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

Nos. 80-1684/1691

IN THE

Supreme Court of the United Stated -—

VAY 21 1981

ALEMAI<t4.2.2 L. STEVAS, |

October Term, 1980

PEAT, MARWICK, MITCHELL & Co., et al.,

Petitioners,

v.

WACHOVIA BANK AND TRUST Co., N.A., ef al.,

Respondents.

WHITE & CASE AND MARION JAY EPLEY, III,

Petitioners,

v.

WACHOVIA BANK AND TRUST Co., N.A., ef al.,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES

CouRT OF APPEALS For THE DISTRICT OF COLUMBIA

BRIEF OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC

ACCOUNTANTS AS AMICUS CURIAE IN SUPPORT OF

THE PETITIONS FOR A WRIT OF CERTIORARI

KENNETH J. BIALKIN

Louis A. CRACO

HOWARD C. BUSCHMAN III

‘ Attorneys for American Institute

of Certified Public Accountants

One Citicorp Center

153 East 53rd Street

New York, New York 10022

(212) 935-8000

—————

Of Counsel

WILLKIE FARR & GALLAGHER

| MITCHELL J. AUSLANDER

| One Citicorp Center

153 East 53rd Street

New York, New York 10022

att (212) 935-8000

nee

ED

QUESTIONS PRESENTED

The American Institute of Certified Public Accountants

confines its present participation to urging the Court to

grant the Writ to review and decide at least

the following issues which are subsumed by certain of the

questions presented in the Petitions for Certiorari.

1. May a private cause of action for damages be

implied under Section 10(b) of the Securities

Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976)

(“1934 Act”) in favor of a purchaser of securities

who is unable to satisfy the criteria for asserting the

express causes of action provided by Section 18 of

that Act?

2. May a private cause of action for damages be

implied under Section 10(b) of the 1934 Act against

a person who is alleged to be an aider and abettor of

a violation of the Section?

i

TABLE OF CONTENTS

PAGE

PRELIMINARY STATEMENT ..........cccccccssesssessseeseeeeeees 1

QUESTIONS PRESENTED ..........csscscsscrsessssssscsssseveeseeeees 2

INTEREST OF THE INSTITUTE AS Amicus Curiae ... 3

SUMMARY OF ARGUMENT. ...........cccccssccssssssssessseseseeees 4

REASONS FOR GRANTING THE WRIT ...........:00008 5

A. The Holding Below Is Representative Of A

Trend Of Lower Court Decisions Which Dis-

regard The Limitations On Implied Causes

Of Action Announced By This Court .......... 5

B. It Was Error To Imply A Cause Of Action

Under Section 10(b) In Favor Of Purchasers

Who Were Unable To Obtain Relief Under

Section 18 Of The 1934 Act ou... eessessees 10

C. Private Causes Of Action For Aiding And

Abetting Violations Of Section 10(b) Of The

1934 Act Should Not Be Implied ......,............ 14

SR RTE AEE OF TAME AS 1 Ae RDO TOC D RR 19

7%

Ba}

ii

TABLE OF AUTHORITIES

PAGE

Cases

Aaron v. SEC, 446 U.S. 680 (1980) woes 3, passim

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

CRUE TED veskoseriasatastindcesindepstibonedadbiguNittnshssedlabhg) ooimunasadacbes au 7, 10

A.H. Robins Co., Inc. v. Ross, 446 U.S. 946 (1980) ..... 3n.3

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

OR ITIE DE sake tiavebinnclanseasetacebiegsillesinsaidditsubiebiehiepedes 6 n.4, passim

Brennan v. Midwestern United Life Insurance Co., 259 F.

I EEO CIES: BAM TIGG Yn scsvvsnenceccsdaciisonetondteses 15, 17

California v. Sierra Club, —U.S.—, 49 U.S.L.W. 4441

SRMEEE WURG: MUNBIED - dacicansaschhoseuscc barciphepasnodibtoandanensaste 7, passim

Cannon v. University of Chicago, 441 U.S. 677

ERIE IED Wieulsisdcsshachevcisinbcephanciebchaboemmid sibs dasccenssesbeden 7 n.6, 9, 16

City Nat'l Bank v. Vanderboom, 422 F.2d 221 (8th Cir.),

cert. denied, 399 U.S. 905 (1970) ..........cccccocscscsssessesees 8 n.7

Clement A. Evans & Co. v. McAlpine, 434 F.2d 100 (5th

Cir. 1970), cert. denied, 402 U.S. 988 (1971) .......... 8 n.7

Daniel v. International Brotherhood of Teamsters, 561 F.2d

1223 (7th Cir. 1977), rev'd on other grounds, 439 U.S.

BU EEO ioe sii el eal el 9

Dupuy v. Dupuy, 551 F.2d 1005 (5th Cir.), cert. denied,

ROUTE MET ROT EY ie esii nc leictusstclcaiacteas 8, 8n.8

Edwards & Hanly v. Wells Fargo Securities Clearance

Corp., 602 F.2d°478 (2d Cir. 1979), cert. denied, 444

RAGING, REE GIMINED, srilicceshiichaosidlnoveiscanithpanbedheubdesescassdposstbes 16

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)..3, passim

Healey v. Catalyst Recovery of Pa., Inc., 616 F.2d 641 (3d

CAN: DUE Kets piicailinsaidiTui os tesibnabidlsrosenessdenestensicienbionsens 6 n.5

Hirsch v. du Pont, 553 F.2d 750 (2d Cir. 1977) .......... 8 n.7

Holdsworth v. Strong, 545 F.2d 687 (10th Cir. 1976),

cert. denied, 430 U.S. 955 (1977). ......cccseccscssreessereecees 8 n.8

Huddleston v. Herman & MacLean, 640 F.2d 534 (5th

(Dr) RRR 2822 Rk AAPG ARO ae ss CORE SS 6n.5

IIT v. Cornfeld, 619 F.2d 909 (2d Cir. 1980) ........... 16 n.12

iii

PAGE

International Brotherhood of Teamsters v. Daniel, 439 U.S.

RS RGA RAE TIES nt A ST PSCC ES aCe 6 n.4

Kardon v. National Gypsum Co., 69 F. Supp. 512

CS IN, MID oss Concdeliaes Uinocscdabacctdacetossiooneneds 9,15 n.11

Kirshner v. United States, 603 F.2d 234 (2d Cir. 1978),

cert. denied, 442 U.S. 909 (1979) o...ccecccccscssseeseeseeeeeres

Kissinger v. Reporters Committee, 445 U.S. 136

TR sl cil s sacacsnincedepensncorinesveosenéssoneons 7, 10

Landy v. FDIC, 486 F.2d 139 (3d Cir. 1973), cert. denied,

En IPED aaa iesceckesesasrvisbesasodsscoovutusiivvins 15, 16 n.12

Mallis v. Bankers Trust Co., 615 F.2d 68 (2d Cir. 1980) 8 n.8

Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017 (6th

PUTER citesticlhsatlledscastoskaissaaphiteldasestenrsiosquevdbncotecseter 6 n.5, 7

Milwaukee v. Illinois, —US.—, 49 U.S.L.W. 4445

eg i a sesclecben 7

National Railroad Passenger Corp. v. National Ass’n of

Railroad Passengers, 414 U.S. 453 (1974) .......... 10

Nelson v. Serwold, 576 F.2d 1332 (9th Cir.), cert. denied,

A CR RES Sa ore 7n.5

Newman v. Prior, 518 F.2d 97 (4th Cir. 1975) ............ 9

Rochez Bros., Inc. v. Rhoades, 491 F.2d 402 (3d Cir.

1974), cert. denied, 425 U.S. 993 (1976) .............0. 8 n.7

Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38 (2d

Cir.), cert. denied, 489 U.S. 1039 (1978) ....7n.5, 16n.12

Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977) 11

SEC v. Coffey, 493 F.2d 1304 (6th Cir. 1974), cert. denied,

ES I Ra 16 n.12

SEC v. Sloan, 436 U.S. 103 (1978) wieeeccccceseeeseeeeeees 7

Straub v. Vaisman & Co., 540 F.2d 591 (3d Cir. 1976) 8n.8

Superintendent of Insurance v. Bankers Life and Casualty

OL SU RR Te i cala a cis hidtalasassmnetidegie 10, 15

Sunstrand Corp. v. Sun Chemical ., 553 F.2d 1033

(7th Cir.), cert. denied, 434 U.S. 875 (1977) .. 70.5, 8n.8

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

(| NETRA UR SAN oS CORR OR oe Ma 3, passim

mii

iv

PAGE

Transamerica Mortgage Advisors v. Lewis, 444 U.S. 11

CN Casta che bickcida sas obccibsidsbadesnesivagsusnocadsenss 7 n.6, passim

Universities Research Ass’. v. Coutu, —US—,

49 U.S.L.W. 4354 (April 6, 1981)... 7 n.6, passim

Wachovia Bank and Trust Co., N.A. v. National Student

Marketing Corp., 461 F. Supp. 999 (D.D.C. 1978) ..6n.4, 9

Woodward v. Metro Bank of Dallas, 522 F.2d 84 (5th Cir.

I sagt eb acidicsis.caphailosaisovnsosseasGbviccasotedaotheeeses 16 n.12

Statutes

Securities Act of 1933

DRM Me RIOR Re CEE (1GIGD) Soccecsssspooicccoccossesccesoass 12 n.10

I AT RR OE CREED cs ccccscssnaneusovorcrscccccorescosos 17

DPW PAs 0119 (197G) vrcsrcsssicsscosessccsressccorssvereses O MA

§17(a), 15 U.S.C. § 77q(a) (1976) 0.0... ecesceeeeees 9

Securities Exchange Act of 1934

§ 10(b), 15 U.S.C. § 78j(b) (1976) 2. 2, passim

EARN FOE CADID) .0.cceccccsccsncescocssccsceoes 4, passim

es Oe Ge 106 (1976) ....ccccccccssccccscccsceocoscsee 17

I MEET BPTI Necseavekecsssescovceussoeicishecssosovescenecnrees 18 n.13

Legislative Materials

78 CONG. REC. 7701, 8040 (1934) uu... eeccsseeseeeeeees 12

H.R. REP. No. 1383, 73d Cong., 2d Sess. (1934) ....12n.9

S. Rep. No. 792, 73d Cong., 2d Sess. (1934) ............ 12 n.9

Hearings on S. Res. 84 (72d Cong.), S. Res. 56 and S. Res.

97 (73d Cong.) Before the Senate Committee on Banking

and Currency, 73d Cong., Ist Sess., pt. 15 (1934) ..3, 12

Hearings on 8.1178-8.1182 Before a Subcommittee of the

Senate Committee on Banking and Currency, 86th

Rs EN NNR ERD D. Sabiescsesscceccsesinesvosnosssscoscsiohooedesss 18

PAGE

Commentaries |

3 A. BROMBERG & L. LOWENFELS, SECURITIES

FRAUD & COMMODITIES FRAUD (1981) ............ 16 n.12

Fischel, Secondary Liability Under Section 10(b) of the

Securities Act of 1934, 69 CAL. L. Rev. 80 (1981) 15, 17

Ruder, Multiple Defendants in Securities Law Fraud

Cases: Aiding and Abetting, Conspiracy, In Pari

Delicto, Indemnification and Contribution, 120 U. Pa.

Lg, FOU Oe. CAT WD svn ishissssactidcsecesasapiaercicssudecesbncesoectibobs 14

Steinberg and Gruenbaum, Variations of “Recklessness”

After Hochfelder and Aaron, 8 SEc. Rea. L. J. 179

TD Hiiscsicedi-vscdicsotinsdnsopacvoulenicleteebiiassystabbaxottbiocaeveisvalites 7n.5

Wheeler, Plaintiff's Duty of Due Diligence Under Rule

10b-5: An Implied Defense to an Implied Remedy, 70

EW. UO. As, BRe: BEE LISTE) Siccicirrsccecsi cesta cisekesveses 8 n.7

Comment, A Reevaluation of the Due Diligence Requtre-

ment for Plaintiffs in Private Actions Under SEC Rule

10b-5, 1978 Wis. L. REv. 904 (1978) ........ 8, 8n.7,8n.8

Other

RESTATEMENT OF TORTS § 286 (1934) o.... ee 15 n.11

RESTATEMENT OF TORTS § 876 (1939) ............. 15, 16 n.12

Nos. 80-1684/1691

IN THE

Supreme Court of the United States

October Term, 1980

PEAT, MARWICK, MITCHELL & Co., et al.,

Petitioners,

Vv.

WACHOVIA BANK AND TRuST Co., N.A., e¢ al.,

Respondents.

WHITE & CASE AND MARION JAY EPLEY, III,

Petitioners,

Vv.

WACHOVIA BANK AND TRUST Co., N.A., et al.,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES

CoURT OF APPEALS FOR THE DISTRICT OF COLUMBIA

BRIEF OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC

ACCOUNTANTS AS AMICUS CURIAE IN SUPPORT OF

THE PETITIONS FOR A WRIT OF CERTIORARI

a

PRELIMINARY STATEMENT

The American Institute of Certified Public Accountants

(“Institute”) submits this brief as amicus curiae pursuant to

Rule 36 of the Rules of this Court in support of the petitions

of Peat, Marwick, Mitchell & Co., et al. (“PMM”) in No.

80-1684 and White & Case, et al. in No. 1691 for a Writ of

Certiorari and urges this Court to review and reverse the

wy

Nie.

2

decision of the Court of Appeals for the District of Colum-

bia entered on December 5, 1980.’

QUESTIONS PRESENTED

The Institute confines its present participation to urging

the Court to grant the Writ to review and decide at least

the following issues which are subsumed by certain of the

questions presented in the Petitions for Certiorari.’

1. May a private cause of action for damages be

implied under Section 10(b) of the Securities

Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976)

(“1934 Act”) in favor of a purchaser of securities

who is unable to satisfy the criteria for asserting the

express causes of action provided by Section 18 of

that Act?

2. May a private cause of action for damages be

implied under Section 10(b) of the 1934 Act against

a person who is alleged to be an aider and abettor of

a violation of the Section?

The Institute contends that these issues are each fairly

presented upon an adequate record in this case. Each issue

is of substantial significance to the interpretation and

development of the law in the area and was wrongly

decided by the Court of Appeals.

1. This brief is submitted upon consent of the parties pursuant to

Rule 36.1 of this Court. The written consent of the Respondents in both

cases, subject to a condition which has been fulfilled, is contained in a

letter of counsel dated May 11, 1981; the consent of Petitioners in No. 80-

1684 is contained in a letter of counsel dated May 11, 1981; and the

consent of Petitioners in No. 80-1691 is contained in the letter of counsel

dated May 14,1981. True copies of such written consents are being filed

simultaneously with this with the Clerk of the Court.

2. The Institute has not palit and does not express any position

with respect to the other issues set out in the questions presented in the

rae for a Writ of Certiorari or upon other issues fairly included

rein

3

INTEREST OF THE INSTITUTE AS

AMICUS CURIAE

The Institute is the only national accounting association

whose membership is limited to certified public account-

ants; it now has approximately 160,000 members. Among

its purposes are the promotion and maintenance of high

professional standards of practice. Pursuant to those pur-

poses, the Institute develops Generally Accepted Auditing

Standards (“GAAS”) which form the standard of profes-

sional conduct for independent public accountants in the

examination and expression of an opinion on financial

statements, and the Institute has come to be accepted as

authoritative in the promulgation and interpretation of

standards and procedures in its field.

The Institute thus has a significant interest in the scope

and bases of civil liability for damages sought to be imposed

upon independent public accountants who are required to

follow GAAS and other Institute pronouncements in con-

nection with their work.

In recognition of this interest, the Institute presented its

views on such matters before the United States Senate in

1934 at the time the Senate was considering the scope of

civil liability for damages to be provided in the 1934 Act.

See Hearings on S. Res. 84 (72d Cong.), S. Res. 56 and S. Res.

97 (73d Cong.) Before the Senate Committee on Banking and

Currency, 73d Cong., lst Sess., pt.15, 7207-10 (1934) (“1934

Hearings”). This Court has permitted the Institute to file

briefs amicus curiae on related issues in Ernst & Ernst v.

Hochfelder, 425 U.S. 185 (1976); Touche Ross & Co. v. Reding-

ton, 442 U.S. 560 (1979); and Aaron v. SEC, 446 U.S. 680

(1980).*

The decision of the Court of Appeals is representative of

a trend in the lower courts to imply causes of action under

3. The Court also granted the Institute leave to file a brief amicus

curiae in support of the Petition for a Writ of Certiorari in A. H. Robins

Co., Inc. v. Ross, 446 U.S. 946 (1980) although the Court denied the Writ

of Certiorari therein.

4

Section 10(b) with considerable liberality. Auditors,

because of the significance of their role in the dissemination

of financial information to investors, are particularly vul-

nerable to such implied causes of action. The accounting

profession and the Institute thus have an important stake,

beyond the concerns of the immediate litigants, in the

appropriate doctrinal and practical development of the

jurisprudence of the 1934 Act. The Institute submits this

brief to express its view that the present case raises issues of

far-reaching significance that should be decided by this

Court.

SUMMARY OF ARGUMENT

The opinion below is typical of lower court decisions

which have interpreted the federal securities laws expan-

sively by implying private rights of action. These deci-

sions abound despite this Court’s repeated admonitions that

such actions should be implied sparingly. The lower

courts have undertaken this expansion by inter alia answer-

ing questions that have been left open by this Court in a

manner which is clearly inconsistent with the Court’s

rulings.

Two examples of such judicial expansion exist in this

ease. The Court of Appeals held that a private cause of

action for damages may be implied under Section 10(b) of

the 1934 Act in favor of a purchaser of securities who is

unable to satisfy the criteria for asserting the express cause

of action provided by Section 18 of that Act. The Court so

held even though the language of Section 18 and its legisla-

tive history clearly demonstrate that Congress made a con-

scious decision to define specifically the extent of a private

cause of action under Section 18. The holding is also at

odds with this Court’s recent pronouncements that the

existence of an express cause of action in a statutory frame-

work tends to show that an implied cause of action was not

intended by Congress.

5

The Court of Appeals also decided that a private cause of

action may be implied against a party who aids and abets a

violation of Section 10(b). The implication of this private

remedy by the Court below as well as many other lower

courts is apparently premised on a tort law analogy that

has been explicitly rejected by this Court. Because there is

no evidence in the language or legislative history of Section

10(b) that Congress intended to create a private right of

action against aiders and abettors under that section, there

is absolutely no foundation for the Court below to do so.

This Court should grant the writ in these cases to decide

now certain hitherto open questions and to provide

urgently needed guidance to the lower courts as to the

existence and scope of implied remedies under the 1934 Act.

Litigation asserting such remedies continues to proliferate

and the decisions rendered by the courts below reflect sub-

stantial confusion which this Court should promptly

address.

REASONS FOR GRANTING THE WRIT

A.

THE HOLDING BELOW IS REPRESENTATIVE OF A

TREND OF LOWER COURT DECISIONS WHICH DIS.

REGARD THE LIMITATIONS ON IMPLIED CAUSES

OF ACTION ANNOUNCED BY THIS COURT.

The Court below decided that an implied private cause of

action for damages exists under Section 10(b) of the 1934

Act: (a) in favor of purchasers who were unable to obtain

the remedies expressly provided in the 1934 Act; and (b)

against professionals who were not sellers of securities but

who allegedly aided and abetted others in violation of that

Act. The Court of Appeals thus answered two of the ques-

tions about the scope of implied civil remedies which were

explicitly reserved by this Court in Ernst & Ernst v.

6

Hochfelder, supra at 192 n.7, 211 n.31.‘ In each instance, the

Institute contends that the Court of Appeals erred for rea-

sons briefly discussed in parts B and C below.

If there were no more to this case than a discrete incident

of error in deciding open questions of federal securities law,

the Institute might not urge this Court to grant certiorari to

review the matter. But there is more to the case.

The decision below is a paradigm of those cases in which

lower courts have increasingly seized upon questions left

open by this Court to develop expansionist applications of

Section 10(b) of the 1934 Act along lines that are quite

plainly at odds with the teachings of this Court’s recent

decisions. Open questions, of course, are open; but the

lower courts seem to be deciding these issues inconsistently

with the doctrinal pronouncements of this Court in the

area. Examples of this propensity to exploit open issues in

aid of the aggressive implication of remedies under the

1934 Act abound; a few will suffice to make the present

point.

This Court has twice left open the issue of whether reck-

lessness could, in some circumstances, satisfy the require-

ment of scienter under Section 10(b). Ernst & Ernst v.

Hochfelder, supra at 194 n.12; Aaron v. SEC, supra at 686 n.5.

The lower courts have rushed to fill that vacuum, repeated-

ly finding that recklessness will suffice to support a claim

for damages under Section 10(b).°

4. The District Court also addressed a third issue left open by this

Court—whether there is a cause of action available under Section 17 of

the Securities Act of 1933, 15 U.S.C. § 77q (1976) (“1933 Act”). Wacho-

via Bank and Trust Co., N.A. v. National Student Marketing Corp., 461

F. Supp. 999, 1004-07 (D.D.C. 1978). See Aaron v. SEC, 446 U.S. 680,

689 (1980); /nternational Brotherhood of Teamsters v. Daniel, 439 US.

551, 557 n.9 (1979); Blue Chip Stamps v. Manor Drug Stores, 421 US.

723, 733 n.6 (1975). The Court of Appeals pretermitted the issue,

Appendix to PMM Petition at 18a-19a n.19, while noting that the circuits

were in conflict on the point.

5S. E.g., Huddleston v. Herman & MacLean, 640 F.2d 534, 544-47

(5th Cir. 1981); Healey v. Catalyst Recovery of Pa., Inc., 616 F.2d 641,

649 (3d Cir. 1980); Mansbach v. Prescott, Ball & Turben, $98 F.2d 1017,

(footnote continued )

7

While these cases acknowledge Hochfelder, they rely

heavily on the familiar invocation of the remedial purposes

“underlying the federal securities laws” as justifying their

liberal construction. See, eg., Mansbach v. Prescott, Ball &

Turben, 598 F.2d 1017, 1024-25 (6th Cir. 1979), citing, Affili-

ated Ute Citizens v. United States, 406 U.S. 128, 151 (1972).

These cases do not pay similar deference to the repeated

cautions by this Court that remedial gaps in congressional

legislative schemes are not to be filled by judicial interpre-

tation,® nor to this Court’s explicit recognition that the

remedial purposes of the 1934 Act do not provide a license

for expansive judicial interpretation of its provisions.

Touche Ross & Co. v. Redington, supra at 578; SEC v. Sloan,

436 U.S. 103, 116 (1978); Ernst & Ernst v. Hochfelder, supra

at 200. This Court has recently reiterated that this con-

straint springs from the constitutional limitations upon the

federal courts as tribunals of limited jurisdiction and from

the constitutional imperative that the courts defer to the

Congress for the development of remedial legislative

schemes. E.g., Kissinger v. Reporters Committee, 445 US.

136, 149-50 (1980); California v. Sierra Club, —U.S.—, 49

U.S.L.W. 4441, 4444 (April 28, 1981); Towche Ross v. Reding-

ton, supra at 578-79; Cf. Milwaukee v. Illinois, —U.S.—, 49

U.S.L.W. 4445, 4447 (April 28, 1981).

The result of this generous interpretation of the scienter

element of Section 10(b) has been the creation, through a

(footnote continued )

1023 (6th Cir. 1979); Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir.),

cert. denied, 439 U.S. 970 (1978); Rolf v. Blyth, Eastman Dillon & Co.,

Inc., $70 F.2d 38, 44 (2d Cir.), cert. denied, 439 U.S. 1039 (1978);

Sunstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1039-40 (7th

Cir.), cert. denied, 434 U.S. 875 (1977). See, Steinberg and Gruenbaum,

Variations of “Recklessness” After Hochfelder and Aaron, 8 SEC. REG. L.

J. 179 (1980).

6. E.g., California v. Sierra Club, —U.S.—, 49 U.S.L.W. 4441, 4444

(April 28, 1981); Universities Research Ass’n v. Coutu, —US.—, 49

U.S.L.W. 4354, 4358 ( April 6, 1981 ); Transamerica Mort Advisors v.

Lewis, 444 U.S. 11, 15-16, 23-24 (1979); Touche Ross & Co. v. Redington,

442 U.S. 560,578 (1979). See also, Cannon v. University of Chicago, 441

U.S. 677, 740-45 (1979) (Powell, J., dissenting).

8

developing federal common law, of an implied cause of

action for bebavior well short of “knowing or intentional

misconduct.” Compare, Aaron v. SEC, supra at 690; Ernst &

Ernst v. Hochfelder, supra at 197.

These developments in the doctrine of scienter have

spawned a cognate line of cases having remarkably anoma-

lous consequences. These decisions hold that, whereas

before Hochfelder a plaintiff could be obligated to prove due

diligence in one form or another in order to make out his

" after Hochfelder, only recklessness on the part of the

plaintiff, demonstrated affirmatively by the defendant,

could bar recovery.* The logic of these cases appears to be

that since his burden of proof as to the defendant’s state of

mind has been increased, the plaintiff’s burden of proof as

to his own culpability should be eased. Whatever one may

think of this emerging rule as a proposition of logic or of

policy, see Dupuy v. Dupuy, 434 U.S. 911 (1977) (White, J.,

dissenting from denial of certiorari), its acceptance in the

Courts of Appeals has mushroomed since Hochfelder. See

Comment, A Reevaluation of the Due Diligence Requirement for

Plaintiffs in Private Actions Under SEC Rule 10b-5, 1978 Wis.

L. REv. 904, 911 (1978).

These cases ascribe to Hochfelder the remarkable conse-

quence of expanding the implied cause of action available

7. E.g., Hirsch v. du Pont, 553 F.2d 750, 762-63 (2d Cir. 1977);

Rochez Bros., Inc. v. Rhoades, 491 F.2d 402, 409 (3d Cir. 1974), cert.

denied, 425 U.S. 993 (1976); Clement A. Evans & Co. v. McAlpine, 434

F.2d 100, 104 (Sth Cir. 1970), cert. denied, 402 U.S. 988 (1971); City

Nat’l Bank v. Vanderboom, 422 F.2d 221, 230 (8th Cir.), cert: denied,

399 U.S. 905 (1970). See also, Wheeler, Plaintif?s Duty of Due Dili-

gence Under Rule 10b-5: An Implied Defense to an Implied Remedy, 70

Nw. U. L. REv. 561 (1976); Comment, A Reevaluation of the Due

Diligence Requirement for Plaintiffs in Private Actions Under SEC Rule

106-5, 1978 Wis. L. REv. 904 (1978).

8. E.g., Mallisv. Bankers Trust Co., 615 F.2d 68, 77-79 (2d Cir.

1980); Dupuy v. Dupuy, 551 F.2d 1005, 1013-24 (Sth Cir. ), cert. denied,

434 US. 911 (1977);. unstrand Corp. v. Sun Chemical Corp., supra at

1048-49; Holdsworth v. Strong, 545 ‘2d 687, 692-95 (10th Cir. 1976),

cert. denied, 430 U.S. 955 (1977); Straub v. Vaisman & Co., 540 F.2d

591, 596-98 (3d Cir. 1976). See Comment, op. cit. supra 1978 Wis. L.

REV. at 911 e¢ seg.

_—

9

under Section 10(b) to previously debarred plaintiffs who

were negligent in the protection of their own affairs. This

is expansionist common law judgecraft in full flight.

Or, again, consider the implication of a cause of action

under Section 17(a) of the 1933 Act, a question which, as

we have previously noted, has three times been left open by

this Court. See note 4, supra. The lower courts virtually

uniformly have reached the conclusion that an implied

cause of action is available under that section notwith-

standing the availability of express causes of action under

both the 1933 Act and the 1934 Act. The discussion of the

matter by the District Court in this case is not atypical.

Wachovia Bank and Trust Co., N.A. v. National Student Market-

ing Corp., supra at 1004-07. That Court was following with

some fidelity the doctrinal developments in the Courts of

Appeals. See, eg., Kirshner v. United States, 603 F.2d 234,

241 (2d Cir. 1978), cert. denied, 442 U.S. 909 (1979); Daniel

v. International Brotherhood of Teamsters, 561 F.2d 1223, 1245-

46 (7th Cir. 1977), rev’d on other grounds, 439 U.S. 551

(1979); Newman v. Prior, 518 F.2d 97, 99 (4th Cir. 1975).

Arguably, much of this derives from the implication of a

private cause of action under Section 10(b) of the 1934 Act

in the first place. The rationale for the implication of that

private cause of action at all has since been thoroughly

discredited. Compare Kardon v. National Gypsum Co., 69 F.

Supp. 512 (E.D. Pa. 1946) with Touche Ross & Co. v. Reding-

ton, supra at 576-78. Quite plainly, if that issue were pre-

sented now for the first time, no private gause of action

would be implied. Cf Cannon v. University of Chicago, 441

U.S. 677, 692-93 n.13 (1979); Blue Chip Stamps v. Manor

Drug Stores, 421 U.S. 723, 729-30 (1975). Although the vast

majority of cases recently brought have been at the

instance of purchasers, the acquiescence thus far accorded

by this Court to the implication of a private cause of action

under Section 10(b) has been limited to actions by sellers,

to whom no express remedies are afforded by the 1933 or

oo.

10

1934 Acts. Affiliated Ute Citizens v. United States, supra;

Superintendent of Insurance v. Bankers Life and Casualty Co.,

404 U.S. 6 (1971). In all other respects, this Court has been

at pains to prune the “judicial oak” identified in Blue Chip

Stamps v. Manor Drug Stores, supra at 737.

In doing so, this Court has exhibited its customary

restraint in not prematurely reaching issues unnecessary

for decision. As this discussion indicates, however, the

lower courts have typically regarded such reserved ques-

tions as comprising an agenda of issues which they were at

liberty to address as common law courts bent on nurturing

the growth of the 10(b) implied cause of action. Two such

fundamental issues are presented here. The Court should

accept this case not only to correct the errors of the Court

below in deciding these particular issues (to which we next

turn), but also to address again the fundamental extrava-

gance which gave rise to those errors in the first place.

IT WAS ERROR TO IMPLY A CAUSE OF ACTION

UNDER SECTION 10(b) IN FAVOR OF PURCHASERS

WHO WERE UNABLE TO OBTAIN RELIEF UNDER

SECTION 18 OF THE 1934 ACT.

This Court has recognized that the existence of an

express cause of action in a statutory regime tends to show

that an implied cause of action was not intended by Con-

gress to be available. As the Court put it in Transamerica

Mortgage Advisors v. Lewis, 444 U.S. 11, 19 (1979), %... itis 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.” Accord,

Universities Research Ass’n v. Coutu, —U.S.—, 49 U.S.L.W.

4354, 4359 n.24 (April 6, 1981); Kissinger v. Reporters Com-

mittee, supra at 148-49; National Railroad Passenger Corp. v.

National Ass'n of Railroad Passengers, 414 U.S. 453, 458

(1974).

ll

This injunction is particularly apt where the cause of

action sought to be implied is broader than the explicit

causes of action provided in terms by the Act. Touche Ross

& Co. v. Redington, supra at 574; Blue Chip Stamps v. Manor

Drug Stores, supra at 736.

The Court below reached precisely the anomalous result

against which these decisions warn. Congress provided an

express remedy to purchasers for misleading statements in

Section 18 of the 1934 Act. That section, among other

things, deals particularly with the liability of persons such

as accountants, who provide professional assistance in con-

nection with filings with the SEC. The language of Sec-

tion 18 and its legislative history and relationship to other

portions of the 1934 Act plainly suggest that Congress

made a conscious policy choice in defining the contours of

the private cause of action established by Section 18 as it

did. It comprehensively described which purchasers

might sue, whom they might sue and for what they might

sue; it established the outer bounds of timeliness for such

an action, provided for certain defenses and positioned the

burden of proof on key issues implicated in the cause of

action it was creating.

All this is clear enough from an examination of the

statutory language which, as this Court has frequently

observed, is the starting point of analysis. F.g., California

v. Sierra Club, supra at 4443; Santa Fe Industries, Inc. v.

Green, 430 U.S. 462, 472 (1977). Moreover, the legislative

history of the 1934 Act demonstrates that Congress meant

what it said in limiting liability along the lines prescribed

in Section 18. While the legislative history of the Act is

silent on the existence or ambit of any implied causes of

action, see Aaron v. SEC, supra at 690; Touche Ross & Co. v.

Redington, supra at 571, that history is not similarly silent

on the scope of the express causes of action provided by

Section 18. Both the Senate Report and the House Report

Lg eS

i ~

>

12

affirmed that liability and damages with respect to mislead-

ing statements contained in filed documents would lie in

favor of “a person who in reliance on the statement and in

ignorance of its faise or misleading character has pur-

chased the security to which it relates at a price affected by

it.”

The congressional debates also focused on the unavaila-

bility of this remedy to a purchaser who did not rely on the

allegedly misleading statements. See, e.g., 78 CONG. REC.

7701, 8040 (1934). Similarly, there was direct focus on the

policy implications of the statute of limitations and the

nature and amount of damages available under the Act.

See, e.g., 1934 Hearings at 6565, 7208-09; see also, Blue Chip

Stamps v. Manor Drug Stores, supra at 736, 740-41. In short,

Congress quite deliberately chose to define with care the

private civil remedy that would be available to purchasers

of securities under the 1934 Act.

Plaintiffs here did not rely on the allegedly misleading

statements and did not timely sue under Section 18. They

could not, therefore, recover upon the express remedy pro-

vided under Section 18.

The Court below-found in this circumstance that the

express cause of action under Section 18 of the Act was “not

available” and did not “adequately dispose of [tine plain-

tiffs’] claim.” Appendix to PMM Petition at 33a, 34a. As

a result, the Court thought that it could and should imply a

' cause of action which would be available to the plaintiffs

and which would completely dispose of their claim.”® This

was error.

9. §. REP. No. 792, 73d Cong., 2d Sess. 21 (1934); H.R. REP. No.

1383, 73d Cong., 2d Sess. 25 (1934). See also, S. REP. No. 792, supra at

13.

10. Brushing aside as irrelevant to the present case this Court's

repeatedly “expressed concern about implying private rights of action

when e remedies have been created by statute”, the Court below

the express causes of action avai ble under Section 18 and

under Section 11 of the 1933 Act to demonstrate that the “express reme-

(footnote continued )

a7 we

13

The remedy of Section 18 was unavailable to these pur-

chasers and did not dispose of their claim precisely because

the Congress so designed the Act as to make a remedy

unavailable to purchasers such as respondents with a claim

such as they had. This is not a judgment which the courts

are at liberty to reverse because they believe the congres-

sional policy was unwise; nor is the hiatus in remedies

produced by the design of the 1934 Act one which the

courts are at liberty to fill. Universities Research Ass’n v.

Coutu, supra at 4358; Touche Ross & Co. v. Redington, supra at

578, 579.

Because the Court below, for reasons of policy, divined a

gap in the statutory scheme which departed from that

Court’s view of the remedial purposes of the legislation it

was construing, it implied a cause of action in favor of

purchasers who did not rely on the allegedly misleading

financial statements and who slept on their rights beyond

the period of limitations governing the express cause of

action provided by the 1934 Act. The Court, in thus imply-

ing a cause of action broader than the express remedies

available under the Act, overreached its authority and

erred as a matter of law.

The writ should be granted to review and reverse this

determination.

(footnote continued )

dies are meant to treat different problems and to be applied in different

situations.” Appendix to PMM Petititon at 27a-28a. t analysis, of

course, begs the question as to whether the different problems and differ-

ent situations to which the express remedies apply were meant by Con-

gress to be the only problems and situations to which private causes of

action should apply. If certiorari is granted by the Court in this case, the

Institute will again seek leave to submit an amicus brief which will,

among other things, examine this issue in some detail.

14

€: |

PRIVATE CAUSES OF ACTION FOR AIDING AND

ABETTING VIOLATIONS OF SECTION 10(b) OF THE

1934 ACT SHOULD NOT BE IMPLIED.

This Court has never decided whether civil liability

could be imposed for aiding and abetting violations of Sec-

tion 10(b). Ernst & Ernst v. Hochfelder, supra at 191-92 n.7.

Preliminary research indicates that since the time this

question was left open in Ernst, the lower courts have been

faced with the issue on literally hundreds of occasions.

These cases typically involve charges against professionals

who have allegedly contributed to a violation by a principal

perpetrator while they were engaged in their callings.

Approximately one half of these cases have involved

accountants.

This Court’s recent decisions which recognized the limits

governing the implication of private remedies under the

federal securities laws in general have likewise repudiated

the theoretical basis usually employed for such actions

against aiders and abettors. Notwithstanding these deci-

sions, however, the lower courts have continued to imply

private causes of action for aiding and abetting violations

of Section 10(b) against parties engaged in customary busi-

ness activities such as preparing financial statements and

giving legal or investment advice. See Ruder, Multiple

Defendants in Securities Law Fraud Cases: Aiding and Abet-

ting, Conspiracy, In Pari Delicto, Indemnification and Contri-

bution, 120 U. Pa. L. REv. 597, 632 (1972). These cases

impose upon such professionals the great burden of investi-

gating the activities of the party who is being assisted and

of forcing them to defend vexatious actions which are often

brought solely for their settlement value. This is an abuse

to which this Court has.adverted: “[E]ven a complaint

which by objective standards may have very little chance

of suzcess at trial has a settlement value to the plaintiff out

bid

15

of any proportion to its prospect of success at trial....” Blue

Chip Stamps v. Manor Drug Stores, supra at 740.

Implied rights of action against an alleged aider and

abettor of a Section 10(b) violation have conventionally

been based—as were such rights under the securities laws

generally''—upon common law tort principles. For exam-

ple, in Brennan v. Midwestern United Life Insurance Co., 259

F. Supp. 673 (N.D. Ind. 1966), the Court, after noting that

nothing in Section 10(b) or its legislative history indicated

a congressional intent to create a private remedy, relied

upon the Restatement of Torts § 876 (1939), and held that

there was a private right of action against an aider and

abettor of a Section 10(b) violation. See also, Landy v.

FDIC, 486 F.2d 139 (3d Cir. 1973), cert. denied, 416 U.S. 960

(1974).

This Court has now rejected this tort law analogy as a

predicate of implied remedies under the federal securities

laws. In Touche Ross & Co. v. Redington, supra at 568, the

Court specifically held that: “{[I|mplication of a private

right of action based on tort principles, therefore, is

entirely misplaced.” See, Fischel, Secondary Liability

Under Section 10(b) of the Securities Act of 1934, 69 CAL. L.

REv. 80 (1981) (“Fischel”). Since the tort law analogy

was the only rationale for implying a private cause of

action against an aider and abettor under Section 10(b), see

id. at 84, citing Brennan, supra, this Court’s rejection of that

rationale has left the judicially created private cause of

action for aiding and abetting without any theoretical

underpinning. The special history which has thus far led

this Court to a limited acquiescence in the implication of a

private right of action on behalf of sellers against principal

wrongdoers, Superintendent of Insurance v. Bankers Life and

Casualty Co., supra at 13 n.9, does not provide a basis for

extending the reach of that cause of action on the basis of a

11. See, ¢.g., Kardon v. National Gypsum Co., supra relying, in the

yi of co congressional intent, upon the Restatement of Torts

286 (1934).

7

16

now rejected analysis. Indeed, the restraint that should

govern such an exercise owes something to principles of

constitutional magnitude and cannot be lightly set aside.

See, Cannon v. University of Chicago, supra at 742-47 (Powell,

J., dissenting).

Instead of relying on common law tort principles to

determine whether to imply a private right of action, the

Court has emphasized that “the focus of the inquiry is on

whether Congress intended to create aremedy.” California

v. Sierra Club, supra at 4444; Universities Research Ass’n v.

Coutu, supra at 4358; Transamerica Mortgage Advisors, Inc. v.

Lewis, supra at 15-16; Cannon v. University of Chicago, supra

at 688. Notwithstanding the Court’s repeated holdings

that congressional intent is the touchstone for determining

whether to imply private remedies under the federal securi-

ties laws, however, the lower courts have adhered to tort

concepts in implying such private causes of action for aid-

ing and abetting.” See, eg., Edwards & Hanly v. Wells

Fargo Securities Clearance Corp., 602 F.2d 478, 483 and n.5

(2d Cir. 1979), cert. denied, 444 U.S. 1045 (1980).

This recourse to the discredited approach is necessitated

by the fact that the securities laws contain no language

rendering an alleged aider and abettor liable for damages

12. Since this Court’s decision in Touche Ross & Co. v. Redington,

supra, in which the implication of private rights of action based on tort

principles was specifically rejected thereby eliminating the sole basis for

aider and abettor liability, the lower courts have dealt with aider and

abettor liability under Section 10(b) in over 100 cases, many of which

have involved accountants. In JIT v. Cornfeld, 619 F.2d 909 (2d Cir.

1980), for example, the Second Circuit listed the elements of a private

cause of action for aiding and abetting a violation of the securities laws.

The third element is “‘s tial assistance’ by the aider and abettor in

the achievement of the primary violation.” Jd. at 922. This element is

taken from the Restatement of Torts § 876 (1939). 3 A. BROMBERG & L.

LOWENFELS, SECURITIES FRAUD & DITIES FRAUD § 8.5(530) at

208.20-.21 21 (1981). The Second Circuit's test, including the “substantial

assistance” element, which is based on tort principles, has been widely

used. E.g., Rolf v. Blyth, Eastman Dillon & Co., Inc., supra; Woodward

v. Metro Bank of Dallas, §22 F.2d 84 (5th Cir. 1975); ‘SE v. Coffey, 493

F.2d 1304 (6th Cir. 1974), cert. denied, 420 U.S. 908 (1975); ty v

FDIC, 486 F.2d 139 (3d Cir. 1973), cert. denied, 416 U.S. 960 (1974)

17

under Section 10(b) and that the legislative history is not

consistent with an implication of such liability.

A look at the statutory language and structure confirms

this. Whereas Section 15 of the 1933 Act and Section 20(a)

of the 1934 Act impose secondary liability on controlling

persons, there is no provision in Section 10(b) for liability

for aiding and abetting. It is clear that when Congress

intended to impose secondary liability, “it had little trouble

in doing so expressly.” Blue Chip Stamps v. Manor Drug

Stores, supra at 734; Fischel, supra at 97. The express provi-

sion of remedies against specific secondary participants

again invokes this Court’s frequent admonition “that where

a statute expressly provides a particular remedy or reme-

dies, a court must be chary of reading others into it.”

Transamerica Mortgage Advisors v. Lewis, supra at 19. The

existence of secondary liability under Section 15 of the 1933

Act and Section 20(a) of the 1934 Act strongly suggests the

limitation of congressional intent on the subject and leads

to the conclusion that the courts may not imply a private

right of action under Section 10(b) against other persons

claimed to be secondarily liable. )

The inquiry into congressional intent to create a private

cause of action for aiding and abetting a Section 10(b)

violation is, of course, a fruitless exercise. It was the

silence of the legislative history as to congressional intent

that originally led the Brennan court, supra, to resort to tort

principles to imply such an action. There is absolutely no

evidence in the legislative history of Section 10(b) that

would indicate that Congress intended to hold aiders and

abettors civilly liable under the Section.

In subsequent reviews of the 1933 and 1934 Acts, Con-

gress failed to enact proposals pertaining to additional aid-

ing and abetting liability. In 1959, for example, the SEC

proposed that an aiding and abetting section be added to

both the 1933 and 1934 Acts to establish a statutory basis

for the proposition that an aider and abettor may be liable

e*.

18

to administrative sanctions or injunctive relief in proceed-

ings brought by the SEC under those sections not contain-

ing an express imputation of such liability. Hearings on

S.1178-8.1182 Before a Subcommittee of the Senate Committee on

Banking and Currency, 86th Cong., Ist Sess. 275-76 (1959).

In proposing these amendments, the SEC noted a precise

limitation on its recommendation: in seeking to extend the

aiding and abetting notion from the criminal law” to “civil

administrative actions by the SEC”, id. at 288, the SEC

Staff specifically recommended that Congress “[m jake it

clear that no civil liability is intended.” Jd. The episode

thus reinforced the plain meaning of the statutory frame-

work: there is no private cause of action against aiders and

abettors under Section 10(b).

The lower courts’ continued use of implied private causes

of action for aiding and abetting violations of Section 10(b)

despite this Court’s recent pronouncements strictly constru-

ing the federal securities laws and despite the Court’s rejec-

tion of the only rationale underlying such actions, creates a

great and inappropriate judicial expansion of such second-

ary liability. The burden of that expansion falls most

heavily on professionals such as lawyers and accountants,

as this case and any tally of the lower court decisions

reflects. Especially when aggravated by liberal interpreta-

tions of scienter and lowered burdens of proof as to plain-

tiffs’ due care, this undisciplined elaboration of implied

remedies poses for those professionals the hazards of vexa-

tious and unlimited exposure against which this Court has

warned. See Blue Chip Stamps v. Manor Drug Stores, supra at

739. The Court should now explicitly resolve this impor-

tant open issue.

13. 18 U.S.C. § 2 (1976).

°

19

CONCLUSION

The Writ of Certiorari in these cases should be granted

and the judgments of the Court of Appeals reversed.

Respectfully submitted,

KENNETH J. BIALKIN

Louis A. CRACO

HOWARD C. BUSCHMAN III

Attorneys for American Institute of

Certified Public Accountants

One Citicorp Center

153 East 53rd Street

New York, New York 10022

(212) 935-8000

Of Counsel

WILLKIE FARR & GALLAGHER

MITCHELL J. AUSLANDER

One Citicorp Center

153 East 53rd Street

New York, New York 10022

(212) 935-8000

=

a