Roskos v. Shearson/American Exp., Inc.

• Decision Date: 27 June 1984
• Docket Number: Civ. A. No. 83-C-1689.
• Citation: 589 F. Supp. 627
• Parties: Thomas ROSKOS, Plaintiff, v. SHEARSON/AMERICAN EXPRESS, INC., a Delaware corporation, Defendant.
• Court: U.S. District Court — Eastern District of Wisconsin

589 F. Supp. 627

Thomas ROSKOS, Plaintiff, v. SHEARSON/AMERICAN EXPRESS, INC., a Delaware corporation, Defendant.

Civ. A. No. 83-C-1689.

United States District Court, E.D. Wisconsin.

June 27, 1984.

William H. Harbeck, Quarles & Brady, Milwaukee, Wis., for plaintiff.

Mark Schmitt, Don S. Peterson, Minahan & Peterson, S.C., Milwaukee, Wis., James H. O'Hagan, J. Jackson, Minneapolis, Minn., for defendant.

DECISION AND ORDER

TERENCE T. EVANS, District Judge.

This securities fraud action is before me on Shearson's motion to dismiss for failure to comply with the particularity requirements of Rule 9(b), Fed.R.Civ.P. Roskos has also moved to dismiss one count of the Complaint because it alleges a claim under a statute which makes no provision for a private right of action.

Roskos claims that Shearson, acting as a sales agent for a partnership which acquires and operates deep sea tuna vessels, solicited him to invest in the partnership. Roskos identifies a number of statements made by, or on behalf of, Shearson (Roskos does not name individuals or documents at the source of these statements) and alleges that these statements were false and misleading and were flawed by material omissions. Roskos alleges that these statements were made "in the latter half of 1981" and that he relied on them in deciding to purchase a limited partnership interest in the partnership. In closing the main portion of his allegations, Roskos alleges that "Defendant's actions ... were intentional, reckless and outrageous, and operated as a fraud and deceit upon plaintiff." Complaint, ¶ 12.

Roskos' Complaint wields six claims. Count I invokes § 10(b) of the Securities & Exchange Act of 1934 and Rule 10b-5. Count II invokes another antifraud provision, § 17 of the Securities Act of 1933. Count III alleges a violation of § 12(2) of the 1933 Act, and further alleges that "Defendant knew or in the exercise of reasonable care should have known of the misrepresentations, untruths and omissions." Complaint, ¶ 24. Count IV raises a common law fraud claim arising under state law. Count V alleges a violation of Shearson's fiduciary duty to Roskos. Count VI asserts a common law negligence claim.

I.

Shearson contends that Count II of the Complaint must be dismissed because § 17(a) of the Securities Act does not entitle Roskos to pursue a private right of action.¹

Shearson's motion thrusts into an area of securities laws which is, at best, unsettled. The Circuit Courts of Appeals are divided as to whether § 17(a) creates a private right. See Kimmel v. Peterson, 565 F.Supp. 476, 482 n. 6 (E.D.Pa.1983) and cases cited therein. The Supreme Court has declined to address the issue. Herman & Maclean v. Huddleston, 459, U.S. 375 103 S.Ct. 683, 685 n. 2, 74 L.Ed.2d 548 (1983). Furthermore, while the Court of Appeals for this Circuit appears to have sided with the majority, in holding that § 17(a) does create a private right, see Daniel v. Int'l Brotherhood of Teamsters, 561 F.2d 1223, 1244-1246 (7th Cir.1977), rev'd on other grounds, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979), its most recent statement regarding this issue destabilizes the issue once again. In Peoria Union Stock Yards Co. v. Penn Mutual Life Insurance, 698 F.2d 320 (7th Cir. 1983), the court commented, "Whether section 17(a) can be enforced by private damage suits is an open question in this circuit ...". Id. at 323. Nor have the district courts within this circuit dealt uniformly with this issue; in Reid v. Mann, 381 F.Supp. 525 (N.D. Ill.1974), the court specifically pointed out its belief that the drafters of § 17(a) did not intend a private right, and distinguished cases where both a § 17(a) and a 10b-5 claim were pending from a case involving "a naked § 17(a) claim devoid of any 10b-5 allegations." Id. at 528.

Other courts have waffled on the issue, preferring to put off a decision on the merits by permitting § 17(a) claims to rest in the shadow of companion claims raised under § 10(b). This strategy may have first been deployed by Judge Friendly in his concurrence in SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. den., 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). Judge Friendly authored the oft-quoted opinion that there is "little practical point in denying the existence of an action under § 17" once a § 10(b) claim is established. Id. at 867. In Caliber Partners, Ltd. v. Affeld, 583 F.Supp. 1308 (N.D.Ill.1984), the court wrote: "This Court will take a leaf from the Court of Appeals' book in Peoria Union Stock Yards and treat the § 17(a) issue as irrelevant — that is, not necessary for decision — unless a substantive distinction between Rule 10b-5 and § 17(a) develops. This Court therefore defers any current decision as to the independent viability of a Section 17(a) claim." See also Kirkland v. E.F. Hutton and Co., Inc., 564 F.Supp. 427, 439 (E.D.Mich.1983).

In this case, however, the particular § 17(a) claims which Roskos raises may not be slender enough to remain in the shadow of his § 10(b) claims. The scope of § 10(b) and Rule 10b-5, two provisions which, among the menagerie of securities fraud laws, have received the most attention from the courts and scholars, has been sharply circumscribed in the last ten years. Not so with § 17(a). As § 10(b) has shrunk, so has its shadow, and portions of § 17(a) now protrude.

Of particular importance to the allegations made in this case is the fact that an action grounded in negligence can lead to § 17(a) liability but cannot justify a § 10(b) sanction. In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201, 96 S.Ct. 1375, 1385, 47 L.Ed.2d 668 (1976), the Supreme Court limited the broad reach of § 10(b) and Rule 10b-5 by requiring that a plaintiff prove scienter. Section 17(a) breaks down into three parts, of which two have been held not to require proof of scienter. Aaron v. SEC, 446 U.S. 680, 697, 100 S.Ct. 1945, 1956, 64 L.Ed.2d 611 (1980) (holding that scienter was required under § 17(a)(1), but not under subsections (a)(2) or (a)(3)).²

Roskos' Complaint can be read to raise both claims requiring proof of scienter — fraud — and of claims not subject to a scienter requirement — negligence. Although Roskos asserts in each count that Shearson's operative conduct worked a "fraud" upon him, not all of the counts of the Complaint need be read to assert § 10(b)-type fraud claims. For instance, Count VI asserts that the same conduct underlying Count II, containing the § 17 claims, also gives rise to a claim for negligence. In responding to the other pending motion (for failure to plead with particularity), Roskos argues that neither Count III (based on § 12(2)) nor Count V (based on claims of breach of fiduciary duty) should be construed as arguing a fraud theory. In light of all this, it appears that the § 17(a) claims in this case do not necessarily correspond completely with claims which could be made under § 10(b). Since Roskos' § 17(a) claims might extend to conduct outside § 10(b)'s shadow, these claims are, in Reid terms, "naked". Accordingly, it would not be proper for me to waffle and defer a decision on the merits of Shearson's § 17(a) argument.

Having reviewed the many cases which have come to grips with the § 17(a) dispute, I am persuaded that § 17(a) does not create a private right of action. In particular, I am persuaded by the lengthy, in-depth, and scholarly opinions written by the courts in Hill v. Der, 521 F.Supp. 1370, 1378 (D.Del.1981); Kimmel v. Peterson, supra; and most significantly, Landry v. All American Assurance Co., 688 F.2d 381 (5th Cir.1982). I agree with the observation made in these cases that the analysis to the contrary is often flawed. First, "while a clear majority view exists, few Circuit Court decisions have analyzed the issue in depth. In fact, as one learned commentator has observed, the existence of the § 17(a) private remedy `seems to be taken for granted.' 6 L. Loss, Securities Regulation 3913 (2nd Ed. Supp.1969)." Landry at 384-385. Indeed, many courts have not been forced to come to grips with § 17(a) because it remained within the shadow of Rule 10b-5. See Peoria Stockyards at 323; Daniel at 1245.

The majority analysis also fails to remain loyal to the factors set forth in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975). In particular, no court which has carefully plumbed the legislative history of § 17(a), in deploying the second Cort factor, has come to the conclusion that a private remedy should be recognized. See Hudson v. Capital Management Intern., Inc., 565 F.Supp. 615, 626 (N.D. Cal.1983). The Landry Court conducted an extensive analysis of not only the legislative intent factor, but the other Cort factors, and rejected the private remedy. The Fifth Circuit appears to be standing fast on this analysis. See Keys v. Wolfe, 709 F.2d 413 (5th Cir.1983).

In brief review of the Cort factors, while it can be said that the language of the statute is broad enough to generate a private right of action, see Daniel at 1245; Kimmel at 486 n. 12, the legislative history of the 1933 Act does not support civil liability under § 17(a). See Landry at 389-390; Kimmel at 486-487; Basile v. Merrill Lynch, Pierce, Fenner & Smith, 551 F.Supp. 580, 586 (S.D.Ohio 1982); Reid v. Mann, supra.

With regard to the third Cort factor, a private remedy under § 17(a) would be inconsistent with the rest of the securities law scheme. As the Landry court explained, implying a private cause of action from § 17(a) would "effectively frustrate the carefully laid framework" of procedural protections outlined in §§ 11 and 12, see n. 1, supra. To permit a private right of action under § 17(a) would cause the statutory and judicially-crafted restrictions on § 10(b) of the 1934 Act and §§ 11 and 12 of the 1933 Act to atrophy and fall away as securities fraud cases hustled in the back door of § 17. See Kimmel at 487.

All in all, I am not persuaded that a private remedy can be...