Robertson v. Dean Witter Reynolds, Inc.

• Decision Date: 10 December 1984
• Docket Number: No. 83-1664,83-1664
• Citation: 749 F.2d 530
• Parties: , Fed. Sec. L. Rep. P 91,868 Robert S. ROBERTSON, Plaintiff-Appellant, v. DEAN WITTER REYNOLDS, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 530

749 F.2d 530

53 USLW 2328, Fed. Sec. L. Rep. P 91,868

Robert S. ROBERTSON, Plaintiff-Appellant, v. DEAN WITTER REYNOLDS, INC., Defendant-Appellee.

No. 83-1664.

United States Court of Appeals Ninth Circuit.

Submitted Jan. 12, 1984.

Decided Dec. 10, 1984.

Janis Harwell, Thelen, Marrin, Johnson & Bridges, San Francisco, Cal., for plaintiff-appellant.

Richard B. Glickman, San Francisco, Cal., for defendant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before GOODWIN, PREGERSON and NELSON, Circuit Judges.

NELSON, Circuit Judge:

Robert S. Robertson alleges that Dean Witter Reynolds, Inc. violated its duty to him under Securities and Exchange Commission ("SEC") Rule 10b-16. Rule 10b-16 requires brokers to disclose in writing the terms of credit they extend to customers who wish to purchase securities on margin. Robertson lost money after Dean Witter sold treasury bonds from his account because he failed to meet a margin call. The district court dismissed Robertson's claim with prejudice pursuant to Fed.R.Civ.P. 12(b)(6). On appeal Robertson argues (1) that Rule 10b-16 creates an implied cause of action, and (2) that proof of scienter is not a necessary element of such a claim. We find that Rule 10b-16 provides for a private right of action but that scienter is a requisite element thereof. We therefore reverse and remand to allow Robertson to amend his complaint to allege scienter on the part of Dean Witter.

FACTS AND PROCEDURAL BACKGROUND

This case comes to us on appeal from a judgment on the pleadings pursuant to Fed.R.Civ.P. 12(b)(6); we therefore assume the truth of all material allegations in the complaint. Robertson opened a brokerage account with Dean Witter on August 15 Interest rates continued to rise, reducing the value of Robertson's bonds, which were also Dean Witter's collateral on its loan to Robertson. Over the next seven months Dean Witter made several margin calls--demands for the payment of additional collateral. Robertson promptly met each of these calls. On August 27, 1981, Dean Witter sent Robertson another margin call requiring the payment of $7100 before September 2. When Robertson had not met the margin call on September 1, Dean Witter sold the treasury bonds to satisfy his remaining debt on its loan. ¹ As a result, Robertson lost his investment in the bonds, including the downpayment, $76,753 in interest charges, and an additional $36,000 he had paid to reduce the principal of his debt, for a total of $149,000. The record does not indicate, however, the amount of interest Robertson received during the seven months he owned the bonds.

1980. On January 22, 1981, he instructed Dean Witter to buy treasury bonds with a face value of $500,000 for his account. Robertson purchased the bonds for $367,138 on margin. He paid $36,714 as a downpayment and Dean Witter extended him credit for the balance. The bonds were priced at a substantial discount from face value because interest rates had risen since the time the bonds were first issued.

On July 7, 1982, Robertson filed a six count complaint in the District Court for the Northern District of California alleging that Dean Witter had violated various federal and state securities laws. In count one, Robertson complained that his loss was caused by Dean Witter's failure to inform him of the terms on which credit was extended to him, in the manner required by section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. Sec. 78j(b), and Rule 10b-16, 17 C.F.R. Sec. 240.10b-16. Counts two and three alleged that Dean Witter had, through misstatements and omissions of material fact, violated sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, 15 U.S.C. Sec. 77q(a)(2), (3). Count four asserted that Dean Witter's failure to ascertain Robertson's financial situation and needs in connection with the credit arrangement constituted a manipulative or deceptive act in contravention of section 15(c)(2) of the Exchange Act, 15 U.S.C. Sec. 78o (c)(2), and Rule 15c2-5, 17 C.F.R. Sec. 240.15c2-5. Counts five and six raised claims under the California Corporations and Civil Codes and common law.

Dean Witter moved to dismiss all six counts of the complaint on the ground that Robertson had failed to state a claim upon which relief can be granted. The district court granted Dean Witter's motion to dismiss counts one and four--the Rule 10b-16 and Rule 15c2-5 claims--with prejudice and entered an order without opinion. Robertson filed a notice of voluntary dismissal without prejudice of the remaining counts pursuant to Fed.R.Civ.P. 41(a). The district court then entered judgment dismissing the action. Robertson appeals only the district court's dismissal of count one. ² Because the order disposed of the action and not merely the complaint, we have jurisdiction. See Ruby v. Secretary of the Navy, 365 F.2d 385, 387 (9th Cir.1966), cert. denied, 386 U.S. 1011, 87 S.Ct. 1358, 18 L.Ed.2d 442 (1967).

DISCUSSION

The district court dismissed Robertson's suit under Rule 12(b)(6) for failure to state a claim upon which relief can be granted. We review a ruling on a motion to dismiss for failure to state a claim upon which relief can be granted de novo, as a question of law. Alonzo v. ACF Property Mgt., Inc., 643 F.2d 578, 579 (9th Cir.1981). We note that a complaint should not be dismissed under Fed.R.Civ.P. 12(b)(6) "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957).

A complaint may be dismissed as a matter of law for one of two reasons: (1) lack of a cognizable legal theory or (2) insufficient facts under a cognizable legal claim. 2A J. Moore, Moore's Federal Practice p 12.08 at 2271 (2d ed. 1982). Robertson's pleadings in district court exposed him to dismissal on either ground. First, he claimed that Rule 10b-16 provides for a private cause of action. Second, he insisted that scienter is not a requisite element of such an action; accordingly, he failed to plead any facts from which scienter could be inferred. The district court failed to specify whether the lack of a private cause of action or the failure to plead scienter was the basis for dismissal.

We believe both issues are fairly presented by the district court's order, and both have been fully briefed and argued. We hold first that Robertson may state a claim for damages under Rule 10b-16. If the order of dismissal were based on the lack of an implied action, therefore, it would be erroneous as a matter of law. Having decided that a private cause of action exists, we also conclude that scienter is an essential element of such an action. We decide this second issue to avoid an immediate successive appeal from either party.

I. Rule 10b-16 Creates a Private Cause of Action

Rule 10b-16 provides in relevant part:

(a) It shall be unlawful for any broker or dealer to extend credit, directly or indirectly, to any customer in connection with any securities transaction unless such broker or dealer has established procedures to assure that each customer

(1) is given or sent at the time of opening an account, a written statement or statements disclosing (i) the conditions under which an interest charge will be imposed; (ii) the annual rate or rates of interest that can be imposed; (iii) the method of computing interest; (iv) if rates of interest are subject to change without prior notice, the specific conditions under which they can be changed; (v) the method of determining the debit balance or balances on which interest is to be charged and whether credit is to be given for credit balances in cash accounts; (vi) what other charges resulting from the extension of credit, if any, will be made and under what conditions; and (vii) the nature of any interest or lien retained by the broker or dealer in the security or other property held as collateral and the conditions under which additional collateral can be required ...

17 C.F.R. Sec. 240.10b-16 (emphasis added).

We must examine the legislative and administrative history of Rule 10b-16 and its enabling statute to decide whether it should be read to imply a private cause of action. Because Rule 10b-16 was not enacted by Congress, but rather by the SEC acting on authority delegated by Congress, a two-step inquiry is necessary: (1) whether Congress delegated authority to establish rules implying a private right of action; and (2) whether the rule in question was drafted such that this private right of action may legitimately be implied. Jablon v. Dean Witter & Co., 614 F.2d 677, 679 (9th Cir.1980) (stock exchange rules). This inquiry leads us to the conclusion that Rule 10b-16 does provide a private right of action, a result also reached by the D.C. Circuit, albeit via a radically more abbreviated route. Liang v. Dean Witter & Co., 540 F.2d 1107, 1113 n. 25 (D.C.Cir.1976).

A. Under the Enabling Statute, Congress Delegated Authority to Establish Rules Implying a Private Right of Action

1. Section 10(b) Is the Enabling Statute

The parties disagree over which statute to analyze: the Truth-In-Lending Act, 15 U.S.C. Sec. 1601 et seq. (1976) ("TILA"), or section 10(b) of the Exchange Act. The TILA requires merchants and commercial lenders to disclose credit terms to potential customers, but expressly exempts transactions involving securities or commodities accounts. 15 U.S.C. Sec. 1603(2). Congress premised this exemption on the understanding that the SEC would, pursuant to existing statutory authority, promulgate "substantially similar" disclosure rules in the securities field. S.Rep. No. 392, 90th Cong., 1st Sess. 9 (1967). ³ In response, the SEC adopted Rule 10b-16. See Liang, supra, 540 F.2d at 1111; Securities Exchange Act Release No. 34-8773, 34 F.R. 19717 (1969).

This history does not suggest, as Robertson...