Petition — United States v. United States Steel Corporation (Nos. 80-1691, 80-1692, 80-1693, 80-1694, 80-1695)

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IN THE { APR 8 199)

Supreme Cowt of the Mnited |

OCTOBER TERM, 1980

- ae

WHITE & CASE and MARION JAY EPLEY, I!I, | :

Petitioners,

lat deo

WACHOVIA BANK & TRUST CoO., N.A., ef al.,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

MILTON V. FREEMAN

Counsel of Record

ROBERT H. WINTER

THOMAS D. NURMI

LAWRENCE A. SCHNEIDER

ROBERT B. OTT

ARNOLD & PORTER

1200 New Hampshire Avenue, N.W.

Washington, D.C. 20036

(202) 872-6700

Attorneys for Petitioners

White & Case and Marion Jay

Epley, II

April 8, 1981

QUESTIONS PRESENTED

1. Assuming that remedies may be implied under Section

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

“in some circumstances”'

(a) Should purchasers who allow their express securities law

remedy under Section 12 of the Securities Act of 1933 (the

“ “1933 Act”) to become time-barred under the express limita-

tions period contained in that Act nevertheless be allowed to

claim an implied remedy under Section 10(b) of the 1934 Act

and thereby obtain a longer limitations period?

(b) Should such an implied right of action for damages be

limited to sellers and held not available to purchasers?

against persons who are neither purchasers nor sellers of

securities but secondary parties such as accountants, lawyers,

and other professional advisers?

2. Did the Court below, in conflict with the principles of

Chevron Oil Co. v. Huson, 404 U.S. 97 (1971), and the

Seventh Circuit’s decision in Schaefer v. First National Bank

of Lincolnwood, 509 F.2d 1287 (7th Cir. 1975), cert. denied,

425 U.S. 943 (1976), err by refusing to apply in this securities

law case, except prospectively, a District of Columbia blue sky

statute of limitations which that very Court of Appeals had

previously conceded “best effectuates”* Congress’ intent?’

1 Piper v. Chris-Craft Industries, 430 U.S. 1, 25 (1977); Santa Fe

Industries v. Green, 430 U.S. 462, 477 (1977).

2 Forrestal Village, Inc. v. Graham, 551 F.2d 411, 413 (D.C. Cir. 1977)

(per curiam).

3 The following were parties to the proceedings in the Court of

Appeals:

Plaintiffs: Wachovia Bank & Trust Co., N.A.; First Wisconsin

Trust Co.; National Fire Insurance Company of Hart-

ford; Mellon Bank, N.A.; and The Dreyfus Offshore

Trust, N.V.

Defendants: John G. Davies; Donald A. Fergusson; Robert A.

Fergusson; James F. Joy; Dennis M. Kelly; Bernard J.

Kurek; Cortes W. Randell; Roger O. Walther; Peat,

Marwick, Mitchell & Co.; Anthony M. Natelli; Joseph

Scansaroli; White & Case; and Marion Jay Epley, III.

TABLE OF CONTENTS

SUN ISG GU Lik bec o-vk ve eh bok vichgece

a ye ie

CORR hinhiiisniai dhe hve

MU I i i yr

ee a a a a aa

Se a, i

Reasons for Granting the Writ......................

I. The Court of Appeals’ Decision Raises Funda-

mental Questions of Federal Law Which Have

Not Been, But Should Be, Definitively Resolved

MRI OSS AA NG US I

Federal Courts May Not Create Implied Rem-

edies Under Section 10(b) of the 1934 Act in

Favor of Securities Purchasers Who Allow

Their “xpress Remedies Under the Federal

Securities Laws To Become Time-Barred.....

No Private Right of Action for Damages

Should Be Implied Under Section 10(b) of the

1934 Act in Favor of Securities Purchasers. . .

No Private Right of Action for Damages

Should Be Implied Under Section 10(b) of the

1934 Act Against Persons Who Are Neither

Purchasers Nor Sellers of Securities.........

PAGE

iii

PAGE

II. The Court of Appeals’ Decision Conflicts with /

Uniform Authority in Other Circuits and Miscon-

strues This Court’s Decision in Chevron Oil Co.v.

TREE ENE ICE SA SEI a NCEA a fe BERR Pe 22

Nee eM eS seats due els 28

APPENDIX

Opinion of the United States Court of Appeals for

the District of Columbia Circuit, dated Decem-

Ne ee kiss) 4's) o ow said .aieheaa ib ath a mie A-1

Opinion of the United States District Court for the

District of Columbia, dated November 20, 1978 _B-1

Order, dated March 4, 1981, denying petition for

EE ie da dlrs 6 ota MONEE Vas deecccaes C-1

Order, dated March 4, 1981, denying rehearing en

District of Columbia Securities Act, D.C. Code

District of Columbia Code Title 12, Section 301 D-2

Securities Act of 1933

S85, TD Wa. SD 7Te CISION i sic ce cvccnakis D-3

OOF, US BB TF CER iin od cas cans Ges D-10

Securities Exchange Act of 1934

§ 10,35 GBs FTES CHRIS) 5 eA ces D-11

TABLE OF AUTHORITIES

CASES: PAGE

Aaron v. SEC, 446 U.S. 680 (1980). .............000- 17

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

SRNL ER UT RRR 72 Se eR ree 8 aerate we 17

Arneil v. Ramsey, 550 F.2d 774 (2d Cir. 1977)......... 14

Batchelor v. Legg & Co., 52 F.R.D. 553 (D. Md. 1971). 25

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

STN EK lash cen eile Wietdee bu occas 12, 16, 17, 18, 19, 20, 21

Board of Regents v. Tomanio, 446 U.S. 478 (1980).... 26-27

Brick v. Dominion Mortgage & Realty Trust, 442 F.

A Be Ee abe oe SOR rr a 13

Carothers v. Rice, [Current] Fed. Sec. L. Rep (CCH)

iil nh Eo OE a 24

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

Cowsar v. Regional Recreations, Inc., 65 F.R.D. 394

Ey LR AORN ua dice Uke 6 06k awed wa ialiwe's 13

Dandorph v. Fahnestock & Co., 462 F. Supp. 961 (D.

Tg, CHER PEAR TENT SLAP Ce IEE ry opk OREM 24

Delaware State College v. Ricks, 449 U.S. ___., 101 S.

CG SN diiis-0 Oa Scans agen Caw ai, ne 26

Dyer v. Eastern Trust & Banking Co., 336 F. Supp. 890

SP SR RPT AD Woks 2 cb iain MOO RAR ECO Le abn 25

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)..... 12, 14,

15-16, 21

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

Cy Ree CONTR sic bale Be iba Ca Wawen cocci passim

Hanover Shoe, Inc. v. United Shoe Machinery Corp.,

AE LETD oben CONS SOUR a weenie 25

PAGE

Houlihan v. Anderson-Stokes, Inc., 434 F. Supp. 1324

AEE ss CES on Waa bee 4 ee Okie welebee 6 oes 24

JI. Case & Co. v. Borak, 377 U.S. 426 (1964)........ 19

Jimenez v. Weinberger, 523 F.2d 689 (7th Cir. 1975), cert.

I Fi CEPT kc 6 bon caked outsic dcr 27

Kissinger v. Reporters Committee for Freedom of the

FIGs: Gee Wie ROO CII oo oh head bene 12, 17, 18

Matter of S/S Helena, 529 F.2d 744 (Sth Cir. 1976).... 27

McNeal v. Paine, Webber, Jackson & Curtis, Inc., 598

Pe EP BTID Soo vnc tnbc bale cevw Oboe copie 24

Morris v. Stifel, Nicolaus & Co., Inc., 600 F.2d 139 (8th

Ce: FP Whe wa ha wh ae bala. ce ORR eae 24

Murray v. Thompson McKinnon Auchincloss, Kohl-

meyer, Inc., [1980-81] Fed. Sec. L. Rep. (CCH)

DI o's o's 0c 0.05 ccrcbbbgkoesbee 13

New York Mercantile Exchange v. Leist, No. 80-757... 17

Nickels v. Koehler Management Corp., 541 F.2d 611 (6th

Cir. 1976), cert. denied, 429 U.S. 1074 (1977) ....... 24

Occidental Life Insurance Co. v. EEOC, 423 U.S. 355

CE RUM og U's hu Vans do ceu he okbew seule sed ae 14-15

Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123 (7th

NTU shoe Cds Wi Weide kedi Nine oe muh went 23, 24, 25

Piper v. Chris-Craft Industries, 430 U.S. 1 (1977) ..... 15

Richardson v. Salinas, 336 F. Supp. 997 (N.D. Tex.

Es <<. db caw eae ehh ki nebn mad tne komenceine koske 25

Santa Fe Industries v. Green, 430 U.S. 462 (1977) ..... 15

Schaefer v. First National Bank of Lincolnwood, 509

F.2d 1287 (7th Cir. 1975), cert. denied, 425 U.S. 943

CRPVER A 650s cocips GaN Ca eg HOeO DERN UsENes Pak 11, 23, 27

PAGE

Superintendent of Insurance v. Bankers Life & Casualty

Se ee AP MET Dy kook ook ed boo kaweeeeks 17

Touche Ross & Co. v. Redington, 442 U.S. 560 (1979).11, 12,

17, 18-19

Transamerica Mortgage Advisors, Inc. v. Lewis, 444

REE PE ETE ce eee so. ee 12, 17, 18

Turner v. First Wisconsin Mortgage Trust, 454 F. Supp.

MUO UNM Se ess 'ack ve po ber'% obo edcwhaaan 13

Ultramares Corp. v. Touche Niven, 255 N.Y. 170, 179

PO Me eg 6h 3) ons cd a ed bles Wh po oe wa 20

United States v. Kubrick, 444 U.S. 111 (1979)......... 27

United States v. Rutherford, 442 U.S. 544 (1979)...... 21

Valencia v. Anderson Brothers Ford, 617 F.2d 1278 (7th

Cir.), cert. granted, 101 S. Ct. 395 (1980)........... 24

Vanderboom v. Sexton, 442 F.2d 1233 (8th Cir.), cert.

denied, 400 U.S. 852 (1970) ...............05- 23, 25, 26

Zweibon v. Mitchell, 606 F.2d 1172 (D.C. Cir. 1979),

cert. pet. filed, 48 U.S.L.W. 3404 (U.S. Dec. 7,

ES ee okies. ily bag 60 6 CARRE RPE Oe bulb eda 24

STATUTES:

District of Columbia Securities Act of 1964, § 14, Pub.

L. No. 88-503, § 14, 78 Stat. 620, 629, D.C. Code

EE ERO TES obi < folk nde Veilcc Bh e ea ekee Kh eens 25

Pub. L. No. 88-241, 77 Stat. 509, D. C. Code § 12-

Pes pune he eile) Ce bieG we cbs 6 2

Public Utility Holding Company Act of 1934, § 16(a),

Be eck CGD CLOT) 6c us b.0'be ROUSSE e doc adie es 14

vii

PAGE

Securities Act of 1933

§ HD), 15 U.S.C. § 770(O) (1976) oi. ees 21-22

Des ke Ws OTT CRPIOP os ccc csbcabcucens 20, 21

Fhe Bl eer FTE IPOs pw so ocean's vo Kod passim

SD Aah. Br GS a Marg PN TUTOR ia das oc ec ceca 6, 12, 14

MG ga BO Pk ae es |) aR a 158.9, 17

Sate AS Ui. O TIMP UASIO). voc kee cee 6, 14

Securities Exchange Act of 1934

Dy Ae Ai FE COSTER wile Uli es ca coe cae we ue 13, 14

§ 10(b), 18 U.S.C. § 78j(6) (1976).............. passim

Dee ao Mais POPES TOR sc cea occ ccs act veecs 26

§ 13a), 15 U.S.C. § 78m(a) (1976)... ... 0... .055 7

§ 14(a), 15 U.S.C. § 78n(a) (1976)..........0.00- 7

i Oe ai aens FE A ESTOR oss siacvone dapdicwnr 6

Oey Ao Mees PC ABP TORS cwdiecdaeccs ewes 13-14

§ 207, 48 Stat. 881 (1934)....... 00. cee ee eee. ie

Trust Indenture Act of 1939

§ 323(a), 15 U.S.C. § 77www(a) (1976) .......... 14

Vili

CONGRESSIONAL DOCUMENTS:

H.R. Rep. No. 1838, 73d Cong., 2d Sess. (1934)....

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

S. Rep. No. 3240, 73d Cong., 2d Sess. (1934).....

78 Cong. Rec. 8025, 8194 et seq., 8203 (1934) ....

H.R. 7852 § 8(e), 73d Cong., 2d Sess. (1934) .....

H.R. 7852 § 17(e), 73d Cong., 2d Sess. (1934) ....

H.R. 7855 § 8(e), 73d Cong., 2d Sess. (1934) .....

H.R. 7855 § 17(e), 73d Cong., 2d Sess. (1934) ....

S. 2693 § 8(e), 73d Cong., 2d Sess. (1934)........

S. 2693 § 17(e), 73d Cong., 2d fess. (1934).......

OTHER AUTHORITIES:

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

Securities Act of 1934, 1969 Cal. L. Rev. 80 (1981)..

Freeman, /mplied Remedies Under Rule 10b-5: Are

They Only for Defrauded Sellers?, Nat’! L.J., Dec.

ME Ss va hie Careers COMMUTE BS amare’ 2 ose coe ae

Freeman, The Liability of Professionals Under Rule

10-b-5, 23 The Practical Lawyer 45 (1977)..........

3 L. Loss, Securities Regulation (2d ed. 1961).........

Note, Limitation ?orrowing in Federal Courts, 77 Mich.

iy ee CUE ROTI Gs bb kas ud Covcdoevncveckeaapeas

PAGE

13-14

IN THE

Supreme Court of the United States

OCTOBER TERM, 1980

No. 80-___

WHITE & CASE and MARION Jay EPLEY, III,

Petitioners,

sashes its

WACHOVIA BANK & TRUST CO., N.A., et al.,

Respondents.

PETITION FOR 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 (Mikva, Robinson and

Flannery,' J.J.) is not yet officially reported; it is unofficially

reported at [1980] Fed. Sec. L. Rep. (CCH) { 97,712 and is set

forth in the Appendix beginning at page A-1. The opinion of

the District Court (Parker, J.), whose judgment was reversed

by the Court of Appeals, is reported at 461 F. Supp. 999 (1978)

and is set forth in the Appendix beginning at page B-1.

Jurisdiction

The judgment of the Court of Appeals was entered on

December 5, 1980. Petitioners’ timely petition for rehearing

1 Sitting by designation, pursuant to 28 U.S.C. § 292(a).

and suggestion for rehearing in banc was denied on March 4,

1981, with two judges voting to grant rehearing. (App. C-1,

C-3) This petition is filed within 90 days of that denial. The

jurisdiction of this Court is invoked under 28 U.S.C.

§ 1254(1).

Statutory and Regulatory Provisions

The texts of Sections 11, 12, 13, and 17 of the Securities Act

of 1933, 15 U.S.C. §§ 77k, 77/, 77m, and 77q (1976); Section

10 of the Securities Exchange Act of 1934, 15 U.S.C. § 78}

(1976); Section ]4 of the District of Columbia Securities Act of

1964, Pub. L. No. 88-503, § 14, 78 Stat. 629, D.C. Code

§ 2-2413 (1973); and Pub. L. No. 88-241, § 1, 77 Stat. 510,

D.C. Code § 12-301 (1973) are set forth in the Appendix

beginning at page D-1.

STATEMENT OF THE CASE

I. Introduction

Respondents are large, institutional investors—three banks,

an offshore investment trust and an insurance company. On

December 17, 1969, they purchased primarily from National

Student Marketing Corporation (“NSMC”) 128,816 shares of

its common stock for $5,667,904.? The sale was a private

placement at a substantial discount from the market price

pursuant to comprehensive negotiated Stock Purchase Agree-

ments. Petitioners White & Case and its partner, Marion Jay

Epley, III, served as outside counsel to NSMC in connection

with the private placement.

Within days after the purchase was completed, the accuracy

of NSMC’s reported financial condition came under attack.

Litigation was commenced shortly thereafter by others. Also

2 —_ Of the five respondents, four sued petitioners. Mellon Bank, N.A.,

chose not to sue White & Case or Mr. Epley.

°F

3 ~

within days, respondents contemplated litigation but did

nothing. More than three years passed. All available federal

express remedies expired. Only then on January 29, 1973 did

respondents sue, alleging a right to implied remedies under the

federal securities laws.

NSMC was “one of the glamor stocks of the 1960s.” Slip op.

at 5° (App. A-5). Starting with its incorporation in 1966,

NSMC enjoyed rapid growth and a spectacular increase in the

price of its common stock. In less than two years, from its

initial public offering in the spring of 1968 to the private

placement on December 17, 1969, the market price of NSMC’s

stock rose from $6 per share to $71 per share (and that after a

two-for-one stock split).

Prior to the December private placement, NSMC had issued

its audited financial statements for its fiscal year ended August

31, 1969. Those statements showed that NSMC, on a consoli-

dated basis including newly acquired companies, had net earn-

ings Of $3,865,080 ($3,185,127 before extraordinary items), a

sharp increase from its reported 1968 net earnings of $388,031.

In public statements by its president and in a company press

release, NSMC had made glowing public estimates of its

earnings for periods subsequent to its August 31, 1969 fiscal

year end. (J.A. 241, 858.)* In the Stock Purchase Agreements

with respondents, NSMC expressly represented that in the

period from August 31, 1969 to the closing of the private

placement on December 17, 1969, there had been “no material

adverse change in the financial condition or results of opera-

tions or business of NSMC and its subsidiaries taken as a

whole.” Stock Purchase Agreement 4 4(n). (J.A. 779.)

In conflict with this representation, as well as its public

statements, NSMC had suffered a sharp financial decline.

Word of NSMC’s financial problems surfaced almost immedi-

3 References are to the slip opinion by the Court of Appeals below.

4 References are to the Joint’ Appendix filed with the Court of

Appeals.

ately after the private placement.

than one week after the private p ent—Barron’s financial

magazine published an article by A\an Abelson, a highly

regarded Wall Street analyst, that critic NSMC’s account-

ing practices as reflected in its certified financial statements,

describing them as “Alice-in-Wonderland.\ (J.A. 711.) In just

g little over a week following publicatiok of the Barron’s

*Xticle, the price of NSMC’s stock drop by almost 16

p¥cent. Concomitantly, reports circulated publicly predicting

liti,\ation by NSMC stockholders under the federal securities

laws&\ The market value of NSMC stock contin to decline;

by JaQuary 15, 1970, it had fallen by almost 30 percent. (J.A.

262-63 |

These \vents, particularly the Barron’s article, hdd a pro-

found im,\ct upon respondent purchasers. For instane, ’ aw-

rence M. Yreene, Vice President and General C 1 of

respondent :Yeyfus Offshore Trust testified during his

tion that in eaWy January 1970 he was “greatly concerned’\and

“upset,” “bega\ to investigate the situation more deeply,” \nd

turned “the ma over to our counsel for litigation.” (J.X.

729.)’ Indeed, prx¥tioners’ efforts through discovery to leari\

more about respoi Yents’ actions in Jar--ary 1970 were consis-’

tently blocked by r.\pondents’ invocation of privilege on the

5 Mr. Greene testified a Yfollows:

“Q Is it your understa. Wing that upon your review of the Barron’s

article in January of 15} that any subsequent investigations you

made with respect to Nai Student Marketing were in contem-

plation of litigation?

“A I was greatly concerned hen | read the [Barron’s article], and,

in fact, | was rather upset Qbout it and I therefore began to

investigate the situation more \eply. Whatever I did following that

in connection with looking into .¥¢ facts is all part and parcel of my

turning the matter over to our cc \nsel for litigation.”

(J.A. 729.) See 461 F. Supp. at 1009 .427 (App. B-15). Other officers

and advisers of respondents had simila\ reactions. (J.A. 737-38, 743,

762, 768.)

ground that respondents were contemplating litigation at that

time. (J.A. 724-25, 727-31.)°

Respondents’ concerns in early January 1970 were well-

founded. On February 16, 1970, NSMC announced a substan-

tial loss of between $1.2 and $1.7 million for the period from

September 1 to November 30, 1969. The announced loss was in

direct conflict with NSMC’s express representation in the

Stock Purchase Agreements of December 17, 1969, that there

had been no materially adverse change in NSMC’s financial

condition since August 31, 1969.

Respondents had a number of remedies that they could have

invoked almost immediately after the private placement. As a

starting point, the Stock Purchase Agreements provided re-

spondents with substantial investigation rights: they were en-

titled to examine NSMC’s and its subsidiaries’ “books of

account, records, reports and other papers, to make copies and

extracts therefrom, and to discuss [NSMC’s and its subsidi-

aries’] respective affairs, finances and accounts with their

respective ‘ficers.” (J.A. 793.) As their counsel admitted at

oral argumuiit before the Court of Appeals, respondents chose

not to invoke these rights. Transcript of Oral Argument,

December 13, 1979, at 60. Respondents also chose not to

pursue their various state law remedies,’ a course that was

taken by other NSMC shareholders less than three months

after the 1969 private placement. See Stuckey v. NSMC, No.

70-H-252 (S.D. Tex., Mar. 19, 1970). (J.A. 484-85.)

6 For example, Mr. Greene specifically claimed privilege in response to

a question concerning conversations with respect to the Barron’s article

in January 1970. His counsel explained the claim of privilege as

follows: “In this instance, . . . the privilege would be that of work

product, which is to say the product of his own investigation relating

to what eventually led to this lawsuit.” (J.A. 729-30.)

7 Respondents could have immediately sued NSMC for rescission of

the stock transaction on the ground of fraudulent inducement. They

also could have sued for damages under ‘state law on a breach of

contract or breach of warranty theory in view of the false express

representation in the Stock Purchase Agreements that there had been

no material adverse change in NSMC’s financial condition since

August 31, 1969.

Respondents also had an alternative under federal law: they

could have filed suit against NSMC under the express civil

remedy contained in Section 12(2) of the 1933 Act. Under

Section 12(2), respondents could have filed suit “to recover the

consideration [they] paid [for the NSMC stock]”—namely,

$5,667,904. They took no such action.

Congress devised a specific statute of limitations to govern

the express remedy under Section 12(2). No claim under that

section can be maintained unless brought within the earlier of

“one year after the discovery of the untrue statement or the

omission” or “three years after the sale.” 15 U.S.C. § 77m.

Eschewing their express remedy under Section 12(2), respon-

dents delayed for years, allowing the specific, congressionally-

mandated limitations periods to lapse.

While respondents sat on their rights, other less sophisti-

cated NSMC shareholders were quick to institute litigation.

Indeed, a class action suit alleging federal securities law claims

against NSMC, its officers, and outside accountants was filed

less than two months after respondents contemplated litigation

in early 1970. Garber v. Randell, No. 70-835 (S.D.N.Y., Mar.

2, 1970). Another class action was filed two months later.

Lipsig v. NSMC, No. 70-2006 (S.D.N.Y., May 15, 1970).

In contrast to these less sophisticated shareholders and

despite the numerous remedies available to them, respondents

did not file suit against anyone, including NSMC to whom they

had paid their money, until January 29, 1973—more than three

years after the private placement and more than three years

after respondents had actually contemplated litigation. On that

date, respondents filed the present lawsuit against NSMC, as

well as its officers, directors and the accountants who certified

its financial statements. Wachovia Bank and Trust Co., et al.

v. National Student Marketing Corporation, et al. (D.D.C.,

filed Jan. 29, 1973). The jurisdiction of the District Court was

based on 15 U.S.C. §§ 77v(a) and 78aa. Petitioners were not

named as defendants in the original complaint but were added

later.* Among their affirmative defenses, petitioners asserted in

their answer that the complaint against them was barred by the

statute of limitations and that the complaint failed to state a

claim upon which relief could be granted. White & Case

Answer 4 56, 57.

Respondents’ suit was not brought under Section 12(2), the

express remedy available to them since at least January 1970.

Plainly, this was because by January 29, 1973 the statute of

limitations applicable to that express remedy against NSMC

had lapsed. Instead, the complaint was based on claimed

implied remedies under Section 10(b) of the 1934 Act and

Section 17(a) of the 1933 Act, sections in which Congress

granted no express remedies and provided no express statutes

of limitations.°

NSMC, the principal defendant which in 1969 received most

of the $5,667,904 paid by respondents, settled respondents’

claims against it for a payment of $300,000 and 300,000 shares

of NSMC stock. The remaining defendants in the suit are

secondary parties, including officers, directors, accountants

and lawyers, who are charged with having aided and abetted

NSMC in its false statements to respondents.

II. Proceedings Below

Following discovery relating, among other things, to the

statute of limitations issue, petitioners moved the District

Court to dismiss respondents’ complaint with prejudice be-

8 Respondents did not file claims against petitioners until May 28,

1975. However, in light of a tolling letter, obtained from White & Case

on January 27, 1973, respondents’ securities law claims against peti-

tioners were properly assumed by the District Court to have been

asserted as of January 27, 1973.

9 The complaint also alleged violations of Sections 13(a) and 14(a) of

the 1934 Act. Respondents abandoned their Section 13(a) claim. 461 F.

Supp. at 1004 n.10 (App. B-5). Respondents never asserted any claim

under Section 14(a) of the 1934 Act against petitioners. Respondents

also asserted nonfederal claims against petitioners, under a theory of

pendent jurisdiction.

cause the federal remedies repondents sought to invoke were

barred by the statute of limitations. Petitioners also moved to

dismiss on the ground that a right of action should not be

implied in favor of respondents under Section 10(b) of the 1934

Act or Section 17(a) of the 1933 Act.'°

Parker, D.J., granted petitioners’ motion to dismiss the

federal claims as time-barred but denied petitioners’ motion to

dismiss based on plaintiffs’ lack of an implied right of action.

461 F. Supp. at 1004-13 (App. B-5 to B-17)."'

On the statute of limitations issue, Judge Parker held that

the two-year statute of limitations contained in the District of

Columbia blue sky law was applicable to respondents’ implied

federal securities law claims. Jd. at 1008 (App. B-12). In so

ruling, Judge Parker followed the decision of the Court of

Appeals in Forrestal Village, Inc. v. Graham, 551 F.2d 411

(D.C. Cir. 1977) (per curiam), in which it had held specifically

that application of the two-year District of Columbia blue sky

statute of limitations “best effectuates” the congressional in-

tent underlying the federal securities laws. 551 F.2d at 413.

Judge Parker also concluded that respondents were on notice

of the alleged fraud more than two years before the suit was

filed. 461 F. Supp. at 1010 (App. B-17).

Respondents appealed to the United States Court of Appeals

for the District of Columbia Circuit, and petitioners cross-ap-

pealed from the order denying their motion to dismiss on the

ground that respondents had no implied right of action. On

December 5, 1980, the Court of Appeals reversed the District

Court’s dismissal of respondents’ securities law claims on

statute of limitations grounds. The Court of Appeals denied

petitioners’ cross-appeal, holding that a right of action in favor

10 Other defendants filed similar motions. Petitioners also moved to

dismiss respondents’ nonfederal common law claims because no inde-

pendent basis existed for subject matter jurisdiction over them.

11 Judge Parker granted petitioners’ motion to dismiss respondents’

nonfederal common law claims because there was no independent basis

for subject matter jurisdiction and, under the circumstances, pendent

jurisdiction should not be permitted. 461 F. Supp. at 1010 (App. B-17).

of respondents may be implied under Section 10(b) of the 1934

Act"

In reversing the District Court, the Court of Appeals refused

to apply in this case its decision in Forrestal Village, which, as

noted, mandated application of the two-year blue sky law

statute of limitations to implied remedies under Section 10(b)

of the 1934 Act and Section 17(a) of the 1933 Act. The Court

of Appeals did not overrule its Forrestal Village decision. Nor

did it question the correctness of its conclusion in Forrestal

Village that application of the two-year statute of limitations

“best effectuates” congressional intent and “best furthered

federal policy.” 551 F.2d at 413; Slip op. at 13 (App. A-13).

Instead, the Court of Appeals reasoned that the concededly

correct rule of Forrestal Village deviated from previous rulings

so that it should not be applied to the present case but should

be applied prospectively only under the special rules of

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

Appeals also found that the three-year statute of limitations, as

applied to respondents’ claims, should not have begun to run

until February 1970. In so ruling, the Court of Appeals

disregarded, without explanation, the critical fact of record

that litigation was actually contemplated by respondents in

early January 1970, a fact discussed at some length in oral

argument before the Court of Appeals. Transcript of Oral

Argument, December 19, 1979, at 14, 30-31."

In upholding an implied right of action under Section 10(b)

of the 1934 Act, the Court of Appeals acknowledged that the

legislative history of Section 10(b) “yields little specific” re-

12 The Court of Appeals declined to rule on whether a right of action

should be implied under Section 17(a) of the 1933 Act. The Court,

however, did note that the question of whether an implied remedy

exists under Section 17(a) “has explicitly been left open by the Supreme

Court,” and that the courts of appeals are in conflict on it. Slip op. at

18 n.19 (App. A-18).

13 Had the January 1970 date instead of the February 1970 date been

chosen, the suit would have been barred even under the three-year

general fraud statute of limitations applied by the Court of Appeals

since the complaint was filed on January 29, 1973.

garding congressional intent to create a private right of action

for damages. Slip op. at 20 (App. A-20). Nevertheless, it

reasoned that it is appropriate to create an implied remedy

“[bJecause the relevant legislative chronicles do not negative

the existence of implied remedies.” Jd. at 21 (App. A-21).

On December 19, 1980, petitioners filed a timely petition for

rehearing and suggestion for rehearing in banc. The petition

was denied on March 4, 1981, with two judges of the Court of

Appeals, Judges Robb and MacKinnon, voting to giant re-

hearing in banc and Judge Wright not participating in the

decision. (App. C-1).

REASONS FOR GRANTING THE WRIT

A writ of certiorari should issue (i) because the decision

below raises fundamental questions of federal law which have

not been, but should be, definitively resolved by this Court,

and (ii) because the decision misconstrues and conflicts with

decisions of this Court and of other Courts of Appeals.

Specifically, the petition should be granted because:

— The Court of Appeals’ decision permits suit to be

brought on implied claims after lapse of the specific

limitations period Congress established for expressly

granted securities law claims, in plain contravention of

Congress’ intent;

— The Court of Appeals’ decision, which expands the

federal courts’ subject matter jurisdiction through the

implication of a private right of action under Section

10(b) of the 1934 Act, contravenes recent and authori-

tative pronouncements of this Court and Congress’

intent in enacting Section 10(b) in that: (1) it permits

such a private right of action in favor of purchasers of

securities in addition to express remedies provided

such purchasers; and (2) it permits such a private right

of action against persons who are neither purchasers

ie LAS

nor sellers of securities but are only peripherally re-

lated to the transaction, including professional ad-

visers such as accountants and lawyers;

.— The Court of Appeals’ decision not to apply its own

prior decision in Forrestal Village, Inc. v. Graham,

551 F.2d 411 (D.C. Cir. 1977)—that the two-year

District of Columbia blue sky law statute of limita-

tions “best effectuates” Congress’ intent—conflicts

with this Court’s decision in Chevron Oil Co. v.

Huson, 404 U.S. 97 (1971), which established the

criteria for prospective-only application of judicial

decisions. The Court of Appeals’ decision also con-

flicts with uniform authority in other circuits which

have applied statutes of limitations to implied securi-

ties law remedies in the normal retroactive manner. In

particular, it conflicts with Schaefer v. First National

Bank of Lincolnwood, 509 F.2d 1287 (7th Cir. 1975),

cert. denied, 425 U.S. 943 (1976), in which the Seventh

Circuit held that Chevron does not permit, much less

require, prospective-only application of a decision that

implied remedy actions under Section 10(b) of the

1934 Act are governed by a blue sky law statute of

limitations.

I. The Court of Appeals’ Decision Raises Fundamental

Questions of Federal Law Which Have Not Been, But

Should Be, Definitively Resolved by This Court.

A. Federal Courts May Not Create Implied Remedies Under

' Section 10(b) of the 1934 Act in Favor of Securities

_ Purchasers Who Allow Their Express Remedies Under the

Federal Securities Laws To Become Time-Barred.

Recent decisions of this Court emphasize that the “task” of

a federal court in determining whether a private right of action

should be implied under a federal statute is “limited solely to

determining whether Congress intended to create the private

right of action asserted.” Touche Ross & Co. v. Redington, 442

”*

U.S. 560, 568 (1979). See also Kissinger v. Reporters Commit-

tee for Freedom of the Press, 445 U.S. 136, 148-49 (1980);

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

15 (1979). If Congress did not intend to create a private remedy

under Section 10(b), the courts are powerless to do so. E.g.,

Transamerica, 444 U.S. at 24:

“The dispositive question remains whether Congress in-

tended to create any such remedy. Having answered that

question in the negative, our inquiry is at an end.”

See also Touche Ross, 442 U.S. at 568; Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 210 (1976).

Congress provided express private remedies for violations of

the federal securities laws and carefully devised the limitations

periods applicable to those express remedies. Congress did not

provide a statute of limitations for implied remedies under the

securities laws because it did not contemplate such remedies. '*

Congress intended the statutes of limitations it provided for

the remedies it enacted to be uniform and to be short. The

statutes of limitations applicable to the express remedies avail-

able to a purchaser under both the 1933 and 1934 Acts are in

substance identical: one year from the discovery of the viola-

tion and no more than three years after the violation occurred.

Specifically, Section 13 of the 1933 Act, 15 U.S.C. § 77m,

limits the period in which to invoke the remedy created under

Section 12(2) for recovery of the consideration paid for the

purchase of securities based upon false statements. It provides

as follows:

“No action shall be maintained to enforce any liability

created under. . . section 12(2) unless brought within one

year after the discovery of the untrue statement or the

14 Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196 (1976) (“there is no

indication that Congress . . . contemplated such a remedy”); Blue

Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 759 (1975) (Powell,

J., concurring) (“[t]he courts . . . have inferred a private cause of

action [under Section 10(b)] that was not authorized by the legisla-

tion”).

\_-

omission, or after such discovery should have been made

by the exercise of reasonable diligence . . . . In no event

shall any such action be brought to enforce a liability

created . . . under section 12(2) more than three years

after the sale.”'*

Neither the uniformity nor the shortness of the congres-

sionally enacted statutes of limitations was an accident. As

Senator Fletcher, the Senate floor manager and one of the

principal authors of the 1934 Act, stated: “We went into [the

subject of statutes of limitations] very carefully.” 78 Cong.

Rec. 8198 (1934). Other legislative history fully supports this

statement.'® Both the appropriate time period and use of dual

;

See also Sec’ions 9(e), 18(c), and 29 of the 1934 Act, 15 U.S.C.

§§ 78i(e), 78r(c), 78cc (1976). The three-year limitations period is

absolute; it does not permit tolling. E.g., Murray v. Thompson

McKinnon Auchincloss, Kohlmeyer, Inc., [1980-81] Fed. Sec. L. Rep.

(CCH) 4 97,869 at 90,376, 90,378 (S.D.N.Y. 1981); Turner v. First

Wisconsin Mortgage Trust, 454 F. Supp. 899, 911 (E.D. Wis. 1978);

Brick v. Dominion Mortgage & Realty Trust, 442 F. Supp 283, 289-91

(W.D.N.Y. 1977); Cowsar v. Regional Recreations, Inc., 65 F.R.D.

394, 397 (M.D. La. 1974).

As originally introduced, the 1934 Act contained uniform periods of

limitations for Sections 9(e) and 18(a) of two years from the date of

discovery of the violations. See H.R. 7852 §§ 8(e) and 17(e) (intro-

duced February 10, 1934), H.R. 7855 §§ 8(e) and 17(e) (introduced

February 10, 1934), S. 2693 §§ 8(e) and 17(e) (introduced February 9,

1934), 73d Cong., 2d Sess. (1934). By the time the House bill was

passed, the periods of limitations had been changed, but they remained

uniform: three years from the date of the violation. 78 Cong. Rec.

8025 (1934). Thereafter, the Senate Committee on Banking and Cur-

rency reported out its own bill with a dual limitations period applicable

to both Sections 9(e) and 18(a) of two years from discovery of the

violation, but no more than six years from the date of the violation. S.

Rep. No. 3420 §§ 9(e) and 18(c), 73d Cong., 2d Sess. (1934) (as

reported out of Committee on April 20, 1934). The Senate passed its

substitute bill after reducing the uniform limitation periods to one year

and five years, respectively. 78 Cong. Rec. 8203 (1934). Finally, the

Conference Committee retained the “one year after the discovery”

limitations period, but reduced the overall limitations period to three

years from the date of the violation; again the limitations period

applicable to Sections 9(e) and 18(a) remained identical. H.R. Rep.

No. 1838, 73d Cong., 2d Sess. at 11, 18, and 32 (1934).

(footnote continued on next page)

criteria based on the time of discovery and the time of

violation were debated at length. 78 Cong. Rec. 8197 ef seq.

(1934). The possibility of fomenting litigation, the need to

encourage resolution of litigation, and the impact upon per-

sons serving on boards of directors, as well as general consider-

ations favoring statutes of limitations, were considered by

Congress. Congress carefully balanced the needs to provide

remedies and to protect against stale claims. The legislative

history confirms that Congress intended to prohibit securities

purchasers from maintaining any claims under the federal

securities laws after the earlier of one year from the date of its

discovery or three years from the date of the alleged violation.

While the lower courts have generally looked to local law for

the statute of limitations to be applied to implied remedies

under the federal securities laws,'’ as this Court stated in

Occidental Life Insurance Co. v. EEOC:

“[A state limitations period should not be] mechanically

applied . . . simply because a limitations period is absent

from the federal statute. State legislatures do not devise

their limitations periods with national interests in mind,

The same limitations period that is applicable to Sections 9 and 18 of

the 1934 Act was carried back into the 1933 Act. As originally enacted,

Section 13 of the 1933 Act provided a “two years after discovery”

limitations period for suits brought under Section 12(2) of the 1933

Act; Section 13 provided no absolute limitations period for Section

12(2) although it provided ten-year absolute limitations periods for

Sections 11 and 12(1) of the 1933 Act. 48 Stat. 74, 84 (1933). As part of

the reforms enacted in 1934, Congress conformed the limitations

period in Section 13 of the 1933 Act to the dual one- and three-year

periods applicable to Sections 9 and 18 of the 1934 Act. See Securities

Exchange Act of 1934, § 207, 48 Stat. 881, 908 (1934).

Moreover, in 1938, Congress amended Section 29 of the 1934 Act to

subject it to the same one- and three-year limitations period. The same

limitations period also governs Section 16(a) of the Public Utility

Holding Company Act of 1935, 15 U.S.C. § 79p(a) (1976), and Section

323(a) of the Trust Indenture Act of. 1939, 15 U.S.C. § 77www(a)

(1976), both of which impose liability for misleading statements.

17 E.g., Arneil v. Ramsey, 550 F.2d 774, 779 (2d Cir. 1977). Although

this practice was referred to by this Court in a footnote in Ernst &

Ernst v. Hochfelder, 425 U.S. 185, 210 n.29 (1976), it was neither

argued to the Court nor discussed in the Court’s opinion.

and it is the duty of the federal courts to assure that the

importation of state law will not frustrate or interfere

with the implementation of national policies. . . . State

limitations periods will not be borrowed if their applica-

tion would be inconsistent with the underlying policies of

the federal statute.” 432 U.S. 355, 367 (1977).

Application of the statute of limitations chosen by the Court of

Appeals in this case “would be inconsistent with the underlying

policies” of the federal securities laws because it would extend

the life of a judicially-created remedy beyond that of the

congressionally-enacted remedy.

As discussed above, respondents failed to file suit against

anyone—including NSMC, which had made express misrepre-

sentations to them and to whom they had paid their money—

until more than three years after they had purchased their

NSMC securities. It was only on January 29, 1973 that re-

spondents sued NSMC and the collateral defendants. At that

point, their express remedy under Section 12 of the 1933 Act

was time-barred under the three-year absolute limitations pe-

riod. Even accepting the Court of Appeals’ February 1970

discovery date, the filing of the suit on January 29, 1973 was

also long past the one-year period from discovery after which

express remedies are barred.

The Court of Appeals permitted respondents to avoid the

untimeliness of their claims by allowing an implied remedy. But

even assuming, arguendo, the existence of an implied remedy

“in some circumstances,”'* it would surely be inappropriate to

apply to such.a judicially-created remedy a limitations period

longer than the absolute three-year and the one year from

discovery limitations periods enacted by Congress for express

remedies.

By allowing respondents a private remedy at that late date,

the Court of Appeals disregarded this Court’s admonition in

Ernst & Ernst v. Hochfelder that:

18 Piper v. Chris-Craft Industries, 430 U.S. 1, 25 (1977); Santa Fe

Industries v. Green, 430 U.S. 462, 477 (1977).

“(T]he judicially created private damages remedy under

§ 10(b, [of the 1934 Act]. . . cannot be extended, consis-

tently with the intent of Congress, to . . . nullify the

effectiveness of the carefully drawn procedural restric-

tions on these express actions.” 425 U.S. at 210.

The rationale underlying this admonition (again ignored by the

Court of Appeals) was articulated by this Court in Blue reonaed

Stamps v. Manor Drug Stores:

“It would indeed be anomalous to impute to Congress an

intention to expand the plaintiff class for a judicially

implied cause of action beyond the bounds it delineated

for comparable express causes of action.” 421 U.S. 723,

736 (1975).

See also Note, Limitation Borrowing in Federal Courts, 77

Mich. L. Rev. 1127, 1133-34, 1148 (1979). Simply put, the

Court of Appeals was not free to imply a securities law remedy

for respondents which could be commenced at a time when

Congress intended that even express remedies should be

barred.

Resolution of the issues presented by this petition will have a

significant impact upon litigation in the federal courts. Even a

cursory review of the publicly reported cases reveals the sub-

stantial amount of implied remedy securities litigation concern-

ing the appropriate statute of limitations. A decision of this

Court consistent with Congress’ intent that no purchaser be

allowed to maintain a securities law claim after lapse of the

short and uniform limitations periods enacted by Congress will

not only terminate this case but will also eliminate a significant

portion of the vexatious litigation pending and continually

being brought under Section 10(b) of the 1934 Act.

B. No Private Right of Action for Damages Should Be

Implied Under Section 10(b) of the 1934 Act in Favor of

Securities Purchasers.

This Court has acquiesced in the recognition of implied

rights of action under Section 10(b) of the 1934 Act “in some

circumstances.”'’? However, all these circumstances have in-

volved claims in favor of sellers of securities. See, e.g., Affili-

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

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

404 U.S. 6 (1971). To date, the Court has left open the

question whether similar rights should be implied in favor of

securities purchasers, for whom, Congress has provided an

express remedy under Section 12 df the 1933 Act. Blue Chip

Stamps, 421 U.S. at 752 n.15. See 3 L. Loss, Securities

Regulation 1178-92 (2d ed. 1961); Freeman, /mplied Remedies

Under Rule 10b-5; Are They Only for Defrauded Sellers?,

Nat’! L.J., Dec. 10, 1979, at 26.*° A writ of certiorari should

issue to resolve this important open question.

Recent decisions of this Court have confirmed the proposi-

tion that federakcourts are courts of limited jurisdiction, and

that they may noNexpand their jurisdiction by creating private

those intended by Congress. See, e.g.,

a statute creates a cause of action,

either expressly 0 plication, is basically a matter of

statutory construc BY. . [W)hat must ultimately be

determined is whet

private remedy asse

rit of certiorari in New York

.S.L.W. 3617 (U.S. Feb. 24,

ivate remedy should be im-

mmange Act.’'

Only recently this Court iss

Mercantile Exchange v. Lei

1981), to determine wheth

plied under the Commoditi

19 See note 18, supra.

20 = The Court also has left op

action should be implied und

of anyone. Aaron v. SEC,

U.S. at 734 n.6.

21 = The Court of Appeals belo

in Leist. Slip op. at 34-35 (

question whether private rights of

on 17(a) of the 1933 Act in favor

. 680, 689 (1980); Blue Chip, 421

d upon the Second Circuit's ruling

to A-35).

In its recent decisions, this Court has established a numb

of basic principles to guide courts in determining whether tc

imply a private right of action. The Court of Appeals’ decision

in this case js in direct conflict with all of those principles.

First, this Court has stated that when a statute provides an

express remedy—as the securities laws do for securities pur-

chasers—courts should refrain from creating additional im-

plied remedies.”* In the decision below, the Court of Appeals

expressly disregarded this principle, calling it “a dangerous

road map with which to explore legislative intent.” Slip op. at

26 (App. A-26).

Second, this ‘Court has stated that federal courts should

refrain from implying private rights of action when the legisla-

tive history is silent on the question.”» The Court of Appeals

below admitted that the legislative history of Section 10(b)

provides no indication that Congress intended a private right

of action. Slip op. at 20 (App. A-20). Nevertheless, it con-

cluded that such a right could be created “because the relevant

legislative chronicles do not negative the existence of implied

remedies.” Slip op. at 2:1 (App. A-21).

Third, this Court has also stated that the “remedial pur-

poses” of a statute along do not justify implication of a private

right of action. Touche;Ross, 442 U.S. at 578. In contrast, the

‘ourt of Appeals supported its implication of a private remedy

i finding a “link between the existence of an implied cause of

action and the broad purposes of the 1934 Act.” Slip op. at 21

(Apps, A-21).”* :

SBR al sa

22 Seesg.g., Kissinger, 445 U.S. at 148-49; Transamerica, 444 U.S. at

19, 21; Wwe Chip, 421 U.S. at 734, 736.

23 See, e.g.,, Touche Ross, 442 U.S. at $71. See also Transamerica, 444

U.S. at 20. ee"

24 This precise argument was soundly rejected in Touche Ross, 442

U.S. at 578:

“The invocation of the ‘remedial purposes’ of the 1934 Act is

similarly unavailing. Only last term, we emphasized that generalized

Finally, this Court has stated that the original analysis in J.J.

Case & Co. v. Borak, 377 U.S. 426 (1964), which suggests a

statutory tort basis for implying a private right of action under

the federal securities laws is no longer good law: “the mere fact

that [a statute] was designed to provide protection for [a class

of persons] does not require the implication of a private

damages action in their behalf.” Touche Ross, 442 U.S. at 578

(analyzing the decision in Borak). Nevertheless, the Court of

Appeals sought to justify its implication of a private remedy in

this case on the ground that respondents are “within the

specific class to be protected by the statute.” Slip op. at 20

(App. A-20).

The issue whether a private remedy should be judicially

implied under Section 10(b) in favor of securities purchasers—

and particularly purchasers such as respondents who have

chosen not to pursue their express remedies—is of the utmost

consequence. Its resolution will have a profound impact upon

the many securities law cases that continuously crowd the

dockets of federal courts. As this Court stated in Blue Chip:

“There has been widespread recognition that litigation

under Rule 10b-5 presents a danger of vexatiousness

different in degree and in kind from that which accompa-

nies litigation in general.” 421 U.S. at 739.

Indeed, the burdens of defending such cases often lead to

“large judgments, payable in the last analysis by innocent

investors, for the benefit of speculators and their lawyers.” Id.

Such consequences should no longer be tolerated if, as we

submit, implication of a remedy in favor of securities pur-

chasers under Section 10(b) is precluded under the standards

enunciated by this Court.

references to the ‘remedial purposes’ of the 1934 Act will not justify

reading a provision ‘more broadly than its language and the

statutory scheme reasonably permit.’ ”

C. No Private Right of Action for Damages Should Be

Implied Under Section 10(b) of the 1934 Act Against

Persons Who Are Neither Purchasers Nor Sellers of

Securities.

Even if purchasers are permitted to assert implied remedies

under Section 10(b), they should not be allowed to assert such

claims against persons who are not sellers but are sued as

so-called aiders and abettors of a seller of securities. As noted,

respondents were provided a specific remedy against sellers

under Section 12(2) of the 1933 Act. They did not avail

themselves of that remedy. They brought suit against NSMC,

the principal seller, under other theories and elected to settle

that claim. They are now pursuing petitioners and other

defendants who are not sellers under “aiding and abetting”

theories of liability. Their argument is that such a remedy needs

to be implied in their favor because Congress did not provide a

specific remedy against such secondary parties.

The fact is, however, that Congress did specifically provide

remedies against just such parties. Section 11 of the 1933 Act

provides for liability of officers, directors, accountants and

other professionals (including in appropriate cases lawyers).

Congress, however, did not want such secondary parties to

have “a liability in an indeterminate amount for an indetermi-

nate time to an indeterminate class.” Blue Chip, 421 U.S. at

748, quoting Chief Judge Cardozo in Ultramares Corp. v.

Touche Niven, 255 N.Y. 170, 179-80, 174 N.E. 441, 444 (1931).

When two years after U/tramares Congress enacted the 1933

Act, it carefully limited such remedies by making them avail-

able, subject to special defenses, only to persons acquiring

shares sold pursuant to a registration statement under the 1933

Act. They are not available to parties such as respondents who

elect to acquire shares in a transaction not covered by the

registration requirements of the Act.

What the Court of Appeals below said in substance is that

Congress made an error in restricting non-sellers’ liability to

persons purchasing under registration statements. The Court

of Appeals sought to cure Congress’ perceived oversight by

providing remedies against such non-sellers in favor of those

who purchased their securities otherwise than under a registra-

tion statement. The Court of Appeals thereby subjected sec-

ondary parties to liabilities not subject to the limitations

periods Congress imposed on Sections 11 and 12. If such a

broad extension of liability beyond Congress’ expressed pur-

poses is to be imposed as a result of the “modest aims” of

Section 10(b) (see Blue Chip, 421 U.S. at 736 n.8), it should be

done only by Congress. See United States v. Rutherford, 442

U.S. 544, 555 (1979) (“Under our constitutional framework,

federal courts do not sit as councils of revision, empowered to

rewrite legislation in accord with their own conceptions of

prudent public policy.”).

In point of fact, for thirty odd years after the enactment of

Section 10(b), there was no thought that secondary parties

could have any liability under that Section and no cases to that

effect. It was only in the late 1960s that suggestions were first

made that liabilities of secondary parties could arise under

Section 10(b). See cases cited in Freeman, The Liability of

Professionals Under Rule 10-b-5, 23 The Practical Lawyer 45,

50-52 (1977). And such liability has never been approved by

this Court.

Indeed, in Ernst & Ernst v. Hochfelder, this Court raised but

did not decide the issue whether “aiding and abetting” is a

sufficient basis for imposing civil liability under Section 10(b)

of the 1934 Act. 425 U.S. at 191 n.7. There is no evidence that

Congress intended to impose liability under Section 10(b) on

secondary parties such as officers, directors, accountants and

lawyers. As late as 1956, it was proclaimed in Congress that no

such remedy existed.** In the case of a primary violation by a

25 _In 1956, the House Committee on Interstate and Foreign Commerce

recommended passage of a bill which would have amended the 1933

Act to provide express civil remedies similar to those under Section

10(b) of the 1934 Act in favor of purchasers of securities issued

pursuant to the exemption from registration contained in Section 3(b)

purchaser or seller of securities, the implied remedy is, at least,

di-ected against a party to the transaction who has engaged in

conduct expressly prohibited by Congress. By contrast, if this

Court tolerates an implied remedy against a secondary party, it

will do so notwithstanding the absence of any evidence that

Congress intended either to permit an implied remedy or even

to make the defendant’s conduct a violation of federal law. See

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

the Securities Act of 1934, 1969 Cal. L. Rev. 80, 93-94 (1981).

II, The Court of Appeals’ Decision Conflicts with Uniform

Authority in Other Circuits and Misconstrues This

Court’s Decision in Chevron Oil Co. vy. Huson.

The Court of Appeals’ decision in Forrestal Village was

based on a determination that application of the two-year

District of Columbia blue sky law statute of limitations to

implied remedies “best effectuates” the congressional intent

underlying the federal securities laws. In this case, the Court of

Appeals did not question the reasoning or conclusion of

Forrestal Village. Instead, it react:ed a result inconsistent with

congressional intent by refusing to apply Forrestal Village to

this case. The Court of Appeals’ decision in this case conflicts

with uniform authority in other circuits and misconstrues this

Court’s decision in Chevron Oil Co. v. Huson, 404 U.S. 97

(1971).

In Chevron, this Court established three criteria which must

be satisfied to justify prospective-only application. The Court

of the 1933 Act. The Committee supported its recommendation by

noting that:

“The only civil remedy the purchaser of a security, issued pursuant

to section 3(b) exemption, has for false and misleading statements

or omissions in the offering circular is‘ to sue the seller of the

security under section 12 of the Securities Act. By contrast, the

investor in registered securities has civil remedies under sections 11

and 12 of the act.” H.R. Rep. No. 2513, 84th Cong., 2d Sess. 5

(1956) (emphasis supplied).

Congress never enacted the bill.

of Appeals’ construction of these criteria and its refusal to

apply the rule of Forrestal Village to this case stand in direct

conflict with the decision of the Seventh Circuit in Schaefer v.

First National Bank of Lincolnwood, 509 F.2d 1287 (7th Cir.

1975), cert. denied, 425 U.S. 943 (1976).

In Schaefer, plaintiffs brought suit for alleged violations of

Section 10(b) relating to events that occurred from 1965 to

August 1967. The events were highly publicized in an indict-

ment brought in August 1967. A complaint was filed in

February 1969, and amended complaints were filed until in

October 1972 new defendants were added. 509 F.2d at 1290-91.

Earlier, in January 1972, the Seventh Circuit had held in

_ Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123, 126-27 (7th

Cir. 1972), that the shorter three-year statute of limitations of

the Illinois Blue Sky statute was applicable to implied actions

under Section 10(b) rather than the longer Illinois five-year

statute of limitations for fraud which had been applied in prior

cases. Id. at 125 n.4.

On appeal from dismissal of the action as time-barred, the

Seventh Circuit rejected plaintiff’s contention “that Chevron

Oil Co. v. Huson . . . precluded retrospective application of

Parrent.” 509 F.2d at 1294. The Court analyzed the criteria set

forth by this Court in Chevron, and concluded that the

decision in Parrent was not an overruling of “clear past

precedent.” Jd. at 1295. It analyzed decisions such as Vander-

boom v. Sexton, 422 F.2d 1233 (8th Cir.), cert. denied, 400

U.S, 852 (1970)—the very case whose reasoning was explicitly

adopted by the Court of Appeals in Forrestal Village, 551 F.2d

at 413—and concluded that by January 1972, when Parrent

was decided, “[c]learly, application of the Illinois Blue Sky

limitations period was foreshadowed, and in any event Parrent

did not constitute an overruling of any clear past prececent of

the Seventh Circuit.” 509 F.2d at 1295.

The Court of Appeals’ prospective-only ruling in this case

also stands in contrast to the decisions of federal courts other

than the Seventh Circuit: no other federal court has given

prospective-only effect to a decision as to which statute of

limitations should be applied to implied securities law claims.

Indeed, as was the Seventh Circuit’s decision in Parrent, every

reported decision on this issue has been applied retrospectively,

even when previous decisions by the same court had opted for

a different statute of limitations. See, e.g., Carothers v. Rice,

[1980] Fed. Sec. L. Rep. (CCH) 4 97,632, at 98,392 (6th Cir.

Sept. 15, 1980); Morris v. Stifel, Nicolaus & Co., Inc., 600

F.2d 139, 141 (8th Cir. 1979); McNeal v. Paine, Webber,

Jackson & Curtis, Inc., 598 F.2d 888, 894 (Sth Cir. 1979);

Nickels v. Koehler Management Corp., 541 F.2d 611, 613, 618

(6th Cir. 1976), cert. denied, 429 U.S. 1074 (1977); Dandorph

v. Fahnestock & Co., 462 F. Supp. 961, 963-64 (D. Conn.

1979).?¢

The Court of Appeals reached its incongruous result in this

case by systematically disregarding and misapplying each of

the criteria established by this Court in Chevron. The first

Chevron criterion requires that “the decision to be applied

nonretroactively must establish a new principle of law,” i.e.,

“an avulsive change” in the law. Chevron, 404 U.S. at 106;

Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S.

481, 499 (1968). Forrestal Village did not satisfy this criterion

because it simply did not establish “a new principle of law.” It

was by no means “avulsive”: it neither “overrul[ed] clear past

precedent on which litigants may have relied” nor “decid[ed]

an issue of first impression whose resolution was not clearly

foreshadowed.” Chevron, 404 U.S. at 106. Rather, the per

curiam decision in Forrestal Village was correctly described as

resolving a “dispute. . . in [the District of Columbia] Circuit”

over which statute of limitations—blue sky or general fraud—

26 We note that in Valencia v. Anderson Brothers Ford, 617 F.2d 1278

(7th Cir.), cert. granted, 101 S.Ct. 395 (1980), and Zweibon v.

Mitchell, 606 F.2d 1172, 1177 (D.C. Cir. 1979), cert. pet. filed, 48

U.S.L.W. 3404 (U.S. Dec. 7, 1979), related issues have: been raised

before this Court. It is of course not possible to know whether the

disposition of these pending matters will be relevant to the issue

presented here.

should be applied to implied securities law claims. Houlihan v.

Anderson-Stokes, Inc., 434 F. Supp. 1324, 1326 (D.D.C.

1977).?” Moreover, during the period in question, other federal

courts of appeals were in dispute over which statute of limita-

tions should be applied to implied securities law claims.?*

Indeed, in Forrestal Village the Court of Appeals simply

“join[ed] the majority of circuits which [had] considered this

question” and explicitly “adopt[ed] the reasoning of the Eighth

Circuit in Vanderboom.” 551 F.2d at 413.”°

The second Chevron criterion requires the court to “[look]

to the prior history of the rule in question, its purpose and

effect, and whether retrospective operation will . . . retard its

operation.” 404 U.S. at 107. The Court of Appeals conceded

27 Even as late as January 1973, when respondents first filed suit, no

federal court had applied the three-year District of Columbia general

fraud statute of limitations to implied securities law claims. The best

authority respondents could find for applying the general fraud statute

of limitations was dictum contained in an unpublished, unofficial

memorandum decision by the Court of Appeals in March 1975, which

under the Court of Appeals’ rules was intended to have no precedential

value. Moreover, respondents have admitted, as they must, that they

could not possibly have relied upon this unofficial decision since it was

issued two years after they filed their original complaint. Appellants

Brief to the Court of Appeals at 4.

28 As early as 1970, the Eighth Circuit had chosen to apply the blue sky

law statute of limitations. Vanderboom v. Sexton, 442 F.2d 1233 (8th

Cir.), cert. denied, 400 U.S. 852 (1970). That decision was followed in

1971 by similar decisions by two district courts—one in the First

Circuit and one in the Fourth Circuit. Dyer v. Eastern Trust & Banking

Co., 336 F. Supp. 890, 906 (D. Me. 1971); Batchelor v. Legg & Co., 52

F.R.D. 553, 558 (D. Md. 1971). In early 1972, the Seventh Circuit

joined the trend toward adoption of the blue sky alternative. Parrent

v. Midwest Rug Mills, Inc., 445 F.2d 123 (7th Cir. 1972). See generally

Richardson v. Salinas, 336 F. Supp. 997, 1000-01 (N.D. Tex. 1972).

29 The District of Columbia blue sky law statute of limitations chosen

by the Court of Appeals in Forrestal Village was enacted by Congress

in 1964 and, as the Court of Appeals acknowledged, has a “com-

monality of purpose” with Section 10(b) of the 1934 Act. It permits no

tolling and prohibits enforcement of any securities claim “after two

years from the contract of sale.” D.C. Code § 2-2413(e) (1973). Under

this statute, respondents’ claims were barred as of December 17,

1971—more than a year before they filed their complaint.

that the “commonality of purpose” of the blue sky law and

Section 10(b) “dictated” the choice in Forrestal Village of the

two-year statute of limitations which “best furthered federal

policy.” Slip op. at 13 (App. A-13). The Court of Appeals

specifically acknowledged that the second Chevron criterion

“suggests retroactive application of Forrestal Village.” Id. It

ultimately disregarded this criterion, asserting that it was

“outweighed by the first and third criteria.” Jd.

The third and final Chevron criterion requires the court to

weigh “the inequity imposed by retroactive application.” 404

U.S. at 107. As highly sophisticated institutional investors,

respondents had undisputed access to knowledgeable legal,

accounting, financial and business advisers. As discussed

above, they had available promptly after the private placement

numerous remedies under the federal securities laws and

otherwise—remedies that other stockholders promptly in-

voked. Although litigation was contemplated within days of

their stock purchases, responderits made a deliberate decision

not to commence litigation. Had respondents merely looked at

Vanderboom in early 1971, long before the two-year blue sky

statute of limitations had barred their claims, they should have

seen “foreshadowed” what the Court of Appeals would later

hold in Forrestal Village. Equity would not be served by

allowing respondents of this type to bring an implied right of

action after they allowed their express remedy under Section 12

of the 1933 Act to become time-barred. Such a result would

turn this Court’s rationale in Chevron on its head: instead of

prospective-only application being used to avoid a harsh result,

it would be used to create one by rewarding plaintiffs who slept

on their rights for years and now seek to prosecute a stale

claim.*°

30 Not only is the Court of Appeals’ decision unsupported by and

contrary to this Court’s decision in Chevron, but its approach to the

statute of limitations conflicts with at least the spirit of recent rulings

by this Court that emphasize the salutary nature of statutes of

limitations. See Delaware State College v. Ricks, 449 U.S. ____., __,

101 S. Ct. 498, 505 (1980) (statutes of limitations “themselves promote

important interests”); Board of Regents v. Tomanio, 446 U.S. 478, 487

Since this Court’s initial decision in Chevron, the federal

courts have refused to expand the Chevron criteria for pro-

spective-only application of decisions beyond the narrowly-de-

fined circumstances contemplated by this Court. See, é.2.,

Matter of S/S Helena, 529 F.d 744, 748 (Sth Cir. 1976);

Jimenez v. Weinberger, 523 F.2d 689, 703-04 (7th Cir. 1975),

cert. denied, 427 U.S. 912 (1976); Schaefer, 509 F.2d at 1294-

95. Adherence to Chevron’s principles has proved essential to

the sound and efficient administration of justice. Chevron has

been an important element in affording litigants and the courts

certainty as to the law that should be applied whenever it

appears that “an avulsive change” in law has occurred, even in

the absence of the overruling of clear past precedent. Unless

certiorari is issued, the decision below will create uncertainty

and confusion as to which law should be applied in the myriad

of cases involving changing or developing areas of the law,

with particular reference to the many cases involving the

statute of limitations on securities law claims. The result will be

to burden both judicial resources and litigants by opening up

yet another arena for imaginative litigants.

(1980); United States v. Kubrick, 444 U.S. 111, 117 (1979) (the statute

of limitations defense is a “meritorious defense, in itself serving a

public interest”).

CONCLUSION

For the foregoing reasons, this petition for a writ of cer-

tiorari should be granted.

Respectfully submitted,

MILTON V. FREEMAN

: Counsel of Record

ROBERT H. WINTER

THOMAS D. NURMI

LAWRENCE A. SCHNEIDER

ROBERT B. OTT

ARNOLD & PORTER

1200 New Hampshire Avenue, N.W.

Washington, D.C. 20036

(202) 872-6700

Attorneys for Petitioners

White & Case and Marion Jay

Epley, ll

April 8, 1981

CERTIFICATE OF SERVICE

In accordance with Rule 28.5(b) of the Rules of the United

States Supreme Court, I hereby certify that three copies of the

foregoing Petition for Writ of Certiorari to the United States

Court of Appeals for the District of Columbia Circuit were

sent by first-class mail, postage prepaid, to each of the follow-

ing counsel for the parties to the proceedings in the Court of

Appeals, on this 8th day of April, 1981.

WILLIAM R. BERNARD, Esquire

910 17th Street, N.W.

Suite 1117

Washington, D.C. 20006

Counsel for Cortes W. Randell

WILLIAM E. HEGARTY, Esquire

CAHILL, GORDON & REINDEL

80 Pine Street :

New York, New York 10005;

Counsel for Peat, Marwick, Mitchell & Co.,

Anthony M. Natelli and Joseph Scansaroli

SIDNEY DICKSTEIN, Esquire

DICKSTEIN, SHAPIRO & MORIN

2101 L Street, N.W.

Washington, D.C. 20037

| Counsel for Roger O. Walther

CHERIF SEDKY, Esquire

HILL, CHRISTOPHER and PHILLIPS, P.-C.

1900 M Street, N.W.

Washington, D.C. 20036

Counsel for Wachovia Bank and Trust Co., N.A..,

First Wisconsin Trust Co., National Fire

Insurance Company of Hartford,

Mellon Bank, N.A., and

Dreyfus Offshore Trust, N. V.

FRANKLIN M, SCHULTZ, Esquire

PURCELL & NELSON

1776 F Street, N.W.

Washington, D.C. 20006

Counsel for James F. Joy

JAMES SHARP, Esquire

GLASSIE, PEWETT, BEBBE & SHANKS

1737 A Street, N.W.

Washington, D.C. 20006

Counsel for Bernard J. Kurek

JAMES J. BIERBOWER, Esquire

BIERBOWER & ROCKEFELLER

Commonwealth Building

1625 K Street, N.W.

Washington, D.C. 20006

Counsel for John G. Davies

GEORGE P. MICHAEBLY, JR., Esquire

SHAW, PITTMAN, POTTS & TROWBRIDGE

1800 M Street, N.W.

Washington, D.C. 20036

Counsel for Donald A. Fergusson and

Robert A. Fergusson

/s/

MILTON V FREEMAN

Counsel of Record for Petitioners White

& Case and Marion Jay Epley, Il

APPENDICES

—

are

—_—_

Notice: This opinion is subject to formal revision before publication in the

Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify

the Clerk of any formal errors in order that corrections may be made before

the bound volumes go to press.

United Strtes Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 79-1595

WACHOVIA BANK AND TRUST Co., N.A.

(as Trustee and Agent for various

trust accounts), ET AL., APPELLANTS

NATIONAL STUDENT MARKETING CORPORATION, ET AL.

No. 79-1596

WACHOVIA BANK AND TRUST Co., N.A.

(as Trustee and Agent for various

trust accounts), ET AL., APPELLANTS

NATIONAL STUDENT MARKETING CORPORATION, ET AL.

No. 79-1597

WACHOVIA BANK AND TRUST Co., N.A.

(as Trustee and Agent for various

trust accounts), ET AL.

NATIONAL STUDENT MARKETING CORPORATION, ET AL.

WHITE & CASE, ET AL., APPELLANTS

Bills of costs must be filed within 14 days after entry of judgment. The court

looks with disfavor upon motions to file bills of costs out of time.

A-2

No. 79-1598

WACHOVIA BANK AND TRUST Co., N.A.

(as Trustee and Agent for various

trust accounts), ET AL.

Vv.

NATIONAL STUDENT MARKETING CORPORATION, ET AL.

PEAT, MARWICK, ET AL., APPELLANTS

No. 79-1599

WACHOVIA BANK AND TRUST Co., N.A.

(as Trustee and Agent for various

trust accounts), ET AL.

Vv.

NATIONAL STUDENT MARKETING CORPORATION, ET AL.

ROGER O. WALTHER, APPELLANT

No. 79-1600

WACHOVIA BANK AND TRUST Co., N.A.

(as Trustee and Agent for various

trust accounts), ET AL.

Vv.

NATIONAL STUDENT MARKETING CORPORATION, ET AL.

JAMES F.. JOY, APPELLANT

A-3

No. 79-1601

WACHOVIA BANK AND TRUST Co., N.A.

(as Trustee and Agent for various

trust accounts), ET AL.

Vv.

NATIONAL STUDENT MARKETING CORPORATION, ET AL.

DONALD A. FERGUSSON AND ROBERT A. FERGUSSON,

APPELLANTS

No. 79-1602

WACHOVIA BANK AND TRUST Co., N.A.

(as Trustee and Agent for various

trust accounts), ET AL.

Vv.

NATIONAL STUDENT MARKETING CORPORATION, ET AL.

CORTES 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

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.

79-1595.

A-4

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. Rezneck,

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. Schultz 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.

A-5

Before: ROBINSON and MIKVA, Circuit Judges, and

FLANNERY*, United States District Judge for

the District of Columbia.

Opinion for the court filed by Circuit Judge MIKVA.

MIKVA, 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 NSMC’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 claims 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 af-

firm appellants’ right to pursue a remedy under section

10(b) of the 1934 Act.

I. BACKGROUND

In December of 1979, appellants (Wachovia)! bought

approximately five million dollars’ worth of NSMC stock

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-

*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.

A-6

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.2 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 fjJed 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), NSMC’s independent auditor; Anthony

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

and Joseph Scansaroli, the PMM audit supervisor. These

defendants were charged with participating in a conspir-

acy 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 misrepresentations about NSMC’s financial condition

had been included in oral statements, in press releases, in

reports 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

2 SEC v. National Student Marketing Corp., 457 F. Supp.

682 (D.D.C. 1978).

3 Natale v. National Student Marketing Corp., Civ. No. 72-

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

Marketing Corp., Civ. No. 70-2006 (S.D.N.Y., filed May 15,

1970); Stuckey v. National Student Marketing Corp., Civ. No.

70-H-251 (S.D. Tex., filed March 19, 1970); Garber v. Randell,

Civ. No. 70-835 (S.D.N.Y., filed March 2, 1970).

A-7

White & Case partner principally in charge of the NSMC

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 as-

sured that the contemplated transaction would not violate

any statute. Two days before the complaint was filed, ap-

pellants had entered into a letter agreement with White &

Case and Epley, which provided that the statute of lim-

itations 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 pri-

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

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

dismissed the action as untimely.5 Both issues are now

before this court.®

* Appellants settled with NSMC and various named defend-

ants, and all claims against those parties were dismissed. De-

fendants below, and appellees here, are PMM and Natelli and

Scansaroli; White & Case and Epley; and the following NSMC

officers and directors: John G. Davies, James F. Joy, Dennis M.

Kelly, Bernard J. Kurek, Cortes W. Randell, and Roger O.

Walther.

5 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 addi-

tion, defendants-appellees John J. Davies, Dennis M. Kelly, and

Bernard J. Kurek have not joined the cross-appeal.

A-8

II. STATUTE OF LIMITATIONS

Two statute of limitations questions must be resolved:

(1) whether the district court committed error in applying

retrospectively Forrestal Village, Inc. v. Graham, 5651

F.2d 411 (D.C. Cir. 1977), which calls for a two-year stat-

ute of limitations in Rule 10b-—5 actions; and (2) whether

the district court properly declined application of the

equitable tolling principle.7

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. § 2-

2413(e).

Resolution of this issue determines whether this suit

should be dismissed on statute of limitations grounds. Ap-

7A 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 Su-

preme 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 558. Hence, a member of the purported class, after denial

of certification, may intervene in an individual suit without pen-

alty for the time period during which the class certification issue

is pending.

The district court correctly ruled that appellants fail to qual-

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

class was granted, not denied. Moreover, no intervention was

ever attempted; 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.

A-9

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

guideline, “‘best effectuates the federal policy involved.’”

Id. at 413.9 In so ruling, this circuit joined the majority of

circuits, 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.

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

tolling. See section II(B) infra.

® 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.

A-10

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 admiralty law to cases like Chevron. Based

on Rodrigue, the district court in Chevron applied the

local one-year limitations period for personal injury suits

and, accordingly, dismissed 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-

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.” Jd. 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.

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

dent occurred, did he realize the serious nature of the injury.

A-l11

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 re-

lied upon it, that is, the law after the claim arose and dur-

ing 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

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 in-

terpretation of the Lands Act would be overturned. The

most he could do was rely on the law as it then was.” Jd.

at 107. In reciting the facts, the Court remarked, “[wJhen

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. Jd. 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 lim-

itations ruling with the law the plaintiff relied upon when

he contemplated filing suit. The court below thus erred in

A-12

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 circuit favored applica-

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

in this circuit reaffirmed the three-year fraud period as

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

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

{ 95,004 (D.C. Cir. 1975); National Realty Trust v.

Neelon Management Co., [1973 Transfer Binder] FED.

SEc. L. REP. (CCH) 4 94,049 (D.D.C. 1973); Conlon v.

University Computing Co., [1972-1973 Transfer Binder]

FED. SEc. L. REP. (CCH) § 93,796 (D.D.C. 1973).

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

limitations 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 securities actions. See Vanderboon v. Sexton, 422

F.2d 1233 (8th Cir. 1970); Batchelor v. Legg & Co., 52

F.R.D. 5383 (D. Md. 1971). On the other hand, forty-six

federal court decisions had applied the forum state’s gen-

eral fraud statute of limitations.11 These cases included

opinions from eight United States Circuit Courts of

Appeals. }?

11 See Brief for Appellants at 34 n.22.

12 F.g., Richardson v. MacArthur, 451 F.2d 35 (10th Cir.

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

1971); Douglass 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); Charney v. Thomas, 372 F.2d 97 (6th Cir. 1967);

Janigan v. Taylor, 344 F.2d 781 (1st Cir.), cert. denied, 382

U.S. 879 (1965); Stevens v. Abbott, Proctor & Paine, 288 F.

Supp. 836 (E.D. Va. 1968); Tobacco & Allied Stocks v. Trans-

america Corp., 143 F. Supp. 323 (D. Del. 1956).

A-13

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 lim-

itations 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 sec-

ond 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.!% This action is therefore

13 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 “[rJetroactivity is t:.. rule” is unavailing. In Zweibon, the

judicial ruling at issue—requiring a warrant for domestic na-

tional security wiretaps—did not overrule precedent. Nor was

the ruling unforeshadowed. 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, though perhaps

not inevitable.” Jd. at 1178 n.31. Hence, rather than adopt an

avulsive change in the law, or resolve a complex issue of first

impression, Zweibon merely extended existing law to domestic

national security situations. However, where, as here, a deci-

A-14

guided by the three-year statute of limitations for general

fraud. e

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 activity. This

court recently articulated the equitable tolling standard in

Fitzgerald 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

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.” Jd. 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),'5 question-

ing NSMC’s auditing procedures and reporting the com-

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

sion displaces the weight of precedent relied upon by the plain-

tiff, prospective, rather than retrospective, application must be

the rule.

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

15 J.A. at 712.

A-15

[Tjhese 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

implicated the accountant-defendants—but only in Feb-

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

hint of fraud available to appellants before February,

1270, was the publication of the Barron’s article, which

appeared on December 22, 1969. This article criticized

NSMC’s practices 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

accountant-defendants. Although the article questions the

nature of certain accounting procedures, it in no way inti-

mates that such procedures were fraudulent. As a matter

of law, we.believe that one article challenging the ac-

counting procedures of a reputable firm is insufficient to

impute knowledge of fraud to appellants. See Robertson v.

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

disseminated information doubting propriety of accounting

practices inconclusive regarding time that plaintiff pos-

sessed 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 Feb-

ruary, 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 Feb-

ruary, 1970. The statute of limitations against the ac-

A-16

countants 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 limitations 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-

defendants. But a more precise determination on the run-

ning of the limitations period against these defendants is

unnecessary. Insofar as the three-year statute of lim-

itations applies, and February, 1970, is the earliest possi-

ble time the attorney-defendants could have been impli-

cated, 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.

III. AVAILABILITY OF IMPLIED REMEDIES

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

16 It shall be unlawful for any person, directly or indi-

rectly, by the use of any means or instrumentality of

interstate commerce or of the mails, or of any facility

of any national securities exchange—

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

chase or sale of any security registered on a national

securities exchange 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 appropri-

A-17

corresponding SEC Rule 10b-5,'7 as well as under section

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

ate in the public interest or for the protection of in-

vestors.

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

17 Rule 10b-5, promulgated 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 indi-

rectly, by the use of any means or instrumentality of

interstate commerce, or of the mails or of any facility

of any national securities exchange,

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

fraud,

(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 cir-

cumstances under which they were made, not mis-

leading, or

ness which operates or would operate as a fraud or

deceit upon any person, in connection with the pur-

chase or sale of any security.

17 C.F.R. § 240.10b-5 (1979).

18 It shall be unlawful for any person in the offer or

sale of any securities by the use of any means or in-

struments of transportation or communication in in-

terstate commerce or by the use of the mails, directly

or indirectly—

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

defraud, or

(2) to obtain money or property by means of

any untrue 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

(3) to engage in any transaction, practice, or

course of business which operates or would op-

erate as a fraud or deceit upon the purchaser.

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

A-18

the express remedies set forth in those statutes.?9

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

Rule 106-5

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.?!

18 Because we decide that appellants may pursue a private

remedy under § 10(b) of the 1934 Act, and because their claims

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 1983 Act. That question has explicitly been left open by

the Supreme Court. See Aaron v. SEC, 100 S. Ct. 1945, 1951

(1980); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723,

733 n.6 (1975). The courts of apneals are in conflict on this issue,

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. denied, 442 U.S. 909 (1979) (recognizing

. implied remedy under § 17(a)); Daniel v. International Bhd. of

Teamsters, 561 F.2d 1228, 1245-46 (7th Cir. 1977), rev’d on

other grounds, 439 U.S. 551 (1979) (same); Newman 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).

20 See, e.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); Fratt 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., 480 U.S. 1, 25 (1977)

(“This Court has nonetheless held that in some circumstances a

A-19

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).

Longstanding judicial application of a court’s statutory in-

terpretation, the Supreme Court has said, when added to

the failure of Congress to reject its reasoning, “argues

significantly in favor of [its] acceptance.” Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 728, 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.22 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

plaintiff? Second, is there any indication of legislative

private cause of action.can be implied with respect to the 1934

Act’s antifraud provisions, even though the relevant provisions

are silent as to remedies.”); Hochfelder, 425 U.S. at 196 (“{T]Jhe

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. 728, 7380 (1975); Affiliated Ute

Citizens v. United States, 406 U.S. 128, 144-54 (1972); Super-

intendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6, 13

n.9 (1971) (“It is now well established that a private right of

action is implied under § 10(b).”).

22 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.

A-20

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).

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, Ine. 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

legislative maneuverings that so reshaped earlier drafts of

the statute at issue as to offer persuasive evidence that

Congress wanted no implied remedies added to what the

statute specifically provided.2* No such legislative history

disposes of the issue here.

23 See text following note 26 infra.

A-21

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

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.

Robinson, 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 en-

forcement because the Commission cannot do the job

alone. See Blue Chip Stamps, 421 U.S. at 730; J.J. Case

Co. v. Borak, 377 U.S. 426, 482-33 (1964); cf. Cannon, 441

U.S. at 708 n.42.24

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 area. 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

24 The fourth factor outlined in Cort—whether the case in-

volves matters traditionally of state or federal concern—is not

as relevant as the first three in an inquiry into congressional

intent. Nevertheless, 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 Con-

gress 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).

A-22

1972, 20 U.S.C. § 1681 (1976), even though the statute it-

self specified no such cause of action. Among the two

opinions recognizing an implied remedy and the two opin-

ions in dissent, there was indeed reconciliation and recon-

sideration of earlier precedents. But the Court reiterated

its adherence to earlier guidelines, in particular, the

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

the complaint voiced by Justice Powell in dissent, who ad-

vocated abandonment of the Cort approach. See 441 U.S.

at 749.25

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 statu-

tory provision worded very similarly to Rule 10b-5. The

Court relied there on two pieces of evidence weighing

against implication of a private remedy. First, the Act

nowhere provided for damage remedies, from which the

25 Even J"stice 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

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

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

26 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.

A-23

Court inferred that Congress had been unwilling to impose

any monetary liability in private suits under the Act. The

1933 and 1934 Acts do, of course, provide express damage

remedies, and the Court in Transamerica specifically dis-

tinguished them. See 444 U.S. at 20-21. Second, although

early drafts of the Investors Advisers Act had given fed-

eral courts jurisdiction over “all suits in equity and ac-

tions 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.??

It may be reasonable to infer from these recent pro-

nouncements that the Court is not favorably inclined to-

27 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., 480 U.S. 1 (1977). Both are distin-

guishable from this case. 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, “[mJost im-

portantly,” 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 Proce-

dure Act, 5 U.S.C. § 702 (1976). 441 U.S. at 317-18.

In Piper, the Court rejected the contention of defeated ten-

der 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 legisla-

tive history indicating that the sole purpose of the Williams Act

was the protection 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 objec-

tive by awarding damages “to the very party whose activities

Congress intended to curb.” Jd. at 39. Even if such damage

awards might contribute indirectly to shareholder protection,

A-24

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

reasonable to imply, as cross-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.”

the Court concluded that that objective could more directly be

realized by “other, less drastic means more closely tailored to

the precise congressional goal underlying the Williatas Act.” Jd.

at 40.

As made clear in our discussion accompanying notes 22-24

supra, the need for private remedies to supplement SEC en-

forcement of the 1984 Act and the absence of legislative history

indicating congressional disapproval of such remedies distin-

guish the case before us and § 10(b) from the statutory provi-

sions at issue in Brown and Piper.

A-25

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-

tory corroborates Congress’ intent, as noted above, that

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

vices.” 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.

BROMBERG, SECURITIES LAW: FRAUD § 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) (“[W]e read § 10(b) to

mean that Congress meant to bar deceptive devices and

contrivances in the purchase or sale of securities whether

conducted 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 re-

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

(1977); Leasco Data Processing Equipment Corp. v. Max-

well, 468 F.2d 1326, 1336 (2d Cir. 1972); Lawrence v.

SEC, 398 F.2d 276, 280 (1st Cir. 1968); Hooper v. Moun-

tain States Securities Corp., 282 F.2d 195, 201 (5th Cir.

1960), cert. denied, 365 U.S. 814 (1961); Fratt v. Robin-

son, 203 F.2d 627, 629-31 (9th Cir. 1953).

Moreover, overlap between the two statutes is neither

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

Inc., 393 U.S. 458, 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 regulation

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

A-26

two should be read together. See Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 206 (1976). There is no conflict

between 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 spe-

cific sections of the 1933 and 1934 Acts provide pertinent

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 rem-

edies are not really available to Wachovia. And the argu-

ment 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 na-

ture of the legislative process militates against each

enactment’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

implied 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 in-

tent [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

Touche Ross & Co. 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,

A-27

736 (1975).28 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, 433 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 lim-

itations on express remedies provided by § 11 and § 12(2) of

that Act).

29 The Supreme Court has never decided whether the exist-

ence 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 ad-

ditional remedy when express remedies are already provided is

not controlling in this case. In Redington, while the Court de-

clined to decide the issue, see 442 U.S. at 574, it did note the

existence of legislative history supporting a finding that the ex-

press remedies were intended to be exclusive. See id. at 573 &

n.15. No such evidence exists here.

30 In case any part of the registration statement,

when such part became effective, contained an untrue

statement of a material fact or omitted to state a ma-

terial 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 per-

son performing similar functions) or partner in

A-28

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.

the issuer 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 statemert 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 cer-

tified any part of the registration statement, or

as having prepared or certified any report or

valuation which is used in connection with the

registration statement, with respect to the

statement in such registration statement, re-

port, or valuation, which purports to have been

prepared or certified by him;

(5) every underwriter with respect to such se-

curity.

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 regis-

tration statement, then the right of recovery under

this subsection shall be conditioned on proof that such

person acquired the security relying upon such untrue

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).

~ as

A-29

Nothing in the remedy expressly provided by section 11

is inconsistent with an implied rig t 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

section 11 claims, and it accounts in part for the fact that

there are two separate sections dealing with related

problems. See Fischmar. 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 Re-

search 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), investors defrauded in a purchase of unregistered

securities are left less protected than investors suffering

losses as the result of typographical errors in a registra-

tion statement.

For the same reasons, implying a remedy under section

10(b) creates no danger of circumvention of section 12(2)

of the 1933 Act,*1 which deals with false prospectuses and

31 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 in-

struments of transportation or communication in

interstate commerce or of the mails, by means of

& 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 statements, in the light of the cir-

cumstances under which they were made, not

misleading (the purchaser not knowing of such

A-30

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

& 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®2 as providing an express remedy that precludes im-

untruth or omission), and who shall not sustain

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 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 such security with interest

thereon, less the amount of any income received

thereon, upon the tender of such security, or for dam-

ages if he no longer owns the security.

Section 12(2), 15 U.S.C. § 771(2) (1976).

32 Any person who shall make or cause to be made any

statement in any application, report, or document

filed pursuant to this chapter or any rule or regulation

thereunder or any undertaking contained in a regis-

tration statement as provided in subsection (d) of sec-

tion 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 ma-

terial 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

A-31

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 objec-

tive of encouraging use of and reliance upon records filed

with the S.E.C.” Ross, 607 F.2d at 556. Section 18 there-

fore requires that plaintiffs prove actual reliance on par-

ticular 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 ith and lack of knowledge of the

falsity. This distinction is noteworthy because, as the

court noted in Ross, “the ultimate outcome of the litiga-

sold a security at a price which was affected by such

statement, for damages caused by such reliance, un-

less 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 reason-

able costs, including reasonable attorneys’ fees,

against either party litigant.

Section 18(a), 15 U.S.C. § 78r<a) (1976).

A-32

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

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.**

83 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); Jor-

dan 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 see McFarland v. Memorex Corp., 493 F. Supp. 631,

655 (N.D. Cal. 1980).

A-33

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

adequately dispose of his claim, an implied remedy is ap-

propriate. *4

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-

tendants 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 1006.35

34 Even those few district courts holding that plaintiffs are

limited 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] Fep. Sec. L. Rep. (CCH)

{ 96,958 (E.D. Mich. 1979); Pearlstein v. Justice Mortgage In-

vestors, [Current] Fep. Sec. L. Rep. (CCH) 4 96,760 (N.D.

Tex. 1978); Berman v. Richford Indus., Inc., [1978] FED. SEC.

L. REP. (CCH) 4 96,518 (S.D.N.Y. 1978); Kulchok v. Govern-

ment Employees Ins. Co., [1977-1978] Fep. Sec. L. REP.

(CCH) 4 96,002 (D.D.C. 1977).

*5 Cross-appellants also mention the express private right of

action provided by § 15 of the 1988 Act, 15 U.S.C. § 770 (1976).

That section imposes secondary liability on the controlling per-

sons of NSMC, but no suit could have been maintained under

A-34

In contrast to the inapplicability of the express remedies

provided by the 1933 and 1934 Acts, an action under sec-

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.

Simplot, 49 U.S.L.W. 2056 (July 22, 1980). That case

arose out of the notorious Maine potato futures default.

The defendants 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.

§ 15 against cross-appellants, who are not controlling persons.

See Safeway Portland Employees’ Federal Credit Union v.

C.H. Wagner & Co., 501 F.2d 1120, 1124 & n.17 (9th Cir. 1974).

aie

Tee >

oy OT ie

A-35

When a principle has become settled through court

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

Workers, 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.

IV. CONCLUSION

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

A-36

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 wnder section 10(b).

Reversed and remanded.

B-1

WACHOVIA BANK AND TRUST CO.,

N.A., et al, Plaintiffs,

NATIONAL STUDENT MARKETING

CORP., et al., Defendants.

M.D.L. No. 105

Civ. A. No. 166-73

United States District Court,

District of Columbia.

Nov. 21, 1978.

Juan A. Del Real, Richard M. Phillips, Hill, Christopher &

Phillips, P.C., Washington, D.C., for plaintiffs.

Milton V. Freeman, Thomas D. Nurmi, Robert H. Winter,

Arnold & Porter, Washington, D.C., for defendants White &

Case and Marion Jay Epley, III.

William E. Hegarty, Mathias E. Mone, Harvey J. Golubock,

Joseph W. Muccia, Cahill, Gordon & Reindel, New York City,

for defendants Peat, Marwick, Mitchell & Co., Anthony M.

Natelli and Joseph Scansaroli.

MEMORANDUM OPINION

BARRINGTON D. PARKER, District Judge:

In this private federal securities laws litigation, filed by the

Wachovia Bank and Trust Company and other plaintiffs' (the

Wachovia plaintiffs), two questions are presented for the

Court’s resolution. First, do the plaintiffs have implied causes

1 This is one of several private lawsuits 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 Offshore Trust, and the

National Fire Insurance Company of Hartford. See note 7 infra.

hoe

B-2

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, 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 defen-

dants 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, affidavits

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 pleadings on the issue of implied causes of

action is denied. However, the Court agrees with the defen-

dants on the statute of limitations issue and concludes that the

federal claims asserted by plaintiffs are time-barred and the

remaining claims must be dismissed for lack of pendent jurisi-

diction.

INTRODUCTION

In late 1969 when the economic fortunes of the National

Student Marketing Corporation (NSMC) were most favorable

and the reports on its financial operations extremely optimis-

tic, the Wachovia plaintiffs purchased at a private placement

2 15 U.S.C. § 77q(a).

3 15 U.S.C. §§ 78j(b), 78m(a) and 78n(a).

4 The defendants also include Anthony M. Natelli and Joseph Scan-

saroli, members of Peat Marwick.

B-3

nearly five million dollars worth of that corporation’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 a Common Stock Purchase

Agreement and issued a legal opinion to plaintiffs. Peat

Marwick, the independent auditor of NSMC, certified the

annual financial statements and played a role in preparation of

interim financial reports and documents filed with the Securi-

ties and Exchange Commission (SEC).

In February of 1970, almost immediately following the

Wachovia transaction, NSMC’s fortunes suffered a sharp re-

versal 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. Randell, (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 Student Marketing Corp., (March 19, 1970). While

White & Case and Peat Marwick were not parties in either

Garber or Stuckey, the complaints outlined the alleged fraudu-

lent scheme and financial manipulation that underlie the Wa-

chovia complaint. A complaint was also filed in October 1971

5 The low bid price fell from 69/2 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.

6 Marion J. Epley, II, was first named as a defendant in the

Consolidated, Amended and Supplemental Complaint, Garber v. Ran-

dell, No. 70-835 (S.D.N.Y. June 2, 1972).

Taken together, the New York class action filings were complaints

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 Novem-

ber 29, 1973, following formal class certification and notice, the

Wachovia plaintiffs officially “opted out” of the class.

B-4

in the Southern District of Ohio, Monroe v. Peat, Marwick,

Mitchell & Co., alleging that: the accountants aided and abetted

others in misrepresenting Siudent Marketing’s financial condi-

tion.

In February 1972, the SEC filed an enforcement and injunc-

tive action against the major participants in the corporate

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 plain-

tiffs sought relief. On January 29, 1973, their original com-

plaint 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 plain-

tiffs’ purchase of NSMC common stock in 1969.* The com-

plaint 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 entered into a

letter agreement that the statute of limitations would be tolled

for two years from that date as to them.’ By its terms,

however, no claims could be asserted which were then barred

by any applicable provision of law.

7 SEC v. National Student Marketing Corp., 457 F.Supp. 682 (D.D.C.

1978).

8 The plaintiffs have since settled and dismissed their claims against

NSMC and various named defendants.

9 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 & Case and Mr.

B-5

It was not until May 28, 1975, that the Wachovia plaintiffs

amended their original complaint to include White & Case and

Epley as defendants. The amended complaint charges those

attorneys with various securities laws violations 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 plaintiffs

seek to amend the original complaint, largely to raise common

law fraud claims against Peat Marwick and the other remain-

ing original 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.

THE IMPLIED CAUSES OF ACTION ISSUE

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

defendants contend in substance that since certain provisions

of the securities laws expressly provide private remedies 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

Epley arising out of the purchase of NSMC securities . . . in

December, 1969. . . .

In any such litigation or suit brought by [the plaintiffs] after

termination or expiration of the tolling period, if White & Case and

Mr. Epley plead the statutue of limitations as to any claims by [the

plaintiffs], it is further understood that any period during which the

statute of limitations is tolled pursuant to this letter shall be

excluded from the computation of the running of the limitation

period. This letter shall not apply 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.

10 Plaintiffs’ claim under § 13(a) of the 1934 Act has been abandoned.

B-6 |

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 allegations 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 appropri-

ate 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.S. 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 Team-

sters, 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 & Quail, Inc., 561

F.2d 152, 159 (8th Cir. 1977), cert. denied, 434 U.S. 1086, 98

S.Ct. 1281, 55 L.Ed.2d 792 (1978). Rather, the defendants urge

that where an express remedy covers the conduct alleged,

judicial implication of « cause of action is not necessary to

effectuate the goals of the securities laws. See Santa Fe Indus-

tries, 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 presented since express remedies were avail-

able if the plaintiffs had chosen to use them.

B-7

Defendants contend that § 18(a) of the 1934 Act'' and

§ 12(2) of the 1933 Act'? provide remedies for the misstate-

ments and omissions alleged by plaintiffs. Specifically, they

assert that most, if not all, of the materially false and mislead-

ing statements are substantially contained in documents filed

with the SEC and are thus subject to the remedy provided by

Section 18(a), 15 U.S.C. § 78r, provides:

Any person who shall make or cause to be made any statement 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 <itle, 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 attorneys’ fees, against either

party litigant.

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 com-

merce or of the mails, by means of a prospectus or vral communica-

tion, which includes an untrue statement of a material 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 omis-

sion), and who shall not sustain 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 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 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.

fog Ss

B-8

§ 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 recov-

ery under § 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. 190, 195 (S.D.N.Y. 1977). The fact that statements

similar to those alleged by plaintiffs were also contained in

documents filed with the SEC is insufficient; absent reliance

upon the filing of the statements with the Commission, § 18(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 state-

ments 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 defendants 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

13 It 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.

B-9

(C.D.Cal.1976). While such a restriction is appropriate in a

negligence 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) provides

the plaintiffs with adequate remedies. If the Court were to

recognize defendants’ solution, the plaintiffs would be rele-

gated to state courts to pursue their claims based on common

law fraud. Such a suggestion needs little discussion. The

gravamen of plaintiffs’ complaint is that defendants Partici-

pated in a scheme to manipulate the national market for

NSMC stock through the broad dissemination of materially

false and misleading statements concerning NSMC. Such con-

duct is clearly a matter of federal, not state, concern. See 15

U.S.C. § 78b.'4

Since this is not a case where the allegations in the complaint

fall entirely within the scope of express provisions of the

securities laws,'* and since the allegations primarily concern a

14 Section 78b, 15 U.S.C., provides:

transactions in securities as commonly conducted upon securities

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

aoe ig

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. 453, 468, 89 S.Ct. 564, 573, 21 L.Ed.2d 668 (1969), especially

since recent developments have properly restricted such implied reme-

dies to the scope authorized by specific statutory provisions. See TSC

Industries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S.Ct. 2126, 48

L.Ed.2d 757 (1976) (materiality); Ernst & Ernst v. Hochfelder, 425

U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976) (scienter); Blue Chip

B-10

complex market manipulation rather than individual misstate-

ments or omissions, see Blackie v. Barrack, 524 F.2d 891, 907

(9th Cir. 1975), cert. denied, 429 U.S. 816, 97 S.Ct. 57, 50

L.Ed.2d 75 (1976), the Court concludes 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 plaintiffs’

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 resulting from a cor-

porate transaction whose approval was obtained by a mislead-

ing proxy statement. Jn re Penn Central Securities Litigation,

347 F.Supp. 1327, 1342 (E.D.Pa.1972), aff’d., 494 F.2d 528

(3rd Cir. 1974). In an attempt to meet the second part of the

test, the Wachovia plaintiffs allege that the stock they pur-

chased 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

Stamps v. Manor Drug Stores, 421 U.S. 723, 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 developed, would significantly burden an already

complex area of the law.

But see Kulchock v. Government Employees Insurance Co., [Trans-

fer Binder ’77-’78 Decisions] Fed.Sec.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 for same); appeal of this

dismissal Order withdrawn in light of final judgment and settlement,

C.A. No. 76-206 (D.D.C. July 28, 1978).

16 Since defendants’ motions are primarily directed to the distinction

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 has merit.

B-11

a claim under the second part of the test, the alleged stock

transaction must be part of the merger itself and not a

subsequent transaction. Therefore, plaintiffs have failed to

state a claim under § 14(a) and defendants’ motion to dismiss

claims 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). See 347 F.Supp. at

1342.

THE STATUTE OF LIMITATIONS ISSUE

A. Motion of White & Case and Epley

The District of Columbia Securities Act, the so-called “blue

sky law,” include

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