decided: April 21, 1978.
EDWARD S. REDINGTON, AS TRUSTEE FOR THE LIQUIDATION OF THE BUSINESS OF WEIS SECURITIES, INC., AND SECURITIES INVESTOR PROTECTION CORPORATION, PLAINTIFFS-APPELLANTS, -
- TOUCHE ROSS & CO., DEFENDANT-APPELLEE.
Appeal from order of the Southern District of New York dismissing complaint. Inzer B. Wyatt, J., ruled that neither SIPC nor broker's trustee in liquidation could maintain suit against accountant under section 17 of the Securities Exchange Act. Reversed as to both plaintiffs and remanded.
Before Lumbard, Mulligan and Timbers, Circuit Judges.
In this appeal, rising out of the insolvency and liquidation of the brokerage firm of Weis Securities, Inc. ("Weis"), we are presented with the question whether a private cause of action exists under section 17 of the Securities Exchange Act of 1934*fn1 against accountants who prepare misleading statements of a broker's financial affairs, and if so, who may maintain such an action.
The district court dismissed the claims herein of the Securities Investor Protection Corp. ("SIPC")*fn2 and of Edward S. Redington, Weis' Trustee in Liquidation ("Trustee"), believing that no claim for relief was stated because no cause of action could be implied from section 17.*fn3 Redington v. Touche Ross & Co., 428 F. Supp. 483 (S.D.N.Y.1977). We conclude that customers of a broker have a right of action against an accountant whose audits of the brokerage firm are false or misleading. Because we believe that SIPC and the Trustee are appropriate parties to seek (between them) total recovery of the customers' damages, we reverse and remand.
Touche Ross & Co. ("Touche Ross") served as Weis' independent certified public accounting firm from 1969 to 1973. In that capacity, Touche Ross prepared annual audits of Weis' affairs as required by section 17 and regulations thereunder.
The complaint herein alleged that during fiscal 1972, certain of Weis' officers conceived and executed a scheme to conceal from the regulatory authorities and the public Weis' dire financial condition.*fn4 The elements of this scheme appear in great detail in the complaint; for example, although Weis had suffered a loss for fiscal 1972 of greater than $1.5 million, its pre-tax earnings for that year were stated as being around $1.7 million.
When Weis' fiscal 1972 ended on May 26, 1972, Touche Ross proceeded to prepare and certify Weis' financial statements, and to answer the financial questionnaire required by the New York Stock Exchange of its member firms. In four opinion letters, dated July 7, July 7, July 21 and July 21 (all of 1972), Touche Ross represented that it had examined (i) the statement of Weis' current financial condition; (ii) Weis' answers to the financial questionnaire; (iii) Weis' consolidated balance sheet for the past year; and (iv) Weis' consolidated statement of earnings for the past five years, and found that each presented fairly and accurately the financial picture of Weis, in conformity with generally accepted accounting procedures.
In fact, Weis' financial condition was not as stated in the above four documents, but was far more precarious. As no steps were taken to attempt to remedy Weis' situation, it continued to deteriorate.*fn5 On May 24, 1973, the SEC sought an injunction preventing Weis and its officers from continuing to violate the "34 Act, and SIPC applied for a decree, pursuant to 15 U.S.C. § 78eee(a)(2), adjudging Weis' customers in need of protection under SIPA. Accordingly, Weis' liquidation was ordered by (then) District Judge Gurfein on May 30, 1973, and Edward Redington was appointed Trustee for the liquidation.
SIPC and the Trustee jointly began an action against Touche Ross in New York state court on July 3, 1975. Redington v. Touche Ross & Co., No. 1399 6/76 (Sup.Ct.N.Y.County). The common allegations of the plaintiffs in the state court complaint were the same as those in the instant case, except that three paragraphs dealing with claims under section 17 of the "34 Act were omitted. Five of the Trustee's six present "causes of action" appear in identical form in the state action, as do four of SIPC's eight present claims. The additional claims in this action are the federal securities law claims.
The instant suit was commenced on April 30, 1976. Under federal law and state common law, SIPC seeks to recover $14 million, either as subrogee of Weis' customers whose claims it has paid under SIPA, or as a member of the group directly injured by Touche Ross' delicts. Likewise under federal law and state common law, the Trustee is claiming $51 million; he contends that he may recover either by standing in the shoes of Weis' customers, since under SIPA, his is the responsibility to marshal and return their property,*fn6 or by standing in the shoes of Weis itself, since, he alleges, Weis as an entity distinct from its conniving officers was directly damaged by Touche Ross' unsatisfactory audit.
SIPC and the Trustee appeal from Judge Wyatt's order dismissing the complaint for failure to state a claim on which relief could be granted (with respect to the section 17 counts). Touche Ross asks us, in the event we reverse, to stay the federal action in favor of the state court suit.*fn7 This last issue, evidently, is one which Judge Wyatt has never had cause to consider.
The first question we address is whether customers of a brokerage firm are given any remedy by the "34 Act against accountants whose section 17 reports are false or misleading. There are two major considerations involved in this decision: the criteria laid down by the Supreme Court in Cort v. Ash, 422 U.S. 66, 95 S. Ct. 2080, 45 L. Ed. 2d 26 (1975), for finding an implied right of action in a statute which is silent on the issue; and the "purchase or sale" requirement reaffirmed by the Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975).
One preliminary matter must be dealt with. Judge Wyatt held that section 17 "was designed to supply administrative guidance in the bookkeeping area and not to create rights in anybody," and that it "does not impose any duty on accountants." 428 F. Supp. at 489, 491. We believe that, even if no right of action were implied, to see nothing but "administrative guidance" in a provision as crucial to the regulation of brokers as section 17 is to take far too narrow a view of the statute. Certified public accountants play a significant role in the scheme created by the "34 Act for the regulation of securities trading, as is recognized by the regulations promulgated by the SEC.*fn8 See, e. g., 17 C.F.R. § 240.17a-5(b), (f), (g), (h), (i), (m). It is well established that section 10(b) of the "34 Act and rule 10b-5 thereunder impose a duty on accountants, for breach of which they may be sued. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976). We hold that section 17 of the "34 Act likewise imposes a duty on accountants.
The factors cited in Cort v. Ash, supra, 422 U.S. at 78, 95 S. Ct. 2080, familiar through much repetition, which bear on the propriety of finding an implied right of action in a statute are:
1) Whether plaintiffs belong to the class for whose special benefit the statute was enacted;
2) Whether there is any indication of legislative intent on the issue;
3) Whether implication of a right of action is consistent with the policies behind the legislative scheme; and
4) Whether the cause of action in question is one traditionally relegated to state law.
A consideration of these four factors convinces us that implication of a right of action in favor of Weis' customers is appropriate.
1. The language of section 17, the SEC rules in the 17a-5 series, and an analysis of the role played by accountants' reports in the regulation of brokers make clear the extent to which Weis' customers are members of a class peculiarly protected by section 17.
The documents and reports that the SEC is empowered to require of brokers must be "necessary or appropriate in the public interest Or for the protection of investors." 15 U.S.C. § 78q(a) (emphasis added). The same is true of the examinations that the SEC is empowered to conduct. Id.*fn9
In order to provide a complete and accurate picture of a broker's financial condition, the SEC requires that the broker enlist an independent accountant to audit and certify its statements, list any matters to which the accountant takes exception, and provide certain additional financial data. Rule 17a-5(b), (i), (k). Furthermore, a notice of any "material inadequacies" found by the accountant in the broker's procedures must be sent to the broker's customers. Rule 17a-5(m)(3).*fn10
The function of this arsenal of financial reports is to protect the broker's customers. One of the main methods adopted by the SEC to shield customers is the net capital rule, in either the form promulgated by the SEC, rule 15c3-1, or the stricter version enforced by the New York Stock Exchange, Exchange Rule 325.
The net capital rule is a requirement that a broker maintain a certain minimum ratio of liquid assets to aggregate indebtedness; its "principal purpose . . . is to require that the capital position of a broker . . . will always be sufficiently liquid to cover his current indebtedness, in order to be able at all times to promptly meet (sic) the demands of customers." Exchange Act Release No. 8024, 6 Fed.Sec.L.Rep. (CCH) P 72,129 (1967). As amended in order to take into account the creation of SIPC, the rule serves particularly to "protect customers prior to the time when the broker's . . . assets would be sufficient to satisfy customers in the event of liquidation." Exchange Act Release No. 11,497, (1975-76 Transfer Binder) Fed.Sec.L.Rep. (CCH) P 80,212.
It is the reporting system created by section 17 that provides the SEC and other regulatory authorities with the information needed to enforce the net capital rule. Thus, a failure to supply accurate reports will leave the customers without protection until the broker's insolvency can no longer be concealed, and liquidation follows.
2. We find no indication, either in the statute itself or in its legislative history, of any congressional intent either to create a private remedy under section 17 or to deny one.*fn11
The legislative history of the section is mute on the issue, leading to the conclusion that Congress never Explicitly considered the question. Nor can it be said that Congress Implicitly chose to deny a private right of action; section 17 is distinctly different in an important respect from statutes as to which such implicit intent has been found.
In SIPC v. Barbour, 421 U.S. 412, 95 S. Ct. 1733, 44 L. Ed. 2d 263 (1975), the Supreme Court noted that SIPA manifested a specific legislative intent to restrict enforcement to the SEC. Id. at 420, 425. In National Railroad Passenger Corp. v. National Association of Railroad Passengers, 414 U.S. 453, 458, 94 S. Ct. 690, 38 L. Ed. 2d 646 (1974), a similar exclusivity was found to rest with the Attorney General; in Cort v. Ash itself, Supra, 422 U.S. at 74-76, 95 S. Ct. 2080, the Federal Election Commission was held to be the agency charged with exclusive enforcement.
We have recently indicated that an intent to commit enforcement of the securities statutes exclusively to the SEC will not readily be implied. Abrahamson v. Fleschner, 568 F.2d 862, 874 n. 19 (2d Cir. 1977). Nothing in section 17 induces us to treat it as an exception to this rule.
3. "Absent specific statements of legislative intent, we must examine the legislative purposes underlying the Act." Abrahamson v. Fleschner, supra, 568 F.2d at 874, conclude that a private right of action under section 17 is consistent with those purposes.
A partial list of the many sections of the securities acts under which private remedies have been implied appears in Franklin National Bank v. L. B. Meadows & Co., 318 F. Supp. 1339, 1341-42 (E.D.N.Y.1970). See III L. Loss, Securities Regulation 1785 (2d ed. 1961). At least since J. I. Case Co. v. Borak, 377 U.S. 426, 84 S. Ct. 1555, 12 L. Ed. 2d 423 (1964) (section 14(a)), it has been accepted in securities law that when a statutory provision imposes a duty on someone in favor of a class of protected persons, those persons may sue for the "statutory tort' committed when the duty is breached.
We have held that section 17 imposes a duty on accountants in favor of brokers' customers. We note that just as in Borak the SEC was not meant to, and does not have the resources to examine and audit all the documents that it receives (in Borak, proxy statements; here, section 17 reports).*fn12 Both it and SIPC, as well as the broker's customers, must rely on the certification by the accountants.
Neither SEC injunctive actions nor criminal prosecutions will restore to customers the money they have lost. Indeed, the cases cited by Judge Wyatt in support of the proposition that there exists injunctive and criminal relief for violations of section 17 do not involve accountants. See 428 F. Supp. at 490, and cases cited. Accordingly, we rule that a private remedy is an essential supplement to the scheme of enforcement of section 17.
4. Finally, it is evident that just as the problems caused by insolvent brokers are national in scope, so must be the standards governing their reporting. Section 17 is part of a statute as to which federal courts have exclusive jurisdiction; state law protection of brokers' customers varies widely. There is no reason to believe that the remedy sought herein is one traditionally relegated to state law.
The court below found a particularly high barrier to plaintiffs in section 18 and the judicially created purchaser-seller doctrine. 428 F. Supp. at 489-90. Section 18 creates private remedy for "misleading statements" in "any application, report, or document filed pursuant to this chapter," in favor of "any person . . . who . . . shall have purchased or sold a security at a price which was affected by such statement . . . ." 15 U.S.C. § 78r.
Applying this language, and the holding of Blue Chip Stamps, supra, 421 U.S. at 736, 95 S. Ct. 1917, Judge Wyatt ruled that the remedy provided by section 18 was exclusive, and that thus no remedy existed for brokers' customers injured as a result of an accountant's misleading statements, absent a purchase or sale of an affected security. We disagree.
Since any misstatement in a section 17 report would not affect the price of the shares of the various issuers in the hands of a broker's customers, a strict application of section 18's limiting language would leave customers without any remedy whatsoever, no matter how egregious the fraud or how grievous their loss. Yet it is plain that brokers' customers are favored wards of section 17. We cannot agree that Congress simultaneously sought to protect a class and deprived the class of the means of protection.
Our holding is not inconsistent with either the purchaser-seller limitation or section 18, which will continue to apply to all investors in market securities who seek relief Qua investors. That is, the Blue Chip doctrine would bar a suit by an investor who claimed to have been induced Not to purchase or sell by a misstatement. We do not believe, however, that the doctrine applies to brokers' customers, protection of whom is wholly independent of protection of investors per se.
In light of the foregoing analysis, we decide that brokers' customers have a right of action against accountants for certifications that violate the standard set by section 17 and rule 17a-5. This does not, however, resolve the question whether the plaintiffs in the instant case, SIPC and the Trustee, are proper parties to bring the action.
SIPC asserts a right to bring this action both in its own right and as subrogee of the customers whose claims it has paid. We hold that SIPC may maintain the action as subrogee.*fn13
SIPA provides expressly that SIPC, upon reimbursing a customer's losses, shall be subrogated to that customer's claims against the debtor's (here Weis') estate. 15 U.S.C. § 78fff(f)(1). Touche Ross contends that SIPC's statutory right of subrogation against the debtor's estate is its exclusive remedy, precluding any rights against third parties such as Touche Ross. We disagree.
Section 78fff is a detailed blueprint for the distribution of the liquidated debtor's estate, and it is to be expected that SIPC's rights against the estate would be included in that section. However, there is no reason to believe that this was meant to destroy SIPC's general common-law right of equitable subrogation.
(T)he general rule is that upon payment of a loss the insurer is entitled to be subrogated pro tanto to any right of action which the insured may have against a third person whose negligence or wrongful act caused the loss.
31 N.Y.Jur., Insurance § 1620, at 510. See Ackerman v. Motor Vehicle Accident Indemnification Corp., 18 A.D.2d 307, 239 N.Y.S.2d 463 (1st Dept. 1963) (explicit statutory provision did not destroy MVAIC's broader common-law right to subrogation).
Moreover, we believe that it is more in keeping with the intent of Congress that wrongdoers not receive a windfall benefit from the existence of SIPC, and that SIPC be able to recoup its losses from solvent wrongdoers. Accordingly, we find that SIPC is subrogated to the right of action implied in section 17 in favor of brokers' customers against third parties such as accountants. See SEC v. Albert Maguire Securities Co., (Current) Fed.Sec.L.Rep. (CCH) P 96,129, at 92,076 (3d Cir. July 27, 1977).
The Trustee contends that he is a proper plaintiff herein, both as the representative of Weis' estate and as bailee of Weis' customers' property. We hold that he may maintain this action on behalf of such customers as have not been fully reimbursed by SIPC.
The barriers to a right of action on Weis' behalf are insurmountable. It is apparent that brokers, such as Weis, were not included in the class of those Protected by section 17; indeed, brokers are the very entities Regulated by section 17.
Two recent cases in point are Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 97 S. Ct. 926, 51 L. Ed. 2d 124 (1977), and Lank v. New York Stock Exchange, 548 F.2d 61 (2d Cir. 1977). In each, a member of the class sought to be regulated by Congress attempted to claim the benefit of an implied right of action under the very statute that regulated it. Chris-Craft held that a defeated tender offeror could not enforce the Williams Act, 15 U.S.C. § 78O (e), against a successful tender offeror, because "a party whose . . . conduct was purposefully brought under federal control by the statute . . . can scarcely lay claim to the status of "beneficiary' whom Congress considered in need of protection." 430 U.S. at 37, 97 S. Ct. at 947.
In Lank, we decided, in a case not unlike the instant case, that the receiver of a liquidated brokerage firm could not because the firm itself could not sue a securities exchange for failure to force the firm to comply with the exchange's rules. We pointed out that the "34 Act did not afford protection "to the very members of the stock exchanges whose conduct was being regulated." 548 F.2d at 66. The extent to which Lank parallels the instant case precludes our holding that the Trustee may maintain this action on Weis' behalf.
However, none of the above considerations apply to an action brought by the Trustee as bailee of the property of Weis' customers. He is responsible for marshalling and returning their property; to the extent that he is unable to do so, he argues, he may sue on behalf of the customer/bailors any wrongdoer whom they could sue themselves.
Rule 17(a) of the Federal Rules of Civil Procedure reads, in part: "(A) . . . bailee . . . may sue in his own name without joining with him the party for whose benefit the action is brought . . . ." The Advisory Committee Notes to this section, added in 1966,*fn14 point out by way of illustration that the "owner of a warehouse in which household furniture is stored is equally entitled to sue on behalf of the numerous owners of the furniture stored." 39 F.R.D. 69, 85 (1966). See generally 5 N.Y.Jur., Bailments §§ 118, 119.
To the extent that customers have claims that have not been satisfied either by Weis in liquidation, See note 6 Supra, or by SIPC, they retain rights of action against Touche Ross. We hold that the Trustee, as bailee, is an appropriate real party in interest to maintain this action on their behalf.
Since we hold that both SIPC and the Trustee may maintain this action against Touche Ross, we remand to the district court for further proceedings consistent with this opinion. We leave to it in the first instance a number of questions that will now arise: whether to stay the federal action pending determination of the state action;*fn15 whether to exercise pendent jurisdiction over the plaintiffs' common-law claims; and what the appropriate standard is for accountant liability in actions under section 17, Cf. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976).
Reversed and remanded.
TIMBERS, Circuit Judge, concurring:
I concur in all respects in Judge Lumbard's clear, concise and, in my view, correct majority opinion.
In view of the characteristically thoughtful and earnest dissent of our Brother Mulligan, however, I should like to add a few words, partly to supplement Judge Lumbard's opinion, but chiefly to suggest that Judge Mulligan's dissent be read in the light of the following observations.
First, in urging that customers of a broker-dealer in liquidation have no implied right of action for damages under Section 17 of the Exchange Act against accountants who prepare false or misleading reports required by that statute, the dissent understandably is disturbed by the Unanimous opinion in Cort v. Ash, 422 U.S. 66, 78, 45 L. Ed. 2d 26, 95 S. Ct. 2080 (1975), as recently reaffirmed in Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 37-45, 51 L. Ed. 2d 124, 97 S. Ct. 926 (1977). Granted that the dissent's massive effort to distinguish or to apply a gloss to Ash is an artful attempt to circumvent this key decision, I fear that our dissenting colleague has misapprehended the essential purpose of Ash in stating certain factors to be taken into consideration in determining whether to imply a right of action under a given statute. The dissent at the outset, Post, at 628, emphasizes that Ash is not relevant to a case which arises under a statute which expressly provides for a private right of action. This overlooks the fact that the Supreme Court specifically applied the Ash analysis in Piper, supra, 430 U.S. at 37-41, in determining whether a private remedy was implicit in Section 14(e) of the same statute with which we are here concerned, i. e. the Exchange Act. Assuming that what the dissent intends to emphasize, Post, at 628, is that Ash does not apply when an Express remedy is provided for the Specific wrong complained of, it must be remembered that the Court reaffirmed the implication of a private right of action under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975), despite the absence of legislative history on the subject, Id. at 737, much less "clear contrary evidence" of legislative intent. Post, at 630.
Second, the dissent's displeasure with J. I. Case Co. v. Borak, 377 U.S. 426, 12 L. Ed. 2d 423, 84 S. Ct. 1555 (1964), likewise is understandable. This seminal opinion written by the late Mr. Justice Tom Clark for a Unanimous Supreme Court, in holding that Section 27 of the Exchange Act provided the jurisdictional underpinning for an implied private right of action for damages (as well as for declaratory and equitable relief) arising from violations of Section 14(a) of the Exchange Act, Id. at 430-35, expressly recognized that "Private enforcement of (Commission rules) provides a necessary supplement to Commission action", Id. at 432, and that "It is the duty of the courts to be alert to provide such remedies as are necessary to make effective the congressional purpose." Id. at 433. Despite our Brother Mulligan's herculean effort in dissent to buttress his assertion that Borak "has been significantly restricted by more recent decisions of the Supreme Court", Post, at 628, those decisions strike me as expressly and emphatically reaffirming the Borak rule*fn1 as Mr. Justice Stevens stated in Piper, supra, 430 U.S. at 67, "Borak remains a viable precedent."
Third, the dissent speaks disparagingly of the SEC amicus brief. Post, at 619 n. 1. As Judge Lumbard correctly points out, Ante, at 627 n. 3, we were aided materially by the SEC brief, whereas the district court did not have the advantage of knowing of the SEC's position. Here again, our Brother Mulligan's attempt to disparage the SEC brief is understandable, for it urges forcefully and cogently that SIPC should be permitted to assert a private right of action under Section 17 of the Exchange Act under the circumstances of this case. But far more basic than whether the SEC as amicus supports or opposes one side or the other in litigation under the federal securities laws, Is that the position of the SEC should be known to the court. That is the point of Judge Lumbard's observation referred to above. And it is especially important in a case of first impression such as the instant one involving a statute under which Congress has imposed on the Commission specific responsibilities.*fn2 Wholly aside from the instant case where I find the SEC amicus brief to measure up to the Commission's high standard of competence and fairness I do hope that our Brother Mulligan's disparagement of the SEC amicus brief will not be construed as a judicial signal, even in dissent, that the Commission should retreat to its position of a generation ago which drew sharp criticism from our Court. Compare Blau v. Mission Corp., 212 F.2d 77, 81 (2 Cir.), Cert. denied, 347 U.S. 1016, 98 L. Ed. 1138, 74 S. Ct. 872 (1954), and Roberts v. Eaton, 212 F.2d 82, 84 (2 Cir.), Cert. denied, 348 U.S. 827, 99 L. Ed. 652, 75 S. Ct. 44 (1954), with Studebaker v. Gittlin, 360 F.2d 692, 695 (2 Cir. 1966), and Greene v. Dietz, 247 F.2d 689, 695-98 (2 Cir. 1957) (concurring and dissenting opinions; per curiam opinion on rehearing). See Some Practical Aspects: The SEC and The Federal Judiciary, 41 A.B.A.J. 1136, 1137-38 (1955).*fn3
Accordingly, after carefully considering Judge Mulligan's dissenting opinion, especially in the light of the observations set forth above, I concur without qualification in Judge Lumbard's majority opinion.
MULLIGAN, Circuit Judge (dissenting):
In my view this case was properly decided by Judge Wyatt and the order and judgment dismissing the complaint should be affirmed.*fn1 The majority announces that "at least since J. I. Case Co. v. Borak, 377 U.S. 426, 84 S. Ct. 1555, 12 L. Ed. 2d 423 (1964) . . . it has been accepted in securities law that when a statutory provision imposes a duty on someone in favor of a class of protected persons, those persons may sue for the "statutory tort' committed when the duty is breached." Majority opinion at 623. The Borak rule, which liberally implied private actions in federal regulatory acts on a statutory tort theory, has been significantly restricted by more recent decisions of the Supreme Court which are misapplied by the majority opinion.*fn2
While the majority purports to consider the factors set forth in Cort v. Ash, 422 U.S. 66, 95 S. Ct. 2080, 45 L. Ed. 2d 26 (1975), it must be emphasized that Justice Brennan in his opinion in Cort carefully restricted their application: "In determining whether a private remedy is implicit in a statute Not expressly providing one, several factors are relevant." 422 U.S. at 78, 95 S. Ct. at 2088 (emphasis supplied). In Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 37, 97 S. Ct. 926, 947, 51 L. Ed. 2d 124 (1977) Chief Justice Burger's opinion similarly confined the Cort factors, noting that they are " "relevant' in determining whether a private remedy is implicit in a statute Not expressly providing one." (Emphasis supplied).
In the instant case, however, we are confronted with a statute for which Congress has clearly provided a remedy in the event of certain violations. Admittedly, section 17(a), set forth in footnote 1 of the majority opinion, does not itself include any private remedy for an infraction of its terms. It simply requires that brokers or dealers such as Weis, make, keep and preserve records and make such reports as the SEC may prescribe by its rules and regulations in the interest of the public and for the protection of investors. Other comparable sections of the "34 Act (the Act) also provide for the filing of reports. See sections 13(a), 15 U.S.C. § 78m(a); 13(d), 15 U.S.C. § 78m(d); 13(f), 15 U.S.C. § 78m(f); and 15(a), 15 U.S.C. § 78O (d). Like section 17(a), these sections include in their text no provisions for a private remedy.
Section 17 is immediately followed, however, by section 18(a), 15 U.S.C. § 78r(a), entitled "Liability for Misleading Statements" which does provide an express private remedy for violation of the reporting provisions of the Act. It states:
Any person who shall make or cause to be made any statement in any application, report, or document filed pursuant to (the "34 Act) or any rule or regulation thereunder . . ., which statement was . . . 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.
Section 18(a) follows upon the heels of section 17. Its subject matter covers reports or documents filed pursuant to the "34 Act and regulations promulgated thereunder. Thus, Judge Wyatt correctly found and, indeed, common sense would dictate, that section 18(a) expressly provides the sole private remedy which Congress intended to be available for a violation of section 17(a) and the other reporting sections of the "34 Act. Furthermore, most courts which have considered the issue have found section 18(a) to contain the only remedy for violation of the Act's reporting sections.*fn3
It seems clear, then, that the statutory scheme enacted by Congress provides in section 18(a) an express but limited remedy for violations of section 17(a). As noted above, the Supreme Court has repeatedly limited use of the Cort factors to instances in which No statutory remedy whatsoever has been provided. Hence, it must seriously be questioned whether the Cort factors are even the appropriate analytical tool to determine whether an implied private right of action should exist for infractions of section 17(a). Nonetheless, using a Cort analysis the majority finds an implied private damage remedy because it determines that brokers' customers are "favored wards" of, and a class "peculiarly protected" by section 17. Therefore, states the majority, we cannot assume that the Congress intended to deprive them of "the means of protection." Majority opinion at 623.
I believe the majority reasoning is faulty in two major respects. In the first place, if the brokers' customers were so clearly the concern of the Congress when it enacted section 17(a), its failure to afford them a private damage remedy in section 18(a), which was contemporaneously enacted and which provides a private remedy for misleading statements in reports filed pursuant to the mandate of the Act, leads to the conclusion that Congress did not intend a private damage remedy to be available to brokers' customers.
The principle of statutory construction by which one reaches this result is somewhat forbiddingly known as "Expressio unius est exclusio alterius ". This maxim was recently emphasized and applied by the Supreme Court in National Railroad Passenger Corp. v. National Association of Railroad Passengers, 414 U.S. 453, 94 S. Ct. 690, 38 L. Ed. 2d 646 (1974) (Amtrak ). There the Court held that the plaintiff association of railroad passengers had no implied cause of action as primary beneficiaries of the Rail Passenger Service Act of 1970 since that Act expressly provided for enforcement by the Justice Department. In its opinion, the Court observed:
A frequently stated principle of statutory construction is that when legislation expressly provides a particular remedy or remedies, courts should not expand the coverage of the statute to subsume other remedies. "When a statute limits a thing to be done in a particular mode, it includes the negative of any other mode." . . . This principle of statutory construction reflects an ancient maxim Expressio unius est exclusio alterius. Since the Act creates . . . a private cause of action only under very limited circumstances, this maxim would clearly compel the conclusion that the remedies created in § 307(a) are the exclusive means to enforce the duties and obligations imposed by the Act.
414 U.S. at 458, 94 S. Ct. at 693.
Soon after its decision in Amtrak the Supreme Court reaffirmed its reliance on the Expressio unius principle in Securities Investor Protection Corp. v. Barbour, 421 U.S. 412, 418-19, 95 S. Ct. 1733, 44 L. Ed. 2d 263 (1975). In finding that the express statutory grant to the SEC of a right to seek injunctive relief to enforce duties under the Securities Investor Protection Act precluded an implied right in others to seek similar relief, the Court reiterated its observation in Amtrak that "express statutory provision for one form of proceeding ordinarily implies that no other means of enforcement was intended by the Legislature." Id. at 419, 95 S. Ct. at 1738.
Similarly, in the instant case the provision by Congress in section 18(a) of a narrow private cause of action for section 17(a) infractions militates strongly against our attributing to Congress a willingness to allow more expansive enforcement of the duties and obligations created by that section. Moreover, while the Court in Amtrak acknowledged that the Expressio unius principle must "yield to clear contrary evidence of legislative intent," 414 U.S. at 458, 94 S. Ct. at 693, the majority here concedes that it finds nothing in the language or legislative history of section 17(a) to indicate that Congress intended to create a private cause of action under that section. In my view appellants have failed to demonstrate the "clear contrary evidence" to rebut the conclusion that the limited express right of action under section 18(a) is the exclusive remedy for a breach of section 17(a).*fn4
We find further support for the position that there is no private right of action implied under section 17(a) in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975). There the Court commented: "When Congress wished to provide a remedy (under the "34 Act) to those who neither purchase nor sell securities, it had little trouble in doing so expressly" 421 U.S. at 734, 95 S. Ct. at 1925. Judge Wyatt's opinion below reviews several such sections of the "34 Act which impose liability on persons other than purchasers or sellers. 428 F. Supp. at 490. The presence of these provisions in the "34 Act reinforces the conclusion that the framing of the section 18(a) remedy in terms of purchasers and sellers of securities to the exclusion of customers of broker-dealers was an intentional congressional limitation on the class for whom a private action would be available in the event of a section 17(a) violation.
The Supreme Court in Blue Chip also addressed itself specifically to section 18:
Section 18 of the 1934 Act, prohibiting false or misleading statements in reports or other documents required to be filed by the 1934 Act, limits the express remedy provided for its violation to "any person . . . who . . . shall have purchased or sold a security at a price which was affected by such statement. . . . 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. at 736, 95 S. Ct. at 1925.
But that is precisely what the majority is imputing to Congress in this case. The misleading reports which create the basis for the claim here made were required to be filed by section 17(a) of the "34 Act and the remedy provided by section 18(a) concededly encompasses not broker-dealer customers but only securities purchasers or sellers.*fn5 I find that Amtrak, Barbour and Blue Chip compel the conclusion that the omission was studied and that the implication of a damage action against accountants under this section is totally unwarranted. The majority cannot properly characterize this as a case where there is no explicit private remedy provided by Congress. Rather, it is a case in which the remedy provided was designed to exclude the class which is here seeking monetary relief. Thus, the majority's holding in my view goes beyond statutory construction; it amounts instead to judicial legislation.
The second flaw in the majority opinion is the failure to consider the impact of Piper v. Chris-Craft Industries, Inc. supra, in its discussion of the Cort factors. In Piper the Court, while again carefully limiting its holding to cases where the statute to be construed provides no private remedy, id. 430 U.S., at 24-25, 97 S. Ct. 926, emphasized that private relief will be implied in favor of a particular class intended to be protected by the statute only when it is " "necessary' " to effectuate Congress' goals. 430 U.S. at 25, 97 S. Ct. 926.*fn6 The inquiry called for is to ascertain the congressional purpose and to determine whether a private damage action by brokers' customers is a Necessary adjunct, id., to accomplish the primary congressional goal embodied by the legislation. Cort v. Ash; supra, 422 U.S. at 84, 95 S. Ct. 2080.
The plain language of section 17 establishes the congressional concern that the SEC be kept on notice of the financial health and stability of registered broker-dealers through whom public investors purchase and sell securities.
The SEC itself has long recognized that the primary protection for brokers' customers lies in preventive monitoring: "customers do not open accounts with a broker relying on suit, judgment and execution to collect their claim they are opened in the belief that a customer can, on reasonable demand, liquidate his cash or securities position." Guy D. Marianette, 11 SEC 967, 971 (1942). Hence, the broker-dealer is required to file reports which are subject to such examination as the SEC may deem necessary or appropriate in the public interest or for the protection of investors. As the majority points out, a principal and, in fact, dominant method of investor protection is the net capital rule. Section 15(c)(3) of the "34 Act, 15 U.S.C. § 78O (c)(3), authorizes the SEC to provide safeguards with respect to the financial responsibility of broker-dealers including their "acceptance of custody and use of customers' securities, and the carrying and use of customers' deposits or credit balances." Pursuant to Rule 15c(3)(1)(b)(2), 17 C.F.R. § 240.15c3-1(b)(2), the SEC exempts broker-dealers who are members in good standing of the New York Stock Exchange (as was Weis) from compliance with SEC net capital requirements. This is because such broker-dealers are subject to Exchange Rule 325, which is deemed by the Commission to impose requirements more comprehensive than the requirements of the SEC. Id. Under Rule 325 Weis was required to maintain a minimum prescribed ratio of aggregate indebtedness to net capital. Compliance by broker-dealers with the net capital rule is ensured by the filing of reports and monitoring by SEC as well as by the Exchange, which is authorized to enforce its regulations, see 15 U.S.C. § 78f and which, according to the SEC brief submitted on this appeal, makes annual examinations of each of its broker-dealer members to this end.
Congressional concern for the solvency of broker-dealers was not limited to the reporting and monitoring requirements of section 17. Following the boom of the 1960's a number of brokerage firms experienced financial instability and even failure. Securities Investor Protection Corp. v. Barbour, supra, 421 U.S. at 415, 95 S. Ct. 1733. The response of Congress was the enactment in 1970 of the Securities Investor Protection Act (SIPA), 15 U.S.C. § 78aaa Et seq. as an amendment to the "34 Act. Under SIPA Congress created the Securities Investor Protection Corporation (SIPC), the function of which extends well beyond providing protection to investors upon the liquidation of their brokers. As the Court noted in Securities Investor Protection Corp. v. Barbour, supra, at 421, 95 S. Ct. at 1739:
The SIPC properly treats an application for the appointment of a receiver and liquidation of a brokerage firm as a last resort. It maintains an early-warning system and monitors the affairs of any firm that it is given reason to believe may be in danger of failure.
The SEC too has noted that the primary purpose of the net capital requirements for broker-dealers is to give "the (SEC), self-regulators and SIPC sufficient early warning to take appropriate action to protect customers prior to the time . . . of liquidation." 1934 Act Release No. 11497, June 26, 1975 (1975-76 Transfer Binder), CCH Fed.Sec.L.Rep. P 80,212.
The majority here finds that since section 18(a) leaves broker-dealer customers without protection and since brokers' customers are the "favored wards" of section 17, it cannot agree that Congress simultaneously sought to protect them and to deprive the class of the means of protection. However, a review of section 17(a) and the rules promulgated by the SEC as well as the creation of SIPC, demonstrates that the means Congress employed to ensure solvency of broker-dealers were to require the keeping and filing of records, the maintenance of certain net capital balances and the oversight of the SEC, SIPC and the Exchanges. Thus, the primary congressional intent obviously has been to provide a system of reports and monitoring which would Prevent insolvency of broker-dealers; not to create private law suits for damages After insolvency has occurred.*fn7
Since the filing requirements of section 17(a) are designed to give early warning, the importance to this scheme of implying a damage remedy After liquidation is dubious. Congress made no suggestion either in 1934 or in 1970, when it enacted SIPA, that a private damage action was a Necessary corollary of the section 17(a) reporting provisions. The threat of liquidation under SIPA as well as the criminal sanctions available for violations of section 17(a) certainly present a greater deterrent than private damage actions.*fn8 As the Supreme Court noted in Piper, "Nor can we agree that an ever-present threat of damages (beyond available injunctive relief) . . . will provide significant additional protection . . . . The deterrent value, if any, of such awards can never be ascertained with precision." 430 U.S. at 39-40, 97 S. Ct. at 948.
Even more importantly, to the extent that a threat of private damage actions might further induce compliance with the reporting scheme of section 17 the majority has discounted the effect of available state law remedies, which arise not from state securities law protection of brokers' customers, but from well established tort law principles.*fn9 See, e. g., Restatement 2d of Torts §§ 531, 552 (1977). Common law actions for damages against accountants have long been recognized. See, e. g., Note, Accountants' Liabilities For False and Misleading Financial Statements, 67 Colum.L.Rev. 1437 (1967). Where, as in the instant case, fraud is arguably alleged, it is important to note that should the actionable elements of fraud be provable, the states have universally permitted recovery to third parties who relied on the misrepresentations. Anno.: Liability of Public Accountant to Third Parties, 46 A.L.R.3d 979, 982-83 (1972). While the state law treatment of actions based only on an accountant's negligence has not been so uniform, id. at 982, the trend in state law, based on generally recognized tort principles, has been to expand the accountant's liability for negligence to those clearly definable classes of third parties who the accountant knew would rely on the statements in question. See, e. g., White v. Guarente, 43 N.Y.2d 356, 401 N.Y.S.2d 474, 372 N.E.2d 315 (1977); Restatements 2d of Torts § 552 (1977). In fact, should scienter be held a required element of the action found implied by the majority in section 17,*fn10 see Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976), it may well be that a state law action would provide a broader basis for accountant liability than the federal action implied here under the "34 Act.
In any event, the very existence of these state law remedies supplies that threat of liability which the majority essentially is seeking in order to promote adherence to the requirements under section 17(a). Thus, the majority wrongly dismisses the significance of available state law remedies on the ground that the standard of liability for private damage actions in connection with 17(a) violations must be national in scope. Since, as demonstrated above, the Primary congressional purpose underlying the section 17 reporting scheme is prophylactic, uniformity of standards for actions brought to recover losses After the brokerage firm has failed simply is not Necessary to achieving the primary goals of that statute. See Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477-78, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977).
The SEC has also argued, and the majority has accepted the position, that private damage actions are a necessary supplement to commission action because the SEC does not have the resources to audit the financial statements submitted under section 17(a). Whatever force this argument might once have had, see J. I. Case Co. v. Borak, supra, 377 U.S. at 432, 84 S. Ct. 1555, is seriously undermined by the Court's observation in Piper that "institutional limitations alone do not lead to the conclusion that any party . . . should have a cause of action for damages." 430 U.S. at 41, 97 S. Ct. at 949. The argument that a regulatory agency is confessedly unable properly to regulate broker-dealers as charged by Congress and detailed by its own regulations, and that therefore the federal courts should find a damage remedy implicit in an act which studiously avoided giving one to the class sought to be represented here, is simply unpersuasive.*fn11
In sum, I conclude that since section 18(a) of the Act does provide a damage remedy for the filing of misleading statements in section 17(a) reports, and since this remedy excludes from its coverage the customers of broker-dealers, the Cort factors employed by the majority afford an inappropriate analytical framework for this case. Instead, under the reasoning of Amtrak and Barbour it is apparent that by limiting actions under section 18(a) to purchasers and sellers of securities Congress expressed its intent to deny recovery for section 17(a) violations to a broader class of plaintiffs. Nor have the appellants here adduced the strong contrary evidence of legislative intent regarding section 17(a) which would lead me to reach the conclusion, embraced by the majority, that implication of such a remedy is consistent with the legislative scheme. Moreover, even if the Cort factors were the proper mode of analysis in this case, they must be applied in conjunction with the gloss of Piper. Yet there is no showing here that a private damage remedy against accountants is Necessary to vindicate the primary congressional purpose embodied in section 17(a). As Judge Medina observed in Lank v. New York Stock Exchange, 548 F.2d 61, 65 (2d Cir. 1977) where we refused to imply a private remedy in favor of the receiver of an insolvent broker-dealer against the Exchange: "Even were we to agree . . . that granting him a right of action against the Exchange would "accord' with the purpose of the (1934) Act, our function here is to discern the intent of Congress, not to legislate in its place."
Having found no implied cause of action arising under section 17(a) in favor of customers of broker-dealers, I could of course find no derivative rights in either SIPC or the trustee. However, I also contest the holding that appellants are proper parties to maintain the action found by the majority to be implied in section 17(a). The majority has properly held that neither the trustee nor SIPC in its own right can bring any action under section 17(a) of the "34 Act. Neither can claim to be an intended beneficiary of that act since both are the creatures of SIPA, enacted in 1970. Nor is either appellant a public investor. Lank v. New York Stock Exchange, supra, 548 F.2d at 64-66 is dispositive of this issue.
Yet while denying to SIPC the right to bring a section 17(a) action on its own behalf, the majority also transmutes that entity into a subrogee clothed with the power in that capacity to bring a private damage action under 17(a) (an action itself now implied by the majority for the first time in the forty-four years section 17 has been on the books). By what alchemy a congressionally created corporation with limited powers to litigate, see Securities Investor Protection Corp. v. Barbour, supra, can now sue in a federal court for an alleged violation of section 17(a) of the "34 Act, is not made clear. When Congress created SIPC, its express but limited rights of subrogation were spelled out in SIPA: "To the extent that moneys are advanced by SIPC to the trustee to pay the claims of customers, SIPC shall be subrogated to the claims of such customers with the rights and priorities provided in this section." 15 U.S.C. § 78fff(f)(1). As the majority recognizes, those claims to which SIPC is subrogated by statute are clearly against the debtor's estate only and no rights against the accountant flow therefrom. Since Congress has delineated the subrogation rights of SIPC, its failure to provide for subrogation against any third party would clearly dictate that none exist under the previously discussed principle: Expressio unius est exclusio alterius. Rogers v. National Surety Co., 116 Neb. 170, 216 N.W. 182 (1927). The effect of the majority's extension of SIPC's subrogation rights is to circumvent the intent of Congress by ignoring the directive of SIPA that SIPC be subrogated "With the rights and priorities provided in this section." 15 U.S.C. § 78fff(f)(1) (emphasis supplied).
Similarly, the Trustee, held by the majority to have no direct cause of action under section 17(a), is nonetheless found to have such capacity in his role as a bailee. The majority finds that his responsibility to marshal and return property to the customers of the debtor broker-dealer authorizes him to bring this action. But that responsibility of the Trustee is created by SIPA, 15 U.S.C. § 78fff(a)(1), and is inherent in his Trustee function, see also 15 U.S.C. § 78fff(b)(1). Having rejected his right to sue as a Trustee of Weis under Lank v. New York Stock Exchange, supra, I fail to see how denominating him a bailee adds a jot or a tittle to his statutorily created status as the representative of Weis an entity regulated by, and precluded from suing under, the Act. Furthermore, the customers on whose behalf the Trustee seeks to maintain suit are not only entitled to bring, but have already initiated their own action against Touche Ross. See notes, 3, 9, Supra. The SEC understandably has expressed no view on this point.