# Amicus Brief — Peat, Marwick, Mitchell & Co. v. Wachovia Bank & Trust Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_1588%3A5 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Brief - **Published:** January 1, 1981 - **Citation:** 452 U.S. 954 ## Text Nos. 80-1684/1691 IN THE Supreme Court of the United Stated -— VAY 21 1981 ALEMAI 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_1588%3A5. Public record. Not legal advice.