate way.
It may be that the Act now created by our Court is a
better or more complete Act than the one actually
passed by the Congress. Who knows? Its deficiency is
that the judicially created Section, establishing a private
cause of action, was never submitted to the people’s
elected representatives and adopted by them. Unlike the
judiciary, the legislative branch does its work through
open debate, negotiation and, often, compromise. Por-
tions of the Investment Advisers Act of 1940 which were
enacted may have been obtained at the cost of leaving
out any private cause of action for damages. If so, we
might even assume that no act would have passed had that
_compromise not been effected.' This possibility pretermits
1. Facially desirable proposals may fail because they are seen
to have undesirable “‘side effects.” Somewhat analogous is the asser-
tion now being made by, and on behalf of, the Courts that the
Congress has created jurisdiction in the federal courts to hear and
determine a host of disputes in areas that ought not require an
Article III court for their resolution. This tendency has resulted
in overburdening the courts to the detriment of the quality of justice
A24
“judicial-legislating,” a constitutional contradiction in
terms. Suffice it to say that I am in complete agreement
with Judge Gurfein’s concurring and dissenting opinion
in Abrahamson v. Fleschner, supra at , concerning
the impropriety of implying a private cause of action in
these circumstances.
So, I respectfully dissent.
available to those litigants whose causes ought properly be before
those courts. A Senator or Member of the House, heeding such
warnings, might resolutely oppose an otherwise well intended measure
that would add to our burden. My brothers today offer him no
encouragement by, themselves, creating a new federal cause of action
which the Congress never provided. It may be that what we do
speaks so loudly that no one will hear what we say.
A25
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
Civil Action SA 74-CA-42
JOHN M. WILSON,
Plaintiff,
V.
FIRST HOUSTON INVESTMENT CORPORATION,
WILLIAM A. WALSER, JERRY ALLGOOD,
MICHAEL BARKER, MERRILL LYNCH,
PIERCE, FENNER & SMITH, INC. and
CHARLES HUNDLEY,
Defendants.
ORDER
Defendants, First Houston Investment Corporation,
William A. Walser, Jerry Allgood and Michael Barker,
move to dismiss plaintiff's complaint on the ground that
this Court lacks jurisdiction over the subject matter of
the Causes of action attempted to be alleged by plaintiff
under The Investment Advisers Act of 1940 and Securi-
ties Exchange Act of 1934 (15 USC § 78j(b) and Rule
10b-5 (17 CFR § 240.10b-5).
Defendants Merrill Lynch, Pierce, Fenner and Smith,
Inc. and Charles Hundley move for summary judgment
upon the ground that there is no genuine issue of material
fact for determination at any trial of the matter and the
law requires judgment for these moving defendants.
A26
1. The Investment Advisers Act, 15 USC § 80b et seq.
The relative position of the parties are expounded in
three cases—one permitting a private action for damages
and two denying such action. These are respectively
Bolger v. Laventhol, Krekstein, Howath & Howath, 381
F. Supp. 26 (S.D.N.Y. 1974), Gamage v. Roberts, Scott
& Co., Inc., 74 Fed. Sec. Law R. § 94, 760 (S.D. Cal.
613-74) and Greenspan v. Del Toro (unreported) No.
73-638-CIV-JE (S.D. Fla. 5-17-74).
This Court is of the opinion that Gamage (supra) and
Greenspan (supra) more accurately state the proper
interpretation to be given The Investment Advisers’ Act
15 USC § 80b et seq.
IT IS ORDERED the motion to dismiss as to all parties
is granted for each of subject matter jurisdiction.
2. The 10 b-5 claims
(a) Merrill Lynch, Pierce, Fenner and Smith, Inc.
and Charles Hundley.
These defendants under the undisputed facts are—at
most—responsible only for causing plaintiff to hire in-
competent and fraudulent investment advisers. That just
cannot be tortured into a 10 b-5 claim.
IT IS ORDERED that motion for summary judgment
of defendants Merrill Lynch, Pierce, Fenner and Smith,
Inc. and Charles Hundley is granted.
>
(b) First Houston Investment Corporation, William
A. Walser, Jerry Allgood and Michael Barker.
Plaintiffs complaint as it now stands alleges no claim
against these defendants which is cognizable under 10 b-5,
A27
Federal Rules of Civil Procedure Rule 9(b). It is con-
ceivable however that plaintiff may be able to allege a
claim of misrepresentation, fraud, deception or failure
to disclose, “in connection with” the purchase or sale of
a security within the liberal concept enumerated in
Superintendent of Insurance of New York v. Bankers Life
and Casualty Co., 404 U.S. 6, 30 L.Ed.2d 128, 92 S.Ct.
165 (1971). He does not come within the broad concept
of Bankers Life (supra) in his complaint. Nor does the
memorandum filed make such a claim viable. The purpose
of 10 b-5 is to give investors the knowledge they need
to make prudent investments i.e., a security the investor
then contemplates buying or selling.
Perhaps plaintiff can meet that requirement.
IT IS ORDERED the motion to dismiss of defendant
First Houston Investment Corporation, William A. Walser,
Jerry Allgood and Michael Barker is granted. Plaintiff
shall file an amended complaint on or before May 20,
1975.
In default of the filing of an amended complaint on or
before May 20, 1975 the action shall be dismissed.
Dated: May 1, 1975.
/s/ MANUEL L. REAL
Manuel L. Real
United States District Judge
A28
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
CV SA 74-ca-42
JOHN M. WILSON,
Plaintiff,
v.
FIRST HOUSTON INVESTMENT CORPORATION,
WILLIAM A. WALSER, JERRY ALLGOOD,
MICHAEL BARKER, MERRILL LYNCH,
PIERCE, FENNER & SMITH, INC. and
CHARLES HUNDLEY,
Defendants.
ORDER FOR JUDGMENT ON THE PLEADINGS
Plaintiff has re-filed a complaint after leave pursuant
to dismissal without prejudice. Defendant again moves
to dismiss.
Plaintiffs new complaint adds nothing to the theory
of his first complaint. The theory that every ill involving
a transaction directly or remotely related to the securities
industry is cured by a 10 b-5 action was wrong then.
It is still wrong.
The motion for judgment on the pleadings is granted.
DATED: July 3, 1975.
/s/ MANUEL L. REAL
Manuel L. Real
United States District Judge
A29
IN THE UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
CIVIL ACTION NO. SA 74-CA-42
JOHN M. WILSON,
Plaintiff
v. :
FIRST HOUSTON INVESTMENT CORPORATION,
WILLIAM L. WALSER, JERRY ALLGOOD,
MICHAEL BARKER, MERRILL LYNCH,
PIERCE, FENNER & SMITH, INC. and
CHARLES HUNDLEY
NOTICE OF APPEAL
Notice is hereby given, pursuant to Rule 3, Federal
Rules of Appellate Procedure, that Plaintiff, JOHN M.
WILSON hereby appeals to the United States Court of
Appeals for the Fifth Circuit from the final judgment
of the Honorable District Court, entered in this action
on the 3rd day of July, 1975.
DATED: July 31, 1975.
/s/ JOEL H. PULLEN
Joel H. Pullen of
Tinsman & Houser, Inc.
1900 NBC Building
San Antonio, Texas 78205
Tel: 225-3121
Attorneys for Plaintiff
A30
CERTIFICATE OF SERVICE
I hereby certify that a copy of the foregoing Notice
of Appeal has been served upon counsel for Defendants
by placing same in the United States Mail, certified,
return receipt requested, addressed to Brice A. Tondre
of Wright & Tondre, 26th Floor, Niels Esperson Building,
Houston, Texas 77002, and to Paul M. Green of Lang,
Cross, Ladon, Boldrick & Green, 1565 Frost Bank Tower.
San Antonio, Texas 78205, this 3lst day of July, 1975.
/s/ JOEL H. PULLEN
Joel H. Pullen
ee
A31
UNITED STATES COURT OF APPEALS
For The Fifth Circuit
No. 75-3422
D. C. Docket No. CA SA74-42
JOHN M. WILSON,
Plaintiff-Appellant,
Vv.
FIRST HOUSTON INVESTMENT
CORPORATION, ET AL.,
Defendants-Appellees.
Appeal from the United States District Court for the
Western District of Texas
Before GODBOLD, TJOFLAT and HILL, Circuit J udges.
JUDGMENT
This cause came on to be heard on the transcript of
the record from the United States District Court for the
Western District of Texas, and was argued by counsel;
ON CONSIDERATION WHEREOF, It is now here
ordered and adjudged by this Court that the judgment
A32
of the said District Court in this cause be, and the same
is hereby, affirmed in part and reversed in part; and that
this cause be, and the same is hereby remanded to the
said District Court in accordance with the opinion of
this Court;
It is further ordered that defendants-appellees pay to
plaintiff-appellant, the costs on appeal to be taxed by
the Clerk of this Court.
February 2, 1978
HILL, Circuit Judge, dissenting.
ISSUED AS MANDATE: MARCH 15, 1978.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.