Court Opinion

ID: 9465988
Source: CourtListenerOpinion
Date Created: 2023-08-05 01:02:14.931394+00
Date Added: 2024-06-11T17:39:29.039502
License: Public Domain

BUTZNER, Circuit Judge,
dissenting:
The principal issue in this appeal is whether investors have a right of action against their brokers for violation of the margin requirements of § 7 of the Securities Exchange Act of 1934 and Regulation T which was promulgated by the Board of Governors of the Federal Reserve System pursuant to that section.1 The district court held that such a right of action does not exist. I would reverse this ruling because I believe that Congress has impliedly authorized private suits of this type by investors who are not knowing participants in their brokers’ violations of the law. Much has been written on this subject, and Judge Russell’s scholarly opinion fairly surveys this literature. Consequently, the outline of my views can be brief.
*1098In determining whether a private remedy is implicit in a statute which does not expressly provide one, we must follow the principles explained in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975). The controversy in this case principally involves Cort’s first criterion: that is, whether the plaintiff is “one of the class for whose especial benefit the statute was enacted.” 422 U.S. at 78, 95 S.Ct. at 2088. I believe that there can be little doubt that in 1934 Congress intended § 7 to benefit investors who establish margin accounts. Although Congress primarily sought to regulate the use of credit for the public welfare, this was not the exclusive reason for enacting § 7. The legislative history discloses that another purpose was to afford protection to individual investors. Quite understandably in 1934, Congressmen did not use the same phrases found in the 1975 Cort opinion. Nevertheless, without speaking in terms of the “especial benefit” the statute afforded investors, Congress made clear its intention to protect this class.
In introducing the House bill, Representative Rayburn, Speaker of the House and Chairman of the House Committee on Interstate and Foreign Commerce, declared:
It [§ 7] deals with the all-important problem of credit control or margins. I have from the beginning considered this problem paramount. A reasonably high margin requirement is essential so that a person cannot get in the market on a shoe string one day and be one of the sheared lambs when he wakes up the next morning.2
Representative Sabath also stressed investor protection:
I am of the opinion that in view of the fact that we cannot, . . . prohibit speculation or gambling, that it is our duty to see that the investing public, or rather the “lambs”, be protected by this Government so that their investments shall not be wiped out even before the receipt of the stock certificates issued to them.3
Thomas Corcoran, testifying as a spokesman for those who drafted the Act, informed the Senate Committee that:
Of course, you have two purposes to serve when you are dealing with margins: One is to protect the lamb; another, and probably the more important of the two, although it does not appeal to one’s human instincts as completely, is the protection of the national business system from the fluctuations that are induced by fluctuations in the market, which in turn stem back to this very exquisite liquidity you get when you have a lot of borrowed money in the market.4
The Senate committee report accompanying the Act similarly demonstrated concern for individual investors:
By the development of the margin account, a great many people have been induced to embark upon speculative ventures in which they were doomed to certain loss.
The ease and celerity with which such a [margin] transaction is arranged, and the absence of any scrutiny by the broker of the personal credit of the borrower, encourage the purchase of securities by persons with insufficient resources to protect their accounts in the event of a decline in the value of the securities purchased. Many thoughtful persons have taken the view that the only way to correct the evils attendant upon stock market speculation is to abolish margin trading altogether. A Federal judge furnished this committee with instances from his long experience on the bench, indicating that a large proportion of the business failures, embezzlements and even suicides in recent years were directly attributable to *1099losses incurred in speculative transactions.5
Finally, a Senate committee report on stock exchange practices released ten days after the passage of the Act articulated the purposes of the margin regulations as follows: ■ •
The provisions are intended to protect the margin purchaser by making it impossible for him to buy securities on too thin a margin, and to vest the Government credit agency with power to reduce the aggregate amount of the Nation’s credit resources which can be directed by speculation into the stock market . .6
Thus, the legislative history of § 7 of the Securities Exchange Act of 1934 discloses a dual intent on the part of Congress to regulate credit and to protect investors.7 Apart from its concern about national credit resources, Congress intended to protect and benefit investors as a special class, distinct from the general public.
Influenced in part by the Act’s legislative history, courts generally held that § 7 impliedly created a private right of action.8 Courts differed, however, over whether to allow recovery to investors who knowingly participated in a violation of the margin laws.9 Congress ended this controversy when it enacted § 7(f) in 1970.10 This amendment makes it unlawful for an investor to violate the margin requirements established by the Federal Reserve Board. The amendment evidenced no intention to penalize innocent investors, and the Board, which is authorized to implement the statute, expressly exempts them.11
I therefore conclude that §§ 7(c) and 7(f), read together, satisfy Cort’s first test for determining whether innocent investors may sue their brokers for margin violations.
Cort next asks whether there is “any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one.” 422 U.S. at 78, 95 S.Ct. at 2088. I think the passage of § 7(f) in 1970 provides a fair indication of Congress’ implicit intention to recognize the legitimacy of private suits. By enacting § 7(f) Congress dealt with the obligation of investors to abide by margin restrictions against a background of case law that for nearly 20 years had established the right of investors to sue their brokers for violation of these restrictions. Nevertheless, Congress did not expressly proscribe private suits by innocent investors when it passed § 7(f). Nor does the legislative history of § 7(f) refer to any intention to prohibit an implied private cause of action on the part of investors. The inference that can be drawn justifiably from such action was recently illustrated in Cannon v. University of Chicago, —— U.S. -, 99 S.Ct. 1946, 60 L.Ed. 560 (U.S. May 14, 1979). That case raised the question of whether a private cause of action may be implied under Title IX of the Education *1100Amendments of 1972. Pointing to the similarity between Title IX and Title VI of the Civil Rights Act of 1964 and the well recognized implied private remedy under Title VI, Mr. Justice Stevens said:
It is always appropriate to assume that our elected representatives, like other citizens, know the law; in this case, because of their repeated references to Title VI and its modes of enforcement, we are especially justified in presuming both that those representatives were aware of the prior interpretation of Title VI and that that interpretation reflects their intent with respect to Title IX.12
Further indication of legislative intent to create a remedy on behalf of innocent investors may be found in § 29 of the Securities Exchange Act of 1934.13 Section 29(b) declares that contracts made in violation of the Act or a rule thereunder are void with respect to the rights of the violator. Section 29(c) specifically includes contracts for the extension of credit. Section 29(b) has been interpreted as making the contract voidable at the option of the innocent party. See Mills v. Electric Auto-Lite Co., 396 U.S. 375, 386-88, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970). A 1938 amendment to § 29(b) added a statute of limitations. The amendment refers to “any action maintained in reliance upon this subsection,” and thus makes it clear that Congress intended the original statute to be interpreted as providing a private remedy.14
Cort’s third inquiry is whether it is “consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff.” 422 U.S. at 78, 95 S.Ct. at 2088. In amici briefs, both the Board of Governors of the Federal Reserve System and the Securities and Exchange Commission, . the agencies primarily charged with regulation of the securities market and the nation’s resources of credit, have told us that private suits are necessary to effectuate the margin regulations. Without belaboring this point, it is sufficient to note that no sound reasons have been advanced for doubting this advice.
The appropriateness of allowing a private right of action is also illustrated by the Official Draft of' the Federal Securities Code, which was approved by the American Law Institute in 1978, subject to the authority of the Reporter to make editorial and technical changes. The eminence of its Reporter and the ability and experience of his advisors assure the Draft’s acceptance as informed commentary, although it has not yet been enacted into law. The Draft provides:
A lender or other person who violates a rule under section 918 limiting the amount of permissible credit is liable to the borrower for (1) the interest paid (including any amount charged by way of discount) and (2), in the court’s discretion on consideration of the circumstances (including the conduct of the parties and the amounts involved) and the purposes of this Code (including the deterrent effect of liability), an additional amount not in excess of (A) twice the interest paid or accrued (including any amount charged by way of discount) and (B) the difference between the borrower’s trading losses and any trading losses that he would have suffered in the absence of the violation.15
Sections 918(b) and (d) of the Draft, which track §§ 7(e) and (f) of the Act, make it unlawful for brokers to extend credit in contravention of the Board’s rules and for investors to obtain such credit. Section 1725(d) of the Draft subjects an investor’s *1101claim to the defense of in pari delicto.16 It is apparent, therefore, that the Draft recognizes the utility of private suits in the legislative scheme to regulate credit.17
Finally, Cort asks “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 action based solely on federal law?” 422 U.S. at 78, 95 S.Ct. at 2088. There is little controversy over this inquiry. Margin requirements are determined nationally. Thus, a federal cause of action does not intrude on an area traditionally reserved to the states.
Accordingly, I would reverse the district court’s holding that an investor, regardless of his innocence, has no private remedy against his broker for violations of § 7 and Regulation T.
I am less concerned about the second ground assigned by the majority for its affirmance of the district court. The evidence may ultimately show that Dr. Stern was not an innocent investor and therefore should not be allowed to recover on the merits of his claim. The district court, however, made no findings on this aspect of the case. Merrill Lynch contends that it did not violate the margin requirements. Consequently, I would remand these issues, which involve questions of fact, inferences, and credibility, to the district court.

. See Securities Exchange Act of 1934, ch. 404, § 7, 48 Stat. 886 (current version codified at 15 U.S.C. § 78g (1976); Regulation T, 12 C.F.R. § 220 (1978).
Section 7(c) of the Act, which makes it unlawful for a broker to extend credit in violation of the margin requirements, is set out in pertinent part in n.2 of the majority opinion.

. 78 Cong.Rec. 7700 (1934).

. 78 Cong.Rec. 8011 (1934).

. Stock Exchange Practices: Hearings on S.Res. 84, S.Res. 56 and S.Res. 97 Before the *1099Senate Committee on Banking and Currency, pt. 15, 73d Cong., 2d Sess. 6494 (1934).

. S.Rep.No. 792, 73d Cong., 2d Sess. 3, 6-7 (1934).

. S.Rep.No. 1455, 73d Cong., 2d Sess. 11 (1934).

. H.R.Rep.No. 1383, 73d Cong., 2d Sess. 7-9 (1934), quoted in the majority opinion at n.7, which identifies the main purpose of the margin provisions as regulation of the nation’s credit resources, does not negate other portions of the legislative history which reflect a dual purpose of credit regulation and protection of investors.

. See, e. g., Landry v. Hemphill, Noyes & Co., 473 F.2d 365 (1st Cir. 1973); Spoon v. Walston & Co., 478 F.2d 246 (6th Cir. 1973); Pearlstein v. Scudder & German, 429 F.2d 1136 (2d Cir. 1970).

. See generally 2 Loss, Securities Regulation 1263-65 (1961); 5 Loss, Securities Regulation 3299-3307 (1969).

. 15 U.S.C. § 78g(f) (1976). Section 7(f) is quoted in n.24 of the majority opinion.

. Regulation X, at 12 C.F.R. § 224.6(a) (1978), provides that:
An innocent mistake made in good faith by a borrower in connection with the obtaining of a credit shall not be deemed to be a violation of this part (Regulation X) if promptly after discovery of the mistake the borrower takes whatever action is practicable to remedy the noncompliance.

. - - U.S. at --, 99 S.Ct. at 1958.

. 15 U.S.C. § 78cc (1976).

. The fact that the appellant did not base his cause of action on § 29(b) does not detract from the significance of this section in assessing Cort's second criterion, that is, whether or not there is any indication of legislative intent to create or deny a private remedy. The parties, the Federal Reserve Board, and the Securities and Exchange Commission briefed the import of this section.

. ALI Fed.Sec.Code § 1716(a) (Mar. 1978 Draft).

. Section 1725(d) provides that:
In a private action created by or based on a violation of this Code (as defined in section 225), the defenses of unclean hands and in pari delicto are valid only to the extent (which may be complete) that it is so determined on consideration of (1) the deterrent effect of the particular type of liability, (2) the financial and legal sophistication of the parties, and (3) their relative responsibility for the loss incurred.

. See notes following § 1716 (Mar. 1978 Draft) and § 1414 (Tent. Draft No. 2, 1973) of the ALI Fed.Sec.Code. Although the Draft is a code and not a restatement, I believe that by recognizing private causes of action for margin violations, it makes explicit what Congress implicitly intended when it enacted § 7(c), as amended by § 7(f).