The opinion of the court was delivered by: BRODERICK
Defendant Chemical Bank ("defendant") seeks dismissal, pursuant to Rule 12, Fed.R.Civ.P., of plaintiff's cause of action charging defendant with violation of Section 7 of the Securities & Exchange Act of 1934
("the Act") and Regulation U
Defendant challenges plaintiff's claim to an implied private right of action under Section 7 and Regulation U, in light of the 1970 amendment adding Paragraph (f) to Section 7,
and Regulation X
promulgated thereunder. Defendant also urges that plaintiff's action is barred by the applicable statute of limitations.
For the reasons hereafter stated, defendant's motion is denied.
Prior to the effective date of the addition of Section 7(f) to the Act, the Second Circuit held, in the context of an alleged violation by a securities broker of Section 7 and Regulation T
promulgated thereunder, that an implied private right of action exists under Section 7:
Although the congressional committee report which recommended the enactment of Section 7 indicates that the protection of individual investors was a purpose only incidental to the protection of the overall economy from excessive speculation, it has been recognized in numerous cases since that time that private actions by market investors are a highly effective means of protecting the economy as a whole from margin violations by brokers and dealers.
Pearlstein v. Scudder & German, 429 F.2d 1136, 1140 (2d Cir. 1970), Cert. denied, 401 U.S. 1013, 91 S. Ct. 1250, 28 L. Ed. 2d 550 (1971) ("Pearlstein I"). See also Serzysko v. Chase Manhattan Bank, 290 F. Supp. 74 (S.D.N.Y.1968), Aff'd, 409 F.2d 1360 (2d Cir.), Cert. denied, 396 U.S. 904, 90 S. Ct. 218, 24 L. Ed. 2d 180 (1969). The Pearlstein I court placed upon brokers the sole responsibility for compliance with Section 7. 429 F.2d at 1141. The court's premise was that Section 7 prohibited the broker from extending credit beyond the legal limit, but that Section 7 did not forbid customers from accepting such credit.
Section 7(f) (and Regulation X promulgated thereunder) made it a violation not only to extend credit beyond the margin limits prescribed by the Federal Reserve Board but also to accept such credit in violation of the margin requirements.
Upon reargument in Pearlstein v. Scudder & German, 527 F.2d 1141, 1145 n.3 (2d Cir. 1975) ("Pearlstein II "), after paragraph (f) had been added to Section 7, the court of appeals expressed doubts about the "continued viability of the rationale of" its decision in Pearlstein I. The issue is before me now. To what extent has Pearlstein I been undermined by the addition of Section 7(f)? Since borrower and lender now are potentially equally culpable, when, if at all, does a private right of action by the borrower against the lender still exist under Section 7?
I conclude that Section 7(f) and Regulation X modify the result in Pearlstein I to the extent that an implied private right of action exists under Section 7 if and only if (1) the borrower does not wilfully or intentionally accept such credit in violation of the margin limits, and (2) promptly after the borrower's discovery of non-compliance, he takes whatever action is practicable to remedy the non-compliance.
The Supreme Court in Cort v. Ash, 422 U.S. 66, 78, 95 S. Ct. 2080, 45 L. Ed. 2d 26 (1975), set out four factors to be considered in determining whether a private remedy may be implicit in ...