The opinion of the court was delivered by: CONNER
This is an action for damages for alleged securities fraud. Plaintiff Alex Colman ("Colman") is an investor and former customer of defendant D. H. Blair & Co., Inc. ("Blair"), a securities broker-dealer and member of the National Association of Securities Dealers, Inc. ("NASD") and the New York Stock Exchange ("NYSE"). Defendant Morton Davis ("Davis") is the president of Blair. Defendant Murray Koppelman ("Koppelman") is a Blair employee who handled Colman's account. Defendant Dr. Phillip David ("David") is Davis's brother and is alleged to be a control person of Blair and an advisor to Koppelman. Colman alleges fraud in connection with the handling of his account, including churning, willful misrepresentations and failure adequately to supervise and control the transactions in Colman's account.
Defendants have moved under Rule 12(b)(6), F.R.Civ.P., to dismiss Counts III and IV of the Second Amended Complaint, as well as Paragraph 22(c) of Count I. The Second Amended Complaint is in eight counts. Count I alleges violations of Section 10(b) of the Securities Exchange Act of 1934 ("Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5. Paragraph 22(c) of Count I alleges that the failure to disclose that defendants had "violated Blair's procedural rules for the management of customer accounts as set forth in Blair's compliance manual and other written and oral instructions to Blair employees" was one of several misrepresentations or omissions in violation of Rule 10b-5. Count III alleges violations of NYSE Rules 405, 342(b) and 408. Count IV alleges violations of Article III of the NASD Rules of Fair Practice ("NASD Rules"), specifically Sections 1, 2, 18 and 27.
The motion of defendants is based upon their contention that there is no implied private right of action for violation of the NYSE and NASD rules specified in Counts III and IV, respectively. Defendants also seek dismissal of Paragraph 22(c) of Count I on the ground that it circuitously attempts to plead a violation of Section 27 of the NASD Rules.
The starting point for this Court's analysis of the issues presented on the instant motion must be Colonial Realty Corp. v. Bache & Co., 358 F.2d 178 (2d Cir.), cert. denied, 385 U.S. 817, 87 S. Ct. 40, 17 L. Ed. 2d 56 (1966). There a customer sought to press claims against a broker-dealer for, inter alia, failure to conduct its dealings in a manner consistent with just and equitable principles of trade, in violation of various NYSE and NASD Rules, including NASD Rules, Section 1. The question presented was whether an implied private right of action exists under such rules.
The Court began its analysis by examining the then-existing Sections 6(b) and 15A(b)(8) of the Act, which generally prohibit the registration of national securities exchanges and broker-dealer associations, respectively, unless such organizations promulgate rules of fair trade and disciplinary procedures to assure compliance by members with such rules and the Act.
These statutory sections authorize wide discretion in establishing standards and principles that should govern the trading of securities. Id. at 181. The Court concluded that the explicit reliance in the statutes upon the disciplinary functions of the exchanges and associations and the absence of such rules from the grant of federal jurisdiction in Section 27 of the Act, 15 U.S.C. § 78aa, are indicative that "Congress did not intend violations of all rules adopted (thereunder) to give rise to civil claims under federal law." Id. The Court, however, declined to hold that such rules cannot provide the basis for implying a private right of action; since the rules as a general matter provide "what amounts to a substitute for regulation by the SEC itself," id. at 182, "a particular ... rule could thus play an integral part in SEC regulation ...," id. Accordingly, a
"court must look to the nature of the particular rule and its place in the regulatory scheme, with the party urging the implication of a federal liability carrying a considerably heavier burden of persuasion than when the violation is of the statute or an SEC regulation. The case for implication would be strongest when the rule imposes an explicit duty unknown to the common law." Id.
The Court concluded that NYSE or NASD Rules which merely proscribe generally acts "inconsistent with just and equitable principles of trade" do not provide a basis for an implied private right of action against an NYSE or NASD member.
Applying the standards set forth in Colonial, district courts in this Circuit reached various results regarding the implication of private causes of action for violation of NYSE or NASD Rules. See, e.g., Rolf v. Blyth Eastman Dillon & Co., Inc., 424 F. Supp. 1021 (S.D.N.Y.1977), aff'd (on alternative grounds), 570 F.2d 38 (2d Cir.), cert. denied, 439 U.S. 1039, 99 S. Ct. 642, 58 L. Ed. 2d 698 (1978) (fraudulent conduct actionable under NYSE Rule 405 and NASD Rules, Section 2); Plunkett v. Dominick & Dominick, Inc., 414 F. Supp. 885 (D.Ct.1976) (Newman, J.) (no implied cause of action under NYSE Rule 405 and NASD Rules, Sections 2 and 27, even though, subsequent to Colonial, SEC adopted similar rules); Architectural League of New York v. Bartos, 404 F. Supp. 304 (S.D.N.Y.1975) (violation of NASD Rules not basis of independent cause of action); Gurvitz v. Bregman & Co., 379 F. Supp. 1283 (S.D.N.Y.1974) (no implied cause of action under NASD Rules, Section 21); Starkman v. Seroussi, 377 F. Supp. 518 (S.D.N.Y.1974) (on facts presented, implied cause of action for violations of NYSE Rules 345.17, 345.19 and 405).
Since Colonial, however, the Supreme Court has given new guidance regarding the implication of private rights of actions from federal statutes and regulations. In Cort v. Ash, 422 U.S. 66, 95 S. Ct. 2080, 45 L. Ed. 2d 26 (1975), the Court ruled that no private cause of action for damages against corporate directors is to be implied in favor of a corporate shareholder under 18 U.S.C. § 610, a criminal statute prohibiting certain political contributions by corporations. In so ruling, the Court delineated the following four factors to be examined in determining the propriety of an implied private remedy:
(1) Is the plaintiff one of the class for whose especial benefit the statute was enacted?
(2) Is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one?
(3) Is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff?
(4) Is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law? Id. at 78, 95 S. Ct. at 2088.
More recently, the Court has had two occasions to address the "implied right of action" question in the securities laws area. In Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S. Ct. 2479, 61 L. Ed. 2d 82 (1979), the Court ruled that no implied right of action exists under Section 17(a) of the Act in a suit by customers of a securities brokerage firm against the firm's ...