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January 29, 1980

In re New York Municipal Securities Litigation

The opinion of the court was delivered by: OWEN

OWEN, District Judge:

In this multi-faceted litigation, before me for pretrial purposes pursuant to an order of the Judicial Panel on Multidistrict Litigation, there are various motions to dismiss. These actions have a common origin in the near financial collapse of the City of New York in late 1974 and early 1975. *fn1" The several complaints allege that the City of New York, former Mayor Abraham Beame and Comptroller Harrison Goldin (the "City Defendants"), and certain banks and brokerage firms (the "Underwriter and Seller Defendants") deliberately misled the public as to the City's desperate financial condition in connection with the underwriting and subsequent resale of various New York City obligations issued during 1974 and 1975. *fn2" Plaintiffs allege that the foregoing constitutes violations of Section 17(a) of the Securities Act of 1933 (the "Securities Act" or the "1933 Act"), 15 U.S.C. § 77q(a) and Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act" or the "1934 Act"), 15 U.S.C. § 78j(6) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.

Eleven separate lawsuits have been consolidated for pretrial matters in this litigation. *fn3" In five of the actions, the City is named as a defendant along with the underwriters and sellers. *fn4" Two of the actions have been certified as class actions pursuant to Fed. R. Civ. P. 23(b)(3), Friedlander v. City of New York, 71 F.R.D. 546 (S.D.N.Y. 1976), and Spector v. City of New York, 71 F.R.D. 550 (S.D.N.Y. 1976). In Friedlander, plaintiffs allege that on June 1, 1974, New York City had outstanding $ 4.4 billion short-term notes, of which the defendant banks held approximately $ 3.5 billion, and of which large of the defendant brokers owned approximately $ 900 million. (Plaintiff's Complaint at para. 31.) According to the complaint, based on "inside" information that the City was unable to repay these obligations, the underwriter defendants underwrote for distribution to the general public approximately $ 2.6 billion of the City's notes. The proceeds of these sales were allegedly to be used to "bail out" the banks' and brokerage firms' own holdings of City notes by reducing those holdings from $ 4.4 billion in June 1974 to $ 1.9 billion in June 1975. The City of New York and its Mayor and Comptroller are alleged to have aided and abetted the foregoing acts by, inter alia, concealing the City's critical financial condition from the public and falsifying certain records to conceal the fiscal crisis. The Friedlander class consists of the first non-dealer purchasers of the City's Revenue Anticipation Notes (the "RANS") issued on December 13, 1974, January 13, 1975, February 14, 1975 and the City's Bond Anticipation Notes issued March 12, 1975. See Friedlander v. City of New York, 71 F.R.D. 546, 548 (S.D.N.Y. 1976).

 The Spector class consists of the holders of the City's general obligation bonds who purchased such bonds between May 1, 1974 and September 30, 1975. Plaintiffs allege that the commercial banks and brokerage firms conspired to conceal information as to the City's desperate financial condition from the investing public. These acts of concealment, along with other short term steps designed to avoid default, were allegedly taken to preserve prevailing bond prices to allow the defendants to profitably dispose of their own holdings of City bonds. Certain of the defendants are said to have reduced their holdings in City bonds from $ 2.5 billion on May 1, 1974 to virtually nil by the time the prices of those bonds plummeted. Here, as in Friedlander, the City is alleged to have aided and abetted this conspiracy by virtue of material misrepresentations and nondisclosures to the public concerning the City's finances. Plaintiffs contend that as a result of the acts of the City defendants and the underwriter and seller defendants, the members of the class -- predominately "after-market" purchasers of the City general obligation bonds -- incurred substantial economic losses.

 The allegations in Goldfarb, Weisberg and Manchester are essentially the same as those in Friedlander and Spector. The remaining cases, while not alleging securities fraud on the part of the City defendants, allege violations of § 17(a) of the Securities Act and/or § 10(b) of the Securities Exchange Act by certain of the commercial banks or brokerage firms. *fn5" It is undisputed that all of the conduct at issue occurred prior to the enactment of the 1975 amendments to the Securities Exchange Act.

 The City and the underwriter and seller defendants move to dismiss for failure to state a claim upon which relief may be granted, Fed. R. Civ. P. 12(b)(6), *fn6" on the following legal theories:

 (1) That transactions involving municipal securities whether by the City, the underwriters or other sellers, are not covered by § 10(b) of the Securities Exchange Act; and, consequently, no private right of action is conferred upon a purchaser of such securities; and

 (2) That while § 17(a) of the Securities Act expressly includes municipal securities and has been construed to confer enforcement rights upon the Securities and Exchange Commission ("SEC") in the event of violations, it does not confer a private right of action upon an investor; and

 (3) That if the antifraud provisions of the securities laws apply to municipal securities, the tenth amendment to the United States Constitution would render such provisions unconstitutional as applied to the City defendants.

 In the alternative, certain of the underwriter defendants argue that if a private right of action does exist as to them with respect to transactions in municipal securities, it must also be implied against the City as issuer.

 From a careful consideration of the 1933 and 1934 Acts (and their amendments) viewed in the light of their extensive legislative I conclude that the motions of the City defendants to dismiss should be granted, while those of the underwriter and seller defendants should be denied.

 I. The Applicability of § 10(b) of the Securities Exchange Act to Municipal Securities and to the Underwriters and Sellers Thereof

 The threshold question presented is whether the private right of action unquestionably available to a purchaser of corporate securities under § 10(b) of the 1934 Act, *fn7" and Rule 10b-5 promulgated thereunder, *fn8" is equally available to a purchaser of municipal securities. This is "basically a matter of statutory construction." TransAmerica Mortgage Advisors v. Lewis, 444 U.S. 11, 100 S. Ct. 242, 62 L. Ed. 2d 146 (1979).

 The Securities Exchange Act was designed "to provide for the regulation of securities exchanges and of the over-the-counter markets... to prevent inequitable and unfair practices in such exchanges and markets..." S.Rep.No. 792, 73d Cong. 2d Sess. 1 (1934). Nevertheless, Congress, by including § 3(a)(12), 15 U.S.C. § 78c(a)(12) in the 1934 Act, clearly contemplated that, at least for some purposes, governmental securities, including those of municipalities, would be exempted from certain of its requirements. The defendants argue that the mere inclusion of § 3(a)(12) in the 1934 Act evidences a Congressional intent to exempt municipal securities from the operations of 10(b). I reject this contention.

 At the time of the events in question, § 3(a)(12) defined an "exempted security" as follows:


The term "exempted security" or "exempted securities" includes securities which are direct obligations of or obligations guaranteed as to principal or interest by the United States;... securities which are direct obligations of or obligations guaranteed as to principal or interest by a State or any political subdivision thereof, or by any agency or instrumentality of a State or any political subdivision thereof, or by any municipal corporate instrumentality of one or more states;... and such other securities... as the Commission may, by such rules and regulations as it deems necessary or appropriate in the public interest or for the protection of investors,... exempt from the operation of any one or more provisions of this chapter which by their terms do not apply to an "exempted security" or to "exempted securities".

 1934 Act, ch. 404, § 3, 48 Stat. 882. This section is strictly definitional. Whether or not a given substantive section applies to "exempted securities" is left to the express language of the particular section. In the Senate Report on the 1934 Act, the draftsmen confirm this view by noting that a "large number of the provisions in the Act expressly include 'exempted securities'". *fn9" In short, when Congress wanted to exclude exempted securities from a section of the Act, it knew how to do so. *fn10" It is significant, therefore, that the language of § 10(b) does not evidence such an intent. That section makes it unlawful for "any person... to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered... any manipulative or deceptive device...." (emphasis added). The Congressional intent to have § 10(b) extend to fraudulent conduct in connection with all securities in the broadest sense, including those defined in § 3(a)(12) could not be clearer. The draftsmen not only omitted reference to "exempted securities," they also specifically included both registered and unregistered securities, as well as transactions on the national securities exchange and the over-the-counter market.

 The legislative history of § 3(a)(12) further demonstrates that it only serves to define "exempted securities." The original draft of § 3(a)(12) expressly exempted only United States Government securities, *fn11" and the Federal Trade Commission was to be vested with the authority to broaden the scope of § 3(a)(12). *fn12" In discussing this grant of authority, the draftsmen wrote:


A large number of provisions in the act expressly exclude "exempted securities." Thus the Commission is able to remove from the operation of any one or more of these provisions any securities as to which it deems them inappropriate.

 H.R.Rep.No.1383, 73rd Cong., 2d Sess., 17 (1934) (Emphasis added); see also S.Rep.No. 792, 73d Cong., 2d Sess., 14 (1934). Thus, Congress granted the Commission the authority to add other securities to the list of exempted securities, but it did not empower the Commission to exclude "exempted securities" from other sections of the Act. That Congress later expanded the definition of "exempted securities" to include those of state and municipal issuers does not alter the limited function of § 3(a)(12).

 It is also clear that obvious political considerations motivated Congress to enact the exemptions it eventually provided for municipal securities in the 1933 and 1934 Acts. Landis, the Legislative History of the Securities Act of 1933, 28 Geo.Wash.L.Rev. 29, 39 (1959). The political, as well as economic, justifications underlying § 3 (a)(12) are most visible in the Congressional hearings on the 1934 Act. Paramount among the political concerns was the impact on federal-state relations of vesting the Federal Trade Commission with the discretionary authority to affect the credit of a state or municipality. Senate Hearings, supra, at 7477. In testimony before the Senate, George B. Gibbons, a New York City municipal bond dealer, highlighted the danger of vesting such power in the Federal Trade Commission:


State bonds and the bonds of their political subdivisions and agencies are not exempted by the provisions of this Act, and they are under the power of the Federal Trade Commission. That gives them, if they so care to use it, a very dangerous power over the financial affairs of all the states, cities, counties and political subdivisions and agencies in them; and it might be exercised to their great disadvantage.


The credit of a state, or a municipality or agency within it, and its ability to finance its many needs for roads, schools, preservation of health, and so on, would be seriously crippled by the refusal of the Federal Trade Commission to exempt its bonds or by the imposing of unreasonable conditions for granting such exemptions, and cause irreparable damage and loss to both the State or municipality and to the holders of their outstanding bonds by the withdrawal of exemption in cases where it had once been granted.

 Senate Hearings, supra, at 7446. *fn13" In fact, these very same objections prompted one member of the House Committee to note that "a real [constitutional] question" existed as to "the power of Congress to place any burden upon a state in the marketing of its bonds...." House Hearings, supra, at 822.

 An equally compelling argument was addressed to Congress detailed the economic impact of failing to include state and municipal obligations in § 3(a)(12). Numberous witnesses observed that the failure to provide a blanket exemption for municipal and state obligations, while providing such an exemption for securities of the federal government, would impose a serious economic burden on the nonexempted securities. See, e.g., House Hearings, supra, at 721. As one witness explained to the Senate Committee:


The inclusion of State and municipal bonds in the bill does not confer any benefit on the holders of municipal bonds nor on the municipalities issuing them. On the contrary, it imposes a very distinct hardship on both municipalities and the purchasers of their bonds and will seriously affect their value as an investment. The exemption of a municipal bond would not add to its present value, and refusing exemption would seriously impair its value.


If being exempted from this bill is helpful to the United States Government bonds, certainly States and municipalities need that help also. If not being exempted would be harmful to Government bonds, certainly States and municipalities should not suffer that harm.

 Senate Hearings, supra, at 7445. See also Id. at 7444. *fn14"

 It was also urged that municipal securities were simply not subject to the same "speculative abuses" as were corporate securities because: (1) there is "practically no speculation" in the municipal market; (2) the purchasers of municipal securities are large, sophisticated public institutions and corporations; and (3) the relatively small number of municipal securities made it "almost impossible to effect wash sales" and "practically impossible to sell municipal bonds short". See, Senate Hearings, supra, at 7443.

 As this legislative history documents, the addition of municipal and state securities to the category of "exempted securities" as defined in § 3(a)(12) evidences essentially a Congressional decision to avoid the political and economic consequences of unequal treatment of federal, state and municipal securities. It does not reflect a legislative intent to exempt municipal securities from the provisions of § 10(b) of the 1934 Act. On the contrary, the legislative debates over the scope of the § 3(a)(12) definition of "exempt securities" compel just the opposite conclusion.

 Of paramount concern to the draftsmen of the original version of § 3(a)(12) -- the same individuals who drafted § 10(b) -- was the protection of investors in municipal and state securities. Thus, it is quite clear from the legislative record that the draftsmen's initial omission of municipal securities from § 3(a)(12) can be explained by the fact that at the time it was drafted approximately 17,300 municipalities -- about 1% of the municipalities in America -- were either delinquent or in default. House Hearing, supra, at 822. *fn15" See also Senate Hearings, supra, at 7413. Congress was apparently convinced that these investors were entitled to the fullest possible protection with regard to these securities. Senate Hearing, supra, at 7477. See also House Hearing, supra, at 821, 822.

 Thus, while the desire to maintain political and economic parity among governmental issuers led to the eventual inclusion of municipal securities in the definition of "exempted securities," Congressional concern for investor protection from the practices of certain sellers of municipal securities remained. In an exchange that suggests the reason why "exempted securities" were not expressly excluded from § 10(b), Senator Gore inquired:


Is there any way that you could vest the administrative agency with the power to forewarn prospective purchasers that the bond of a certain town is a bad investment? Is there any red light at all? One of the objects of this bill is to protect the fool against his follies. I do not know whether they can do it or not, but I do not see any difference between the man that loses his money by buying municipal bonds that are no good, I do not see that he is any better off than if he put it in a railroad bond or a chewing-gum factory bond or something of that sort. He lost his money....

 Senate Hearings, supra, at 7450. In fact, evidence of fraud and misrepresentations in the sale of municipal securities to the public was frequently brought to the attention of the Senate Committee. See, Senate Hearings, supra, at 232.

 Finally, strong support for the view that the draftsmen of § 10(b) and § 3(a)(12) were concerned with protecting the investor in municipal securities may be found in the testimony of Commissioner Landis. *fn16" In response to Representative Pettengill's charge that municipal securities were being "overregulated" by the proposed draft of the 1934 Act, Commissioner Landis stated:


Well, in answer to your first question, I would have to answer that first question yes, there are abuses there [in the municipal securities market]. How widespread they are, and how important they are is a pretty hard matter to guess at,..., and we cannot, of course, say there are no abuses in the trading of municipal securities. Unquestionably there are salesmen who trade in municipal securities, deal in them, sell them, and will not tell the purchasers that they are in default. They are not reputable salesmen, of course, but there have been things like that done, unquestionably.


Furthermore, one of the things in municipal securities is that you must differentiate between general obligations of a municipality, and special obligations.... That distinction is often not made by the salesman. It escapes the prospective purchaser of these bonds, and sometimes because the salesman wishes it to escape.

 House Hearing, supra, at 897. Based on this legislative history, I must conclude that while municipal securities were ultimately included in the definition of "exempt securities" in § 3(a)(12), they were not thereby removed from the strictures of § 10(b) of the 1934 Act.

 The case law supports the existence of an implied cause of action under § 10(b) of the 1934 Act in favor or purchasers of municipal securities. The Supreme Court's decision in Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 92 S. Ct. 165, 30 L. Ed. 2d 128 (1971), where the underlying securities were United States Treasury bonds, firmly established a private cause of action under § 10(b) in favor of the seller of any securities -- whether or not exempted under § 3(a)(12). The unanimous Court stated in broad language that "section 10(b) outlaws the use 'in connection with the purchase or sale' of any security of 'any manipulative or deceptive device or contrivance,'" 404 U.S. at 10, 92 S. Ct. at 168. In a footnote the Court added "section 3(a)(10) of the 1934 Act defines 'security' very broadly... and clearly embraces Treasury bonds." *fn17" 404 U.S. at 10 n. 6, 92 S. Ct. at 168. Thus, the Superintendent result demonstrates that the definition of "a security" for the purposes of § 10(b) includes all those securities enumerate in § 3(a)(10), including municipal securities.

 Defendants argue that Cannon v. University of Chicago, 441 U.S. 677, 99 S. Ct. 1946, 60 L. Ed. 2d 560 (1979) and Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S. Ct. 2479, 61 L. Ed. 2d 82 (1979) undermine the holding of Superintendent of Insurance. I reject this contention. Cannon recognized that although the language of § 10(b) is merely duty-creating, as opposed to right-creating, ever since "Superintendent of Insurance, the Supreme Court has explicitly acquiesced in the 25 year-old acceptance by the lower federal courts of 10b-5 causes of action. See also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196, 96 S. Ct. 1375, 47 L. Ed. 2d 668; Blue Chip Stamps v. Manor Drug, 421 U.S. 723, 730, 95 S. Ct. 1917, 44 L. Ed. 2d 539." Cannon v. University of Chicago, supra, at 692 n. 13. Superintendent of Insurance "reflects the unique history of § 10b-5," Cannon v. University of Chicago, supra, at 738 (Powell J., dissenting), and its holding is unaffected by recent decisions applying a more restrictive standard on implication of private rights of action.

 Other federal courts that have considered the question almost uniformly favor the implication of a private remedy under § 10(b) and Rule 10-5 on behalf of purchasers of exempted securities. See, e.g., Shapiro v. Schwamm, 279 F. Supp. 798 (S.D. N.Y. 1968); Texas Continental Life Ins. Co. v. Bankers Bond Co., Inc., 187 F. Supp. 14 (W.D. Ky. 1960), rev'd on other grounds sub nom. Texas Continental Life Ins. Co. v. Dunne, 307 F.2d 242 (6th Cir. 1962), settlement agreement enforced sub nom. All States Investors Inc. v. Bankers Bond Co., Inc., 343 F.2d 618 (6th Cir.), cert. denied, 382 U.S. 830, 86 S. Ct. 69, 15 L. Ed. 2d 74 (1965); Thiele v. Shields, 131 F. Supp. 416 (S.D.N.Y. 1955) Greenwich Savings Bank v. Shields, 131 F. Supp. 368 (S.D.N.Y. 1955); Connecticut Mutual Life Ins. Co. v. Shields, 131 F. Supp. 363 (S.D.N.Y. 1954); Baron v. Shields, 131 F. Supp. 370 (S.D.N.Y. 1954). Moreover, courts have uniformly rejected the argument advanced here by the defendants that because the express civil liability provision of § 12(2) of the 1933 Act, 15 U.S.C. § 77L(2) *fn18" exempt governmental securities, *fn19" purchasers of those securities should not be permitted to circumvent that exception by suing under § 10(b) of the 1934 Act. *fn20" In Thiele v. Shields, supra, the court explained:


That Congress intended to exempt a seller of municipal bonds from liability for failure to prove that he exercised reasonable care in investigating the truth of a representation is not inconsistent with the subjection to civil liability of the same seller after the purchaser proves that he knowingly misrepresented a fact.

 131 F. Supp. at 419. *fn21" Accord, Baron v. Commercial Industrial Bank [1979] Fed.Sec.L.Rep. (CCH) para. 96,826 (S.D.N.Y. 1979); Connecticut Mutual Life Insurance Co. v. Shelds, supra; Greenwich Savings Bank v. Shields, supra; Baron v. Shields, supra; Compare 3 Loss Securities Regulation 1778-91 (2d ed. 1961) and 6 Loss Securities Regulate 3917 (1969) with 1A Bromberg Securities Law: Fraud -- SEC Rule 10b-5 § 2-4(2) (3)(1977); *fn22" cf. Weber v. C.M.P. Corp., 242 F. Supp. 321 (S.D.N.Y. 1965). *fn23"

 In the present litigation, the plaintiffs allege that the commercial banks and brokerage firms engaged in a conspiracy to defraud the purchasers of New York City bounds and notes. The language and legislative history of § 10(b), as well as the legal precedents recognizing an implied private remedy on behalf of the defrauded purchasers, support the conclusion that § 10(b) applies to municipal securities and to the underwriters who sell them. The underwriter and seller defendants' motion to dismiss the § 10(b) cause of action as to them is accordingly denied.

 II. The Applicability of § 10(b) to Municipal Issuers: The City of New York and its Officials.

 On its motions to dismiss, the City first contends that § 10(b) does not apply to municipalities. Although I have concluded that § 10(b) extends to transactions in municipal securities, I also conclude that as "person" is defined in the 1934 Act, liability under § 10(b) does not reach a municipal issuer.

 Section 10(b), and Rule 10b-5 promulgated thereunder, make it unlawful for "any person" to engage in fraud in the sale or purchase of "any security." At the time of the events in suit, and prior to its amendment on June 4, 1975, § 3(a)(9) of the 1934 Act defined "person" as follows:


The term "person" means an individual, a corporation, a partnership, an association, a joint-stock company, a business trust, or an unincorporated organization.

 1934 Act, ch. 404, § 3(a)(9), 48 Stat. 882. This definition of "person" does not, by its terms, apply to municipalities, states or the federal government. *fn24" Nor can such entities be included by implication. This is clear from a comparison of § 3(a)(9) of the 1934 Act with § 2(2) of the 1933 Act, 15 U.S.C. § 77b(2) in which Congress expressly included governmental entities:


The term 'person' means an individual, a corporation, a partnership, an association, a joint-stock company, a trust, any unincorporated organization, or a government or political subdivision thereof. *fn25"

 (Emphasis added.) Moreover, in June of 1975, Congress found it necessary to amend § 3(a)(9) to expressly include a "government, or political subdivision, agency, or instrumentality of a government." Pub.L.No.94-29, § 3, 89 Stat. 97 (1975), 15 U.S.C. § 78c(a)(9)(1977 Supp.). Thus, the omission of express reference to these entities in § 3(a)(9) of the 1934 Act reflects a decision not to include governments within that section.

 While the plaintiffs and certain defendants argue, nonetheless, that the difference between the definition of "person" in the 1934 Act and the 1933 Act are merely stylistic," the legislative history and statutory framework of the securities laws contradict this view. Regulation of governmental instrumentalities was carefully avoided in both the 1933 and 1934 Acts. Congressional reluctance to subject governmental issuers to the civil liability provisions of the securities laws is clearly expressed in the House Report accompanying the 1933 Act. There, the Committee, explaining the reasons for the § 3(a)(2) exemption for governmental issuers, stated:


Paragraph (2) exempts United States, Territorial and State obligations, or obligations of any political subdivision of these governmental units. The term "political subdivision" carries with it the exemption of such securities as county, town, or municipal obligations, as well as school district, drainage district,. . . The line drawn by the expression 'political subdivision' corresponds generally with the line drawn by the courts as to what obligations of States their units and instrumentalities created by them, are exempted from Federal taxation. By such a delineation, any constitutional difficulties that might arise with reference to the inclusion of state and municipal obligations are avoided.

 H.R.Rep.No.85, 73rd Cong., 1st Sess. 14 (accompanying H. R. 5480) (Emphasis added.) These same constitutional limitations, real or imagined, upon Congress' authority to subject governmental issuers to the regulatory scheme were an obvious factor leading to the exemption of such issuers from § 5 and § 12(2) of the 1933 Act. *fn26" One year later, after further hearings on the constitutional political and economic impact of regulations affecting governmental issuers, Congress continued to be of the same view and exempted transactions in government obligations from certain provisions of the 1934 Act. *fn27" The definition of "person" in the 1934 Act, operating as it does to remove governmental instrumentalities from the civil liability provisions of § 10(b), simply furthers the Congressional policy announced in the 1933 Act.

 This analysis is not inconsistent with my earlier conclusion that Congress intended underwriters and sellers to be liable under § 10(b) for their own independent fraudulent conduct in connection with municipal securities. The underwriter defendants argue, by analogy, that since § 12 (2) of the 1933 Act exempts both municipal issuers and underwriters, any exemption for municipal issuers under § 10(b) of the 1934 Act necessarily extends to underwriters. The underwriters cannot claim a "derivative immunity" such as that afforded underwriters and § 12(2) of the 1933 Act. It is true that the Congressional protection afforded governmental issuers under § 12(2) similarly shields underwriters from liability for negligent misrepresentations or omissions. However, § 12(2) exhibits nothing more than a Congressional intent not to impose the disclosure burden of § 5 of the 1933 Act on governmental issuers, and not to shift that responsibility to the underwriters of governmental obligations. By contrast, in § 10(b) of the 1934 Act, Congress clearly intended to differentiate between the governmental issuer on the one hand, and underwriters and sellers on the other. Although the debate on the 1934 Act reveals no evidence of a Congressional concern with fraud on the part of governmental issuers, the same cannot be said of Congress' attitude toward others doing business in municipal securities. As observed earlier in the discussion of the scope of § 10(b), Commissioner Landis testified before Congress that some sellers of municipal bonds had defrauded the investing public. House Hearing, supra, at 897. *fn28" Congress' decision to subject underwriters and sellers of municipal securities to civil liability under § 10(b) for their own fraudulent conduct understandably followed.

 Next, it has been argued that Congress, by redefining "person" to include a municipality in the 1975 Amendments to 1934 Acts merely made explicit what had all along been the case. The legislative history, however, compels the opposite conclusion. *fn29" Although Congress sought to establish a regulatory scheme for the municipal securities market by the adoption of the 1975 amendments, *fn30" what Commissioner Landis referred to as "obvious political reasons" again led Congress to regulate municipal securities dealers but to exempt the municipalities themselves. Concern that "even if regulation were limited to dealers, it would inevitably have consequences for issuers." *fn31" prompted the adoption of the Tower Amendments. These amendments attempted to limit the "collateral effect" of the 1975 Amendments *fn32" on issuers in the following way:


(d)(1) Neither the Commission nor the Board is authorized under this chapter, by rule or regulation, to require any issuer of municipal securities, directly or indirectly through a purchaser or prospective purchaser of securities from the issuer, to file with the Commission or the Board prior to the sale of such securities by the issuer any application, report, or document in connection with the issuance, sale, or distribution of such securities.


(2) The Board is not authorized under this chapter to require any issuer of municipal securities, directly or indirectly through a municipal securities broker or municipal securities dealer or otherwise, to furnish to the Board or to a purchaser or a prospective purchaser of such securities any application, report, document, or information with respect to such issuer


. . . .

 15 U.S.C. § 78o-4(d). The aim of the Tower Amendments was to insure that the 1934 Act (as amended) would not "tamper in any way with prerogatives of state and local governments in their sale of securities." 121 Cong. Rec. 6188 (1975) (Remarks of Senator Williams). Thus, in 1975 Congress merely ratified the approach taken in 1934 with respect to municipal securities. It chose, again, for possibly "obvious political reasons," to exempt municipalities themselves from regulation while subjecting others in the municipal securities market to the Act's regulatory scheme.

 The legislative history of the 1975 Amendments to the Exchange Act is not silent on the question of the applicability of the antifraud provisions of the securities laws to municipal securities. *fn33" However, as the following comment from the Senate Report indicates, the record is somewhat ambiguous:


The Committee is mindful of the historical relationship between the federal securities laws and issuers of municipal securities. Apart from the general antifraud provisions, municipal securities are exempt from all substantive requirements.

 S.Rep.No.94-75 at 44, U.S.Code Cong. & 1975, p. 221. See also Id. at 45. *fn34" First, this statement merely confirms that § 10(b) was intended to cover transactions in municipal securities. Second, as discussed infra, this statement accurately reflects the fact that § 17(a) expressly subjected municipal issuers to the injunctive and criminal provisions of the 1933 Act. See Proposed Amendments to the Securities Exchange Act of 1934: Hearings on S. 249 Before the Subcommitte on Securities of the Senate Committee on Banking, Housing and Urban Affairs, 94th Cong., 1st Sess. 476-79 (1975).Whatever effect the 1975 Amendments may have had on the amenability of governmental issuers to civil liability under § 10(b) in future lawsuits, *fn35" nothing in the legislative history of those Amendments indicates that prior to their enactment § 10(b) was meant to give rise to a private cause of action against a governmental issuer.

 Contrary to the plaintiffs' contention, the Second Circuit in Forman v. Community Services, Inc., 500 F.2d 1246 (2d Cir. 1974), rev'd on other grounds sub nom. United Housing Foundation v. Forman, 421 U.S. 837, 95 S. Ct. 2051, 44 L. Ed. 2d 621 (1975) did not have before it the question presented here. In Forman, the plaintiffs, purchasers of shares in a New York State financed cooperative apartment, brought suit against several corporate defendants under § 10(b) of the 1934 Act and § 17(a) of the 1933 Act. Significantly, the plaintiffs also sought to recover damages from the New York State Housing Finance Agency and the State of New York alleging violations of 42 U.S.C. § 1983 arising out of the same conduct which gave rise to the § 10(b) claims asserted against the other defendants. Thus, the Forman court had no occasion to consider whether § 10(b) applied directly to governmental issuers. *fn36"

 While Forman did not have the question before it, courts that have considered whether § 10(b) extends to municipalities agree that it does not. Decisions in the Second Circuit and in this district have acknowledged the fact that the definition of "person" in § 3(a)(9) of the 1934 Act did not include municipalities. In Monell v. Department of Social Services of the City of New York, 532 F.2d 259 (2d Cir. 1976), rev'd on other grounds, 436 U.S. 658, 98 S. Ct. 2018, 56 L. Ed. 2d 611 (1978) the court, in a footnote, observed :


The definition of "person" in § 3(a)(9) of the Securities Exchange Act of 1934 did not include governmental agencies until the 1975 amendments of § 3(a)(9). . . .

 532 F.2d at 263 n. 3.Two recent district courts expressed the same view. *fn37" In Greenspan v. Crosbie [1976-1977 Transfer Binder] Fed.Sec.L.Rep. (CCH) para. 95,780 (S.D.N.Y. 1976), the court dismissed a lawsuit brought under § 10(b) by the sellers and purchasers of the stock of a Canadian company against the Province of Newfoundland and Labrador, and the three highest officials of that province. While a suggestion of immunity filed by the State Department removed the individual defendants, the court dismissed the government defendants for lack of subject matter jurisdiction. After explaining that governments were not "persons" within the meaning of § 3(a)(9), the court observed:


. . . it is clear that Congress intended to exclude governments from its definition of "persons" in the 1934 Act. It is significant that the earlier Securities Act of 1933 defines 'person' as '... a government or political subdivision thereof.' 15 U.S.C. § 77b(2). The definition in the 1934 Act virtually parallels the language, with the important exception that governments are excluded. Congress obviously intended to exclude governments from liability for violation of the 1934 Act.

 Id. at 90,827. According to the Greenspan court, the language of § 3(a)(9) is "clear and unambiguous" in not covering governments. Any other interpretation of § 3(a)(9) would contradict its plain meaning.

 An identical interpretation of § 3(a)(9) was reached in In re Equity Funding Corp. of America Securities Litigation 416 F. Supp. 161, 198 (C.D. Cal. 1976). There the plaintiffs asserted claims under § 10(b) against the States of California and Illinois and various state administrative agencies and officials. Those defendants were charged with aiding and abetting other defendants in the commission of securities fraud. After reaching the conclusion that the definition of person in § 3(a)(9) did not include states or their agencies, the court explained:


It could hardly be argued that 'aider and abettor' liability can be imposed under § 10(b) on entities not within the scope of principal liability under the statute, because not 'persons' under § 3(a)(9).

 Id. at 198. The view of the Equity Funding court is unexceptional. The decisions in Greenspan and Equity Funding, as well as the court's reading of § 3(a)(9) in Monell, are in agreement with this court's view that the draftsmen of § 3(a)(9) did not intend to include governments -- municipal, state, federal or foreign -- within the definition of "person."

 Finally, this court need not decide whether the 1975 Amendments had the effect of subjecting municipalities to the civil liability provisions of the 1934 Act. In fact, testimony before Congress a year later suggests that the 1975 Amendments were intended to resolve any question as to the SEC's authority to act with respect to governmental issuers. Cf. City of Philadelphia v. SEC, supra. It is significant that the same Congress that adopted the 1975 Amendments, one year later was unable to adopt -- or even report out of committee -- a bill that would have provided for express civil liability in connection with municipal securities. See, Municipal Securities Full Disclosure Act of 1976: Hearings Before the House of Representatives Subcommittee on Consumer Protection and Finance, supra. Congress apparently felt that grave political and constitutional consequences flowed from subjecting the day to day conduct of municipal officials to the scrutiny of the federal securities laws. For example, exposing the mayor of a city to strict antifraud liability under § 10(b) for otherwise general remarks made during an after-dinner speech to constituents would be highly questionable, and would fundamentally alter the relationship between elected officials and the electorate. In my opinion, interjection of the federal securities laws into clearly political affairs of local government represents an unwarranted intrusion into the political life of the community.

 Given the foregoing, the City of New York cannot be held liable under § 10(b) of the 1934 Act either as a principal or as an aider and abettor, and the complaints, to the extent they are based on § 10(b) are dismissed. Finally, since the complaints allege that Mayor Beame and Comptroller Goldin acted solely within their official capacities, *fn38" they cannot be held individually liable under § 10(b), and the complaints as to them are dismissed.

 III. § 17(a) Claim Against the City of New York

 The plaintiffs argue that, even if § 10(b) does not apply to a municipality, a private cause of action against the City exists under § 17(a) of the 1933 Act, 15 U.S.C. § 77q(a). To resolve this question, one must examine the statutory framework of the 1933 Act, the legislative history § 17(a), and the relevant law. See Cannon, supra, and Reddington, supra. Based on an analysis of those sources, I conclude that the plaintiffs' complaint against the City under § 17(a) must also be dismissed. *fn39"

 Section 17(a) of the 1933 Act must be viewed together with the express civil liability provisions of § 11 and § 12(2) of the same Act. Section 11 only deals with noncompliance or faulty compliance with the registration and prospectus requirements of § 5. By contrast, § 12(2) of the 1933 Act, which expressly excludes exempted securities from its coverage, specifically provides a private remedy to a defrauded investor. Given the interrelationship of these sections, Congress probably did not intend § 17(a) to furnish defrauded investors with a further basis for asserting civil liability. See Douglas & Bates, Federal Securities Act, 43 Yale L.J. 171 (1934) ("Section 17 probably does not enlarge civil remedies of purchasers... since Section 11 and 12 expressly state the remedies which are available"); 3 Loss, Securities Regulation 1785 (2d ed. 1966); Jennings & Marsh, Securities Regulation 863 (4th ed. 1977).

 This interpretation of the structure of the 1933 Act, and the role of § 17(a) in that framework, is supported by its legislative history. First, the House Report on the 1933 Act clearly states under the heading, "Civil Liabilities" that "Sections 11 and 12 create and define the civil liabilities imposed by the act and the machinery for their enforcement which renders them practically valuable." H.R.Rep.No.85, 73d Cong., 1st Sess. 9 (1933). Nowhere in that discussion is § 17(a) mentioned. Second, § 17(a) appears to have been intended for a wholly different function, explained by one leading commentator as follows:


"[A] reading of [ § 17(a)] in light of the entire Act leaves no doubt that violations of its provisions give rise only to a liability to be restrained by injunctive action or, if willfully done, to a liability to be punished criminally."

 Landis, Liability Sections of Securities Act, 18 American Accountant, 330, 331 (1933). The same view was expressed by Judge Friendly in SEC v. Texas Gulf & Sulphur Co., 401 F.2d 833, 867 (2d Cir. 1968), cert. denied sub nom. Coates v. SEC, 394 U.S. 976, 89 S. Ct. 1454, 22 L. Ed. 2d 756 (1969) (Friendly, J. concurring), where he observed that there was "unanimity among the commentators" that § 17(a) of the 1933 Act "was intended only to afford a basis for injunctive relief and, on a proper showing, for criminal liability...." While the SEC has expressed the view that § 17(a) grants it the authority to investigate municipal issuers, see SEC Release No. 34-11876 (November 26, 1975); see generally n. 34, supra and accompanying text, neither the legislative history nor the statutory language of § 17(a) supports the implication of a private cause of action with respect to municipal issuers.

 Plaintiffs urge that Kirshner v. U.S., 603 F.2d 234, (2d Cir. 1978), rehearing denied, No. 77-6104 (2d Cir. July 18, 1979), cert. denied sub nom. Goldberg v. Kirshner, 444 U.S. 995, 100 S. Ct. 531, 62 L. Ed. 2d 426 (1979) has established a "naked § 17(a)" cause of action. See Wigand v. Flo-Tek, Inc., 609 F.2d 1028 (2d Cir. 1979), as amended, No. 79-7150 (2d Cir. January 14, 1980). In Kirshner, the Court of Appeals for the Second Circuit recently held that the plaintiff, a beneficiary of a pension fund, could sue the trustees of that fund under both § 10(b) and § 17(a). In upholding the § 17(a) claim, the court noted that "there [is] little practical point in denying the existence of an action under § 17(a) once it is established that an aggrieved buyer has a private action under § 10(b) of the 1934 Act." Id. at 241, citing SEC v. Texas Gulf Sulphur Co., supra, at 867 (Friendly, J. concurring). However, since as I perceive it, Congress did not intend to confer a private cause of action under § 10(b) against a municipal issuer, see supra, n. 24 to 35 and accompanying text, Congress certainly did not intend to provide such a remedy under § 17(a) alone. Consequently, I deem it inappropriate to imply a private cause of action against municipal issuers under § 17(a). *fn40"

 The question being elsewhere undecided, and now squarely presented, I conclude for the reasons stated above that a private right of action against municipal issuers does not exist under § 17(a) of the 1933 Act, and the plaintiffs' claims against the City based thereon are dismissed.

 IV. The Pendent State Law Claims

 Notwithstanding that the plaintiffs' federal securities law claims against the City defendants must fall, the question remains as to whether there is pendent jurisdiction over the City defendants with respect to the plaintiffs' common law fraud claims. This raises the "subtle and complex" issue presented in Aldinger v. Howard, 427 U.S. 1, 96 S.Ct 2413, 49 L. Ed. 2d 276 (1975), of "whether the doctrine of pendent jurisdiction extends to confer jurisdiction over a party as to whom no independent basis of federal jurisdiction exists." Id. at 2-3, 96 S. Ct. at 2415. I conclude that this court lacks the power in this case to adjudicate state law claims against a party not otherwise subject to federal jurisdiction.

 In Aldinger, the plaintiff commenced an action in federal court against Spokane County and various county officials. In addition to a cause of action under Section 1983 of the Civil Rights Act of 1871, 42 U.S.C. § 1983, the complaint alleged common law tort claims. The Court held that since the county was not subject to suit under 42 U.S.C. § 1983, the state law claims would have to be dismissed as well. *fn41" The court pointed out that the parameters of the federal courts' subject matter jurisdiction are defined not only by the language of Article III of the Constitution, but by the "deductions which may be drawn from congressional statutes as to whether Congress wanted to grant this sort of jurisdiction to federal courts." Id. at 17, 96 S. Ct. at 2421.Thus, great emphasis was placed on the fact that Congress had excluded counties from liability under § 1983 by not including them in the statute's definition of "persons":


Parties such as counties, whom Congress excluded from liability in § 1983, and thereby by reference in the grant of jurisdiction under § 1343(3), can argue with a great deal of force that the scope of that "civil action" over which the district courts have been given statutory jurisdiction should not be so broadly read as to bring them back within that power merely because the facts also give rise to an ordinary civil action against them under state law.

 Id. at 17. In furtherance of this legislative intent, the Court concluded that the plaintiffs' state law claims against the county could not be joined with its federal claims against other parties. *fn42" In essence, the Court held that pendent jurisdiction could not be used to bring local governments back into the very cases from which the substantive legislation had excluded them.

 This analysis is obviously applicable here. As discussed earlier, Congress excluded cities from the scope of § 10(b) of the of the Act confers jurisdiction over "... actions at law brought to enforce liability or duty created by this chapter or the rules and regulations thereunder." 15 U.S.C. § 78aa. The exclusion of cities from liability under the substantive provisions of the Act evidences a Congressional intent to withhold federal court jurisdiction over actions for securities fraud under state law. I deem it inappropriate, given the principle of Aldinger, to hold the City defendants on a pendent jurisdiction theory in the very actions from which Congress has excluded them. *fn43" Plaintiffs' state law claims against the City defendants are therefore dismissed.


 The motion to dismiss by the underwriter and seller defendants is denied, and the motion to dismiss by the City of New York and its former Mayor and Comptroller is granted.

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