Court Opinion

ID: 9476451
Source: CourtListenerOpinion
Date Created: 2023-08-05 05:56:30.129135+00
Date Added: 2024-06-11T17:45:19.315035
License: Public Domain

TANG, Circuit Judge,
dissenting:
For thirty-eight years, the implied right of action under § 17(a) has helped protect the investing public from securities fraud and misrepresentation.1 It has come under increasing attack recently, and today it suffers a mortal blow. The majority persuasively presents the case for reversing the law of this circuit. Other courts have questioned the § 17(a) implied remedy because they sense a Supreme Court trend towards restricting the standards for implying private remedies. Because the majority’s decision is neither mandated by precedent nor consonant with the fundamental purposes of securities law, I respectfully dissent.
The implied right of action under § 17(a) comports with the mandate of recent Supreme Court cases. The Court set forth a four-part test for measuring the permissibility of implying a private right of action in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975). Section 17(a) clearly satisfies the first requirement. Bondholders and other members of the investing public are members “ ‘of the class for whose especial benefit the statute was enacted.’ ” Cort v. Ash, 422 U.S. at 78, 95 S.Ct. at 2088 (quoting Texas & Pacific R. Co. v. Rigsby, 241 U.S. 33, 39, 36 S.Ct. 482, 484, 60 L.Ed. 874 (1916)).
The purpose of the bill is to protect the investing public and honest business. The basic policy is that of informing the investor of the facts concerning securities to be offered for sale in interstate and foreign commerce and providing protection against fraud and misrepresentation.
S.Rep. No. 47, 73d Cong., 1st Sess. 1 (1933); 77 Cong.Rec. 2983 (May 8, 1933) (remarks of Sen. Fletcher).
The second factor, evidence of legislative intent “either to create such a remedy or deny one,” Cort v. Ash, 422 U.S. at 78, 95 S.Ct. at 2088, also weighs in favor of retaining the implied private remedy. The legislative history of the 1933 Act makes no mention whatsoever of civil liabilities under § 17(a).2 However, it is significant *1359that when Congress comprehensively amended federal securities laws in 1975, it left § 17(a) unchanged.
When Congress acts in a statutory context in which an implied remedy has already been recognized by the courts.... the question is whether Congress intended to preserve the pre-existing remedy.
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 378-79, 102 S.Ct. 1825, 1839, 72 L.Ed.2d 182 (1982). In 1975 the Seventh3 and Fourth4 Circuits and district courts in the Second, Third, Fourth, Fifth and Ninth Circuits5 recognized a private § 17(a) remedy.6 The fact that Congress left the statute unchanged evidences an intent to preserve the remedy.
The third Cort v. Ash factor, consistency with the “underlying purposes of the legislative scheme,” also favors the implied remedy. The underlying purpose of federal securities laws is to encourage private enforcement.
[W]e repeatedly have emphasized that implied private actions provide “a most effective weapon in the enforcement” of the securities laws and are “a necessary supplement to Commission action.” Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 310, 105 S.Ct. 2622, 2628, 86 L.Ed.2d 215 (1985) (quoting J.I. Case Co. v. Borak, 377 U.S. 426, 432, 84 5.Ct. 1555, 1560, 12 L.Ed.2d 423 (1964)).
I disagree that the § 17(a) private remedy makes §§ 11 & 12 “entirely superfluous.” The latter sections carry an inference of liability and shift the burden of proof to the defendant. Under § 17(a) the burden of proof remains on the plaintiff. Furthermore, “[t]he fact that other provisions of a complex statutory scheme create express remedies has not been accepted as a sufficient reason for refusing to imply an otherwise appropriate remedy under a separate section.” Cannon v. University of Chicago, 441 U.S. 677, 711, 99 S.Ct. 1946, 1965, 60 L.Ed.2d 560 (1979); but cf. Touche Ross & Co. v. Redington, 442 U.S. 560, 571, 99 S.Ct. 2479, 2486, 61 L.Ed.2d 82 (1979) (presence of explicit provisions will provide “further justification” for refusing to imply a remedy). The Seventy-Third Congress adopted both the 1933 and 1934 Acts. The Acts contain overlap and duplication which courts have tolerated.7 In the *1360overall statutory scheme, the overlap between a private remedy under § 17(a) and §§ 11 & 12 is hardly unusual or significant. It is significant, however, that § 10(b) and Rule 10b-5 contain almost identical language to § 17(a). That there is a private right of action under § 10(b) and Rule 10b-5 is “simply beyond peradventure.” Herman & MacLean v. Huddleston, 459 U.S. 375, 380, 103 S.Ct. 683, 686, 74 L.Ed.2d 548 (1983).
The majority argues that when this court implied a remedy in § 17(a) by reason of its similarity to § 10(b)8 it was “embarking on a course fraught with danger” because scienter may not be an element of a private action under § 17(a)(2) & (3). See Aaron v. SEC, 446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980). When purchasing securities, the investing public entrusts its hard-earned money to corporate officials. Investors usually lack a sophisticated understanding of investment products and must rely on the assurances and expertise of these officials. Congress reasonably could have chosen to hold securities sellers to a fiduciary standard of care. That these officials might be held to a mere negligence standard in a private action under § 17(a)(2) & (3) causes me little concern. Nevertheless, if the evil is the negligence standard then we should adjust the standard of care, not eliminate the remedy.
The final Cort v. Ash requirement is whether the implied remedy is “traditionally relegated to state law_” Cort v. Ash, 422 U.S. at 78, 95 S.Ct. at 2088. Regulation of misconduct in the securities field is not a peculiar concern of the states. Cf. Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 35, 100 S.Ct. 242, 255, 62 L.Ed.2d 146 (1979).
The Ninth Circuit has definitively held that a private cause of action exists under § 17(a). Mosher v. Kane, 784 F.2d 1385, 1391-92 n. 9 (9th Cir.1986); Stephenson v. Calpine Conifers II, Ltd., 652 F.2d 808, 815 (9th Cir.1981). I agree with the court in Mosher that recognizing an implied right of action is “the better view.” 784 F.2d at 1391-92 n. 9. Stephenson and Mosher are
consistent with Congress’ intent, repeatedly recognized by the Court, that securities legislation enacted for the purpose of avoiding frauds be construed “not technically and restrictively, but flexibly to effectuate its remedial purposes.”
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 217, 96 S.Ct. 1375, 1392, 47 L.Ed.2d 668 (1976) (Blackmun, J., dissenting); see also Huddleston, 459 U.S. at 386-87, 103 S.Ct. at 689-90; Affiliated Ute Citizens v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 1471, 31 L.Ed.2d 741 (1972); Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6, 12, 92 S.Ct. 165, 169, 30 L.Ed.2d 128 (1971).
The Supreme Court has expressly reserved this issue four times in the last twelve years.9 That the Court has failed to resolve it, manifests that the question is much closer than the majority makes it seem. The Court recently reaffirmed the private right of action under § 10(b) and Rule 10b-5. Huddleston, 459 U.S. 375, 103 S.Ct. at 683. We are prematurely, and perhaps even incorrectly, anticipating the ruling of the Court.
Today’s decision invokes in me the reaction expressed by Justice Blackmun in his dissent in Blue Chips Stamps, the decision that restricted § 10(b) and Rule 10b-5 actions to actual purchasers and sellers of securities:
In doing so, the Court exhibits a preternatural solicitousness for corporate well-being and a seeming callousness toward the investing public quite out of keeping, it seems to me, with our own traditions and the intent of the securities laws.
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 762, 95 S.Ct. 1917, 1938, 44 *1361L.Ed.2d 539 (1975) (Blackmun, J., dissenting).
Perhaps, as commentators suggest, the trend is toward restricting the anti-fraud protections in federal securities law.10 Today, the 9th Circuit rushes to the forefront. The majority opinion brings an end to the § 17(a) implied private remedy in this circuit. I prefer to adhere to stare decisis and pay my respects to a worthy doctrine at this hour of its- premature demise.

. The private right of action was first recognized in Osborne v. Mallory, 86 F.Supp. 869 (S.D.N.Y.1949).

. The Civil Liabilities section of the House Committee Report neither explicitly nor implicitly says that Congress intended §§ 11 & 12 to be the exclusive private remedies under the Act. The legislative history quoted in the majority opinion cautioning against the "imposition of 'greater responsibility’" is taken out of context and inapposite. The paragraph discusses the burden shifting requirements of §§ 11 & 12:
The provisions throwing upon the defendant in suits under sections 11 and 12 the burden of proof to exempt himself are indispensable to make the buyer's remedies under these sections practically effective. Every lawyer knows that with all the facts in the control of the defendant it is practically impossible for a buyer to prove a state of knowledge or a failure to exercise due care on the part of the defendant. Unless responsibility is to involve merely paper liability it is necessary to throw the burden of disproving re*1359sponsibility for reprehensible acts of omission or commission on those who purport to issue statements for the public’s reliance. The responsibility imposed is no more nor less than that of a trust. It is a responsibility that no honest banker and no honest business man should seek to avoid or fear. To impose a lesser responsibility would nullify the purposes of this legislation. To impose a greater responsibility, apart from constitutional doubts, would unnecessarily restrain the conscientious administration of honest business with no compensating advantage to the public.
H.R.Rep. No. 85, 73d Cong., 1st Sess. 9 (1933). Unlike §§11 & 12, § 17 does not shift the burden of proof. In this respect, it imposes a lesser standard of responsibility.

. Schaefer v. First National Bank of Lincolnwood, 509 F.2d 1287, 1293 (7th Cir.1975), cert. denied, 425 U.S. 943, 96 S.Ct. 1682, 48 L.Ed.2d 186 (1976).

. Johns Hopkins University v. Hutton, 488 F.2d 912 (4th Cir.1973), cert. denied, 416 U.S. 916, 94 S.Ct. 1622, 40 L.Ed.2d 118 (1974).

. See, e.g., Dack v. Shanman, 227 F.Supp. 26, 28-29 (S.D.N.Y.1964); Pfeffer v. Cressaty, 223 F.Supp. 756, 757 (S.D.N.Y.1963); Thiele v. Shields, 131 F.Supp. 416, 419 (S.D.N.Y.1955); Wulc v. Gulf & Western Ind., 400 F.Supp. 99 (E.D.Pa.1975); Crowell v. Pittsburgh and Lake Erie R. Co., 373 F.Supp. 1303, 1310-11 (E.D. 1974); Dorfman v. First Boston Corp., 336 F.Supp. 1089, 1093-96 (E.D.Pa.1972); Corey v. Bache & Co., 355 F.Supp. 1123 (S.D.W.Va.1973) (by implication); Larson v. Tony’s Investments, Inc., 46 F.R.D. 612 (M.D.Ala.1969) (by implication); Hecht v. Harris, Upham & Co., 283 F.Supp. 417, 422 (N.D.Cal.1968), modified, 430 F.2d 1202 (9th Cir.1970).

. As the majority opinion notes, there was a minority view. Curran does not require an "overwhelming majority” for us to give weight to Congressional inaction.

. Much of the information required to be filed by § 12 of the 1934 Act was already required by §§ 6 & 7 of the 1933 Act. Both § 10 of the 1934 Act and § 17 of the 1933 Act prohibit fraudulent conduct. “While some conduct actionable under § 11 may also be actionable under § 10(b), it is hardly a novel proposition that the 1934 Act and the 1933 Act 'prohibit some of the same conduct.’" Herman & MacLean v. Huddleston, 459 U.S. 375, 383, 103 S.Ct. 683, 687, 74 L.Ed.2d 548 (1983) (quoting United States v. Naftalin, 441 U.S. 768, 778, 99 S.Ct. 2077, 2084, 60 L.Ed.2d 624 (1979).

. Stephenson v. Calpine Conifers II, Ltd., 652 F.2d 808, 815 (9th Cir.1981).

. Bateman Eichler, 472 U.S. at 304 n. 9, 105 S.Ct. at 2625 n. 9; Huddleston, 459 U.S. at 378 n. 2, 103 S.Ct. at 685 n. 2; International Bhd. of Teamsters v. Daniel, 439 U.S. 551, 557 n. 9, 99 S.Ct. 790, 795 n. 9, 58 L.Ed.2d 808 (1979); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 733-34 n. 6, 95 S.Ct. 1917, 1924 n. 6, 44 L.Ed.2d 539 (1975).

. See, e.g., Steinberg, Section 17(a) of the Securities Act of 1933 After Naftalin and Redington, 68 Geo.L.Rev. 163, 163-65 (1979).