# Opposition — First Houston Investment Corp. v. Wilson

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition
- **Published:** January 1, 1979
- **Citation:** 444 U.S. 959

## Text

a
,

Supreme Court. U. S,
FILED

———————__|+—_—_" Ks |
MICHAEL RODAK, JR., CLERK

In the

Supreme Court of the United States
October Term 1977

No. 77-1717

First Houston INVESTMENT CORPORATION,
WILutiaM A. WALSER, JERRY ALLGOOD
and MICHAEL BARKER,
Petitioners,
v.

JOHN M. WILson,
Respondent.

Brief in Opposition to Petition for Writ of
Certiorari to the United States Court of Appeals
for the Fifth Circuit

TINSMAN & Houser, INc.,
1900 N.B.C. Building,
San Antonio, Texas 78205,
(512) 225-3121,

Attorneys for Respondent.

SS NT TS TES

Page
rr 1
QUESTIONS PRESENTED ..._«_ a2
STATUTES INVOLVED 22 ooccococceceececceceee. 2
STATEMENT OF THE CASE... 2
REASONS WRIT SHOULD NOT BEGRANTED __ 3
osc. ccecnecostsescescseccccececcecece. 6
CERTIFICATE OF SERVICE... 6
cc cccmcanseovapecorecenens A1-A27

Statute

Investment Advisers Act of 1940, Secs. 206 and
214, 15 U.S.C. 80(b) — 6 and 80(b) — 14... 2

ii TABLE OF AUTHORITIES
Page
Cases
Abrahamson v. Fleshner, 1976-77 Transfer Binder F.
Sec. Law Rpt. (C.C.H.) 1 95,889 bso Cir. oo
cert. pending No. 77-1279 _.. a 3
Blitzstein vy Ford Motor Company, 288 F. 2d
738 (5th Cir. 1961) tiesiigeaees a ae
Cort v. Ash, 422 U.S. 66 (1975) CE ee
Foreman v. Davis, 371 U.S. 178 Ce gee enn et RE 4

Jones v. Chaney & James Construction Company, Inc.,
399 F. 2d 84, 86 (5th Cir. 1966) es,

Lewis v. Transamerica Corp., No. 75-1285 9th Cir. ss 3

M. T. Reed Construction Company v. Virginia
Metal Products Corp., 214 F. 2d 127 (5th ( Cir. 1954) .. 4

Roth v. Hyer, 142 F. 2d 227 (5th Cir. mee

cert. denied 323 U.S. 712... al A Porch ria ARE 4
Federal Rules of Civil a
SR ae) Sun cian waco ~
Treatise

Wright and Miller, Federal Practice and Procedure,
Vol. 6, Section 1476, pgs. 393-394... sists 4-5

In the

Supreme Court of the United States
October Term 1977

No. 77-1717

First HoustoN INVESTMENT CORPORATION,
WILLIAM A. WALSER, JERRY ALLGOOD
and MICHAEL BARKER,
Petitioners,

Vv.

JOHN M. WILSON,
Respondent.

Brief in Opposition to Petition for Writ of
Certiorari to the United States Court of Appeals
for the Fifth Circuit

OPINIONS BELOW

The opinion of the Court of Appeals (A 1-20) is reported
at 566 F. 2d 1235 (5th 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 21-23), and its decision granting judgment on the plead-
ings with respect to the claim under the Securities Exchange
Act of 1934 (A 28) are unreported.

2

QUESTIONS PRESENTED
I.

Whether the United States Court of Appeals for the Fifth
Circuit properly held that a private right of action for dam-
ages should be implied under the Investment Advisers Act
of 1940,

II.

Whether the United States Court of Appeals for the Fifth
Circuit properly held that it had jurisdiction to consider
Respondent’s claim under the Investment 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 brief. (A 1-3).

STATEMENT OF THE CASE

Petitioners’ statement of the case is largely correct. How-
ever, it should be pointed out that when Respondent filed
the Amended Complaint to allege a cause of action under
Section 10(b) of the Securities Exchange Act of 1934, this
was the only claim on which the Court had granted permis-
sion for filing of an amended complaint. Also, there was no
order issued pursuant to Federal Rule of Civil Procedure
54(b) to make the Court’s prior order final and appealable.

3
I.

REASONS WHY THE WRIT SHOULD NOT
BE GRANTED

A.

THE FIFTH CIRCUIT’S DECISION IS CONSISTENT
WITH EVERY CIRCUIT WHICH HAS CONSIDERED
THE INVESTMENT ADVISER’S ACT.

The decision of the Fifth Circuit to imply a private cause
of action in this case is consistent with every other circuit
court that has considered this matter. Lewis v. Trans-
American, Corp., 9th Cir. No. 75-1285, Abrahamson v.
Fleshner, 1976-77 Transfer Binder, Fed. Sec. Law Rep.
(CCH) Paragraph 95,889 (2nd Circuit 1977). Cert. pending
No. 77-1279. Further, as the Fifth Circuit held, permitting
an implied cause of action is in accordance with this court’s
decision in Cort v. Ash, 422 U.S. 66 (1975).

Indeed, what Petitioner is asking this Court to hold is
that although fraudulent acts by investment advisers are
prohibited, nevertheless if the prohibited actions occur, a
party who has lost his money because of such actions cannot
recover for the violation of the act. In short, the act would
be reduced to a virtual nullity and investment advisers who
violate the act would have no financial liability to persons
they injure.

B.

THE SINGLE FINAL JUDGMENT BRINGS FORTH
ALL RULINGS WHICH PRECEDED IT.

The Fifth Circuit correctly held that Plaintiffs’ allegations
under Investment Advisers Act were properly preserved for

4

review. Foreman v. Davis, 371 U.S. 178. A Notice of Appeal
from the fina] judgment presents for consideration all prior
rulings of the trial court and all interlocutory and relevant
matters which preceded the final judgment. M. T. Reed Con-
struction Company v. Virginia Metal Products Corp., 214 F.
2d 127 (5th Cir. 1954), Roth v. Hyer, 142 F. 2d 227 (5th Cir.
1944) cert. denied 323 U.S. 712, Blitzstein v. Ford Motor
Company, 288 F. 2d 738 (5th Cir. 1961), Jones v. Chaney &
James Construction Company, Inc., 399 F. 2d 84, 86 (5th
Cir. 1966), Roth v. Hyer, 142 F. 2d 227 (5th Cir. 1944).

The Rule which should be applied is stated by Wright and
Miller as follows:

“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
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 be-
cause he decides to abide by the court’s order and amend
his pleading rather than allowing the judgment to be
entered against him and taking an immediate appeal.

The reviewing court also should consider the reasons
why the party elected to amend. For example, a party
may wish to avoid the expense and delay involved in
a direct appeal from the dismissal of the complaint.

5

Moreover, waiver should not be imposed without con-
sidering the possible prejudicial impaci on the amending
party. There is some very good support in the cases for
a flexible approach. In Blazer v. Black, the district court
granted defendant’s motion to strike portions of the
complaint and ordered plaintiff either to amend his
pleadings to conform to the ruling or to proceed to trial
on the complaint without the stricken allegations. Plain-
tiff amended his complaint but, on appeal from a
directed verdict in favor of defendant, challenged the
order to strike on the ground that eliminating the allega-
tions had the effect on changing the claim asserted in
the original complaint. In a strong dictum, Judge
Murrah, speaking for the Tenth Circuit, stated that a
party who amends his pleading to conform it to a
court ruling only waives his objections to that order
insofar as it applies to technical defects in the pleading;
he does not waive his exceptions to rulings that strike
a “vital blow” to a substantial portion of his claim. This
seems to be a reasonable standard for determining when
a party who amends his pleadings to avoid dismissal
should be permitted to assert the court’s alleged error
in its original determination on appeal.” 6 Wright and
Miller, Federal Practice and Procedures, Section 1476,
pages 393 and 394.

When the District Court dismissed the investment advisers
claim for lack of jurisdiction, and permitted further amend-
ment on the 10(b) 5 claims but did not certify its dismissal on
the investment advisers claim, pursuant to Federal] Rule 54 in
order to make it appealable, the Fifth Circuit properly held
that the notice of appeal properly brought forth this dis-
missal for review.

6
CONCLUSION

Respondent respectfully requests that the Application for

Writ of Certiorari be in all things denied.

Respectfully submitted,
haiti
1900 N.B.C. Building Counsel for Respondent
San Antonio, Texas 78205
(512) 225-3121

CERTIFICATE OF SERVICE

I hereby certify that three true and correct copies of the
foregoing Response To Petition For Writ of Certiorari and
the following Appendix thereto have been served upon
Petitioners’ counsel by mail, postage prepaid, on this the
29th day of June, 1978, addressed as follows:

Brice A. Tondre
2684 South Tower
Pennzoil Place

Houston, Texas 77002 ped Mk (7 ? Le»

—S

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 shall, 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 Or 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 SiTs

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 cquity 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 rendercd shall be subject to review as

A4
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.

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 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 management 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 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 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 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 Remcdics 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):

[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 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). Sce 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.

II.

[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:
“It 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 v. 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. C'.ief Justice Burger, writing for the
majority, noted that:

A10

[W]here congressional purposes are likely io 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 USS. 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 US.
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 vy.
Wheeler, 373 U.S. 647, 652 83 S.Ct. 1441, 10
L.Ed.2d 605 (1963); cf. J. I. Case Co. vy. Borak,
377 U.S. 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); Id., 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 wel! 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.

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 . . . to create such a reme-
ee

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 US.

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 appellecs 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-

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 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 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 proceed-

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. 8§ 77k
and 771 (1970); §§ 9(*), 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-29/7) (1970).

Al6

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:

[Aj 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. /d. 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. Id. 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 legisl#tive 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 US.
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.

Als

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 US.
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 stc~k 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.

S. E. C. v. Capital Gains Research Bureau, 375 US.
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 cvidence of actual injury—was not in deroga-
tion of the common law. /d. 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

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 Icgislative 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 fraudiigms
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.

III.

{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 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 of 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.
15 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 Con-
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).

\

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 vy. Fleschner, F.2d
___., at ___._ (2d Cir. 1977). Perhaps the Congress
should pass a law providing what my brothers find to be
needcd. 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 rcason 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 ycars 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 cxecutive 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 necd 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 IIIT 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.

i o those litigants whose causes ought properly be before
‘aac ae A Reena 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,

Vv.

FIRST HOUSTON INVESTMENT CORPORATION,
WILLIAM A. WALSER, JERRY ALLGOOD,
MICHAEL BARKER, MERRILL LYNCH,

PIERCE, FENNER & SMITH, ING. 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.

Plaintiff's 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.

au 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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385006_0010%3A2. Public record. Not legal advice.