Basile v. Merrill Lynch, Pierce, Fenner & Smith

• Decision Date: 29 November 1982
• Docket Number: C-1-82-748,C-1-82-774 and C-1-82-857.,No. C-1-82-740,C-1-82-740
• Citation: 551 F. Supp. 580
• Court: U.S. District Court — Southern District of Ohio
• Parties: Simon A. BASILE, et al., Plaintiffs, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Defendants. Allen G. ZARING, Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Defendants. John E. KUHN, et al. v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Defendants. Wayne L. DICKERHOFF, et al., Plaintiffs, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Defendants.

551 F. Supp. 580

Simon A. BASILE, et al., Plaintiffs, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Defendants.

Allen G. ZARING, Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Defendants.

John E. KUHN, et al. v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Defendants.

Wayne L. DICKERHOFF, et al., Plaintiffs, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Defendants.

Nos. C-1-82-740, C-1-82-748, C-1-82-774 and C-1-82-857.

United States District Court, S.D. Ohio, W.D.

November 29, 1982.

Michael G. Kohn, Kohn & Helmer, Cincinnati, Ohio, for Basile, Zaring, Kuhn and Chism.

Timothy L. Bouscaren, Walker, Chatfield & Doan, Cincinnati, Ohio, for Basile, Dicherhoff, Murphy, Jameson, Slagle, Homoelle and Peck.

Michael F. Haverkamp, Cincinnati, Ohio, for Merrill Lynch, Pierce, Fenner & Smith, Inc.

Michael G. Long, Columbus, Ohio, for Rex Railways, Inc., in all cases.

Thomas B. Ridgley, Columbus, Ohio, for Rex Railways, Inc. in No. C-1-82-774.

SPIEGEL, District Judge:

This matter came on for consideration of defendant Rex Railway's motion to dismiss (doc. 7), plaintiffs' memorandum in opposition (doc. 11), and defendant's reply memorandum (doc. 13).¹ For reasons to be discussed, we hereby deny defendant's motion.

These actions for fraud were brought pursuant to section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), rule 10b-5, 17 C.F.R. § 240.10b-5, and the common law of the state of Ohio. All but one of the plaintiffs in Dickerhoff also assert a claim under section 12(2) of the Securities Act, 15 U.S.C. § 77l(2).

Plaintiffs allege fraud in the offer and sale of boxcar management programs devised by defendant Rex Railway and sold through defendant Merrill Lynch, Pierce, Fenner & Smith. By order of the Court (doc. 14), these actions have been consolidated for pretrial purposes only.

Defendant Rex Railway moved to dismiss all but the 12(2) claims pursuant to Rule 12(b), Fed.R.Civ.P., on the grounds that there is no implied right of action under section 17(a), that there is no implied right of action under section 10(b) where the federal securities acts expressly provide a remedy, and that even if plaintiffs have any implied rights of action their claims are barred by the statute of limitations. Although we agree that there is no implied private rights of action under section 17(a), we find that there is such a right under section 10(b) and that the pleadings do not conclusively show that the plaintiffs' claims are barred by the statute of limitations. Accordingly, we deny defendant's motion.

As a preliminary matter we note that with respect to the implied causes of action we need not determine at this stage of the litigation what law governs. Defendant maintains that the contracts between plaintiffs and defendant Rex Railway provide that the agreements are to be governed by New Jersey law. The result, however, is the same whether we apply the law of the Third or the Sixth Circuit as neither of those Circuits has decided the particular issues presented by the instant cases.

I. Introduction

Defendant's motion addresses two sections of the federal securities acts, section 17(a) of the Securities Act of 1933 and section 10(b) of the Securities Exchange Act. Both of these sections are anti-fraud provisions; neither provides an express private right of action.

The Supreme Court has instructed us that the 1933 and 1934 acts are "interrelated components of the federal regulatory scheme governing transactions in securities." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 206, 96 S.Ct. 1375, 1387, 47 L.Ed.2d 668 (1976). Although we must, therefore, consider the relationships between the Acts, we should also be guided by the fact that the Acts focus on different areas of securities regulation and are enacted for different purposes.

The Securities Act of 1933, 15 U.S.C. § 77a et seq., regulates public offerings of securities. It forbids offers and sales of securities not registered with the Securities and Exchange Commission, with the exception of certain enumerated exempt securities. The Act also prohibits fraud or deceit in the offer and sale of securities. The basic purpose of the Act is to assure that the public has access to adequate reliable information about any securities offered to the public.

The Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., a much broader statute, extended federal regulation to securities already issued. Unlike the Securities Act which focuses on a single provision and has been amended only slightly, the 1934 Act has multiple provisions covering several areas of regulation and has been amended substantially. In addition to establishing the Securities Exchange Commission (SEC), the 1934 Act, inter alia, imposes disclosure requirements on publicly held corporations, prohibits various manipulative or deceptive practices in connection with the purchase or sale of securities, restricts the amount of credit that can be extended for the purchase of securities, imposes registration requirements or brokers and dealers, and establishes SEC registration and supervision of national security exchanges and other entities involved in securities transactions. The 1934 Act, as amended, is clearly a far more comprehensive statute than the 1933 legislation.

Our determination of whether a private right of action can be implied under section 17(a) and whether there is a private right of action under section 10(b) for conduct for which the securities acts provide an express remedy is premised on the interrelatedness of the two acts as well as the distinct nature of each of the acts. Furthermore, we emphasize that congressional intent is the key to both issues. Both issues involve implied rights — the first raises the existence of an implied right of action; the second, the scope of an already established implied right. As will be discussed, the Supreme Court has made it emphatically clear that no private right of action shall be implied without a finding that Congress intended the implication of such a right. We conclude that this same test must be applied where the issue is the scope of a recognized implied right.

II. Implied Rights of Action

In Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975) the United States Supreme Court held that four factors must be considered in determining whether to imply a private cause of action from a general prohibition contained in a federal statute.

First, is the plaintiff "one of the class for whose especial benefit the statute was enacted," — that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy? And finally, 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 (emphasis original, citations omitted). In subsequent cases, however, the Court has adopted a more stringent standard in which the central inquiry goes to congressional intent. Stating that the four Cort factors are not entitled to equal weight, the Court concluded that three of those factors — "the language and focus of the statute, its legislative history, and the purpose of the statute — are ones traditionally relied upon in determining legislative intent." Touche Ross & Co. v. Redington, 442 U.S. 560, 575-76, 99 S.Ct. 2479, 2489, 61 L.Ed.2d 82 (1979). In another implied action case, the Court insisted that close attention be paid to the "elemental cannon of statutory construction that where a statute expressly provides a particular remedy or remedies, a court must be chary of reading others into it." Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 19, 100 S.Ct. 242, 247, 62 L.Ed.2d 146 (1979) (TAMA).

Only last term, the Supreme Court emphasized again that the inquiry focuses primarily on congressional intent. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, ___ U.S. ___, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982). The majority and the four dissenters agreed that failure to provide an express private right of action is not necessarily inconsistent with congressional intent to provide such a right. In holding that an investor may maintain an action against a commodities broker for violating an antifraud provision of the Commodities Exchange Act, 7 U.S.C. §§ 1 et seq., the majority reasoned that to determine intent where a statute is silent on the issue of a private cause of action, the court must begin by considering the state of the law at the time the legislation was enacted.

More precisely we must examine Congress' perception of the law that it was shaping or reshaping. When Congress enacts new legislation, the question is whether Congress intended to create a private remedy as a supplement to the express enforcement provisions of the statute. When Congress acts in a statutory context in which an implied private remedy has already been recognized by the courts, however, the inquiry logically is different. Congress need not have intended to create a remedy since one already existed; the question is whether Congress intended to preserve the pre-existing remedy.

___ U.S. at ___, 102 S.Ct. at 1839 (footnote omitted).

The analysis which we must undertake in determining whether Congress intended that a private right of action be implied is clear. Middlesex County Sewerage Authority v. National Sea Clammers Association, 453 U.S. 1, 13, 101 S.Ct. 2615, 2622, 69 L.Ed.2d 435 (1981); California v. Sierra Club, 451 U.S. 287, 293, 101 S.Ct. 1775, 1779, 68 L.Ed.2d 101 (1981); TAMA, 444 U.S. at 15, 100 S.Ct. at 245; Redington, 442 U.S. at...