Court Opinion

ID: 9475579
Source: CourtListenerOpinion
Date Created: 2023-08-05 05:31:46.708149+00
Date Added: 2024-06-11T17:44:47.967215
License: Public Domain

MERRITT, Circuit Judge,
dissenting.
The issue here is whether the City of Covington as a “municipal” rather than a private “corporation” is responsible for fraud under Rule 10b-5 as an issuer of municipal bonds or is exempt from liability. I disagree with the holding of our Court and the three cited District Court cases that the 1934 Exchange Act1 definition of “person” — “ ‘person’ means a corporation” —does not include a “municipal corporation.” I disagree for four reasons that municipal corporations are exempt from liability for fraud: (1) The courts have uniformly interpreted similar phrases or definitions in the antitrust, bankruptcy, tax and numerous other fields to include municipal corporations. (2) The policy and purpose of the 1934 Act leads to the conclusion that municipal corporations are included. (3) The Securities and Exchange Commission, the agency which administers the 1934 Act, takes the position that municipal corporations are included. (4) Neither the legislative history of the 1934 Act nor the language of the 1933 Act noted by the Court suggest to me that the word “corporation” in the 1934 Act should be read to exclude a “municipal corporation.”
1. Precedent in Other Fields. — In the antitrust field, the Supreme Court long ago recognized in Chattanooga Foundry & Pipe Works v. City of Atlanta, 203 U.S. 390, 396, 27 S.Ct. 65, 66, 51 L.Ed. 241 (1906), that a municipality is a “person” within the meaning of section 8 of the Sherman Act. Section 8 has a definition similar to the 1934 Exchange Act: “The word ‘person’ or ‘persons,’ wherever used in this act shall be deemed to include corporations and associations existing under or authorized by the laws of either the United States, the laws of any of the Territories, the laws of any State, or the laws of any foreign country.” The Court held that the City of Atlanta could therefore maintain a treble damages action under section 7 of the Act, the precursor to section 4 of the Clayton Act, against the supplier from whom the city purchased water pipes for use in constructing a waterworks system.
In Georgia v. Evans, 316 U.S. 159, 62 S.Ct. 972, 86 L.Ed. 1346 (1942), the Court held that the “any person” language in section 7 of the Act included States, and thereby permitted the State of Georgia to bring an action in its own name charging injury from a combination to fix prices and suppress competition in the sale of asphalt which the State purchased annually for use in building public highways. The Court stated: “Nothing in the Act, its history, or its policy, could justify so restrictive a construction of the word ‘person’ in § 7 as to exclude a State.” 316 U.S. at 162, 62 S.Ct. at 974. The Supreme Court has also subjected cities to antitrust liability in City of Lafayette, Louisiana v. Louisiana Power & Light Co., 435 U.S. 389, 98 S.Ct. 1123, 55 L.Ed.2d 364 (1978); but cf. Town of Hallie v. City of Eau Claire, 471 U.S. 34, 105 S.Ct. 1713, 85 L.Ed.2d 24 (1985) (applying state action doctrine to exempt city from antitrust liability).
In the bankruptcy context, the Supreme Court held in Lincoln v. Ricketts, 297 U.S. 373, 56 S.Ct. 507, 80 L.Ed. 724 (1936), that a municipal corporation is a “corporation” and hence a “person” entitled to priority under former section 64b(7) of the Bankruptcy Act. The Lincoln court reasoned as follows with respect to the general definitional language of the Bankruptcy Act:
The words “having any of the powers and privileges of private corporations not possessed by individuals or partnerships” do not mean, as the context plainly shows, that those described must be “private corporations,” but that the term embraces those which have powers and privileges analogous to those of private corporations and not possessed by individuals or partnerships. Municipal corporations have such powers and privileges and thus fall within the definition of the terms “corporations” as used in the *1272Bankruptcy Act. Id. at 374-75, 56 S.Ct. at 308.
In the tax context, courts have reached a similar result when interpreting the phrase “person” under the Internal Revenue Code. In Hoye v. United States, 277 F.2d 116 (9th Cir.1960), the court held that under a Code provision pertaining to collection and defining the term “person” without making a distinction in its applicability to different classes of corporations, municipal corporations, such as the City of Los Angeles, were included. The Supreme Court had earlier held in Sims v. United States, 359 U.S. 108, 79 S.Ct. 641, 3 L.Ed.2d 667 (1959), that the same provision of the Code, which does not mention States in its definition of “person,” nevertheless should be read to include States within the meaning of “person” as used in that Code provision.
Under the federal Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 (1982), courts have held that the word “enterprise” under 18 U.S.C. § 1962 — a word similar to the word “corporation” — encompasses various state and local governmental entities. The term “enterprise” under 18 U.S.C. § 1962 has been read to include a county circuit court, United States v. Blackwood, 768 F.2d 131 (7th Cir.) (Timbers, J.), cert. denied, - U.S. -, 106 S.Ct. 569, 88 L.Ed.2d 554 (1985); a city police department, United States v. Kovic, 684 F.2d 512 (7th Cir.), cert. denied, 459 U.S. 972, 103 S.Ct. 304, 74 L.Ed.2d 284 (1982); a state district court, United States v. Qaoud, 777 F.2d 1105 (6th Cir.1985); a county sheriff’s office, United States v. Davis, 707 F.2d 880 (6th Cir.1983); a state governor’s office, United States v. Thompson, 685 F.2d 993 (6th Cir.) (en banc), cert. denied, 459 U.S. 1072, 103 S.Ct. 494, 74 L.Ed.2d 635 (1982), and United States v. Sisk, 476 F.Supp. 1061 (M.D.Tenn.1979), aff'd on other grounds, 629 F.2d 1174 (6th Cir.1980), cert. denied, 449 U.S. 1084, 101 S.Ct. 871, 66 L.Ed.2d 809 (1981); and a state bureau of cigarette and beverage taxes, United States v. Frumento, 563 F.2d 1083 (3rd Cir.1977), cert. denied, 434 U.S. 1072, 98 S.Ct. 1258, 55 L.Ed.2d 776 (1978).
2. The Purpose of the 1934 Act. — The Supreme Court has consistently held that the details of the securities laws must be construed in conformity with their dominant general purpose, and that, to the extent permitted by the text, they should be interpreted “so as to carry out in particular cases the generally expressed legislative policy.” See S.E.C. v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351, 64 S.Ct. 120, 123, 88 L.Ed. 88 (1943); accord Herman & MacLean v. Huddleston, 459 U.S. 375, 387 n. 23, 103 S.Ct. 683, 690 n. 23, 74 L.Ed.2d 548 (1983).
Legislative purpose is a particularly valuable guide to statutory construction when the statute is either silent on an issue, or when the situation was unforeseen at the time the act was passed. See 2A Singer, Sutherland Statutes and Statutory Construction, § 45.09 at 40 (4th ed. 1984 rev.). In this context, the 1934 Act is silent as to whether municipal corporations were intended to be included in the term corporation as used in Section 3(a)(9) of the 1934 Act.2 Moreover, as the Supreme Court has stated “[w]hen we deal with private actions under Rule 10b-5, we deal with a judicial oak which has grown from little more than a legislative acorn_ [I]t would be disingenuous to suggest that either Congress in 1934 or the Securities and Exchange Commission in 1942 foreordained the present state of the law with respect to Rule 10b-5.” Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737, 95 S.Ct. 1917, 1926, 44 L.Ed.2d 539 (1975).
It is therefore appropriate that we should look to the general purpose of the 1934 Act and specifically, the antifraud provision, when determining whether municipal corporations should be excluded from the term corporation in Section 3(a)(9) of the 1934 Act.
The 1934 Act and its companion legislative enactments3 were promulgated in an *1273attempt to combat the abuses in the financial markets which were believed to have contributed to the stock market crash of 1929 and the depression of the 1930s. See S.E.C. v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186, 84 S.Ct. 275, 279, 11 L.Ed.2d 237 (1963); H.Rep.No. 1383, 73d Cong., 2d Sess. 3 (1934); S.Rep. No. 792, 73d Cong., 2d Sess. 3 (1934).
The 1934 Act embraces a “fundamental purpose ... to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.” Affiliated Ute Citizens v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 1470, 31 L.Ed.2d 741 (1972), citing S.E.C. v. Capital Gains Research Bureau, Inc., 375 U.S. at 186, 84 S.Ct. at 279 (1963).
Congress stated that its purpose in enacting the 1934 Act was “to impose the requirements necessary to make [securities] regulation and control reasonably complete and effective.” 15 U.S.C. § 78(b) (1982). The antifraud provisions of Section 10(b) were an integral part of meeting that goal.
Section 10 of the 1934 Act makes it unlawful “for any person, directly or indirectly,” to “employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention” of any rule “the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j (1982). Rule 10b-5, promulgated by the Commission under this broad rulemaking authority, provides that, in connection with the purchase or sale of any security, it shall be “unlawful for any person, directly or indirectly” (1) “To employ any device, scheme or artifice to defraud,” (2) “To make any untrue statement of material fact” or to omit to state a material fact so that the statements made “in light of the circumstancés, are misleading,” and (3) “To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person.” Rules and Regulations under the Securities Exchange Act of 1934, 17 C.F.R. § 240.-10b-5 (1986); Affiliated Ute Citizens v. United States, 406 U.S. at 151, 92 S.Ct. at 1470 (1972).
The Supreme Court has repeatedly recognized that securities laws combating fraud should be construed “not technically and restrictively, ,but flexibly to effectuate [their] remedial purposes.” Herman & MacLean v. Huddleston, 459 U.S. at 386-87, 103 S.Ct. at 689, citing S.E.C. v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 284, 11 L.Ed.2d 237 (1963); accord Superintendent of Insurance v. Bankers Life and Casualty Co., 404 U.S. 6, 12, 92 S.Ct. 165, 168, 30 L.Ed.2d 128 (1971); Affiliated Ute Citizens v. United States, 406 U.S. at 128, 92 S.Ct. at 1456. Congress was clear that “disregard of trust relationships by those whom the law should regard as fiduciaries, are all a single seamless web.” Superintendent of Insurance v. Bankers Life and Casualty Co., 404 U.S. at 11-12, 92 S.Ct. at 168, citing H.R.Rep. No. 1383, 73d Cong., 2d Sess. 6 (1934). It is unlikely that Congress intended that an investor should be caught in this web, without a legal means of escape, merely because the corporate perpetrator of the fraud was also a municipality.
The antifraud proscriptions are “broad and ... are obviously meant to be inclusive.” Affiliated Ute Citizens v. United States, 406 U.S. at 151, 92 S.Ct. at 1470. To narrowly interpret the term “corporation” in Section 3(a)(9) to exclude municipal corporations, without clear legislative intent to do so, would undermine both the general purpose of the 1934 Act and the specific purpose of the antifraud provision.
3. The SEC Position. — It is the position of the SEC that issuers of municipal securities were always included in the definition of person in Section 3(a)(9) of the 1934 Act and thus subject to Section 10(b) and Rule 10b-5 liability and that the 1975 Amendments merely reiterated this fact. See In re New York City Municipal Securities Litigation, 507 F.Supp. 169, 183 n. 33 (S.D.N.Y.1980). Obviously, the position of the administrative agency charged with the administration of the Act is entitled to deference and should be followed unless there *1274are good reasons to the contrary. The principle of deference is even more significant when the legislation in question grants to the administrative agency, as does the 1934 Act, the authority to make “rules ... necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j (1982). The historical development of liability under the 1934 Act is based primarily on Rule 10b-5, a Commission Rule, and the Commission’s interpretation of its rules respecting liability are entitled to even more weight than is normally the case.
4. Language and Legislative History Not To The Contrary. — The majority opinion claims to be grounded on the language of the statute when it is only by virtue of missing language that this case arises. The Act defines “person” as a “corporation” without including the word “municipal.” Silence does not constitute language as a matter of law, but only by operation of the maxim expressio unius est exclusio alterius. See In Re Chicago, M., St. P. & Pac. R. Co., 658 F.2d 1149, 1158 (7th Cir.1981), cert. denied, 455 U.S. 1000, 102 S.Ct. 1632, 71 L.Ed.2d 867 (1982); 2A Singer, Sutherland Statutes and Statutory Construction § 47.25 at 209-10 (4th ed. 1984 rev.). Because it is not substantive law, courts may reject the maxim where appropriate. See In Re Chicago, M., St. P. & Pac. R. Co., 658 F.2d at 1158 (citing cases rejecting maxim).
I believe that the propriety of applying this maxim of construction to this case has already been disposed of by the Supreme Court’s opinion in Herman & MacLean v. Huddleston, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). In Huddleston, the Court specifically rejected application of ex-pressio unius est exclusio alterius where it would displace an action under § 10(b). Herman & MacLean v. Huddleston, 459 U.S. at 383 n. 23, 103 S.Ct. at 690 n. 23. In so doing, the Court reiterated its view that “such canons ‘long have been subordinated to the doctrine that courts will construe the details of an act in conformity with its dominating general purpose.’ ” Herman & MacLean v. Huddleston, 459 U.S. at 387 n. 23, 103 S.Ct. at 690 n. 23, quoting S.E.C. v. C.M. Joiner Leasing Corp., 320 U.S. 344, 350-51, 64 S.Ct. 120, 123, 88 L.Ed. 88 (1943). It is certainly contrary to the broad remedial purposes of the 1934 Act to hold that an entity engaging in the type of activity actionable under § 10(b) is nonetheless exempt from sanction simply because it was not specifically enumerated in the definitional section of the statute. As stated by the Supreme Court in Girouard v. United States, 328 U.S. 61, 69, 66 S.Ct. 826, 829, 90 L.Ed. 1084 (1946), “[i]t is at best treacherous to find in congressional silence alone the adoption of a controlling rule of law.” Accordingly, I do not believe that the failure to specifically enumerate municipal corporations in the definition of “person” can be dispositive of this issue.
In the alternative, the majority opinion uses the legislative history to the 1933 Act to argue that municipalities were given an exemption from the 1934 Act. This analysis is unpersuasive on several grounds. First, the 1933 Act history suggests only that the legislature perceived a constitutional problem with subjecting states to federal regulation under that Act. In retrospect, this concern was unfounded. See Parden v. Terminal Railway of the Alabama State Dock Dept., 377 U.S. 184, 84 S.Ct. 1207, 12 L.Ed.2d 233 (1964) (governmental entity waives immunity by participating in federally-regulated field); Garcia v. San Antonio Metro Transit Authority, 469 U.S. 528, 105 S.Ct. 1005, 83 L.Ed.2d 1016 (1985) (state interests protected from federal intrusion by political power, not judicial exemption). Where silence is the product of uncertainty, courts retain the power to interpret the law when the questionable issue is resolved. See Girouard v. United States, 328 U.S. at 69-70, 66 S.Ct. at 829-30 (reinterpretation of naturalization oath not barred where Congress failed to adopt explicitly earlier, now overrules cases). Therefore, we are not obliged to graft a constitutional misunderstanding onto the 1934 Act simply because it appears in the legislative history of an earlier statute, the 1933 Act.
Even if the legislative history of the 1933 Act were probative, this twice-removed ex*1275trinsic evidence is amply rebutted by extrinsic evidence from cases discussed above interpreting other acts and by the well-established purpose of the 1934 Act. The majority concludes that congressional silence in the 1933 Act definition of “person” specifically enumerated municipal corporations, showing that Congress knew how to draft an all-inclusive definition. Alternative explanations, however, are equally persuasive. For example, Congress may have intended the term “corporations” to include municipal corporations, and therefore specific reference was unnecessary. Extrinsic evidence provided by the statutes discussed above in which municipal corporations were included as “corporations” supports this view, and is more persuasive than an argument based on silence. Finally, it is contrary to the intent expressed in the 1934 Act to interpret the definitions of “person” in such a restrictive manner. Reading “corporations” to include municipal corporations is the only interpretation consistent with both the letter of the statute and its spirit.
Accordingly, I do not join in our Court's opinion that exalts Congressional silence over Congressional purpose. Furthermore, I do not find persuasive our Court’s almost total reliance on the reasoning of In re New York City Municipal Securities Litigation, 507 F.Supp. 169 (S.D.N.Y.1980), a district court case from the Southern District of New York that exempts New York City from allegations of massive bond fraud at a time when New York was teetering on the edge of bankruptcy.

. Securities Exchange Act of 1934, 15 U.S.C. 78a-78kk (1982).

. 15 U.S.C. § 78c(9) (1982).

. Securities Act of 1933, 15 U.S.C. § 77a-77aa (1982); Public Utility Holding Company Act of 1935, 15 U.S.C. § 79-79z-6 (1982); Trust Indenture Act of 1939, 15 U.S.C. § 77aaa-77bbbb (1982); Investment Company Act of 1940, 15 U.S.C. § 80a-l-80a-64 (1982).