In re New York City Municipal Securities Litigation
| Citation | 507 F. Supp. 169 |
| Parties | In re NEW YORK CITY MUNICIPAL SECURITIES LITIGATION. |
| Decision Date | 25 January 1980 |
| Court | United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York |
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Pomerantz, Levy, Haudek & Block, New York City by Richard M. Meyer, Eugene H. Zagat, Jr., William E. Haudek, New York City, for Friedlandler class plaintiffs.
Gold, Farrell & Marks by Thomas R. Farrell, New York City, for Spector class plaintiffs.
William M. Weisberg, New York City, for plaintiffs Goldfarb and Weisberg.
Teitler & Teitler by Michael F. Teitler, New York City, for plaintiff World Airways, Inc.
Allen G. Schwartz, Corp. Counsel by Bruce S. Kaplan, Chief Asst. Corp. Counsel, John F. Grubin, Steven Been, James M. Kaplan, Asst. Corp. Counsels, New York City, of counsel, for municipal defendants City of New York, Abraham Beame and Harrison Goldin.
Barry R. Ostrager, Kathleen Schaaf, Simpson, Thacher & Bartlett, New York City, for Manufacturers Hanover Trust Co.
Irwin J. Sugarman, Schulte & McGoldrick, New York City, for Ehrlich-Bober & Co., Inc.
Robert P. Beshar, New York City, for Weeden & Co.
M. William Munno, Paul Batista, Seward & Kissel, New York City, for Bank of America.
Stephen A. Weiner, Robert J. Sussman, Winthrop, Stimson, Putnam & Roberts, New York City, for Bear, Stearns & Co.
Laura B. Hoguet, Richard J. Holwell, White & Case, New York City, for Bankers Trust Co.
Ronald L. Cohen, Donovan, Leisure, Newton & Irvine, New York City, for A. G. Becker & Co., Inc.
Thomas A. Shaw, Jr., Breed, Abbott & Morgan, New York City, Paul B. Galvani, George M. Moriarty, Ropes & Gray, Boston, Mass., for First Nat. Bank of Boston.
Evan A. Davis, Edmund H. Kerr, Cleary, Gottlieb, Steen & Hamilton, New York City, for Salomon Bros.
Lowell G. Harriss, Davis, Polk & Wardwell, New York City, for Morgan Guaranty Trust Co.
W. Foster Wollen, Paul A. Merolla, Shearman & Sterling, New York City, for Citibank, N. A.
Richard C. Casey, Joseph G. Riemer, III, Brown, Wood, Ivey, Mitchell & Petty, New York City, for Merrill Lynch, Pierce, Fenner & Smith, Inc.
Gregory A. Markel, Cravath, Swaine & Moore, New York City, for Chemical Bank.
Jon Paul Robbins, Nitkin, Alkalay, Handler & Robbins, New York City, for First Pennco Securities Inc.
Briscoe R. Smith, Toni C. Lichstein, Milbank, Tweed, Hadley & McCloy, New York City, for The Chase Manhattan Bank, Nat. Assn.
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 1975.1 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 1975.2 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(b), 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.3 In five of the actions, the City is named as a defendant along with the underwriters and sellers.4 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 in short-term notes, of which the defendant banks held approximately $3.5 billion, and of which large clients of the defendant brokers owned approximately $900 million. (Plaintiff's Complaint at ¶ 31.) According to the complaint, on the basis of "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.5 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),6 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 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 histories and the relevant case law, 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.
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,7 and Rule 10b-5 promulgated thereunder,8 is equally available to a purchaser of municipal securities. This is "basically a matter of statutory construction." Trans-America Mortgage Advisors v. Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed. 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 operation 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...
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