Bolger v. Laventhol, Krekstein, Horwath & Horwath

• Decision Date: 29 July 1974
• Docket Number: No. 73 Civ. 5063.,73 Civ. 5063.
• Citation: 381 F. Supp. 260
• Parties: David F. BOLGER et al., Plaintiffs, v. LAVENTHOL, KREKSTEIN, HORWATH & HORWATH, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

381 F. Supp. 260

David F. BOLGER et al., Plaintiffs, v. LAVENTHOL, KREKSTEIN, HORWATH & HORWATH, et al., Defendants.

No. 73 Civ. 5063.

United States District Court, S. D. New York.

June 26, 1974.

Reargument July 29, 1974.

Walsh & Frisch, New York City, for plaintiffs; E. Roger Frisch, Robert D. Mercurio, New York City, of counsel.

Willkie, Farr & Gallagher, New York City, for defendants Laventhol, Krekstein, Horwath & Horwath, Landis & Landis, and Morris Landis; Louis A. Craco, Stephen Greiner, New York City, of counsel.

Christy, Frey & Christy, New York City, for defendants Morton Dear and Thomas Martino, Jr.; David P. Steinmann, New York City, of counsel.

METZNER, District Judge:

This is a motion to dismiss the complaint pursuant to Rules 12(b)(1) and (6), Fed.R.Civ.P., for lack of subject matter jurisdiction and failure to state a claim upon which relief may be granted.

Plaintiffs are nineteen limited partners of Takara Partners Limited (Takara), a New York limited partnership which was organized on July 16, 1969, for the purpose of investing and trading in securities. The moving defendants are Laventhol, Krekstein, Horwath & Horwath (Laventhol), an accounting firm which prepared certain financial statements for Takara; Landis & Landis, a New Jersey accounting firm which was part of Laventhol; Morris Landis and Morton Dear, partners in Laventhol and Landis & Landis; and Thomas Martino, an employee of Laventhol. The remaining defendants are Akiyoshi Yamada and John Galanis, two general partners of Takara who exercised exclusive control over its assets and securities transactions, and Robert Bier and Michael Weiner, two additional employees of Laventhol.

The complaint alleges that Yamada and Galanis violated Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a)) (1933 Act), Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) (1934 Act), and Section 206(1) and (2) of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-6(1) and (2)) (Advisers Act) by engaging in a series of illegal transactions on behalf of the partnership designed to defraud the limited partners of Takara.¹ These transactions included, inter alia, purchases of over $1 million in "unsuitable securities" for which they privately received cash inducements, misappropriation of Takara's assets, the manipulation of securities in Takara's portfolio for their own benefit, dissemination of false "monthly letters" to the limited partners concerning the value of Takara's assets, and the payment of cash to various accountants for the purpose of securing favorable opinions on Takara's financial condition.

The movants are charged with aiding and abetting these securities law violations as a result of their dissemination in March 1970 of false and misleading certified financial statements (1969 Report), and in April 1971 of materially false and misleading information concerning the investment performance of Takara during 1970 (1970 Income Tax Report). It is unnecessary, for the purpose of deciding this motion, to refer to the specific allegations concerning the actions of the movants.

It is further alleged that as a result of receiving and relying on the 1969 Report and the 1970 Income Tax Report, plaintiffs were prevented from learning the true facts about Takara's precarious financial condition. Because of this lack of knowledge they took no steps to recover their investments in Takara, or to prevent further deterioration of its financial status until late May 1971 when Laventhol first disclosed that it could not issue an opinion as to Takara's financial condition, as required by the partnership agreement, for the year ending 1970, because of serious irregularities in its financial records. At that point, plaintiffs acted to save their investments by obtaining an order dissolving Takara. On August 10, 1971, however, the partnership was adjudicated a bankrupt. Plaintiffs now seek damages in the sum of $2,417,641 representing their lost investments.

In the course of these proceedings, plaintiffs have conceded that the Section 17(a) claim contained in Count Two is no longer viable. Consequently, Count Two is dismissed.

We turn then to Count One of the complaint which charges the defendants with violations of Sections 206(1) and (2) of the Advisers Act. These sections provide:

"It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly —

(1) to employ any device, scheme, or artifice to defraud any client or prospective client;

(2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client . . .."

It is admitted, for the purposes of this motion, that Yamada and Galanis were investment advisers as defined in Section 202(a)(11) of the Act (15 U.S. C. § 80b-2(a)(11)), and that the movants aided and abetted them in committing acts which were violative of these provisions.

Defendants contend, however, that this count must be dismissed because the Advisers Act does not explicitly authorize — nor should the court imply — a private right of action for damages to redress violations of the Act. Although the Advisers Act has been on the legislative rolls for thirty-four years, this is the first time that a court has been called upon to specifically determine whether such a private action may be maintained.²

It is undisputed that neither Section 206, nor any other section of the Advisers Act, contains any language which explicitly authorizes a private party to sue for damages for violations of the antifraud provisions of the Act. That factor alone, however, is not dispositive of the instant claim. The Supreme Court has repeatedly recognized that private rights of action may be implied in favor of the intended beneficiaries of an Act in order to enforce compliance with its provisions. See, e. g., J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964); Tunstall v. Brotherhood of Locomotive Firemen and Enginemen, 323 U.S. 210, 65 S.Ct. 235, 89 L.Ed. 187 (1944); Texas & Pacific R. R. v. Rigsby, 241 U.S. 33, 36 S.Ct. 482, 60 L.Ed. 874 (1916); cf., Bivens v. Six Unknown Named Agents, 403 U.S. 388, 91 S.Ct. 1999, 29 L.Ed.2d 619 (1971); Bell v. Hood, 327 U.S. 678, 66 S.Ct. 773, 90 L.Ed. 939 (1946). Securities legislation has proved to be no exception. See generally, III Loss, Securities Regulation, 932-956 (1961); J. I. Case v. Borak, supra, 377 U.S. at 432, 84 S.Ct. 1555.

By implying private damage actions in these cases, the courts have in effect legislated interstitially in order to effectuate the broad "remedial purposes" of the federal securities laws. Securities and Exchange Commission v. Capital Gains Research Bureau, 375 U.S. 180, 195, 84 S.Ct. 275, 11 L.Ed.2d 237 (1964).

In determining if a similar private right of action should be implied under the Advisers Act, we must ascertain whether such an implication would be "consistent with the evident legislative intent and, of course, with the effectuation of the purposes intended to be served by the Act." National Railroad Passenger Corp. v. National Association of Railroad Passengers, 414 U.S. 453, 458, 94 S.Ct. 690, 693, 38 L.Ed.2d 646 (1974); see also, Ash v. Cort, 496 F.2d 416 (3d Cir. 1974). We conclude that it is.

The Advisers Act was the last in a series of federal legislation designed to eliminate certain abuses in the securities industry, abuses which Congress determined had contributed to the 1929 stock market crash and the depression of the 1930's. "A fundamental purpose, common to these statutes, was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry." Securities and Exchange Commission v. Capital Gains Bureau, Inc., 375 U.S. supra at 186, 84 S.Ct. at 280. This Act, along with the Investment Company Act of 1940, was spawned by an exhaustive study and report of investment trusts and investment companies undertaken by the Securities and Exchange Commission pursuant to Section 30 of the Public Utility Holding Company Act of 1935 (15 U.S.C. § 79z-4).

On the basis of this study, Congress determined that persons who paid for investment advice needed protection from dishonest and self-dealing advisers. Thus the Senate Report supporting the enactment of this legislation stated:

"The nature of the functions of investment advisers, their increasing widespread activities, their potential influence on security markets and the dangerous potentialities of stock market tipsters imposing upon unsophisticated investors, convinces this Committee that protection of investors requires the regulation of investment advisers on a national scale." S.Rep. No.1775, 76th Cong., 3d Sess., at 21 (1940).

This view was echoed by the House Report which declared that the Advisers Act was designed to:

". . . protect the public from the frauds and misrepresentations of unscrupulous tipsters and touts and to safeguard honest investment advisers against the stigma of the activities of these individuals by making fraudulent practices by investment advisers unlawful." H.R.Rep.No.2639, 76th Cong., 3d Sess., at 28 (1940).

Based on the foregoing expressions of legislative purpose, it is clear that plaintiffs, as persons who were defrauded out of substantial sums of money by their investment advisers, fall squarely within the class of persons whom the antifraud provisions of Section 206 were intended to protect. Compare, Independent Investor Protective League v. Securities and Exchange Commission, 495 F.2d 311, 312 (2d Cir. 1974); Herpich v. Wallace, 430 F.2d 792, 813-16 (5th Cir. 1970). They thus have standing to seek redress for the injuries they allegedly suffered at the hands of the defendants. See, Sierra Club v. Morton, 405 U.S. 727, 92 S.Ct. 1361, 31 L.Ed.2d 636 (1972); Association of Data...