Petition — Peat, Marwick, Mitchell & Co. v. Wachovia Bank & Trust Co.

Supreme Court brief1981

Ask Donna

What actually matters in this document.

Text

? 198)

Prat, Marwick, Mircuent & Co.,

Antuony M. Naren and JoszpH ScansaRolt,

Petitioners,

Vv.

Wacnovia Bank anv Trust Oo., N.A., Matton Bank, N.A.,

Fmst Wisconsin Trust Co., Toe Dreyrus OrrsHore

Trust, N.V., and Nationan Fire Insurance Co. or

Hanrtrorp,

Respondents.

_ PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Wuuium FE. Heaarry

80 Pine Street

New York, New York 10005

(212) 825-0100

Counsel of Record

Viotor M. Earzz, II

345 Park Avenue

New York, New York 10022

| Attorneys for Petitioners

Of Counsel:

Maruias BE. Mone

JosePH W. Mucor

CaHILL Gorpon & RernpeL

80 Pine Street

New York, New York 10005

April 1981

- ‘+ i el ll i li il ll

Questions Presented

1. May a federai court create a damage remedy under

§17(a) of the Securities Act of 1933 or §10(b) of the

Securities Exchange Act of 1934 for purchasers of secu-

rities who cannot establish the elements of any of the

‘ express causes of action which those Acts provide injured

securities purchasers?

2. May a litigant avoid the retroactive effect of a pre-

vious decision when he is unable to show that all three

factors of Chevron Oil Co. v. Huson, 404 U.S. 97 (1971),

favor prospective-only effect?

Parties Below

Plaintiffs-appellants-cross appellees in the court of ap-

peals were Wachovia Bank and Trust Co., N.A., Mellon

Bank, N.A., First Wisconsin Trust Co., The Dreyfus Off-

shore Trust, N.V., and National Fire Insurance Co. of

Hartford. The defendants-appellees-cross-appellants were

Cortes W. Randell, James F. Joy, Roger O. Walther, Peat,

Marwick, Mitchell & Co., Anthony M. Natelli, Joseph Scan-

saroli, Donald A. Fergusson, Robert A. Fergusson, White

& Case and Marion J. Epley, III. The defendants-appellees

were John G. Davies, Bernard J. Kurek and Dennis M.

Kelly:

TABLE OF CONTENTS

PAGE

Questions Presented i

i RSE RL ISLS IR OAS i

SERIE GE RPMNODD osaces soccstoccescrinssthcrscetsbonclbissaceossadepalciaeciedatt ii

ne Fi ETE SS RCRD CLE INES Mey ili

eens GOW cc hs 1

TR i a eee 1

SN op dasessnuesti 2

OINOING, (OE I CNB sia ik ns en ceccssenscdannnctichledapesentalitasesninicn 2

The express causes Of action .2..............cececeeeeeeee 3

I MONS NO i Sn ak a emsaiieene 6

Reasons for Granting the Writ -...2.2.222..2....2.2...-c-cccseceoeeoee 9

1. The “implied” remedy .............: 9

2. Retroactivity ................ 17

ConcLusion ie |

APpPpENDIX—

Opinion of the United States Court of Appeals

for the District of Columbia Cireuit, dated De-

cember 5, 1980 ; la

Opinion of the United States District Court for the

District of Columbia, dated November 20, 1978 .. 38a

iii

PAGE

Order, dated March 4, 1981, denying petition for

rehearing .................--. 64a

Order, dated March 4, 1981, denying rehearing

OH IRE ONG ant Uae MORITA NEON: 55 SOAR RUE IS eo 7 66a

Provisions of the Securities Act of 1933, 15 U.S.C.

§ 77a et seq. (1976) . : 66a

ROOOCUOIN By SO Cee COW cociccccetcpesscntisespecieelogtoen 66a

EP et eB fe OA Sy y | SR ae REE E RRC 69a

BB Be AS SG RL Gy Wy § SERN mea On enor eA CORN 75a

Section 13, 15 U.S.C. § 77m ..................0cceceeseeeee 76a

Section 16, 16 GiB $770 so scica....sae 77a

a Be AB MRS OR: oR A 77a

Provisions of the Securities Exchange Act of 1934,

15 U.S.C. §$ 78a et seq. (1976) -........2....0.-ccicencocssanese 79a

eS Se (| i nea 79a

RBOGEIOM By DO URIs © 1) ovcccnececcscessscccccccdsiuncnors 83a

ection: $6; 16.6.0 5G TB ee isnccccisscccssescneninsesesies 84a

Section 28(a), 15 U.S.C. § 78bb(a) .................... 85a

TaBLE oF AUTHORITIES

Cases:

Aaron v. SEC, 446 U.S. 680 (1980) 2... eee seeeeee 10, 14

Abrams v. Johns-Manville Corp., [1979-80] CCH Fed.

Sec.L.Rep. 97,305 (S.D.N.Y. 1980) 2.0... 10n

Adams v. Standard Knitting Mills, Inc., 623 F.2d 422

(6th Cir.), cert, denied, 101 S.Ct. 795 (1980) ............ 10n

Affiliated Ute Citizens v. United States, 406 U.S. 128

CA EME ibismcsicbipee aa iat oe

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 123

(1975) «.:... a 10-11

Burks v. Lasker, 441 U.S. 471 (1979) 10

PAGE

Chevron Oil Co. v. Huson, 404 U.S. 97 (1971) ........ 8-9, 17,18

City of Philadelphia v. Westinghouse Electric Corp.,

210 F.Supp. 483 (E.D. Pa.), petition for mandamus

_ and prohibition denied, 312 F.2d 742 (3d Cir, 1962),

cert. dented, 372 U.S. 943 (1963) nu... cceceeeeeceeeeee 14n

Clayton v. Skelly Oil Co., [1977-78] CCH Fed.Sec.L.

BEC FPO CREP. MOTE D piven eecteseckececsessecesanaunctponss 10n

Ernst &@ Ernst v. Hochfelder, 425 U.S. 185 (1976)

12, 14n

Forrestal Village, Inc. v. Graham, 551 F.2d 411 (D.C.

CBRE AW ic cessicvictsnsendsareradanartdlecironaputbynsmnbiccibasatalih 6, 8,17

Heizer Corp. v. Ross, 601 F.2d 330 (7th Cir. 1979) ........ 10n

International Brotherhood of Teamsters v. Daniel, 439

IRIN SUE oa iki audits aki. Acco shceabuintallasbdaetacecncbucoacbiabcgian 10

_ Kardon v. National Gypsum Co., 69 F.Supp. 512 (E.D.

Be ence ots aeestiicoaicedpebagtiinlis cc ahavDoriaaetunss celeste loa sltila 14n

Kissinger v. Reporters Committee, 445 U.S. 136 (1980) 14

Leist v. Simplot, 638 F.2d 564 (2d Cir. 1980), cert.

granted sub nom. New York Mercantile Exchange v.

Leist (No. 80-757), 49 U.S.L.W. 3617 (U.S. Feb. 23,

Poller v. First Virginia Mortgage and REIT, [1978]

CCH Fed.Sec.L.Rep. { 96,564 (E.D. Va. 1978) .......... 9n

Ross v. A.H. Robins Co., 607 F.2d 545 (2d Cir. 1979),

cert. denied, 446 U.S, 946 (1980) ..........000...... sovtanttoctoces 10n

Mirch: «Samael ioe)

PAGE

Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977) 10

Seiffer v. Topsy’s International, Inc., 487 F.Supp. 653

fo ET oN One ee a ee a ROO eA AIMOEE eS HE 10n

Superintendent of Insurance v. Bankers Life and Cas-

aptly’ Cé., 408-U SB: 6 (3078) ee a 10-11

Touche Ross & Co. v. Redington, 442 U.S. 560 (1979)

7, 9, 11,13, 14n

Transamerica Mortgage Advisors, Inc. v. Lewis, 444

Tee a8 Te ee 13, 15

Upjohn Co. v. United States, 101 S.Ct. 677 (1981) ........ 14n

Valencia v. Anderson Brothers Ford, 617 F.2d 1278

(7th Cir.), cert. granted (No. 80-84), 49 U.S.L.W.

I Arts BUNT BOR, RINUOOD cides. cnc uiindanshcsundecotecdiccees 17

Congressional Documents:

H.R. Conf. No. 1838, 734 Cong., 2d Sess. (1934) ......... 13

H.R. Rep. No. 2513, 84th Cong., 2d Sess. (1956) ............ 15

Remarks of Rep. Rayburn, 78 Cong. Ree. 7701 (1934) 12

Remarks of Sen. Fletcher, 78 Cong. Rec. 2271 (1934) .. 14n

Stock Exchange Practices: Hearings on S.Res, 84,

S.Res. 56 and S.Res. 97 Before Senate Comm. on

Banking and Currency, 73d Cong., 2d Sess. (1934)

| 12, 12n

Stock Exchange Regulation: Hearing on H.R. 7852

and H.R. 8720 Before House Comm. on Interstate

and Foreign Commerce, 73d Cong., 2d Sess. (1934) .. 12n

§.2693, 73d Cong., 2d Sess. (1934) .cccocceccesnccsseeeneen 11

PAGE

Statutes: at

Judicial Code, 28 U.S.C. § 1254(1) (1976) 2

Securities Act of 1933

§ 3(b), 15 U.S.C. § 77e(b) (Supp. IIT 1979) ............ 15

CO 1 UAE 6776: (I0Tee as 2, 3-4

$11; 15 U.8.C. $ 77k (1976) .................... 2, 4, 7, 13, 14, 15

RR RUe MocM Oe. © TCL CAME OD nacenkcsierepenarcalnentnlcpins 2,4, 7,13

§ 18,15 U.S.C. § 77m (1976) ...................... 2,5

yk Ele So eg |: RRR non manne 2,5

Ts Be Tite Te CIT hectic ccenscpescccmnsvneovnny passim

§ 22, 15 U.S.C. § 77v (1976) ....... dncsclsildiesi sis cnltibdesciell 3

Securities Exchange Act of 1934

ARP AANA CO CRIN icin steers ceakennccccicsocnone 2,4, 5,8

§10(b), 15 U.S.C. § 78j(b) (1976) ......-..002 passim

§13(d), 15 U.S.C. §78m(d) (1976 & Supp. TI

I ci shales eRe alicia tnptpcindtebtnenecetiiehacnis 3n

§13(e), 15 U.S.C. § 78m(e) (1976) once 9

§ 14(a), 15 U.S.C. § 78n(a) (1976) 2 ee eeeeee 3n

§14(e), 15 U.S.C. § 78n(e) (1976) on tee y

$18, 15 U.S.C. § 78r (1976). .......................0-. 2,5, 8,11, 14

§ 28(a), 15 U.S.C. § 78bb (9) (1976) 000.022 2,5

SEC—Regulation

- 17 CBB. §240.10b-16 (1980) ....2.....cnecccoseccneecneeoneeee 9

Other Authorities:

Brooks, The Go-Go Years (1973) 2

NO: 806i s0s hie

In THE

Supreme Court of the United States

Octoser Term, 1980

Pgat, Marwick, Mitrcuety & Co.,

AntuHony M. Narerii and Joszpx Scansarou,

Petitioners,

Wacnovia Bank anv Trust Oo., N.A., Metton Bank, N.A.,

Fmst Wisconsin Trust Co.,. Taz Dreyrus OrrsHore

Trust, N.V., and Nationa Free Insurance (Co. or

Hartrorp,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Opinions Below

The opinion of the court of appeals (set forth beginning

at page la of the appendix to this petition) is not yet

officially reported; it is unofficially reported at [1980] CCH

Fed.Sec.L.Rep. 1 97,712. The opinion of the district court

(set forth beginning at page 38a of the appendix) is re-

ported at 461 F.Supp. 999.

’ Jurisdiction

The judgment of the court of appeals was entered De-

cember 5, 1980, Petitioners’ timely petition for rehearing,

with suggestion for rehearing en banc, was denied without

opinion on March 4, 1981 (Circuit Judges Robb and Mac-

Kinnon would have heard the case en banc and Circuit

Judge Wright did not participate) (66a-67a). This peti-

tion is filed within 90 days of that denial. The jrrisdiction

of this Court is invoked under 28 U.S.C. § 1254(1) (1976).

Statutory: Provisions

Sections 5, 11, 12, 13, 16 and 17 of the Securities Act of

1933 (the “1933 Act”), 15 U.S.C. §§ 77e, 77k. 771, 77m, 77p,

77q (1976), and Sections 9, 10, 18 and 28(a) of the Secu-

rities Exhange Act of 1934 (the “1934 Act” ), 15 U.S.C.

§§ 781; 78], 78r, 78bb(a) (1976), are set forth in the ap-

pendix beginning at page 68a.

Statement of the Case

National Student Marketing Corporation (“NSMC”) was

one of the “hot new issues” of the 1968-1969 stock market,

chronicled in Brooks, The Go-Go Years (1973). Its stock

was offered to the public in April 1968 at $6 and sold at $14

the same day. By December 1969, the stock, which had

been split 2 for 1, was selling at $70, or 100 times earnings.

Mr. Brooks explains that NSMC’s president was able to

fool “the ‘whole brains trust of institutional investing” be-

cause “he was plausible and they were gullible as well as

greedy; that, in times of speculative madness, the wisdom

and experience of the soundest and soberest may yield to a

hysteria induced by the glimpse of fool’s gold dished by a

young man with a smile on his lips and a gleam in his eye”

(id. at 285).

In December 1969, Wachovia Bank and Trust Co., N.A.,

Mellon Bank, N.A., First Wisconsin Trust Co., The Drey-

Sey

Tes ane

fus Offshore Trust, N.V., and National Fire Insurance Co.

of Hartford (collectively “Wachovia Bank”) purchased

some 130,000 shares of NSMC’s stock from NSMC and two

of its controlling persons. The purchase was made at a

37% discount from the market price of the stock. Within

days, the market price began a precipitous decline and by

the end of March 1970 had dropped by over 90%.

Peat, Marwick, Mitchell & Co. (“PMM”) was the inde-

pendent auditor of NSMC. PMM examined and reported

upon the financial statements of NSMC which NSMC filed

with the Securities and Exchange Commission (“SEC”).*

Wachovia Bank sued NSMC, the selling shareholders,

PMM and others in January 1973 and in 1975 added White

& Case, counsel for NSMC in connection with the Wachovia

Bank purchase, and its partner Epley as defendants.

Wachovia Bank alleged that financial disclosures by NSMC

including the financial statements examined and reported

upon by PMM overstated NSMC’s financial position and

results of operations. The action asserted causes of action

“implied” under §17(a) of the 1933 Act and § 10(b) of the

1934 Act. The district court was alleged to have jurisdic-

tion by reason of § 22 of the 1933 Act and § 27 of the 1934

Act.**

The express causes of action

Section 5 of the 1933 Act requires that securities sold

by an issuer (including, for this purpose, controlling per-

sons of an issuer) be registered with the SEC by a regis-

* Petitioners Natelli and Scansaroli were, respectivel , & partner

and an employee of PMM. r

** Wachovia Bank also alleged causes of action “implied” under

§§ 13(d) and 14(a) of the 1934 Act. The § 13(d) c’uim was aban-

doned (43a n.10), and Wachovia Bank not appeal from the

dismissal of the §14(a) claim (8a n.6).

tration statement containing prescribed information includ-

ing financial statements. Section 11(a)(3) provides an

express’ damage remedy for purchasers of securities

against the independent auditor in the event the financial

statements contained in the registration statement are mis-

leading.

Wachovia Bank contracted away that remedy. Wachovia

Bank made representations in its stock purchase agreement

concerning investment intent so that the transaction, as a

“private placement”, would be exempt from the registra-

tion requirement. Accordingly, no registration statement

was filed.

Section 12(2) of the 1933 Act provides an express dam-

age or rescission remedy for purchasers of securities

(whether or not registered pursuant to § 5) if the securities

are sold by means of a misleading statement. The pur-

chaser’s remedy is against the seller, not against other

persons such as the independent auditor.

Other purchasers of NSMC stock brought a rescission

action pursuant to §12(2) against NSMC in March 1970.

That action was later settled and the purchasers received

back the stock they had exchanged for NSMC stock.

Wachovia Bank did not utilize the 4 12(2) remedy against

NSMC or the selling stockholders from whom it purchased.

_ Section 9(a)(4) of the 1934 Act prohibits misleading

statements by brokers and by sellers which are made for

the purpose of inducing purchases of a security listed on

an exchange, and §9(e) provides an express damage

remedy for persons who purchase such securities at a price

affected by the misstatement. The stock of NSMC was not

listed on a stock exchange.

‘Section 18 of the 1934 Act riveieines an express damage

remedy for purchasers of securities, whether or not-listed

on an exchange, against those, including the independent

auditor, who make or cause to be made misleading state-

ments which are contained in documerts filed with the SEC.

Reliance upon the misleading statem<nt is an element of the

cause of action. |

Wachovia Bank has disclaimed any reliance upon the

NSMC financial statements which were reported upon by

PMM and which were filed with the SEC.*

Sections 13 of the 1933 Act and 18(c), as well as 9(e),

of the 1934 Act require that any suit upon the express

causes of action be brought within one year of discovery of

the wrongful conduct or three years from the purchase

complained of.

In early January 1970, within weeks of the stock pur-

chase, internal counsel for one of the Wachovia Bank pur-

chasers “turn[ed] the matter over to our counsel for liti-

gation.” The court of appeals held that equitable tolling

of any limitations period insofar as PMM is concerned

ended in February 1970. Wachovia Bank did not, however,

bring suit until January 1973, 37 months after the purchase

of the NSMC stock and at least 35 months after Wachovia

Bank was on notice of a claim against PMM concerning

the financial statements of NSMC.

Sections 16 of the 1933 Act and 28(a) of the 1934 Act

provide that the express remedies of the Acts are in addi-

tion to any remedies available at common law. Wachovia

Bank did not pursue any common law remedy against

PMM. Jha

PMM moved to dismiss the complaint on the grounds {i)

that in the circumstances §10(b) of the 1934 Act and

* The Wachovia Bank comp’aint pleaded reliance, but the courts

below accepted Wachovia Bank’s disclaimer of made by

affidavit in response to PMM’s motion to dismiss. —

~ 6

$17(a) of the 1933 Act did not provide an “implied” dam-

age remedy for Wachovia Bank and alternatively (ii) that

under the ruling of the court of appeals in Forrestal

Village, Inc. v. Graham, 551 F.2d 411 (D.C. Cir. 1977), the

two-year statute of limitations of the District of Columbia

“blue sky” law applied to such claims and barred Wachovia

Bank’s action commenced more than three years after its

purchase.

The decisions below

The district court held that Wachovia Bank might assert

“implied” causes of action under §10(b) of the 1934 Act

and §17(a) of the 1933 Act since “it appears that neither

§$18(a) [of the 1934 Act] nor §12(2) [of the 1933 Act]

provides the plaintiffs with adequate remedies” (47a). The

district court, however, dismissed the complaint as time-

barred (57a-62a).

The court of appeals affirmed the holding that Wachovia

Bank has an “implied” damage remedy under §10(b).

The court declined to reach the question of whether

Wachovia Bank has an “implied” remedy under § 17(a) of

the 1933 Act (18a n.19).'

The court said that the inquiry concerning legislative

intent is “not necessarily for evidence that Congress spe-

cifically intended to imply a private right of action, but

rather for indications whether Congress meant to deny

such a remedy” (21a). The court said that a § 10(b) damage

remedy “compensates the investors,” “affords a broad

deterrent force against the fraud that the statute con-

demns” and is “a necessary supplement to administrative

* There can be little doubt but that under this Court’s recent rul-

there is no private damage under § 17(a). Since it is

to distinguish § 10(b) from § 17(a), it was no doubt easier

for the court of appeals not to deal with § 17(a).

Ld —

enforeement” of the federal securities laws by the SEC

(22a). ,

The court recognized that this Court has left open the

question whether a cause of action may be implied under

§10(b) for actions and transactions which are the subject

of express remedy provisions.

“The Supreme Court has never decided whether the

existence of express remedies precludes implication of

a private right of action, and it specifically left the

issue open in Hochfelder, 425 U.S. at 211 n.31, and in

Blue Chip Stamps, 421 U.S. at 752 n.15. Dicta in

Redington expressing reluctance to create an addi-

tional remedy when express remedies are already

provided is [sic] not controlling in this case. In Red-

ington, while the Court declined to decide the issue,

see 442 U.S. at 574, it did note the existence of legis-

lative history supporting a finding that the express

remedies were intended to be exclusive, see 442 U.S.

at 574.” (28a n.29)

The court nevertheless and inexplicably said as to the

legislative history referred to in Touche Ross & Co. v.

Redington, 442 U.S. 560 (1979), that “no such evidence

exists here” (28a n.29).

The court held that the express remedies could be ig-

nored because such remedies were “not available” (34a) to

Wachovia Bank: the express cause of action under $11 of

the 1933 Act was not available because “no registration

statement was filed, and the suit was brought well beyond

the time allowed under section 11” (29a) ; the express cause

of action under §12(2) of the 1933 Act was not available

because of “section 12(2)’s short statute of limitations and

apparent restriction of defendants to sellers” (31a); the

express cause of action under § 18 of the 1934 Act was not

available because § 18 requires “actual reliance” (32a) and

“plaintiffs have not claimed reliance” (34a). A §18 cause

of action also was time-barred under §18(c). The court

did not mention the express remedy of §9(e) of the 1934

Act, which also was “not available.” The court concluded:

“Even if we were inclined to hold that the express

remedies were intended to be exclusive, they should

only preclude implied causes of action in those cases

in which they truly constitute ‘remedies.’ . . .”

“Appellants should, therefore, be able to maintain a

cause of action under section 10(b), the only true relief

available to them.” (33a, 35a)

In its reference to the “only true relief available to”

Wachovia Bank, the court ignored the common law rem-

edies available under state law.

In fashioning an “implied” federal remedy for Wachovia

Bank the court eliminated the reliance and statute of limita-

tions elements of the express federal remedies because those

elements made the express remedies unavailable to Wacho-

via Bank. It said that the 410(b) remedy “presumes re-

liance if the omission is material or if the misstatement

affects the price of the stock” (32a), and it applied the local

statute of limitations governing common law actions for

fraud (14a) (although common law remedies were other-

wise ignored). .

The court of appeals reversed the dismissal of. the

Wachovia Bank action as time-barred, concluding that it

was error to apply its decision in Forrestal Village, supra,

“retroactively” to Wachovia Bank’s action, Although it said

the shorter “blue sky” statute “best furthered federal

policy” (14a), it said that this second factor of Chevron

Ow Co. v. Huson, 404 U.S. 97 (1971), was “outweighed”

by the first and third factors (13a). It held that, with the

benefit of “equitable tolling” (15a-16a), the Wachovia Bank

$10(b) action was timely. |

Reasons for Granting the Writ

1. The “implied” remedy—The court of appeals recog-

nized how frequently this Court has been called upon to

“decide whether a private remedy is implicit in a statute

not expressly providing one,” quoting from Touche Ross

& Co. v. Redington, 442 U.S. at 562 (23a). It went on to

say, however, and it is at the heart of its decision and

why the writ should issue: “But the Court did not announce

that it was going out of the business.” (23a)

The court of appeals misunderstood or rejected the

meaning of this Court’s decisions, and it is not alone among

the lower courts. The most recent weekly edition of the

CCH Federal Securities Law Reports contains two deci-

sions “implying” causes of action under § 13(e) of the 1934

Act and Rule 10b-16 under that Act; a third decision estab-

lishing a rule of damages in yet another “implied” action

under §14(e) of the 1934 Act; and a fourth decision fix-

ing the amount of attorneys’ fees in an “implied” action

under § 10(b) of the 1934 Act. CCH Fed.Sec.L.Rep., Report

No. 907 (April 1, 1981).

The writ should issue so that the lower courts may be

reminded of the separation of legislative and judicial func-

tions established by the Constitution and so that once and

for all the existence and elements of “implied” remedies

under §§ 10(b) and 17(a) may be settled.*

* The question ‘has been the subject of mounting litigation in the

_ lower courts. See, ¢.g., the decisions cited by the court of appeals

at 34a n.34, 28a n.28 and Poller v. First Virginia Mortgage and

The Court has three times expressly left open the ques-

tion of whether there is an “implied” remedy under § 17(a)

of the 1933 Act. Does §17(a) “in light of the express civil

remedies of the 1933 Act [give] rise to an implied cause of

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

723, 734 n.6 (1975), or provide “private parties with an

implied cause of action for damages,” International Broth-

erhood of Teamsters v. Daniel, 489 U.S. 551, 557 n.9 (1979) ?

Most recently, in Aaron v. SEC, 446 U.S. 680, 689 (1980),

the Court said “it has not had occasion to address the ques-

tion whether a private cause of action exists under § 17(a).”

As to §10(b) of the 1934 Act, the Court has said that

it has “recognized an implied cause of action under [§ 10

(b)] in some circumstances,” Santa Fe Industries, Inc. v.

Green, 430 U.S. 462, 477 (1977). It has “assumed” the

existence of the “implied” cause of action, Aaron v. SEC,

446 U.S. at 689, but “whether a cause of action exists” is a

question the answer to which “may be assumed without

being decided,” Burks v. Lasker, 441 U.S. 471, 476 n.5

(1979).

The Court has never sustained the §10(b) claim of a

purchaser such as is present here. Superintendent of In-

surance v. Bankers Life & Casualty Co., 404 U.S. 6 (1971),

involved an injured seller who has no remedy under the

REIT, [1978] CCH Fed.Sec.l.Rep. { 96,564 at 94,352 (E.D.Va.

1978) ; Clayton v. Skelly Oil Co., [1977-78] CCH Fed.Sec.L:Rep.

7 96,269 at n.1 (S.D.N.Y. 1977) ; Abrams v. Johns-Manville Corp.,

[1979-80] CCH Fed.Sec.L.Rep. [97,305 (S.D.N.Y. 1980); Seiffer

v. Topsy’s International, Inc., 487 F.Supp. 653, 662 (D.Kan. 1980),

For reasons which presumably include the settlement value of

the mere existence of the issue, the issue has not often reached

courts of appeals. See, however, Adams v. Standard Knitting Mills,

Inc., 623 F.2d 422, 429 n. 6 (6th Cir.), cert. denied, 101 S.Ct. 795

(1980) ; Ross v. A.H. Robins Co., 607 F.2d 545 (2d Cir. 1979)

cert. denied, 446 U.S. 946 (1980); Heizer Corp. v. Ross, 601 F.2d

$30, 335 (7th Cir. 1979).

Ley fe

a i

3 + ,

gee oS CT

eo” swe

1933 Act, as did Affiliated Ute Citizens v. United States,

406 U.S. 128 (1972).

The Court has not sustained an implied remedy which

is broader than the remedy provided by Congress. To the

contrary, in Blue Chip Stamps, 421 U.S. at 736, the Court

said:

“It would indeed be anomalous to impute to Congress

an intention to expand the plaintiff class for a judi-

cially implied cause of action [under § 10(b)] beyond

the bounds it delineated for comparable express causes

of action.”

Similarly, in Touche Ross & Co. v. Redington, 442 U.S. at

574:

“[Wle are extremely reluctant to imply a cause of ac-

tion . . . that is significantly broader than the remedy

that Congress chose to provide.”

But the court below did exactly that, and it did so in the

face of legislative history that demonstrates the importance

Congress attached to the elements of the express causes

of action.

In enacting §18, Congress considered and rejected a

cause of action based upon the effect upon market price of

a report filed with the SEC, but the court of appeals here

said that such an effect was sufficient for a §10(b) claim

(32a). The initial version of the provision which became

§18(a) required only that the plaintiff be a person “who

shall have purchased or sold a security the price of which

may have been affected by such statement.” S. 2693, 73rd

Cong., 2d Sess. § 17(a) (1934). That version was criticized

in the hearings concerning the 1934 Act because it permitted

recovery of damages by persons “who have not relied upon

the inaccurate or misleading statement” and by those who

“trade recklessly” as well as “unscrupulous traders” who

were not misled by the statements later alleged to be false.*

Because of that criticism, the bill was redrafted and the

requirement of actual reliance was added. As explained by

Representative Sam Rayburn, then Chairman of the Com-

mittee on Interstate and Foreign Commerce:

“The first provision of the bill as originally written

was very much challenged on the ground that reliance

should be required. This objection has been met.” (78

Cong.Rec. at 7701 (1934) )

_ The original version of §18 also contained a provision

barring any action not brought within two years after dis-

covery of the facts constituting the cause of action and six

years after the cause of action accrued. Senator Kean

thought the two-year period “nothing but blackmail.”

“They discover it after the market has gone down,

and after something has happened, and they are look-

ing for mistakes. .. .” (1934 Senate Hearings at 6565)

The bill was revised to require that an action be brought

within one year of discovery and three years of accrual of

the cause of action. The Court has described this as a

“significant” change, Ernst & Ernst v. Hochfelder, 425 U.S.

185, 212 n.31 (1976), but such a description is altogether

too modest as the chronology of this action demonstrates.

As part of the same act passed in 1934, Congress also

amended the 1933 Act to reduce the limitations period for

* Stock Exchange Practices: Hearings on S.Res. 84, S.Res. 56

and S.Res. 97 Before Sen. Comm. on Banking and Currency, 73d

Cong. 2d Sess. at 6638, 7084 (1934) (“1934 Senate Hearings”) ;

Stock Exchange Regulation: Hearing on H.R, 7852 and 8720 Be-

fore House Comm. on Interstate and Foreign Commerce, 73d Cong.,

2d Sess. at 226, 656 (1934) (“1934 House Hearing”). See also

1934 Senate Hearings at 6939, 7186, 7567-68; 1934 House Hearing

at 262, 489.

actions under §§ 11 and 12 from two years from discovery

and ten years from the purchase to one year and three years

and to provide a limited reliance requirement in actions

under $11, H.R. Conf. Rep. No. 1838, 73d Cong., 2d Sess.

41-42 (1934).

“‘Obviously, then, when Congress wished to provide a

‘private damages remedy, it knew how to do so and did so

expressly.” Transamerica Mortgage Advisors, Inc. v.

Lewis, 444 U.S, 11, 21 (1979), referring to § 18 of the 1934

Act and § 11 of the 1933 Act and quoting Touche Ross & Co.

v. Redington, 442 U.S. at 572.

The court of appeals here stressed that the express

remedies enacted by Congress were “not available” to

Wachovia Bank (34a). It ignored this Court’s direction in

Touche Ross, 442 U.S. at 579, that:

“[Wle are not at liberty to legislate. If there is to be

a federal damages remedy under these circumstances,

Congress must provide it. ‘[I]t is not for us to fill any

hiatus Congress has left in this area.’ ”

The court of appeals rejected the expressio unius canon

of statutory construction as “a dangerous road map” (27a).

It ignored this Court’s teaching in Transamerica Mortgage,

444 U.S. at 19-20, that:

“(I]t is an elemental canon of statutory construction

that where a statute expressly provides a particular

remedy or remedies, a court must be chary of reading

others into it. ‘When a statute limits a thing to be done

in a particular mode, it includes the negative of any

other mode.’ ... See Amtrak, 414 U.S., at 458; Securi-

ties Investor Protection Corp. v. Barbour, 421 U.S. 412,

419; T.1.M.E., Inc. v. United States, 359 U.S. 464, 471,”

and that the expressio wnius canon may yield only “to per-

suasive evidence of a contrary legislative intent.” Accord,

Kissinger v. Reporters Committee, 445 U.S. 136, 148-49

(1980) :

“The Records Act also expressly provides administra-

tive remedies for violations of the duties it imposes,

implicating our conclusion in Transamerica M ortgage

that it is ‘an elemental canon of statutory construction

that where a statute expressly provides a particular

remedy or remedies, a court must be chary of reading

others into it.’”

The intent of Congress with respect to private damage

remedies is evident from the terms of the 1933 Act and the

1934 Act and from their legislative history. A federal dam-

age remedy against experts such as independent auditors

is provided where a statement or opinion of such a person

is one which Congress required to be filed with the SEC—

in $11 for misstatements in 1933 Act registration state-

ments and in $18 for misstatements in 1934 Act filings.

The legislative history demonstrates that a private damage

action “was not within the contemplation of the Congress

that enacted § 10(b),” Aaron v. SEC, 446 U.S. at 691."

* Section 10(b) was intended, rather, to provide the SEC with

authority to regulate new manipulative market devices not al-

ready expressly proscribed by other provisions of the 1934 Act,

Hochfelder, 425 U.S. at 201-02. See 78 Cong. Ree. at 2271 ( 1934)

(remarks of Sen. Fletcher),

An “implied” §10(b) cause of action for an injured seller was

first established in Kardon v. National Gypsum Co., 69 F.Supp.

512 (E.D. Pa. 1946), decided by Judge Kirkpatrick, on the basis

of the common law statutory tort concept emphatically rejected by

the Court in Touche Ross & Co. v. Redington, 442 U.S. at 576-78.

Judge Kirkpatrick also decided the first case to articulate the

so-called “control group” test for determining the scope of the

attorney-client privilege in the corporate context, City of Philadel-

phia v. Westinghouse Electric Corp., 210 F.Supp. 488, 485 (B.D.

Pa.), petition for mandamus and prohibition denied, 312 F.2d 742

(8d Cir, 1962), cert. denied, 372 U.S. 943 (1963). Only three

months ago the Court considered and rejected that test, Upjohn

Co, v, United States, 101 8.Ct. 677, 683 (1981).

walls

Post-enactment legislative history provides, as it did in

Transamerica Mortgage, 444 U.S. at 23 n.13, “another clear

indication that Congress knew how to confer a private right

of action when it wished to do so.” In 1956 a bill was pro-

posed in Congress to amend the 1933 Act to provide a civil

remedy against experts such as the independent auditor

for purchasers of publicly offered shares exempt from the

1933 Act registration requirements under §3(b) (the ex-

emption for small public offerings). The House Committee

on Interstate and Foreign Commerce recommended pas-

sage of the amendment on the ground that purchasers in

transactions exempt from the registration requirement,

like the Wachovia Bank purchase, may rely on “statements

of officers and directors of the issuer, its underwriters,

accountants, attorneys, engineers and other experts” and

“there is no civil liability to any of the aforementioned

individuals,” H.R. Rep. No. 2513, 84th Cong., 2d Sess. at 5

(1956).

“The only civil remedy the purchaser of a security,

issued pursuant to section 3(b) exemption, has fox false

and misleading statements or omissions in [an] offer-

ing circular is to sue the seller of the security under

section 12 [of the 1933 Act]. By contrast, the investor

in registered securities has civil remedies under sec-

tions 11 and 12... [and] can sue not only the seller

of the security, but also the issuer, its officers and

directors, the underwriters, the accountants, the at-

torneys.” (Ibid.) |

The SEC opposed the amendment since it would frustrate

the purpose of the exemption from registration, and

“criminal liability in the event that false statements were

made” constituted a sufficient deterrent to non-sellers (id.

at 32). The SEC recognized § 17 of the 1933 Act provides

only for criminal and injunctive remedies, that the § 11

cause of action for money damages was not applicable and

that the §12(2) cause of action for money damages was

available only against sellers (id. at 31). It said “[t]he

history of the statute makes it clear that this pattern of

the statute was based on a policy decision of the Congress”

concerning liability “in the exempted field” (ibid.). The

bill was not enacted.

The court of appeals did not refer to the legislative his-

tory at the time of the enactment of the 1933 and 1934 Acts.

Rather, it argued that the absence of express Congressional

disapproval of “judicial implication” was a “significant”

silence (36a), relying upon Leist v. Simplot, 638 F.2d 283

(2d Cir. 1980). This Court has granted certiorari to re-

view that decision sub nom. New York Mercantile Exchange

v. Leist (No. 80-757), 49 U.S.L.W. 3617 (U.S. February 23,

1981).

The court’s acknowledgment that “judicial implication”

is what is involved underlines the error it made. The

Constitution prohibits “judicial implication” of private

causes of action, Congressional silence does not validate

the exercise by federal judges of Congress’ legislative

power.

As is evidenced by the decision below and by the deci-

sions referred to earlier (supra p. 9), many lower courts

are reluctant to follow the teaching of this Court’s most

recent decisions concerning the inference of a private

remedy from a statute providing none. Unstated, but

plainly underlying that reluctance, is the belief that the

federal courts must provide a forum and a remedy for

every grievance that has some relationship to federal leg-

islation or regulation. Only this Court can recall the lower

courts to their role under the Constitution.

2. Retroactivity—The decision of the court of appeals

denying retroactive application to its ruling in Forrestal

Village is in direct conflict with Valencia v. Anderson

Brothers Ford, 617 F.2d 1278 (7th Cir.), cert. granted (No.

80-84), 49 U.S.L.W. 3350 (U.S, Nov. 10, 1980).

There, the Court of Appeals for the Seventh Circuit held:

“All three of the factors listed in Chevron Oil must be

shown to favor prospective-only application before a

decision will be denied retroactive effect.” (617 F.2d

at 1289)

Here, referring to the second factor of Chevron Oil, the

court below said:

“The second factor is more equivocal, The court did

base its decision in Forrestal Village on which statute

of limitations period best furthered federal policy. But

the choice was ultimately dictated by the ‘commonality

of purpose’ between the blue sky law and sections 10(b)

and 17(a), 551 F.2d at 414, not by any substantive dif-

ference between a two- and three-year limitation. Even

if this second factor suggests retroactive application

of Forrestal Village, we think it outweighed by the first

and third criteria, which overwhelmingly dictate that

the decision be applied prospectively here.” (13a-14a)

(footnote omitted)

Even as to the first and third Chevron Oil factors, the

court’s certitude is contradicted by its own Forrestal Vil-

lage decision where, in applying the “blue sky” statute of

limitations to bar the plaintiff, it had said the result was

“obvious” (551 F.2d at 414). An obvious result can be

neither unforeseeable nor inequitable.

In any case, the plaintiff in Forrestal Village was held to

be time-barred by the two year “blue sky” statute. What

aie. <,

wr z+ - iad

then was different about the situation of the Wachovia

Bank plaintiffs who turned the matter over to counsel for

litigation more than three years before they brought suit?

Unless the presence of all three Chevron Oil factors is

required, the precedential value of any decision is uncer-

tain. The decision below made of the rule of Chevron Oil

not a rule, but the present-day equivalent of the length

of the chancellor’s foot.

CONCLUSION

The writ of certiorari should issue.

Respectfully submitted,

Wuuum BE. Heoarry

80 Pine Street

New York, New York 10005

(212) 825-0100

Counsel of Record

Viororn M. Eaartz, IIT

345 Park Avenue

New York, New York 10022

Attorneys for Petitioners

Of Counsel:

Martuius BE. Mons

JosrPpH W. Mucora

Canrtu Gorpon & Rermpet

80 Pine Street

New York, New York 10005

April 1981

—

- - de P*.

Seog tte

. Opinion of United States Court of Appeals

: UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 79-1595

Wacnovia Bank anv Trust Co., N.A,

(as Trustee and Agent for various

trust accounts), ET AL., APPELLANTS

Vv.

Nationa, Stupent MarxetinG Corporation, BT AL.

No. 79-1596

Wacnovys Bank anv Trust Co., N.A.

(as Trustee and Agent for various

trust accounts), BT AL., APPELLANTS

Vv.

Nationa, Strupent MarketTine CorporaTIon, BT AL.

No. 79-1597

Wacnovia Bank anv Trust Co., N.A.

(as Trustee and Agent for various

trust accounts), eT AL.

Vv.

Nationa. Stupent Marxetrna Corporation, BT AL.

Waurre & Cass, Br AL, APPELLANTS

Opinion of United States Court of Appeals

No. 79-1598

Wacnovia Bank anv Trust Co., N.A.

(as Trustee and Agent for various

trust accounts), ET AL.

NationaL Stupent Marketine CorpPoRATION, ET AL.

Pgat, Marwick, ET AL., APPELLANTS

No. 79-1599

Wacnovia Bank anv Trust Co., N.A.

(as Trustee and Agent for various

trust accounts), ET AL.

Vv.

Nationat Stupent Marxetine CorpPoRATION, ET AL.

Roger O. WALTHER, APPELLANT

No. 79-1600

Wacnovia Bank anv Trust Co., N.A.

(as Trustee and Agent for various

trust accounts), ET AL.

Vv.

Nationat Stupent Marxetine CorpoRATION, BT AL.

James F’, Joy, APPELLANT

Opinion of United States Court of Appeals

No. 79-1601

Wacnuovia Bank anv Trust Co., N.A.

(as Trustee and Agent for various

trust accounts), ET AL.

Vv.

Nationa Stupent MarketinG CorPoRATION, ET AL.

Donatp A. Fercusson anp Rosert A. Fercusson,

APPELLANTS

No. 79-1602

Wacuovia Bank anp Trust Co., N.A.

(as Trustee and Agent for various

trust accounts), ET AL.

Vv.

Nationa, Stupent Marketine CoRPoRATION, ET AL.

Corres W. RANDELL, APPELLANT

- Appeals from the United States District Court

for the District of Columbia

(D.C. Civil Action No. 166-73)

Argued December 13, 1979

JUDGMENT ENTERED THIS DATE

Decided December 5, 1980

Juan A. del Real and Gilbert C. Miller, with whom :

Richard M. Phillips was on the brief, for appellants in No. 4

79-1595.

Opinion of United States Court of Appeals °

Paul Gonson, Principal Associate General Counsel, Se-

curities and Exchange Commission, with whom Michael

K. Wolensky, Assistant General Counsel, Securities and

Exchange Commission, was on the brief, for amicus

curiae, Securities and Exchange Commission, in No. 79-

1595 urging reversal.

Milton V. Freeman, with whom Daniel A. Reeneck,

Thomas D. Nurmi, and Lawrence A. Schneider were on

the brief, for White & Case and Marion Jay Epley, III,

appellees in No, 79-1595 and cross-appellants in No. 79-

1597.

William E. Hegarty, with whom Mathias E. Mone was

on the brief, for Peat, Marwick, Mitchell & Co., et al. ap-

pellees in Nos. 79-1595 and 79-1596 and cross-appellants in

No. 79-1598.

Franklin M. Schulte and Bruce W. Dunne were on the

brief for James F. Joy, appellee in Nos. 79-1595, 79-1596,

79-1597, 79-1598, 79-1599, 79-1601, and 79-1602 and cross-

appellant in No. 79-1600.

Sidney Dickstein was on the brief for Roger O. Walther,

appellee in Nos. 79-1595, 79-1596, 79-1597, 79-1598, 79-1600,

79-1601, and 79-1602 and cross-appellant in No. 79-1599.

William R. Bernard was on the brief for Cortes W.

Randell, appellee in Nos. 79-1595, 79-1596, 79-1597, 79-1598,

79-1599, 79-1600, and 79-1601 and cross-appellant in No.

79-1602.

George P. Michaely, Jr., and Thomas W. Armstrong

were on the brief for Fergusson, et al., appellees in No.

79-1595 and cross-appellants in No. 79-1601.

Also Cherif Sedky entered an appearance for appellants

Wachovia Bank and Trust Co., et al. in Nos. 79-1595 and

79-1596.

Opinion of United States Court of Appeals

Before: Rosrnson and Mrxva, Circuit Judges, and Fuan-

nERY*, United States District Judge for the

District of Columbia.

Opinion for the court filed by Circwit Judge Mrxva.

Mrxva, Circuit Judge: This is yet another installment in

the saga of the collapse of one of the glamor stocks

of the 1960s, the National Student Marketing Corporation

(NSMC). Appellants allege a widespread scheme to mis-

represent the financial condition of NSMC and thereby to

stimulate investor interest in NSMOC’s securities. They

seek damages to remedy losses suffered when the value of

NSMC stock dropped suddenly and dramatically more

than a decade ago, and they appeal the district court’s

dismissal of their claim as time-barred. On cross-appeal,

defendants argue that the court below erred in finding

that appellants have a private right of action under section

10(b) of the Securities Exchange Act of 1934 (the 1934

Act), 15 U.S.C. § 78j(b) (1976), and under section 17(a)

of the Securities Act of 1933 (the 1933 Act), 15 U.S.C.

§ 77q(a) (1976).

We reverse the district court’s holding that appellants’

claims are barred by the statute of limitations, and we

affirm appellants’ right to pursue a remedy under section

10(b) of the 1934 Act,

I. Backerounp

In December of 1979, appellants (Wachovia)! bought

approximately five million dollars’ worth of NSMC stock

* Sitting by designation pursuant to 28 U.S.C. § 292(a). Judge

Flannery authored section II of this opinion.

1 Appellants are the Wachovia Bank and Trust Co., the Mel-

lon Bank, the First Wisconsin Trust Co., the Dreyfus Offshore

Trust, and the National Fire Insurance Company of Hartford.

—.

ll ae

Opinion of United States Court of Appeals

from the corporation and two of its directors. The pur-

chase was a private placement transaction governed by

detailed purchase agreements. Two months later, the

market price of NSMC stock declined more than sixty per-

cent, and NSMC announced that it expected to report a

loss for the previous fiscal quarter.

The Securities and Exchange Commission (SEC) then

began a two-year investigation of NSMC, which ended in

February, 1972, with the filing of an enforcement and in-

junction action against NSMC and the other major partici-

pants in NSMC’s merger with Interstate National Corpo-

ration.? The Commission charged that the price of NSMC

stock had been artificially inflated in violation of the secu-

rities laws, In addition, various civil actions were filed in

1970 and 1972 by purchasers of NSMC stock.’

The original complaint in this case, filed January 29,

1973, sought damages from NSMC and several of its offi-

cers and employees and from Peat, Marwick, Mitchell &

Co. (PMM), NSMOC’s independent auditor; Anthony Na-

telli,, the PMM partner in charge of the NSMC account;

and Joseph Scansaroli, the PMM audit supervisor. These

defendants were charged with participating in a conspiracy

to defraud investors by artificially inflating the price of

NSMC stock and thereby violating various sections of the

1933 and 1934 Acts. Specifically, appellants contended that

* SEC v. National Student Marketing Corp., 457 F. Supp. 682

(D.D.C. 1978).

* Natale v. National Student gp reg Corp., Civ. No. 72-721

(S.D.N.Y,, filed Feb. 18, 1972); Lipsig v. National Student Mar-

keting Corp., Civ. No. 70-2006 (SDNY, filed May 15, 1970);

Stuckey v. National Student Marketing. Corp. .» Civ. No. 70-H-251

(8.D. filed March 19, 1970); Garber v. Randell, Civ. No.

70.885 (BD.NY., filed March 2,.1970).

% =

Opinion of United States Court of Appeals

misrepresentations about NSMC’s financial condition had

been included in oral statements, in press releases, in re-

ports filed with the SEC, and in other published reports

not filed with the Commission. The fraudulent scheme was

allegedly furthered by NSMC’s acquisition of a number of

corporations,

The original complaint did not name as defendants

White & Case, NSMC’s outside counsel, or Jay Epley, the

White & Case partner principally in charge of the NSMO

account, As NSMC’s counsel, they had drafted a purchase

agreement between appellants and NSMC and had issued

a legal opinion to appellants, in which the buyers were

assured that the contemplated transaction would not vio-

late any statute. Two days before the complaint was filed,

appellants had entered into a letter agreement with White

& Case and Epley, which provided that the statute of

limitations would be tolled as to them for two years from

the date of the letter. Appellants then amended their com-

plaint on May 28, 1975, to include White & Case and Epley

as defendants.

The defendants‘ moved to dismiss the complaint on two

grounds: that the action was time-barred under the two-

year statute of limitations of the District of Columbia’s

blue sky law, and that the sections of the securities acts

on which the claims were based did not provide for or allow

a private right of action. The district court held that a

private remedy was implied under section 10(b) of the 1934

‘ gs | corms settled with NSMC and various named defendants,

and claims against those parties were dismissed. Defendants

below, and appellees here, are PMM and Natelli and Scansaroli;

White & Case and Epley; and the following NSMC officers and di-

rectors: John G, Davies, James F. Joy, Dennis M. Kelly, Bernard

J. Kurek, Cortes W. Randell, and Roger O. Walther.

Opinion of United States Court of Appeals ;

Act and under section 17(a) of the 1933 Act, but the court

dismissed the action as untimely.’ Both issues are now

before this court.®

II. Srarute or Liurrations

Two statute of limitations questions must be resolved:

(1) whether the district court committed error in applying

retrospectively Forrestal Village, Inc. v. Graham, 551 F.2d

411 (D.C. Cir. 1977), which calls for a two-year statute of

limitations in Rule 10b-5 actions; and (2) whether the dis-

trict court properly declined application of the equitable

tolling principle.’

* The district court’s opinion is reported at 461 F. Supp. 999

(D.D.C. 1978).

* Appellants abandoned their claim under § 13(a) of the 1934

Act, 15 U.S.C. § 78m(a) (1976). Their claim under § 14(a) of that

Act, 15 U.S.C. § 78n(a) (1976), was dismissed by the court below,

and appellants do not appeal from that decision. In addition, de-

fendants-appellees John J. Davies, Dennis M. Kelly, and Bernard

J. Kurek have not joined the cross-appeal.

"A third issue—whether appellants may take advantage of class

action tolling—warrants only brief comment. In American Pipe &

Construction Co. v. Utah, 414 U.S. 588 (1974), the Supreme Court

held that commencement of a class action tolls the running of the

statute of limitations “for all purported members of the class who

make timely motions to intervene after the court has found the suit

inappropriate for class action status.” Id. at 553. Hence, a mem-

ber of the purported class, after denial of certification, may inter-

vene in an individual suit without penalty for the time period

during which the class certification issue is pending.

The district court correctly ruled that appellants fail to qualify

for the American Pipe tolling rule. Here, certification of the class

was granted, not denied. Moreover, no intervention was ever at-

tempted ; appellants filed their own action nine months before the

district court granted certification, and preferred to pursue their

own case rather than seek class relief.

Opinion of United States Court of Appeals

A. The Applicable Statute of Limitations

For causes of action implied under the securities laws,

the forum state’s statute of limitations rules, See Ernst &

Ernst v. Hochfelder, 425 U.S. 185, 210 n.29 (1976). At

issue here is which limitations period to apply: the three-

year general fraud provision, D.C. Code § 12-301(8) (1973),

or the two-year blue sky law provision, id. 4 2-2413(e).

Resolution of this issue determines whether this suit

should be dismissed on statute of limitations grounds. Ap-

pellants bought NSMC stock on December 17, 1969. The

statute of limitations began to run at the end of February,

1970,’ and the suit was filed in January, 1973—more than

two years, but less than three years, after the limitations

period had begun to run. The district court found the

two-year period applicable and accordingly dismissed the

case for untimely filing.

The question of the appropriate statute of limitations is

an equivocal one because the trend in the federal case law

has shifted. Federal courts once favored invocation of the

general fraud limitations period for Rule 10b-5 actions.

But during the last decade, the law has moved toward ap-

plication of the blue sky law limitations period.

The case law in this circuit reflects that general trend.

Before 1977, this court favored application of the three-

year general fraud limitations period. But in Forrestal

Village, Inc. v. Graham, 551 F.2d 411 (D.C. Cir. 1977),

we decided that the two-year blue sky law provision,

rather than the three-year general fraud limitations guide-

line, “ ‘best effectuates the federal policy involved.’” Id. at

* We arrive at this date by invoking the doctrine of equitable

tolling. See section II(B) infra,

10a

Opinion of United States Court of Appeals

413.’ In so ruling, this circuit joined the majority of cir-

cuits, which at that time—in 1977—applied local blue sky

law limitations periods to section 10(b) and section 17(a)

securities actions.

Whether the instant case should be governed by a three-

year or two-year statute of limitations thus turns on

whether the Forrestal Village decision is applied prospec-

tively or retrospectively. The critical precedent on this

question is Chevron Oil Co. v. Huson, 404 U.S. 97 (1971).

We therefore look to that opinion for guidance.

In Chevron, the plaintiff, who was injured while work-

ing on a drilling rig located on the Outer Continental

Shelf, filed suit more than two years after the date the

injury occurred. The defendant originally declined to raise

the issue of the limitations period. The parties correctly

assumed, based on federal court precedent, that admiralty

law—including the doctrine of laches—applied to the case.'®

During discovery, however, the Supreme Court released its

decision in Rodrigue v. Aetna Casualty & Surety Co., 395

U.S. 352 (1969), which removed the applicability of ad-

miralty law to cases like Chevron. Based on Rodrigue, the

district court in Chevron applied the local one-year limita-

tions period for personal injury suits and, accordingly, dis-

missed the case. See 404 U.S. at 98-99.

Articulating three criteria, the Supreme Court ruled in

Chevron that its Rodrigue decision should be given pros-

pective effect. The first, and most fundamental, factor is

that “the decision to be applied nonretroactively must es-

* Forrestal Village noted that the blue sky statute, because it

deals with the sale of securities, more closely resembles Rule 10b-5

than does common law fraud. See 551 F.2d at 414.

1° The plaintiff alleged that, only many months after the accident

oceurred, did he realize the serious nature of the injury.

lla

Opinion of United States Court of Appeals

tablish a new principle of law, either by overruling clear

past precedent on which litigants may have relied or by

deciding an issue of first impression whose resolution was

not clearly foreshadowed.” Id. at 1006 (citation omitted).

Second, the court must consider whether retrospective

application will further or hinder the purpose of the deci-

sion in question. Finally, prospectivity is required if ret-

roactive application will create substantial injustice.

In applying the first criterion and deciding whether a

current decision overrules precedent, does the court look

to the law as it appears at the time of the new decision, or

to the time when a claim arose and a plaintiff relied on the

law? The state of the law may fluctuate between these two

dates, thereby changing the outcome of the first inquiry

required by Chevron. The distinction is critical here.

The court below applied Forrestal Village retroactively.

It ruled that that case failed to overrule precedent, as it

existed when the decision was released in 1977. It is cor-

rect that, in 1977, the circuits favored application of the

blue sky law limitations period. Chevron, however, does

not seek to compare a new decision to the extant law when

that decision was published. Rather, Chevron favors com-

paring the decision to the law at the time the plaintiff

relied upon it, that is, the law after the claim arose and

during the running of the limitations period.

This choice is clear in the opinion itself, The very lan-

guage of the first criterion set out in Chevron requires

nonretroactive application of a decision that overrules law

“on which litigants may have relied.” Moreover, the Court

repeatedly noted that its Rodrigue decision reversed the

law that the plaintiff relied upon when he contemplated

filing suit. For example, the Court observed that, from the

time the plaintiff was injured until he commenced suit, the

12a

Opinion of United States Court of Appeals

federal cases supported application of admiralty law to

cases such as plaintiff’s: “[i]t cannot be assumed that he

[plaintiff] did or could foresee that this consistent inter-

pretation of the Lands Act would be overturned. The most

he could do was rely on the law as it then was.” Id. at

107. In reciting the facts, the Court remarked, “[w]hen

this law suit was initiated, there was a line of federal court

decisions” favoring application of admiralty law, and the

doctrine of laches, to the case. Id. at 99. The court further

noted that the plaintiff’s injuries occurred three years be-

fore Rodrigue was released, and that the plaintiff filed his

law suit more than one year before that decision.

The lesson is clear. Chevron mandates nonretroactive

application of a statute of limitations decision that over-

_ rules the weight of past precedent. In deciding whether

this criterion is met, a court must compare the new limita-

tions ruling with the law the plaintiff relied upon when

he contemplated filing suit, The court below thus erred in

looking at the state of the law in 1977 when Forrestal

Village was decided. '

Appellants relied on the law from December, 1969, when

they bought NSMC stock, until January, 1973, when they

filed suit. During that period, this cireuit favored applica-

tion of the general fraud limitations period. In fact, courts

in this cireuit reaffirmed the three-year fraud period as

late as 1975. See, e.g., Vance v. National Realty Trust,

[1974-1975 Transfer Binder] Fev. Sec. L. Rep. (CCH)

q] 95,004 (D.C, Cir. 1975); National Realty Trust v. Neelon

Management Co., [1973 Transfer Binder] Fen. Src. L.

Rep. (CCH) {/ 94,049 (D.D.C. 1973); Conlon v. University

Computing Co., [1972-1973 Transfer Binder] Fen. Src. L.

Rer. (CCH) { 93,796 (D.D.C. 1973).

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Opinion of United States Court of Appeals

Moreover, as of December, 1971—when the two-year lim-

itations deadline applied by the district court expired—

only one circuit court and one federal district court had

applied the blue sky law limitations period to federal secu-

rities actions. See Vanderboon v. Sexton, 422 F.2d 1233

(8th Cir. 1970); Batchelor v. Legg & Co., 52 F.R.D. 533

(D. Md. 1971). On the other hand, forty-six federal court

decisions had applied the forum state’s general fraud stat-

ute of limitations." These cases included opinions from

eight United States Circuit Courts of Appeals."

Thus, prior to, and during, the running of the limitations

period, federal courts, including this circuit, overwhelm-

ingly adopted the general fraud limitations period. It was

the law at this point in time on which appellants relied.

Accordingly, consideration of the first factor of Chevron

points toward prospective application of Forrestal Village.

For the same reason, the third criterion also favors

prospectivity. As in Chevron, “[i]t would also produce the

most ‘substantial inequitable results’ to hold that [appel-

lants] ‘slept on [their] rights’ at a time when [they] could

not have known the time limitation that the law imposed

upon [them].” 404 U.S. at 108 (citation omitted).

The second factor is more equivocal. The court did base

its decision in Forrestal Village on which statute of limita-

11 See Brief for Appellants at 34 n.22.

4 E.g., Richardson v. MacArthur, 451 F.2d 35 (10th Cir. 1971) ;

Bailes v. Colonial Press, Inc., 444 F.2d 1241 (5th Cir. 1971) ; Doug-

lass v. Glenn E. Inton Investments, Inc., 440 F.2d 912 (9th Cir.

1971) ; Klein v. Auchincloss, Parker & Redpath, 436 F.2d 339 (2d

Cir. 1971) ; Morgan v. Koch, 419 F.2d 998 (7th Cir. 1969) ; Char-

ney v. Thomas, 372 F.2d 97 (6th Cir. 1967); Janigan v. Taylor,

344 F.2d 781 (1st Cir.), cert. denied, 8382 U.S. 879 (1965) ; Stevens

v. Abbott, Proctor & Paine, 288 F. Supp. 836 (E.D. Va. 1968) ;

Tobacco & Allied Stocks v. Transamerica Corp., 143 F. Supp. 323

(D. Del. 1956).

en on a

l4a

Opinion of United States Court of Appeals

tions period best furthered federal policy. But the choice

was ultimately dictated by the “commonality of purpose”

between the blue sky law and sections 10(b) and 17(a), 551

F.2d at 414, not by any substantive difference between a

two- and three-year limitation. Even if this second factor

suggests retroactive application of Forrestal Village, we

think it outweighed by the first and third criteria, which

overwhelmingly dictate that the decision be applied pros-

pectively here."* This action is therefore guided by the

three-year statute of limitations for general fraud.

B. Equitable Tolling

The doctrine of equitable tolling permits, with respect

to fraud, the tolling of the limitations period until the

plaintiff discovers, or should have discovered through the

exercise of due diligence, the fraudulent actwity? This

court recently articulated the equitable tolling standard in

Fitegerald v. Seamans, 553 F.2d 220, 228 (D.C. Cir. 1977) :

“time does not begin to run until plaintiff discovers, or by

reasonable diligence could have discovered, the basis of

18 Appellees’ citation to Zweibon v, Mitchell, 606 F.2d 1172, 1177

(D.C. Cir. 1979), petition for cert. filed, 48 U.S.L.W. 3404 (U.S. .

Dec. 7, 1979) (Nos. 79-881 & 79-883), for the proposition that

“[r]etroactivity is the rule” is unavailing. In Zweibon, the judicial

ruling at issue—requiring a warrant for domestic national security

wiretaps—did not overrule precedent. Nor was the ruling unfore-

shadowed. On several occasions in the late 1960s, the Supreme

Court had expressed concern regarding warrantless wiretaps, and

“[e]xtension of that concern to the national security sphere was

certainly likely, th perhaps not inevitable.” Jd. at 1178 n.31.

Henee, rather’ pt an avulsive change in the law, or resolve

a complex issue of first impression, Zweibon merely extended exist-

ing law to domestic national security situations. However, where,

as here, a decision displaces the weight of precedent relied upon by

the ory conyl am aaa rather than retrospective, application

must be the rule. .

“a

15a

Opinion of United States Court of Appeals

the lawsuit.” The Fitzgerald formulation of the equitable

tolling doctrine reiterated a standard long applied in fed-

eral courts. See, e.g., Cook v. Avien, Inc., 573 F.2d 685,

695 (1st Cir. 1978); Berry Petroleum Co. v. Adams & Peck,

518 F.2d 402, 410 (2d Cir, 1975) ; Klein v. Bower, 421 F.2d

338, 343 (D.C. Cir. 1970).

The district court decided against invocation of the

equitable tolling principle. It ruled that appellants “should

have known of the fraud within the two-year statute of

limitations, running immediately after the sale.” 461 F.

Supp. at 1010. The court based its ruling on certain “ ‘code

blue’ notices of fraud.” Id. at 1009. These included the

precipitous decline of the price of NSMC stock between

December 17, 1969, and February 17, 1970; NSMC’s re-

ported loss on February 16, 1970, of 1.2 to 1.7 million dol-

lars; and articles in Barron’s (December 22, 1969) and

The Wall Street Journal (February 17, 1970),* question-

ing NSMC’s auditing procedures and reporting the com-

pany’s financial problems. The court below thus concluded:

[T]hese facts, coupled with the several lawsuits filed

in 1970, provided a clearly marked trail, which, if

pursued with diligence, would have led the plaintiffs

to the fraud of the NSMC officials and to the attorney-

defendants and their involvement in the stock sale.

Id.

There can be little doubt that these code blue factors im-

plicated the accountant-defendants—but only in February,

1970, when most of the events occurred. The only hint of

fraud available to appellants before February, 1970, was

4 Joint Appendix (J.A.) at 710.

18 J.A. at 712.

16a

Opinion of United States Court of Appeals

the publication of the Barron’s article, which appeared on

December 22, 1969. This article criticized NSMC’s prac-

tices of deferring costs, and of including as part of its 1969

income the earnings of companies acquired after expiration

of the 1969 fiscal year.

This article, taken alone, was insufficient to alert ap-

pellants to fraudulent activity committed by the accoun-

tant-defendants, Although the article questions the nature

of certain accounting procedures, it in no way intimates

that such procedures were fraudulent. As a matter of law,

we believe that one article challenging the accounting pro-

cedures of a reputable firm is insufficient to impute knowl-

edge of fraud to appellants. See Robertson v. Seidman &

Seidman, 609 F.2d 583 (2d Cir. 1979) (publicly dissemi-

nated information doubting propriety of accounting prac-

tices inconclusive regarding time that plaintiff possessed

knowledge of fraud). Hence, although we agree with the

court below that the code blue factors, taken cumulatively,

were sufficient to warn appellants of the possibility of fraud

on the part of the accountant-defendants, we nonetheless

find that the court committed error in declining to toll the

limitations period until February, 1970. The statute of

limitations cannot run until the events that implicated the

accountants occurred, and all but one of them occurred, or

became discernible, in February, 1970. The statute of limi-

tations against the accountants should thus be tolled until

that time. Given our holding above that the three-year

statute of limitations applies to this case, appellants filed

this suit against the auditor-defendants within the limita-

tions period.

We are unsure whether the code blue factors were suffi-

cient to place appellants on notice in February, 1970, of

the possibility of fraud committed by the attorney-defen-

17a

Opinion of United States Court of Appeals

dants. But a more precise determination on the running of

the limitations period against these defendants is unneces-

sary. Insofar as the three-year statute of limitations ap-

plies, and February, 1970, is the earliest possible time the

attorney-defendants could have been implicated, appellants’

claims against these defendants clearly fall within the

limitations deadline. We therefore reverse the ruling of the

court below and find that appellants’ claims are not time-

barred.

ITI. Avarmasrmiry or Impirep Remepies

The second issue in this case resurrects a decade-old and

multi-faceted controversy and requires application of a

doctrine that was examined by the Supreme Court no less

than five times during the last Term. The question before

the court on the cross-appeal, and necessary to our deci-

sion in light of our holding on the statute of limitations

question, is whether an implied right of action-is available

to Wachovia under section 10(b) of the 1934 Act** and the

corresponding SEC Rule 10b-5,"" as well as under section

16 Jt shall be unlawful for any person, directly or indirectly, by

the use of any means or instrumentality of interstate com-

merce or of the mails, or of any facility of any national secu-

rities exchange—

(b) To use or employ, in connection with the purchase or

sale of any security registered on a national securities ex-

change or any security not so registered, any manipulative or

deceptive device or contrivance in contravention of such rules

and regulations as the Commission may prescribe as necessary

or appropriate in the public interest or for the protection of

investors.

Section 10(b), 15 U.S.C. § 78j(b) (1976).

1 Rule 10b-5, Swe y: ers by the SEC pursuant to authority

granted by § 10(b) of the 1934 Act, provides in full:

It shall be unlawful for any person, directly or indirectly,

by the use of any means or instrumentality of interstate com-

18a

Opinion of United States Court of Appeals

17(a) of the 1933 Act,'* or whether plaintiffs are limited to

the express remedies set forth in those statutes.’

merce, or of the mails or of any facility of any national securi-

ties exchange,

(a) To employ any device, scheme or artifice to defraud,

(b) To make any untrue statement of a material fact or to

omit to state a material fact necessary in order to make the

statements made, in the light of the circumstances under which

they were made, not misleading, or

which operates or would operate as a fraud or deceit upon any

person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5 (1979).

18 Tt shall be unlawful for any person in the offer or sale of

any securities by the use of any means or instruments of trans-

portation or communication in interstate commerce or by the

use of the mails, directly or indirectly—

(1) to employ any device, scheme, or artifice to de-

fraud, or

(2) to obtain money or property by means of any un-

true statement of a material fact or any omission to state

a material fact necessary in order to make the statements

made, in the light of the circumstances under which they

were made, not misleading, or

(8) to engage in any transaction, practice, or course of

business which operates or would operate as a fraud or

deceit upon the purchaser.

Section 17(a), 15 U.S.C. § 77q(a) (1976).

1 Because we decide that appellants may pursue a private rem-

edy under § 10(b) of the 1934 Act, and because their can be

fully satisfied by such an action, we do not decide whether a private

right of action may be implied under § 17(a) of the 1933 Act. That

question has explicitly been left open by the Supreme Court. See

Aaron v. SEC, 100 8. Ct. 1945, 1951 (1980) ; Blue Chip Stamps v.

mond gg sigue dee 421 pi iow ph a (1975). The courts of

ap are in conflict on e, though most have recognized a

cause of action implicit in § 17(a). Compare Kirshner v. United

States, 603 F.2d 234, 241 (2d Cir. 1978), cert. jed, 442 U.8. 909

(1979) (recognizing implied remedy under §17(a)); Daniel v.

International Bhd. of Teamsters, 561 F.2d 1228, 1245-46 (7th Cir.

19a

Opinion of United States Court of Appeals

A. Implying a Cause of Action Under Section 10(b) and

Rule 10b-5

It has been almost thirty-five years since a private cause

of action was first implied under section 10(b) and Rule

10b-5, and “a substantial body of case law and commen-

tary has developed as to its elements.” Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 197 (1976). Although the initial

formulation of the implied remedy and the molding of its

contours occurred in the courts of appeals,” the Supreme

Court has recognized an implied cause of action under

10(b) many times.”

Moreover, despite many efforts, successful and unsuc-

cessful, to amend related sections of the national securities

laws, Congress never saw reason to limit or constrict the

application of implied remedies under section 10(b). Long-

1977), rev’d on other grounds, 439 U.S. 551 (1979) (same) ; New-

man v. Prior, 518 F.2d 97, 99 (4th Cir. 1975) (same), with Shull

v. Dain, Kaiman & Quail, Inc., 561 F.2d 152, 159 (8th Cir. 1977),

cert, denied, 434 U.S..1086 (1978) (rejecting implied remedy).

2° See, ¢.g., Matheson v. Armbrust, 284 F.2d 670 (9th Cir. 1960) ;

Hooper v. Mountain States Securities Corp., 282 F.2d 195 (5th

Cir. 1960), cert. denied, 365 U.S. 814 (1961); Pratt v. Robinson,

203 F.2d 627 (9th Cir. 1953) ; Fischman v. Raytheon Mfg. Co., 188

F.2d 783 (2d Cir. 1951).

21 See Santa Fe Indus., Inc. v. Green, 480 U.S. 462, 477 (1977) ;

Piper v. Chris-Craft Indus., Inc., 4380 U.S. 1, 25 (1977) (“This

Court has nonetheless held that in some circumstances a private

cause of action can be implied with respect to the 1934 Act’s anti-

fraud provisions, even though the relevant provisions are silent as

to remedies.”) ; Hochfelder, 425 U.S. at 196 (“[T]he existence of

a private cause of action for violations of the statute and the Rule

is now well-established.”); Blue Chip Stamps v. Manor Drug

Stores, 421 U.S. 723, 730 (1975) ; Affihated Ute Citizens v. United

States, 406 U.S. 128, 144-54 (1972); Superintendent of Ins. v.

Bankers Life & Casualty Co., 404 U.S. 6, 13 n.9 (1971) (“It is now

30 gate that a private right of action is implied under

20a

Opinion of United States Court of Appeals

standing judicial application of a court’s statutory inter-

pretation, the Supreme Court has said, when added to the

failure of Congress to reject its reasoning, “argues signi-

ficantly in favor of [its] acceptance.” Blue Chip Stamps v.

Manor Drug Stores, 421 U.S. 723, 733 (1975).

The starting point for any inquiry regarding implied

remedies is the intent of Congress in passing the statute in

the first place. The Supreme Court’s recent opinions, em-

phasizing that congressional intent must be the touch-

stone, have reaffirmed use of the test first articulated in

Cort v. Ash, 422 U.S. 66 (1975), for ascertaining that in-

tent.”? There the Court outlined the following four-step

analysis to guide efforts to determine legislative intent:

First, is the plaintiff “one of the class for whose

especial benefit the statute was enacted”—that is, does

the statute create a federal right in favor of the plain-

tiff? Second, is there any indication of legislative

intent, explicit or implicit, either to create such a

remedy or to deny one? Third, is it consistent with

the underlying purposes of the legislative scheme to

imply such a remedy for the plaintiff? And finally, is

the cause of action one traditionally relegated to state

law, in an area basically the concern of the States, so

that it would be inappropriate to infer a cause of ac-

tion based solely on federal law?

Id. at 78 (citations omitted) (emphasis in original).

*2 Although one of the dissenters in Cannon v. University of

Chicago would have discarded the Cort approach, see 441 U.S. 677,

742 (1979) (Powell, J., dissenting), the controversy has primarily

revolved around how to apply Cort, not whether to apply it. See

Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 23-24

(1979) ; Touche Ross & Co. v. Redington, 442 U.S. 560, 575-76

(1979) ; Cannon, 441 U.S. at 688.

cer

¢ 21a

Opinion of United States Court of Appeals

Applying the Cort criteria, it is clear firstly that

Wachovia is within the specific class to be protected by the

statute. Section 10(b) proclaims as its purpose “the protec-

tion of investors.” Secondly, as in other cases in which

private remedies have been implied, a search of the legis-

lative history yields little specific. Congress did not spend

much time discussing 10(b), notwithstanding its clear place

as a “ ‘catch-all clause to prevent manipulative devices.’ ”

Hochfelder, 425 U.S. at 202 (quoting Thomas Corcoran,

spokesperson for the drafters of the statute) ; see Chiarella

v. United States, 445 U.S. 222, 226 (1980).

Such silence, however, is neither surprising nor deter-

minative. See Transamerica Mortgage Advisors, Inc. v.

Lewis, 444 U.S. 11, 18 (1979); Cannon v. University of

Chicago, 441 U.S. 677, 694 (1979); Blue Chip Stamps, 421

U.S. at 737. If Congress had spoken plainly enough, the

task would be simple. The quest, therefore, is not neces-

sarily for evidence that Congress specifically intended to

imply a private right of action, but rather for indications

whether Congress meant to deny such a remedy. This was

the thrust of Transamerica. There, the Court found legis-

lative maneuverings that so reshaped earlier drafts of the

statute at issue as to offer persuasive evidence that Con-

gress wanted no implied remedies added to what the statute

_ specifically provided.** No such legislative history dis-

poses of the issue here.

Because the relevant legislative chronicles do not nega-

tive the existence of implied remedies, the third factor of

Cort must be examined: whether a private remedy “is

necessary or at least helpful to the accomplishment of the

statutory purpose.” Cannon, 441 U.S. at 703. We find

more than the requisite link between the existence of an

*8 See text following note 26 infra.

22a

Opinion of United States Court of Appeals

implied cause of action and the broad purposes of the 1934

Act. A private right of action not only compensates the

investors who are the beneficiaries of section 10(b) in gen-

eral, but also affords a broad deterrent force against the

fraud that the statute condemns. See, e.g., Fratt v. Robin-

son, 203 F.2d 627, 631 (9th Cir. 1953). And, as the SEC

argues forcefully in its amicus position, a private remedy

is a necessary supplement to administrative enforcement

because the Commission cannot do the job alone. See Blue

Chip Stamps, 421 U.S. at 730; J.I. Case Co. v. Borak, 377

U.S. 426, 432-33 (1964) ; cf. Cannon, 441 U.S. at 708 n.42.%

Application of the Cort criteria thus points in favor of

appellants’ right to pursue a cause of action here. Cross-

appellants urge, however, that recent opinions of the Su-

preme Court have limited preexisting law in this are. We

cannot read those cases to support a conclusion that a pri-

vate remedy under section 10(b) no longer exists.

In Cannon v. University of Chicago, 441 U.S. 677 (1979),

the Court held that there was a private right of action

under Title IX of the Education Amendments of 1972, 20

U.S.C. § 1681 (1976), even though the statute itself speci-

fied no such cause of action. Among the two opinions

recognizing an implied remedy and the two opinions in

dissent, there was indeed reconciliation and reconsidera-

tion of earlier precedents. But the Court reiterated its

**The fourth factor outlined in Cort—whether the case involves

matters traditionally of state or federal concern—is not as relevant

as the first three in any inquiry into congressional intent. Never-

theless, that criterion is clearly satisfied here. As the court below

found, appellants’ complaint alleges a broad scheme to manipulate

the national market for NSMC stock. Conduct with such national

implications is exactly what Congress was interested in controlling

when it provided for federal regulation of the securities markets in

the 1934 Act. See § 2, 15 U.S.C. § 78b (1976).

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Opinion of United States Court of Appeals

adherence to earlier guidelines, in particular, the four-part

test of Cort v. Ash. In fact, that was the core of the com-

plaint voiced by Justice Powell in dissent, who advocated

abandonment of the Cort approach. See 441 U.S. at 749.75

The second case cited as proof of this radical shift away

from implied remedies is Touche Ross & Co. v. Redington,

442 U.S. 560 (1979). There the Court did reject urgings for

an implied remedy for violations of section 17(a) of the Se-

curities Act of 1934, 15 U.S.C. § 78q(a) (1976). The Court

pointed out how frequently it was called upon to “decide

whether a private remedy is implicit in a statute not ex-

pressly providing one.” Jd. at 562. But the Court did not

announce that it was going out of the business.”®

Most recently, in Transamerica Mortgage Advisors, Inc.

v. Lewis, 444 U.S. 11 (1979), the Court refused to imply a

cause of action under section 206 of the Investors Advisers

Act of 1940, 15 U.S.C. § 80b-5 (1976), a statutory provision

worded very similarly to Rule 10b-5. The Court relied

there on two pieces of evidence weighing against implica-

tion of a private remedy. First, the Act nowhere provided

for damage remedies, from which the Court inferred that

Congress had been unwilling to impose any monetary li-

ability in private suits under the Act. The 1933 and 1934

Acts do, of course, provide express damage remedies, and

the Court in Transamerica specifically distinguished them.

** Even Justice Powell did not suggest that no private remedy

should be implied under § 10(b); rather, he argued that implica-

tion of a cause of action under that section “reflects the unique his-

tory of Rule 10b-5” and does not “articulate any standards of gen-

eral applicability.” 441 U.S, at 738 (Powell, J., dissenting).

*6 For the Court in Redington, “the inquiry end[ed]” when (1)

§ 17(a) neither prohibited conduct nor granted private rights, but

merely required that certain forms be filed, and (2) the legislative

history was silent. 442 U.S. at 576. Here, of course, § 10(b) does

specifically prohibit certain conduct.

| 24a

Opinion of United States Court of Appeals

See 444 U.S. at 20-21. Second, although early drafts of the

Investors Advisers Act had given federal courts jurisdic-

tion over “all suits in equity and actions at law brought to

enforce any liability or duty” created by the statute, the

final version appeared without the italicized phrases. The

Court interpreted this omission as corroborating Congress’

rejection of any civil liability. See id. at 21-22. In contrast,

the 1934 Act’s jurisdictional provision, 15 U.S.C. § 78aa

(1976), is identical to the early version of the Investors

Advisers Act quoted above.’

*7 In addition to those cases discussed above, the Supreme Court

has recently failed to imply private rights of action in Chrysler

Corp. v. Brown, 441 U.S. 281 (1979), and in Piper v. Chris-Craft

Indus., Inc., 430 U.S. 1 (1977). Both are distinguishable from this

ease. In Brown, involving the Trade Secrets Act, 18 U.S.C. § 1905

(1976), the Court expressed reluctance to find an implied remedy

in a criminal statute. And, “[m]ost importantly,” the Court noted,

a private right was not necessary to effectuate the purposes of the

Act in that case because of the availability of review under § 10 of

the Administrative Procedure Act, 5 U.S.C. § 702 (1976). 441

U.S. at 317-18.

In Piper, the Court rejected the contention of defeated tender

offerors that they were entitled to a private remedy under § 14(e)

of the 1934 Act, 15 U.S.C. § 78n(e) (1976), added by the Williams.

Act of 1968. The Court’s decision was based on legislative history

indicating that the sole purpose of the Williams Act was the pro-

tection of shareholders of target corporations. See 430 U.S. at

26-35. Moreover, the Court held, an implied remedy in favor of

tender offerors might be inconsistent with that objective by award-

ing damages “to the very party whose activities Congress intended

to curb.” Id. at 39. Even if such damage awards might contribute

indirectly to shareholder protection, the Court concluded that that

objective could more directly be realized by “other, less drastic

means more closely tailored to the precise congressional goal under-

lying the Williams Act.” Id. at 40.

As made clear in our discussion accompanying notes 22-24 supra,

the need for private remedies to supplement SEC enforcement of

the 1934 Act and the absence of legislative history indicating con-

gressional disapproval of such remedies distinguish the case before

us and § 10(b) from the statutory provisions at issue in Brown

and Piper.

25a

Opinion of United States Court of Appeals

It may be reasonable to infer from these recent pro-

nouncements that the Court is not favorably inclined to-

ward expanding the doctrine of implied remedies; it is un-

reasonable to imply, as crvss-appellants seem to in their

briefs, that all the implied remedies that have previously

been established have now been swept away. In sum, we

find that under the Cort analysis, section 10(b) continues

to lend itself to private remedies, and that neither the

spirit nor the letter of any Supreme Court opinion sug-

gests otherwise.

B. Application of Section 10(b) to Newly Issued Securities

Cross-appellants argue that the entire 1934 Act, of

which section 10(b) is a part, is inapplicable to this case

because the Act was intended to regulate securities only

after distribution. It is the 1933 Act, say cross-appellants,

which was meant to cover newly issued securities. Such a

rigidly compartmentalized analysis misses the clear inten-

tion of Congress and the overall purposes of the statutory

scheme. Section 10(b) by its very terms applies to “any

security,” whether or not registered on a national ex-

change. The language was intended to be sweeping, and it

has been so held. See Affiliated Ute Citizens v. United

States, 406 U.S. 128, 151 (1972). In SEC v. Capital Gains

Research Bureau, 375 U.S. 180, 195 (1963), the Court de-

clared that Congress wanted securities legislation aimed

at protecting against fraud to be construed “not techni-

cally and restrictively, but flexibly to effectuate its reme-

dial purposes.”

Cross-appellants advance the legislative history of the

1934 Act as supportive of their interpretation. Even if the

language of section 10(b) were not so plain, its legislative

history would offer cross-appellants little solace. That his-

26a

Opinion of United States Court of Appeals

tory corroborates Congress’ intent, as noted above, that

10(b) act as a “catch-all clause to prevent manipulative

devices.” In fact, earlier drafts of the section limited its

applicability to securities listed on a national exchange,

but that restriction was removed in conference, See 1 A.

Bromserc, Szcurttres Law: Fravup § 2.2(320) (1977).

The broad scope of section 10(b) has been widely recog-

nized, and the section has been applied to newly issued

securities and to those sold in private placements. See, e.g.,

Superintendent of Insurance v. Bankers Life & Casualty

Co., 404 U.S. 6, 12 (1971) (“[WJe read §10(b) to mean

that Congress meant to bar deceptive devices and contri-

vances in the purchase or sale of securities whether con-

ducted in the original markets or face to face.”); Woolf

v. S.D, Cohn & Co., 515 F.2d 591, 606-07 (5th Cir. 1975),

vacated on other grounds, 426 U.S. 944 (1976), on remand,

546 F.2d 1252 (5th Cir.), cert. denied, 434 U.S. 831 (1977);

Leasco Data Processing Equipment Corp. v. Maxwell, 468

F.2d 1326, 1336 (2d Cir, 1972) ; Lawrence v. SEC, 398 F.2d

276, 280 (1st Cir. 1968) ; Hooper v. Mountain States Secu-

rities Corp., 282 F.2d 195, 201 (5th Cir. 1960), cert. denied,

365 U.S. 814 (1961); Fratt v. Robinson, 203 F.2d 627, 629-

31 (9th Cir. 1953).

Moreover, overlap between the two statutes is neither

“gnusual nor unfortunate.” SEC v. National Securities,

Inc., 393 U.S. 453, 468 (1969), quoted in United States v.

Naftalin, 441 U.S. 768, 778 (1979). It is nowhere written

that each pronouncement of Congress must be mutually

exclusive of every other pronouncement. In the securities

field, Congress has dealt with the problems of regulations

many times—on both the cosmic and the specific levels.

The 1933 and 1934 Acts are meant to be interrelated and

interdependent components of a general scheme, and the

27a

Opinion of United States Court of Appeals

two should be read together. See Ernst d& Ernst v. Hoch-

felder, 425 U.S. 185, 206 (1976). There is no conflict be-

tween them, and their overlap in no way diminishes the

plain meaning of section 10(b).

C. The Relevance of Express Remedies

Cross-appellants’ final contention is that section 10(b)

may not give rise to an implied remedy because other

specific sections of the 1933 and 1934 Acts provide perti-

nent express remedies. The argument smacks somewhat

of a “Catch 22” arrangement because in each instance

cross-appellants are at the ready to show that the express

remedies are not really available to Wachovia. And the

argument has been unavailing in previous cases for reasons

that are applicable here.

The ancient maxim “expressio unius est exclusio al-

terius” is a dangerous road map with which to explore

legislative intent. As we have pointed out above, the nature

of the legislative process militates against each enact-

ment’s being self-contained and mutually exclusive of every

other enactment. Even in the context of a single piece of

legislation, the existence of an express remedy arising

under one section does not preclude the need for an im-

plied remedy in other situations under other sections of

the act. Such rigid analysis, noted the Supreme Court,

would be an “excursion into extrapolation of legislative

intent [that is] entirely unilluminating.” Cort v, Ash, 422

U.S. 66, 83 n.14 (1975).

It is true that the Supreme Court has expressed concern

about implying private rights of action when express rem-

edies have been created by statute, but that concern has

been limited to cases in which the express remedies would

be nullified if additional remedies were implied. See

28a

Opinion of United States Court of Appeals

Touche Ross & Ce. v. Redington, 442 U.S, 560, 574 (1979) ;

Ernst & Ernst v. Hochfelder, 425 U.S. 185, 208-11 (1976) ;

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723,

736 (1975).** Such circumvention can hardly be an issue

here, where the express remedies are totally different

from the remedy implied under section 10(b), and where

the express remedies are meant to treat different prob-

lems and to be applied in different situations.”

Section 11 of the 1933 Act,®® for example, imposes civil

liability for filing a false registration statement. Under

28 Cf. Greater Iowa Corp. v. McLendon, 378 F.2d 783, 790 (8th

Cir. 1967) ; McFarland v. Memorex Corp., 493 F. Supp. 631, 653

(N.D. Cal. 1980); Gunter v. Hutcheson, 4383 F. Supp. 42, 46-47

(N.D. Ga. 1977); Dorfman v. First Boston Corp., 336 F. Supp.

1089, 1093-96 (E.D. Pa. 1972) (all holding that implied remedy

under § 17(a) of the 1933 Act would circumvent limitations on

express remedies provided by § 11 and § 12(2) of that Act).

22 The Supreme Court has never decided whether the existence

of express remedies precludes implication of a private right of

action, and it specifically left the issue open in Hochfelder, 425 U.S.

at 211 n.31, and in Blue Chip Stamps, 421 U.S. at 752 n.15. Dicta

in Redington expressing reluctance to create an additional remedy

when express remedies are already provided is not controlling in

this ease. In Redington, while the Court declined to decide the

issue, see 442 U.S. at 574, it did note the existence of legislative

history supporting a finding that the express remedies were in-

tended to be exclusive. See id. at 573 & n.15. No such evidence

exists here.

30 In ease any part of the registration statement, when such

part became effective, contained an untrue statement of a ma-

terial fact or omitted to state a material fact required to be

stated therein or necessary to make the statements therein not

misleading, any person acquiring such security (unless it is

proved that at the time of such acquisition he knew of such

untruth or omission) may, either at law or in equity, in any

court of competent jurisdiction, sue—

(1) every person who signed the registration statement ;

(2) every person who was a director of (or person per-

forming similar functions) or partner in the issuer

29a

Opinion of United States Court of Appeals

that provision, a defendant may be held liable even for

negligent misstatements. Because of its broader liability,

section 11’s reach is limited by restrictions on the class of

plaintiffs to whom its remedy is available and by a short

and strict statute of limitations. To no one’s surprise, the

remedy is unavailable to Wachovia on both counts: no

registration statement was filed, and the suit was brought

well beyond the time allowed under section 11.

Nothing in the remedy expressly provided by section 11

is inconsistent with an implied right of action under sec-

tion 10(b). Under 10(b), negligence is not enough—one is

liable only for fraud. The higher burden of proof under

section 10(b) is clearly a trade-off for the limitations on

at the time of the filing of the part of the registration

statement with respect to which his liability is asserted ;

(3). every person who, with his consent, is named in

the registration statement as being or about to become a

director, person performing similar functions, or partner;

(4) every accountant, engineer, or appraiser, or any

person whose profession gives authority to a statement

made by him, who has with his consent been named as

having prepared or certified any part of the registration

statement, or as having prepared or certified any report

or valuation which is used in connection with the regis-

tration statement, with respect to the statement in such

registration statement, report, or valuation, which pur-

ports to have been prepared or certified by him;

(5) every underwriter with respect to such security.

If such person acquired the security after the issuer has made

generally available to its security holders an earning statement

covering a period of at least twelve months beginning after the

effective date of the registration statement, then the right of

recovery under this subsection shall be conditioned on proof

that such person acquired the security relying upon such un-

true statement in the registration statement or relying upon

the registration statement and not knowing of such omission,

but such reliance may be established without proof of the

reading of the registration statement by such person.

Section 11(a), 15 U.S.C. § 77k(a) (1976).

30a

Opinion of United States Court of Appeals

section 11 claims, and it accounts in part for the fact that

there are two separate sections dealing with related prob-

lems. See Fischman v. Raytheon Mfg. Co., 188 F.2d 783,

786-87 (2d Cir. 1951); Beecher v. Able, 435 F. Supp. 397,

412 (S.D.N.Y. 1977). See also Globus v. Law Research

Service, Inc., 418 F.2d 1276, 1284 (2d Cir. 1969), cert.

denied, 397 U.S. 913 (1970) (same argument applied when

implying remedy under section 17(a) of the 1933 Act).

Moreover, according to the view urged by cross-appellants,

section 10(b) would serve no useful function because fraud

is included within the broad proscription of section 11.

Indeed, if no remedies may be implied under 10(b), in-

vestors defrauded in a purchase of unregistered securities

are left less protected than investors suffering losses as

the result of typographical errors in a registration state-

ment,

For the same reasons, implying a remedy under section

10(b) creates no danger of circumvention of section 12(2)

of the 1933 Act,*' which deals with false prospectuses and

#1 Any person who—

(2) offers or sells a security (whether or not exempted

by the provisions of section 77c¢ of this title other than

paragraph (2) of subsection (a) of said section), by the

use of any means or instruments of transportation or com-

munication in interstate commerce or of the mails, by

means of a prospectus or oral communication, which in-

cludes an untrue statement of a material fact or omits to

state a material fact necessary in order to make the state-

ments, in the light of the circumstances under which they

were made, not misleading (the purchaser not knowing of

such untruth or omission), and who shall not sustain

the burde» of proof that he did not know, and in

the exercise of reasonable care could not have known, of

such untruth or omission,

shall be liable to the person purchasing such security from

him, who may sue either at law or in equity in any court of

competent jurisdiction, to recover the consideration paid for

3la

Opinion of United States Court of Appeals

oral communications. The cause of action expressly pro-

vided by that section is available in the event of negligent

misstatements, and again the more stringent fraud re-

quirement of section 10(b) serves as a trade-off for section

12(2)’s short statute of limitations and apparent restriction

of defendants to sellers of securities. See Wachovia Bank

&é Trust Co. v. National Student Marketing Corp., 461 F.

Supp. 999, 1006 (D.D.C. 1978). See also In re New York

City Municipal Securities Litigation, MDL No. 314 M

21-22, slip op. at 16 & n.20 (S.D.N.Y. Jan. 25, 1980) (using

similar analysis to approve section 10(b) suit by pur-

chasers of municipal securities foreclosed from using ex-

press remedy of section 12(2), which exempts government

securities),

Finally, cross-appellants point to section 18 of the 1934

Act® as providing an express remedy that precludes im-

AS gu .

such security with interest thereon, less the amount of any

income received thereon, upon the tender of such security, or

for damages if he no longer owns the security.

Section 12(2), 15 U.S.C, § 771(2) (1976).

82 Any person who shall make or cause to be made any state-

ment in any application, report, or document filed pursuant to

this chapter or any rule or regulation thereunder or any un-

dertaking contained in a registration statement as provided in

subsection (d) of section 780 of this title, which statement was

at the time and in the light of the circumstances under which

it was made false or misleading with respect to any material

fact, shall be liable to any oe (not knowing that such

statement was false or misleading) who, in reliance upon such

statement, shall have purchased or sold a security at a price

which was affected by such statement, for damages caused by

such reliance, unless the person sued shall prove that he acted

in good faith and had no knowledge that such statement was

false or misleading. A person see to enforce such liability

may sue at law or in equity in any court of competent jurisdic-

tion. In any such suit the court may, in its discretion, require

an undertaking for the payment of the costs of such suit, and

assess reasonable costs, including reasonable attorneys’ fees,

against either party litigant.

Section 18(a), 15 U.S.C. § 78r(a) (1976).

“sy

32a

Opinion of United States Court of Appeals

plication of a cause of action under section 10(b). Section

18 makes any person filing a “false or misleading” state-

ment with the SEC liable for damages caused by reliance

on that statement. Cross-appellants’ contention was re-

cently considered and rejected by the Second Circuit in

Ross v. A.H. Robins Co., 607 F.2d 545 (2d Cir. 1979),

cert, denied, 100 S. Ct. 2175 (1980). The court there dis-

cussed various differences between the two sections which

militate against regarding them as mutually exclusive.

First, section 10(b) by its very terms has a much broader

reach than does section 18. The latter, noted the Second

Circuit, has “the narrow and particularized objective of

encouraging use of and reliance upon records filed with

the 8.E.C.” Ross, 607 F.2d at 556. Section 18 therefore

requires that plaintiffs prove actual reliance on particular

filed statements, whereas section 10(b) presumes reliance

if the omission is material or if the misstatement affects

the price of the stock.

Second, section 10(b) imposes a more stringent burden

of proof on plaintiffs—proof of actual fraud. Under section

18, a plaintiff need only show that a filed document con-

tains a material omission or misstatement and that he re-

lied on that document. The defendant then has the onus of

establishing his good faith and lack of knowledge of the

falsity. This distinction is noteworthy because, as the

court noted in Ross, “the ultimate outcome of the litiga-

tion may hinge upon who bears the burden of establishing

the defendant’s state of mind.” 607 F.2d at 556.

In addition to pointing out the differences between the

express remedy of section 18 and an implied remedy under

section 10(b), the Second Circuit also reasoned that a

holding that the section 18 remedy is exclusive would be

incongruous. Whether a misstatement occurs in a filed or

33a

Opinion of United States Court of Appeals

unfiled document has no bearing on the damage resulting

from an investor’s reliance on that document and therefore

should not be considered significant. Moreover, if section

18’s remedy is deemed exclusive, corporate managers will

have an incentive to file misleading documents with the

SEC in order to limit their liability to those few who can

prove actual reliance on the documents. The very purpose

of section 18—encouraging reliance on filed records—

would be substantially frustrated.

We find Ross persuasive support for our holding that a

cause of action may be implied under section 10(b), irre-

spective of the availability of the express remedies pro-

vided by other sections of the securities laws. By approv-

ing an implied remedy under section 10(b), we do not pave

the way for circumvention of the limitations on the express

remedies. The absence of similar restrictions in section

10(b) suits is counterbalanced by that section’s stricter

burden of proof. The various remedies are aimed at right-

ing different wrongs, and no one of them should therefore

be considered exclusive.**

Even if we were inclined to hold that the express rem-

edies were intended to be exclusive, they should only pre-

clude implied causes of action in those cases in which they

truly constitute “remedies.” Where, as here, those ex-

press remedies are not available to a plaintiff or do not

*8 Other courts have agreed that the remedies of the two Acts

are cumulative and that plaintiffs have a choice in the event of

overlap. See Shaefer v. First Nat’l Bank, 509 F.2d 1287, 1292

(7th Cir. 1975), cert. denied, 425 U.S. 943 (1976); Wolf v. Frank,

477 F.2d 467, 475 (5th Cir.), cert. denied, 414 U.S. 975 (1973);

Rekant v. Desser, 425 F.2d 872, 882 (5th Cir. 1970) ; Jordaw Bldg.

Corp. v. Doyle, O’Connor & Co., 401 F.2d 47, 51 (7th Cir. 1968) ;

Matheson v. Armbrust, 284 F.2d 670, 674 (9th Cir. 1960). But

an v. Memorex Corp., 493 F. Supp. 631, 655 (N.D. Cal.

34a

Opinion of United States Court of Appeals

adequately dispose of his claim, an implied remedy is ap-

propriate.**

In this case, relief was not available to Wachovia under

any of the aforementioned provisions. The scope of section

11 of the 1933 Act is restricted to false registration state-

ments, and the transaction here, because it did not involve

a public offering, was not subject to the registration re-

quirement. See section 4(2) of the 1933 Act, 15 U.S.C.

§ 77d(2) (1976). Cross-appellants may not be sued under

section 12(2) of the 1933 Act, which limits potential de-

fendants to sellers. See Wachovia, 461 F. Supp. at 1006;

Collins v. Signetics Corp., 605 F.2d 110, 113 (3d Cir.

1979); DeMarco v. Edens, 390 F.2d 836, 841 n.3 (2d Cir.

1968). Finally, plaintiffs have not claimed reliance on any

documents filed with the SEC and thus may not bring suit

under section 18 of the 1934 Act. Moreover, they have al-

leged materially false statements which were never con-

tained in a filed document and which are thus exempt from

section 18 liability. See Wachovia, 461 F. Supp. at 1006.**

In contrast to the inapplicability of the express remedies

provided by the 1933 and 1934 Acts, an action under sec-

34 Even those few district courts holding that plaintiffs are lim-

ited to the express remedy of § 18 have done so only with respect

to particular documents filed with the SEC. See, e.g., McKee v.

Federal’s Inc., [Current] Fzp. Seo. L. Rep. (CCH) {[ 96,958 (E.D.

Mich. 1979) ; Pearlstein v. Justice Mortgage Investors, [Current]

Fep, Sec. L. Rep. (CCH) 7 96,760 (N.D. Tex. 1978); Berman v.

Richford Indus., Inc., [1978] Fen, Sec. L. Rep. (CCH) 7 96,518

(S.D.N.Y. 1978); Kulehok v. Government Employees Ins. Co.,

[1977-1978] Fev. Szo. L. Rep. (CCH) 96,002 (D.D.C. 1977).

5 Cross-appellants also mention the express private right of ac-

tion provided by § 15 of the 1933 Act, 15 U.S.C. §770 (1976).

That section imposes secondary liability on the controlling persons

of NSMC, but no suit could have been maintained under § 15

against cross-appellants, who are not controlling persons. See

Safeway Portland Employees’ Federal Credit Union v. C.H. Wag-

ner & Co., 501 F.2d 1120, 1124 & n.17 (9th Cir. 1974).

35a

Opinion of United States Court of Appeals

tion 10(b) is particularly appropriate here. That provision

is concerned with the type of fraud alleged by plain-

tiffs—“a complex market manipulation rather than indi-

vidual misstatements or omissions.” Wachovia, 461 F.

Supp. at 1007; see Blackie v. Barrack, 524 F.2d 891, 903

n.19, 907 (9th Cir. 1975), cert. denied, 429 U.S. 816 (1976).

Appellants should, therefore, be able to maintain a cause

of action under section 10(b), the only true relief available

to them. We hold that appellants may pursue their claims

under that section, regardless of whether an alternative

remedy is available to them under some other section of

the 1933 or 1934 Act.

It has become fashionable to challenge the existence of

any implied remedies, as evidenced by the ever-increasing

frequency with which the question has been presented to

the Supreme Court and to other courts. See Redington,

442 U.S. at 562. We find nothing in the opinions of either

the Supreme Court or of the other courts of appeals to

warrant the suggestion that implied remedies no longer

exist. Most recently, the Court of Appeals for the Second

Circuit found a private remedy implied by the Commodity

Exchange Act, 7 U.S.C. §§ 1-24 (1976). See Leist v. Sim-

plot, 49 U.S.L.W. 2056 (July 22, 1980). That case arose

out of the notorious Maine potato futures default. The de-

fendants urged the court to deny a private remedy because

Congress had amended the Commodity Exchange Act in

1974 and had failed to include an express private remedy

in the sections pertinent to the case. The court pointed out:

The existence of an implied right of action under the

Act as it stood in 1974 was repeatedly called to the

attention of, and implicitly approved by, Congress.

When a principle has become settled through court

36a

Opinion of United States Court of Appeals

decisions, there is no occasion for Congress to speak

unless it wishes a change.

Id.

As we noted above, the securities laws have been ad-

dressed by Congress on numerous occasions since 1934,

most recently in 1975. Obviously, if Congress had wished

to disapprove the judicial implication of a private remedy

under section 10(b), it had an opportunity to do so. The

silence is significant. Cf. Power Reactor Development Co.

v. International Union of Electrical, Radio & Machine

W orkers, 367 U.S. 396, 409 (1961).

The court in Leist also addressed the argument that the

Supreme Court has changed the law of implied remedies.

After reviewing the Court’s recent opinions, which we

have discussed above, the Second Circuit rejected the ar-

gument, saying

[t]he effect of these decisions is simply to emphasize

that the ultimate touchstone is congressional intent

and not judicial notions of what would constitute wise

policy.

49 U.S.L.W. at 2057. We read those cases alike. Just as it

would be lawmaking for the courts to decide what good

policy is in the first instance, so too the courts ought not

retract for policy reasons a longstanding doctrine of legis-

lative interpretation, especially one impliedly approved by

Congress. It is the prerogative of Congress, presumed to

be aware of how its enactments have been treated, to

sound the call for a new direction.

ree +

eh “

37a

Opinion of United States Court of Appeals

TV. Conciusion

It is more than a decade since the collapse of NSMC

stock, and long past time that appellants be given an op-

portunity to pursue the substance of their claims and, if

appropriate, to recover for losses incurred as NSMC

shareholders and alleged victims of securities fraud. We

reverse the holding of the court below that it is the two-

year statute of limitations for the District of Columbia’s

blue sky law that applies here and the holding that the

doctrine of equitable tolling is unavailable to appellants.

Accordingly, we find that this action is not time-barred

under the District’s three-year limitations period for gen-

eral fraud claims.

We hold further that appellants may rely on a remedy

implicit under section 10(b) of the 1934 Act, irrespective of

the possibility of overlap between that implied cause of ac-

tion and express remedies provided by other sections of

the securities laws. Section 10(b) is peculiarly appropriate

to the allegations of fraud made by appellants, and we find

nothing in the legislative history of the securities laws or .

in recent Supreme Court opinions inconsistent with an im-

plied right of action under section 10(b).

Reversed and remanded.

38a

Opinion of United States District Court

UNITED STATES DISTRICT COURT

For tHE District or CoLumBIA

M.D.L. No. 105

Civil Action No. 166-73

‘Wachovia Bank Anp Trust Co., N.A., ef al.,

Plaintiffs,

Nationa Stupent Marxetine Corp., et al.,

Defendants.

APPEARANCES

Juan A. Dex Rear, Esquire

Ricuarp M. Purmurres, Esquire

Hu, CHrisTopHER AND Pures, P.C.

Washington, D. C. 20036

Attorneys for Plaintiffs

Mizton V. Freeman, Esquire

Tuomas D. Nurmi, Esquire

Rosert H. Winter, Esquire

Arnoip & Porter

Washington, D. C. 20036

Attorneys for Defendants White & Case and Marion

Jay Epley, II

39a

Opinion of United States District Court

Wuuium FE. Heearry, Esquire

Maruis KE. Monz, Esquire

Harvey J. Gouusock, Esquire

JosepH W. Muccia, Esquire

CaHILL Gorpon & RernpEL

New York, New York 10005

Attorneys for Defendants Peat, Marwick, Mitchell &

Co., Anthony M. Natelli and Joseph Scansaroh

Before

Barrineton D. Parker

United States District Judge

Decided: November 20, 1978

MeEMoRANDUM OPINION

Barrington D. Parker, District Judge:

In this private federal securities laws litigation, filed by

the Wachovia Bank and Trust Company and other plain-

tiffs’ (the Wachovia plaintiffs), two questions are presented

for the Court’s resolution. First, do the plaintiffs have im-

plied causes of action under §17(a) of the Securities Act

of 1933 (1933 Act)? and §§10(b), 13(a) and 14(a) of the

Securities Exchange Act of 1934 (1934 Act)?* Second, is

this private action, brought under these statutory sections,

1This is one of several private law suits growing out of the

National Student Marketing Corporation stock fraud scheme.

M.D.L. No. 105. The plaintiffs in this proceeding are Wachovia

Bank and Trust Co., First Wisconsin Trust Co., The Dreyfus Off-

shore Trust, and the National Fire Insurance Company of Hart-

ford. See note 7 infra.

715 U.S.C. §77q(a).

15 U.S.C. §§ 78j(b), 78m(a) and 78n(a).

40a

Opinion of United States District Court

barred by the applicable statute of limitations and, if so,

is there an independent cause of action based on common

law fraud, breach of fiduciary duty and legal malpractice?

These issues have been raised by the law firm of White &

Case, Marion J. Epley, a partner, and the accounting firm

of Peat, Marwick, Mitchell & Co. (Peat Marwick). The

defendants have moved for judgment on the pleadings

under Rule 12(c), Federal Rules of Civil Procedure, or

alternatively to dismiss the complaint with prejudice under

Rule 12(b) (6).

The Court has considered the various memoranda, affi-

davits and exhibits filed as well as the oral argument of

counsel. For the reasons set forth herein the Court finds

that plaintiffs have stated a private cause of action under

§17(a) of the 1933 Act and §10(b) of the 1934 Act and,

therefore, defendants’ motion for judgment on the plead-

ings on the issue of implied causes of action is denied. How-

ever, the Court agrees with the defendants on the statute of

limitations issue and concludes that the federal claims as-

serted by plaintiffs are time-barred and the remaining

claims must be dismissed for lack of pendent jurisdiction.

INTRODUCTION

In late 1969 when the economic fortunes of the National

Student Marketing Corporation (NSMC) were most favor-

able and the reports on its financial operations extremely

optimistic, the Wachovia plaintiffs purchased at a private

placement nearly five million dollars worth of that corpo-

ration’s stock. The terms of the purchase were governed

by two contracts between the parties, dated December 17,

1969. White & Case, acting as NSMC’s counsel, drafted

‘The defendants also include Anthony M. Natelli and Joseph

Seansaroli, members of Peat Marwick.

4la

Opinion of United States District Court

a Common Stock Purchase Agreement and issued a legal

opinion to plaintiffs. Peat Marwick, the independent audi-

tor of NSMCO, certified the annual financial statements and

played a role in preparation of interim financial reports

and documents filed with the Securities and Exchange Com-

mission (SEC). ! |

In February of 1970, almost immediately following the

Wachovia transaction, NSMC’s fortunes suffered a sharp

reversal and the stock’s market price dropped markedly.®

Shortly thereafter, in early 1970, two civil actions arising

out of the collapse were filed in the Southern District of

New York federal court. Garber v. 2andell, (March 2,

1970) ; Lipsig v. National Student Marketing Corp., (May

15, 1970) (naming Peat Marwick as defendant). In early

1972, a third action was filed in the Southern District,

Natale v. National Student Marketing Corp., (February 18,

1972) (naming White & Case as defendant).* Also, on

March 19, 1970, a civil complaint was filed in the Southern

District of Texas federal court. Stuckey v. National Stu-

dent Marketing Corp., (March 19, 1970). While White &

Case and Peat Marwick were not parties in either Garber

or Stuckey, the complaints outlined the alleged fraudulent

scheme and financial manipulation that underlie the Wach-

5 The low bid price fell from 6914 on December 17, 1969, to 26

on February 17, 1970 (after giving effect to a two-for-one stock

split). National Quotation Bureau Report, Dec. 1, 1976, at 16, 18.

* Marion J. Epley, III, was first named as a defendant in the -

Consolidated, Amended and Supplemental Complaint, Garber v.

Randell, No. 70-835 (S.D.N.Y. June 2, 1972).

Taken together, the New York class action filings were com-

plaints brought on behalf of all purchasers of NSMC stock who

made their purchases between April 1, 1968, and February 17,

1972, and therefore included the Wachovia group as “asserted”

class members. On November 29, 1972, following formal class

certification and notice, the Wachovia plaintiffs officially “opted

out” of the class.

42a

Opinion of United States District Court

ovia complaint. A complaint was also filed in October 1971

in the Southern District of Ohio, Monroe v. Peat, Marwick,

Mitchell @ Co., alleging that the accountants aided and

abetted others in misrepresenting Student Marketing’s

financial condition.

In February 1972, the SEC filed an enforcement and in-

junctive action against the major participants in the corpo-

rate acquisition and merger of National Student Marketing

and Interstate National Corporation.’ White & Case and

Peat Marwick, among others, were named as defendants in

that proceeding.

Despite this turn of events, more than three years elapsed

after their December 1969 purchase before the Wachovia

plaintiffs sought relief. On January 29, 1973, their original

complaint was filed seeking damages from NSMC, several

of its officers and employees; Peat Marwick, the partner in

charge of the Washington, D.C., office, Anthony M. Natelli;

and the auditor, Joseph Scansaroli. The complaint charged

those named defendants with a conspiracy to defraud and

violations of applicable federal securities laws in connection

with plaintiffs’ purchase of NSMC common stock in 1969.°

The complaint did not include any common law counts.

On January 27, 1973, two days before this suit was filed,

the Wachovia plaintiffs and the attorney-defendants en-

tered into a letter agreement that the statute of limitations

would be tolled for two years from that date as to them.’

78SEC v. National Student Marketing Corp., 457 F.Supp. 682

(D.D.C. 1978).

* The plaintiffs have since settled and dismissed their claims

against NSMC and various named defendants.

® The tolling letter, dated January 27, 1973, provides that:

White & Case and Mr. Epley are agreeable to the tolling of

the statute of limitations for a period of two years from the

date of this letter as to claims of [the plaintiffs] against White

43a

Opinion of United States District Court

By its terms, however, no claims could be asserted which

were then barred by any applicable provision of law.

It was not until May 28, 1975, that the Wachovia plain-

tiffs amended their original complaint to include White &

Case and Epley as defendants. The amended complaint

charges those attorneys with various securities laws viola-

tions in addition to common law fraud, breach of fiduciary

duty and legal malpractice.

In addition to the motions of the attorney and accountant

defendants addressed in this opinion, the Wachovia plain-

tiffs seek to amend the original complaint, largely to raise

common law fraud claims aga’nst Peat Marwick and the

other remaining origina] defendants. Also before the Court

is a motion of the defendant Roger O. Walther, a principal

executive officer of NSMC and a major participant in its

operations. He seeks to amend his answer to raise the

statute of limitations defense.

Tue ImMpiiep Causes or Action Issuz

In seeking dismissal of all claims asserted under §17(a)

of the 1933 Act and §§ 10(b) or 14(a) of the 1934 Act,’® the

& Case and Mr. Epley arising out of the purchase of NSMC

securities . . . in December, 1969. .. .

In any such litigation or snit brought by [the plaintiffs] after

termination or expiration of the tolling period, if White &

Case and Mr. Epley plead the statute of limitations as to any

claims by [the plaintiffs], it is further understood that any

period during which the statute of limitations is tolled pursu-

ant to this letter shall be excluded from the computation of

the running of the limitation period. This letter shall not a

ply to and shall not revive any claims which [the plaintiffs),

as of the date of this letter, are already barred from asserting

by any applicable provisions of law.

1° Plaintiffs’ claim under §13(a) of the 1934 Act has been

abandoned.

44a

Opinion »f United States District Court

defendants contend in substance that since certain provi-

sions of the securities laws expressly provide private reme-

dies for the conduct alleged here, the Wachovia plaintiffs

cannot bypass the substantive and procedural limitations

of those provisions by basing their claims for relief on

judicially implied causes of action under the above-cited

provisions. Resort to the express remedies is now time-

barred and thus dismissal of the present implied claims

would effectively foreclose any recovery under the federal

securities laws. Plaintiffs strenuously object that their al-

legations encompass conduct which is not covered by the

express provisions and which clearly falls within the recog-

nized scope of implied causes of action.

The Court concludes that plaintiffs have stated a claim

under §17(a) of the 1933 Act and §10(b) of the 1934 Act.

However, even assuming an implied action would be appro-

priate under §14(a) of the 1934 Act, they have failed to

state a claim under that provision.

Initially, it should be noted that defendants do not contest

the implication of a private remedy under all circumstances,

and for good reason, since an implied right of action has

been recognized repeatedly under §10(b), see, e.g., Ernst

& Ernst v. Hochfelder, 425 U.S. 185, 196, 96 S.Ct. 1375, 47

L. Ed. 2d 668 (1976); Blue Chip Stamps v. Manor Drug

Stores, 421 U.C. 723, 730, 95 S.Ct. 1917, 44 L. Ed. 2d 539

(1975). With less frequency and certitude, such an action

has also been sanctioned under § 17(a), see, e.g., Daniel v.

International Brotherhood of Teamsters, 561 F.2d 1223,

1244-45 (7th Cir. 1977), cert. granted, 434 U.S. 1061, 98

S.Ct. 1232, 55 L.Ed. 2d 761 (1978); Forrestal Village, Inc.

v. Graham, 179 U.S. App. D.C. 225, 551 F.2d 411, 413

(1977); but see Shull v. Dain, Kalman 4 Quail, Inc., 561

F.2d 152, 159 (8th Cir. 1977), cert. denied, 434 U.S. 1086,

N x

45a

Opinion of United States District Court

98 S.Ct. 1281, 55 L.Ed. 2d 792 (1978). Rather, the defen-

dants urge that where an express remedy covers the conduct

alleged, judicial implication of a cause of action is not nec-

essary to effectuate the goals of the securities laws. See

Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477, 97

S.Ct. 1292, 51 L.Ed. 2d 480 (1977); Piper v. Chris-Craft

Industries, Inc., 430 U.S. 1, 41, 97 S.Ct. 926, 51 L.Ed. 2d 124

(1977). Thus, they do not appear to argue that implied

actions under §17(a) or §10(b) are inapplicable to the

conduct alleged, but only that such implied remedies are

unnecessary under the facts and circumstances here pre-

sented since express remedies were available if the plain-

tiffs had chosen to use them.

Defendants contend that §18(a) of the 1934 Act and

§12(2) of the 1933 Act*® provide remedies for the mis-

1 Section 18(a), 15 U.S.C. § 78r, provides:

Any person who shall make or cause to be made any state-

ment in any application, report, or document filed pursuant

to this chapter or any rule or regulation thereunder or any

undertaking contained in a registration statement as provided

in subsection (d) of section 780 of this title, which statement

was at the time and in the light of the circumstances under

which it was made false or misleading with respect to any

material fact, shall be liable to any person (not knowing that

such statement was false or misleading) who, in reliance upon

such statement, shall have purchased or sold a security at a

price which was affected by such statement, for damages caused

by such reliance, unless the person sued shall prove that he

acted in good faith and had no knowledge that such statement

was false or misleading. A person seeking to enforce such

liability may sue at law or in equity in any court of competent

jurisdiction. In any such suit the court may, in its discretion,

require an undertaking for the payment of the costs of such

suit, and assess reasonable costs, including reasonable attor-

neys’ fees, against either party litigant.

12 Section 12(2), 15 U.S.C. §771, provides:

Any person who—

(2) offers or sells a security ... by the use of any means or

instruments of transportation or communication in interstate

*-*.%

46a

Opinion of United States District Court

statements and omissions alleged by plaintiffs. Specifically,

they assert that most, if not all, of the materially false and

misleading statements are substantially contained in docu-

ments filed with the SEC and are thus subject to the rem-

edy provided by §18(a). Insofar as certain statements

may not be contained in such filed documents, they urge

that § 12(2) provides an adequate remedy.

This Court is not persuaded that these express remedies

suffice to effectuate congressional intent, as indicated by

the securities laws, to proscribe the type of fraudulent

conduct alleged here. With limited exceptions, plaintiffs

do not allege reliance upon documents filed with the SEC

and, contrary to the position of defendants, such reliance

is essential to recovery under 4 18(a). Heit v. Weitzen, 402

F.2d 909, 916 (2d Cir. 1968), cert. denied, 395 U.S. 903, 89

S.Ct. 1740, 23 L.Ed.2d 217 (1969); Gross v. Diversified

Mortgage Investors, 438 F. Supp. 199, 195 (S.D.N.Y. 1977).

The fact that statements similar to those alleged by plain-

tifis were also contained in documents filed with the SEC

is ine icient; absent reliance upon the filing of the state-

commerce or of the mails, by means of a prospectus cr oral

communication, which includes an untrue statement of a mate-

rial fact or omits to state a material fact necessary in order to

make the statements, in the light of the circumstances under

which they were made, not misleading (the purchaser not

knowing of such untruth or omission), and who shall not sus-

_ tain the burden of proof that he did not know, and in the

exercise of reasonable care could not have known, of such

untruth or omission, shall be liable to the person p

such security from him, who may sue either at law or in equity

in any court of competent jurisdiction, to recover the con-

sideration paid for such security with interest thereon, less

the amount of any income received thereon, upon the tender

of such security, or for damages if he no longer owns the

security. 7

ee ey

47a

Opinion of United States District Court

ments with the Commission, 418(a) is inapplicable.** In

addition, plaintiffs have alleged materially false statements

which were never contained in a document filed with the

SEC and thus are clearly exempt from § 18(a) liability.

Defendants respond that the remedy for such nonfiled

statements rests with §12(2). That provision, however,

contains a number of restrictions, based in large part on

the fact that it reaches even negligent misstatements and

omissions, and is not directed solely at the intentional fraud

alleged here. It appears doubtful that Congress intended

victims of intentional fraud to be limited to the negligence

remedy provided by §12(2). Moreover, there is some

question whether the section applies to the present defen-

dants since they were not “sellers” of the securities in

question. See e.g., In re Equity Funding Corp. of America

Securities Litigation, 416 F. Supp. 161, 181 (C.D. Cal.

1976). While such a restriction is appropriate in a negli-

gence context, it clearly is unwarranted here where the

participants are charged with intentional fraud.

In short, it appears that neither § 18(a) nor § 12(2) pro-

vides the plaintiffs with adequate remedies. If the Court

were to recognize defendants’ solution, the plaintiffs would

be relegated to state courts to pursue their claims based on

common law fraud. Such a suggestion needs little discus-

sion. The gravamen of plaintiffs’ complaint is that de-

fendants participated in a scheme to manipulate the na-

tional market for NSMC stock through the broad

dissemination of materially false and misleading state-

18 Tt is unclear whether reliance must be on the actual document

filed with the SEC, or whether reliance on a copy of such document

would suffice. The latter seems to be the more reasonable position

since it is the knowledge that it has been filed with the Commission

that justifies reliance on the document.

48a

Opinion of United States District Court

ments concerning NSMC. Such conduct is clearly a matter

of federal, not state, concern. See 15 U.S.C. § 78b.**

Since this is not a case where the allegations in the com-

plaint fall entirely within the scope of express provisions

of the securities laws,’* and since the allegations primarily

14 Section 78b, 15 U.S.C., provides:

transactions in securities as commonly conducted upon securi-

ties exchanges and over-the-counter markets are affected with

a national public interest which makes it necessary to provide

for regulation . . . in order to protect interstate commerce, the

national credit, .. . and to insure the maintenance of fair and

honest markets in such transactions:

(3) ‘Frequently the prices of securities on such exchanges and

markets are susceptible to manipulation and control, and the

dissemination of such prices gives rise to excessive specula-

tion: ....

15 An implied cause of action should be available even where

the alleged misconduct also falls completely within the confines of

an express remedy. “The fact that there may well be some overlap

is neither unusual nor unfortunate,’ SEC v. National Securities,

Inc., 393 U.S. 4538, 468, 89 S.Ct. 564, 573, 21 L.Ed.2d 668 (1969),

especially since recent developments have properly restricted such

implied remedies to the scope authorized by specific statutory pro-

visions. See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 488

96 S.Ct. 2126, 48 L.Ed.2d 757 (1976) (materiality); Ernst &

Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1875, 47 L.Ed.2d 668

(1976) (scienter) ; Blue Chip Stamps v. Manor Drug Stores, 421

U.S. 728, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975) (purchaser/seller).

Moreover, to conclude that express and implied causes of action

should not overlap would require a case-by-case determination of

the applicability of implied remedies under the particular factual

situation presented. Such a procedure, especially in a pretrial

stage when the factual bases for the various claims have not been

. ee would significantly burden an already complex area of

the law.

But see Kulchock v. Government Employees Insurance Co.,

[Transfer Binder ’77-78 Decisions] Fed. See. L. Rep. (CCH)

{ 96,002 (D.D.C. 1977) (complaint dismissed on ground that there

is no implied cause of action for misstatements in documents filed

with the SEC because § 18 of the 1934 Act provides express remedy

= < ‘>

Sigs :

Se eee .

nF)

’

49a

Opinion of United States District Court

concern a complex market manipulation rather than in-

dividual misstatements or omissions, see Blackie v. Bar-

rack, 524 F.2d 891, 907 (9th Cir. 1975), cert. demied, 429

U.S. 816, 97 S.Ct. 57, 50 L.Ed.2d 75 (1976), the Court con-

cludes that plaintiffs have stated a claim under §10(b) of

the 1934 Act and §17(a) of the 1933 Act.*®

A different conclusion is reached with respect to plain-

tiffs’ asserted cause of action under §14(a) of the 1934

Act. To support such a claim, plaintiffs must allege an

injury to their corporate suffrage rights or an injury re-

sulting from a corporate transaction whose approval was

obtained by a misleading proxy statement. In re Penn

Central Securities Litigation, 347 F. Supp. 1327, 1342 (E.D.

Pa. 1972), aff'd, 494 F.2d 528 (8rd Cir. 1974). In an attempt

to meet the second part of the test, the Wachovia plaintiffs

allege that the stock they purchased was authorized on the

basis of the misleading NSMC proxy material concerning

the Interstate transaction. The Court does not read the

test so broadly. Plaintiffs’ injury did not result from the

authorization of the stock, but from their later purchase of

it at an allegedly inflated price. To state a claim under the

second part of the test, the alleged stock transaction must

be part of the merger itself and not a subsequent trans-

action. Therefore, plaintiffs have failed to state a claim

under §14(a) and defendants’ motion to dismiss claims

for same) ; appeal of this dismissal Order withdrawn in light of _

—o and settlement, C.A. No. 76-206 (D.D.C. July 28,

1978).

16 Since defendants’ motions are primarily directed to the dis-

tinction between express and implied remedies, the Court need

not consider the relationship between the two implied causes of

action.

Defendants make other minor arguments in support of their

motions to dismiss, none of which have merit.

50a

Opinion of United States District Court

asserted under that provision must be granted. Of course,

to the extent allegations contained in these claims are also

applicable to the alleged manipulative scheme, they are

properly brought under §10(b) and §17(a). Bee 347 F.

Supp. at 1342.

Tue Srature or Limitations Issuer

A. Motion of White & Case and Epley

The District of Columbia Securities Act, the so-called

“blue sky law,” includes a statute of limitations which in

part provides that:

No person may bring an action under this section after

two years from the contract of sale... .”

Only recently our Circuit ruled that when a private action

is brought under § 10(b) of the 1934 Act and §17(a) of the

1933 Act, this two-year blue sky period is the applicable

statute of limitations. Forrestal Village, Inc. v. Graham,

179 U.S. App. D.C. 225, 551 F.2d 411 (1977). Since the

Wachovia plaintiffs allege violations of §§ 10(b) and 17(a),

and their other claims concern securities fraud, Forrestal

Village mandates application of the two-year statute of

limitations,

The pending claims against the attorney-defendants

were not filed until May 1975, though, by virtue of the toll-

ing letter, it must be assumed that theses claims were filed

on January 27, 1973.% Both of these dates are more than

two years after the December 17, 1969, contracts of sale.

The defendants accordingly urge that the securities laws

17T).C. Code § 2-2413(e) (1978).

18 See p. 1004 and note 9.

5la

Opinion of United States District Court

claims are untimely filed under the blue sky law and should

be dismissed with prejudice. Because plaintiffs’ common

law claims are allegedly dependent upon the time-barred

securities claims, defendants contend that the Court should

not exercise pendent jurisdiction over the state law claims.

- Plaintiffs argue initially that Forrestal Village should

not be applied retroactively and that they are entitled to

the benefits of the D.C. three-year statute of limitations for

common law fraud actions.’® Citing the criteria of Chevron

Oi Co. v. Huson, 404 U.S. 97, 106-07, 92 S.Ct. 349, 30

L.Ed.2d 296 (1971), they allege that Forrestal Village

overrules the only precedent in the District and therefore

creates a new principle of law which cannot fairly be ap-

plied retroactively.

The Court, in agreement with defendants, cannot accept

this argument. Indeed, White & Case point out the’ prior

law is by no means unequivocal, consisting largely of three

unreported United States District Court cases, all of which

barred actions under the three-year general fraud limita-

tions period.”” The Forrestal Village court did not an-

nounce a new general principle of law, but “join[ed] the

majority of circuits” in applying a local blue sky law stat-

ute of limitations in securities frand cases. 551 F.2d at

413. Lastly, this Court has already applied the decision

retroactively. Houlihan v. Anderson-Stokes, 434 F. Supp.

1324 (D.D.C. 1977).

Having adopted the blue sky provision, the Court must

next determine when the two-year period commenced to

run. Plaintiffs’ principal opposition to defendants’ motion

19D.C. Code § 12-301(8) (1973).

2 See Reply by Defendants White & Case and Marion J. Epley,

III, to Plaintiffs’ Memorandum in Opposition to Motion to Dismiss

the Complaint, August 26, 1977, at 18-22.

veg.

ay Soa:

a La a

a any

52a

Opinion of United States District Court

to dismiss is that the federal common law tolling doctrine is

applicable and held the limitations period in abeyance until

such time as the alleged fraud was or should have been dis-

covered. They identify the relevant date as February 3,

1972, when the SEC filed its injunction action before this

Court.* Only then, they contend, was it that “[t]he first

hint of any participation by White & Case in the massive

NSMC stock fraud surfaced... .””

The federal] tolling doctrine appears in Bailey v. Glover,

where the Supreme Court announced that:

the decided weight of authority is in favor of the

proposition that where the party injured by the fraud

remains in ignorance of it without any fault or want

of diligence or care on his part, the bar of the statute

does not begin to run until the fraud is discovered,

though there be no special circumstances or efforts on

the part of the party committing the fraud to conceal

it from the knowledge of the other party.

88 U.S. (21 Wall.) 342, 348, 22 L.Ed. 636 (1875) (emphasis

added). Where federal securities laws violations are al-

leged, as here, this time-honored doctrine has been recog-

nized to mean that the statute of limitations cannot be said

to run until a plaintiff, in the exercise of reasonable dil-

igence, discovered or should have discovered the fraudulent

activity underlying his cause of action.** The law is also

21 See note 7 supra.

22 Plaintiffs’ Memorandum in Opposition to Motion by Defen-

dants White & Case and Marion J. Epley, III, July 29, 1977, at 2.

23 Cook v. Avien, Inc., 573 F.2d 685, 694-95 (1st Cir. 1978);

Arneil v. Ramsey, 550 F.2d 774, 780-01 (2d Cir. 1977) ; Newman

v. Prior, 518 F.2d 97, 100 (4th Cir. 1975); Tomera v. Galt, 511

F.2d 504, 509 (7th Cir. 1975); Hudak v. Economic Research

sie ie :

53a

Opinion of United States Distrirt Court

clear that the statutory period will not await a plaintiff's

leisurely discovery of the full details of the fraudulent

scheme, but begins to run when plaintiff possesses sufficient

information, which in the exercise of due diligence, war-

rants further inquiry.”

White & Case and Epley do not contend that the Wacho-

via plaintiffs had actual knowledge of their participation

in the fraudulent scheme. Instead, they allege that the facts

were such that plaintiffs, four large sophisticated institu-

tional investors, should have formulated some suspicion

against the law firm shortly after the private placement

in 1969. Defendants label the following uncontroverted

occurrences, established and known to the public in early

1970, as “code blue” alert notices of fraud:

a. The precipitous decline of NSMC stock within

sixty days after the plaintiffs’ purchase, from 69% on

December 17, 1969, to 26 on February 17, 1970;*5

Analysts, Inc., 499 F.2d 996, 1001-02 (5th Cir. 1974), cert. denied,

419 U.S. 1122, 95 S.Ct. 805, 42 L.Ed.2d 821 (1975) ; Vanderboom

v. Sexton, 422 F.2d 1233, 1240 (8th Cir. 1970), cert. denied, 400

U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970); Janigan v. Taylor,

344 F.2d 781, 784 (1st Cir. 1965), cert. denied, 382 U.S. 879, 86

8.Ct. 163, 15 L.Ed.2d 120 (1965) ; Long v. Abbott Mortgage Corp.,

459 F.Supp. 108 (D. Conn. 1978).

*4 Cook v. Avien, Inc., supra note 23, at 696; Klein v. Bower,

421 F.2d 338, 343 (2d Cir. 1970).

26 See p. 2 and note 5 supra and affidavit of Thomas D. Nurmi,

filed October 26, 1977.

See also Hupp v. Gray, 500 F.2d 993, 996-97 (7th Cir. 1974)

(dramatic fall in market price from $47 per share to $17.50 per

share, rather than the $75 predicted to the purchaser, sufficient to

put wholly unsophisticated investor on notice that “something was

amiss”) ; Robertson v. Seidman & Seidman, [Current] Fed.Sec.L.

Rep. (CCH) {96,420 (S.D.N.Y. May 3, 1978) (85% decline in

value of stock over less than a year, among other signs, should

have led plaintiff to suspect fraud). See also Cook v. Avien, Inc.,

supra note 23, at 696.

54a

Opinion of United States District Court

b. The loss, ranging from 1.2 to 1.7 million dollars,

reported in early 1970 by NSMC for the quarter ended

November 30, 1969 ;7* and

c. News articles reporting NSMC financial difficul-

ties in Barron’s (December 12, 1969) and The Wall

Street Journal (February 17, 1970).

In addition to the above, it is established that in early 1970,

key officials of two plaintiffs, The Dreyfus Offshore Trust

(general counsel and vice president) and First Wisconsin

Trust Company (investment analyst), commenced investi-

gation and contemplated suit.”

The Court agrees that these facts, coupled with the sev-

eral lawsuits filed in 1970, provided a clearly marked trail

which, if pursued with diligence, would have led the plain-

tiffs to the fraud of the NSMC officials and to the attorney-

defendants and their involvement in the stock sale. A

statute of limitations does not become operative when a

26 This loss was reported in the national press, including the

February 17, 1970, Wall Street Journal.

27 Lawrence M. Greene, general counsel and vice president of

Dreyfus, began investigating in January 1970. When questioned

concerning the Barron’s article of December 12, 1969, his deposi-

tion at p. 118 reads:

Q. Is it your understanding that upon your review of the

Barron’s article in January of 1970 that any subsequent in-

vestigations you made with respect to National Student

Marketing were in contemplation of litigation?

A. I was greatly concerned when I read the article. ... ,

and, in fact, I was rather upset about it and I therefore began

to investigate the situation more deeply. Whatever I did fol-

lowing that in connection with looking into the facts is all part

and parcel of my turning the matter over to our counsel for

litigation. (emphasis added).

Robert G. Steffel, an investment analyst, testified that First

Wisconsin Trust was contemplating suit in late 1970 or early 1971.

55a

Opinion of United States District Court

plaintiff discovers all aspects of a fraudulent scheme, but

rather from the time when a clue to the facts, if pursued

diligently, would lead to an uncovering of the general

fraudulent scheme. Berry Petroleum Co. v. Adams & Peck,

518 F.2d 402, 410 (2d Cir. 1975); Klein v. Bower, 421 F.2d

338, 343 (2d Cir. 1970).

This situation is virtually indistinguishable from that in

the recent § 10(b) case of Robertson v. Seidman ¢ Seidman,

[Current] Fed. Sec. L. Rep. (CCH) {96,420 (S.D.N.Y.

May 3, 1978). In that proceeding an investor asserted that

the defendant-accountants certified false and misleading

financial statements in a stock sale. The district court

granted summary judgment and dismissed the complaint

ag time-barred, holding that the investor should have dis-

covered the fraud more than two years before suit was filed.

The investor relied upon the federal tolling doctrine, claim-

ing ignorance of the accountants’ role until a later time

when the SEC announced proceedings against them. The

court found that the investor should have discovered the

fraud far earlier, because the evidence showed that in the

intervening period: the stock dropped markedly in value;

he had suspected fraud and had discussed it with his

broker; and was aware of a class action suit arising out of

the same stock offering, charging price inflation through

dissemination of false and misleading information. While

that class complaint did not specifically name the accoun-

tants, the court found that “the plaintiff should at least

have been on notice that further inquiry into the fraudulent

practices surrounding . . . the public offering would be

prudent,” Robertson at 93,518, and there were public facts

available indicating the accountants’ role.

There is no difference between Robertson and this action

except for the involvement of accountants rather than

oy ees

56a

Opinion of United States District Court

attorneys. That of course is of no consequence. The

Wachovia plaintiffs knew that White & Case had drafted

the Stock Purchase Agreement as well as the legal opinion

to secure their purchase. Their blanket claim that before

the SEC injunctive action was filed in 1972 they had no

reason to suspect this “reputable and prestigious” law firm

of any unlawful role in a stock sale is rejected. As respon-

sible money managers and investors, they had a duty to

pursue every aspect of the transaction, including the role

of the legal counsel in such a suspect sale. Their experi-

ence and their access to highly specialized personnel and

consultants imposed an obligation of reasonable diligence

commensurate with their sophistication and standing in the

financial community.

Whatever is notice enough to excite attention and put

the party on his guard and call for inquiry, is notice of

everything to which such inquiry might have led.

When a person has sufficient information to lead him

to a fact, he shall be deemed conversant of it.... The

presumption is that if the party affected by any frau-

dulent transaction or management might, with ordi-

nary care and attention, have seasonably detected it,

he seasonably had actual knowledge of it.

Wood v. Carpenter, 101 U.S. 135, 141, 25 L.Ed. 807 (1879).

Plaintiffs argue that the question as to when they had

knowledge of White & Case’s fraud and the issue of reason-

able care as grounds for tolling the statute are disputed

factual issues and cannot be disposed of without a trial.

The Court disagrees. See Jones v. Rogers Memorial Hos-

pital, 143 U.S. App. D.C, 51, 53, 442 F.2d 773, 775 n.2 (1971).

The National Student Marketing matters were consolidated

for pretrial discovery and have been pending for more than

chal

57a

Opinion of United States District Court

five years. All parties in this proceeding have conducted

expensive, time consuming and exhaustive discovery. The

papers, exhibits and argument on these motions have been

especially thorough and, in this Court’s opinion, if there

are any undisclosed facts at this stage, their relevancy and

materiality are minimal.

Taken as a whole, the record is more than sufficient to

show that plaintiffs should have investigated the attorney-

defendants’ potential role in the suspicious sale and should

have known of the fraud within the two-year statute of

limitations, running immediately after the sale. Plaintiffs’

complaint as to White & Case and Epley is untimely filed

and the motion of these defendants to dismiss must be

granted. With dismissal of the federal claims at this time,

the pendent state common law claims fall as well. United

Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130,

16 L.Hd.2d 218 (1966); Robertson v. Seidman & Seidman,

supra, at 93,519; Hupp v. Gray, 500 F.2d 993, 997 (7th Cir.

1974).

B. Motion of Peat Marwick, Natelli and Scansaroli

In seeking dismissal, the accountant-defendants adopt in

large measure the White & Case and Epley argument that

Forrestal Village controls and that, in this private action

under §§17(a) and 10(b) of the federal securities laws,

the applicable statute of limitations is the two-year pro-

vision of the District of Columbia blue sky law. To counter

the federal tolling doctrine urged by the Wachovia in-

vestors, they point to the several private actions filed in the

New York federal courts, particularly the Lipsig class

action of May 15, 1970, the first to name Peat Marwick

as a defendant. The accountant-defendants also argue

that those law suits, together with other events and devel-

opments widely publicized in the financial community, were

58a

Opinion of United States District Court

yellow caution lights, all ignored by Wachovia. Since the

complaint under consideration was not brought until Janu-

ary 29, 1973, the federal tolling doctrine does not protect

the plaintiffs.

The plaintiffs on the other hand allege and urge that

filing of the several New York class actions, of which they

were asserted members, tolled the running of the limita-

tions period. The Lipsig, Garber and Natale complaints

were filed on behalf of NSMC shareholders who made their

stock purchases between April 1968 and February 1972,

and did indeed include plaintiffs as purported members.

These actions were consolidated in April 1972 and later

transferred by the Judicial Panel on Multidistrict Litiga-

tion to this Court for pretrial proceedings. The New York

actions were certified as class actions and, during October

1973, notice of class action determination was sent to the

various class members including the Wachovia plaintiffs.

In January 1973, however, the Wachovia plaintiffs had

filed the present complaint naming Peat Marwick, Natelli

and Scansaroli among the defendants. In justification for

their course of action they asserted that their status as

institutional purchasers made their complaint dissimilar to

the earlier class actions. On November 29, 1973, they

“opted o«t” to pursue their independent claims.

Peat Murwick argues that the Wachovia plaintiffs should

have filed an action within two years of the 1969 purchase

and that the January 1973 complaint is therefore time-

barred. The accountant-defendants contend that the statute

of limitations was not tolled by the various class actions,

because by opting out, the plaintiffs forfeited any benefits

accruing to the class members. As members in the earlier

filed class action proceedings the Wachovia plaintiffs could

bl si ot

>»

la ee

59a

Opinion of United States District Court

not exclude themselves from the class and then file law

suits which otherwise would be time-barred.

The class action tolling doctrine is best illustrated in

American Pipe & Construction Co. v. Utah, 414 U.S. 538, 94

8.Ct. 756, 38 L.Ed.2d 713 (1974), where the Supreme Court

held that filing of a class action complaint tolls the running

of the statute of limitations for all purported class members

who timely seek intervention after the lower court has

found the asserted class too small to certify. According to

the Court, a contrary rule allowing participation only by

those potential class members who had earlier filed motions

to intervene would deprive class actions of the efficiency

and economy of litigation which they are designed to pro-

mote. This rule is not inconsistent with the functional

operation of a statute of limitations, since the policies of

ensuring fairness to defendants and of barring plaintiffs

who have slept on their rights are satisfied when a named

plaintiff “notifies the defendants not only of the substan-

tive claims being brought against them, but also of the num-

ber and generic identities of the potential plaintiffs who

may participate in the judgment.” 414 U.S. at 554-55, 94

S.Ct. at 767.

In light of these policy considerations, this Cirenit has

called for a “broad, functional” reading of American Pipe.”

McCarthy v. Kleindienst, 562 F.2d 1269, 1274 (D.C. Cir.

1977). The court there extended the American Pipe tolling

doctrine to a case where a motion for class certification had

been denied not because of size but on grounds of untimeli-

8 See also United Airlines, Inc. v. McDonald, 482 U.S. 385, 97

S.Ct. 2464, 53 L.Ed.2d 423 (1977) (potential class members could

intervene after final judgment for the purpose of ap the

a 4g of class certification, even though the limitations had

run).

60a

Opinion of Uniied States District Court

ness and nonpredominance of common questions. The court

found that a motion to intervene brought by 266 asserted

class members four years after the events at issue, but one

day after denial of class certification, was timely, because

there was no evidence of manipulative behavior by the

plaintiffs and the defendants had received “sufficient notice

of the contours of potential claims to toll the running of the

statute of limitations.” 562 F.2d at 1275. See also Umited

Airlines, Inc. v. McDonald, 432 U.S. 385, 97 S.Ct. 2464, 53

L.Ed.2d 423 (1977).

The American Pipe line of cases concerns the propriety

of intervention following denial of class certification. Here,

there has been certification of a class which includes the

Wachovia plaintiffs. Before that certification decision,

plaintiffs filed a separate action. Following certification,

they opted out of the class rather than pursuing class relief.

The broad issue here, therefore, is whether the policy con-

siderations of American Pipe operate to toll the limitations

period for all purported class members until certification

is decided.

The (curt finds that, under the circumstances presented

here, the class action tolling doctrine does not protect the

Wachovia complaint brought against the accountant-defen-

dants, Preliminarily, the doctrine cannot operate against

defendants Natelli and Scansaroli. Since they were not

named in the original New York actions, they cannot fairly

be charged with the notice requisite for class action tolling.

Notice considerations also mean that the consolidated

amended complaint naming them, filed on June 2, 1972, does

not relate back for tolling purposes. Arneil v. Ramsey, 550

F.2d 774, 782 n. 10 (2d Cir. 1977).**

**The amendment came more than two years after the Lipsig

action naming Peat Marwick. Therefore, even if the latter suit

6la

Opinion of United States District Court

Insofar as Peat Marwick is concerned, plaintiffs base

their opposition to the motion largely on a footnote in a

Supreme Court class action decision following American

Pipe. In Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 94

§.Ct. 2140, 40 L.Ed.2d 732 (1974), a case concerning notice

to potential class members, the Court referred to American

Pipe as establishing that

commencement of a class action tolls the applicable

statute of limitations as to all members of the class.

417 U.S. at 176 n.13, 94 S.Ct. at 2152.

While at least one court has found that this dictum “ap-

pears to have... eliminated” the general tolling question,”

this Court is not so persuaded. There is precedent sup-

porting an interpretation opposite to plaintiffs’ in the

Second Circuit. In Arneil v. Ramsey, supra, that court

refused to toll the running of the statute of limitations for

a separate action brought by two plaintiffs who were not

asserted members of a class action as originally filed. See

also Stull v. Bayard, 561 F.2d 429, 433 (2d Cir. 1977), cert.

denied, 434 U.S. 1035, 98 S.Ct. 769, 54 L.Ed.2d 783 (1978).

For the Court to find otherwise, that the class action

filings tolled the limitations period for plaintiffs’ separate

suit, would sanction duplicative suits and violate the poli-

cies behind American Pipe. Even assuming that this action

should have put plaintiffs on notice that individual accountants

at Peat Marwick were involved in the fraud, the federal tolling

doctrine cannot be added to the class action tolling doctrine to

protect the suit against Natelli and Scansaroli.

° Agostine v. Sidcon Corp., 69 F.R.D. 487, 448 n.13 (E.D. Pa.

1975) (Truth in Lending case). See also McAlpine v. AAMCO

Automatic Transmissions, Inc., 1977-1 Trade Cases | 61,359 (E.D.

Mich. 1977) (antitrust case—court found dicta

sive” and tolled the statute of limitations for damage purposes).

62a

Opinion of United States District Court

and the original class actions raise identical issues, the

filing of a class action should not cause Peat Marwick to be

responsible for meeting separate independent actions by

class members after their statute of limitations has run.

If different issues are raised, there is even less reason

to credit Peat Marwick with notice.

The Court also finds it noteworthy that the plaintiffs

filed this action before class certification had been decided.

If, following certification, they had determined that the

class action strategy would not protect their rights and

had then promptly filed a separate action, their arguments

might be more persuasive. By filing their action before a

certification decision, opting out of the class after certifica-

tion, and then claiming the benefits of tolling, they appear

to have been manipulating the tolling doctrine and other

class action procedures. While the Court is aware that

American Pipe had not been decided as of January 29, 1973,

when plaintiffs filed this action, their delay is not justifiable

in light of the traditional purposes of a statute of limita-

tions.

Since the Wachovia plaintiffs are not protected by the

class action tolling doctrine, their complaint against Peat

Marwick was not timely filed and must be dismissed. In

light of this disposition, it is not necessary for the Court

to address Peat Marwick’s contention that the instant

action does not involve the same issues raised in the New

York actions.

Oruer Motions

a. In light of the Court’s dismissal of the Wachovia

plaintiffs’ complaint against the accountant-defendants, the

motion of the plaintiffs to amend the complaint to add com-

mon law fraud claims against Peat Marwick, Natelli and

63a

Opinion of United States District Court

Scansaroli is denied. The Court would not exercise pendent

jurisdiction over such state claims if the amendment were

allowed. See p. 12 supra.

The motion to amend will also be denied insofar as plain-

tiffs seek to amend the caption to reflect the parties who

have not settled, given that various cross-claims are pend-

ing and such a technical change is not necessary. The

motion will be granted, at this time, only insofar as plain-

tiffs seek to delete references to §$13(a) of the 1934 Act

under the Count I heading.

b. The Court finds that defendant Walther’s motion to

amend his answer to raise a statute of limitations defense

is appropriate. In light of the pleadings that have been

filed on this issue, the plaintiffs will not be prejudiced by

the amendment.

ce. The motion of the Wachovia plaintiffs to compel

White & Case and Epley to produce documents, memoranda

allegedly prepared for counsel, does not bear on the factual

issues involved in these motions and will be denied as moot.

OxpERED accordingly.

Entered: November 20, 1978

Barrineton D. Parker

United States District Judge

64a

Order Denying Rehearing

UNITED STATES COURT OF APPEALS

For tHe District or CotumsBia Crrcurr

No. 79-1595

September Term, 1980

Argued 12-13-79

Wacnovia Bank anv Trust Co., N.A. (as Trustee and

Agent for various trust accounts), et al.

Appellants

NationaL Stupent Marxetine Corporation, et al.,

And consolidated cases

Before:

Rosrnson and Mrixva, Circuit Judges;

Fuannery, Judge, United States District Court for the

District. of Columbia

ORDER

This matter is before the Court for consideration of the

petitions for rehearing of Peat, Marwick, Mitchell & Co.,

Anthony M. Natelli and Joseph Scansaroli, White and

Case and Marion Jay Epley, III, Joy Walther, Donald A. —

Fergusson and Robert A. Fergusson, and the motion of

Cortes W. Randell for leave to file petition for rehearing y

out of time, it is a

. a

ss i i

i ;

PS * ye? Orr. “ s e . " , Ce ae es

65a

Order Denying Rehearing

OrpErep by the Court that the motion of Cortes W. Ran-

dall for leave to file out of time is denied, and, it is

FurrHer Orperep by the Court that all of the aforesaid

petitions for rehearing are denied.

Per Curiam

For tHe Court:

George A. Fisher, Clerk

By: /s/ Roserrt A. Bonner

Robert A. Bonner

Chief Deputy Clerk

Fiuzp Maron 4, 1981

Grorce A. Fisuer, Clerk

66a

Order Denying Rehearing En Banc

UNITED STATES COURT OF APPEALS

For tHe District or CoLumBm Crrcuir

No. 79-1595

September Term, 1980

Civil Action No. 166-73

Argued 12-13-79

Wacnovia Bank anv Trust Co., N.A. (as Trustee and

Agent for various trust accounts), e¢ al.

Appellants

Vv.

Nationa, Stupent Marxetine Corporation, et al.,

And consolidated cases

Before:

MoGowan, Chief Judge;

Wricut, Tamm, Rosrnson, MacKinnon, Ross, WI.Key,

Wap, Mrxva, Epwarps and Grxssurc, Circuit Judges

OrpErR

This matter is before the Court for consideraticn of the

suggestions for rehearing en banc of Peat, Marwick, Mitch-

ell & Co., Anthony M. Natelli and Joseph Scansaroli, White

and Case and Marion Jay Epley, III, Joy Walther, Donald

A. Fergusson and Robert A. Fergusson. These suggestions

67a

Order Denying Rehearing En Banc

have been circulated to the full Court. A majority of the

judges have not voted in favor of rehearing this matter

en banc. On consideration of the foregoing, it is

Orperep by the Court en banc, that all of the aforesaid

suggestions are denied.

Circuit Judges MacKinnon and Robb would rehear these

cases en banc.

Circuit Judge Wright did not participate in the foregoing

order. |

Per Curiam

For THE Court:

George A. Fisher, Clerk

By: /s/ Rosert A. Bonner

Robert A. Bonner

Chief Deputy Clerk

Frrzep Maron 4, 1981

Grorce A. FisHer, Clerk

68a

Securities Act of 1933

§ 5, 15 U.S.C. § 77e (1976)

§77e. Prohibitions relating to interstate commerce and

the mails

(a) Sale or delivery after sale of unregistered securities

Unless a registration statement is in effect as to a secu-

rity, it shall be unJawful for any person, directly or indi-

rectly—

(1) to make use of any means or instruments of

transportation or communication in interstate com-

merce or of the mails to sell such security through the

_ use or medium of any prospectus or otherwise; or

- (2) to carry or cause to be carried through the mails

or in interstate commerce, by any means or instru-

ments of transportation, any such security for the

purpose of sale or for delivery after sale.

(b) Necessity of prospectus meeting requirements of

section 77j of this title.

It shall be unlawful for any person, directly or in-

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