Washington Public Power Supply System Securities Litigation, In re

• Decision Date: 30 July 1987
• Docket Number: No. 86-3594,86-3594
• Citation: 823 F.2d 1349
• Parties: , Fed. Sec. L. Rep. P 93,330 In re WASHINGTON PUBLIC POWER SUPPLY SYSTEM SECURITIES LITIGATION. Henry PUCHALL, et al., Plaintiffs-Appellants, v. HOUGHTON, CLUCK, COUGHLIN & RILEY, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1349

823 F.2d 1349

56 USLW 2094, Fed. Sec. L. Rep. P 93,330

In re WASHINGTON PUBLIC POWER SUPPLY SYSTEM SECURITIES LITIGATION Henry PUCHALL, et al., Plaintiffs-Appellants, v. HOUGHTON, CLUCK, COUGHLIN & RILEY, et al., Defendants-Appellees.

No. 86-3594.

United States Court of Appeals Ninth Circuit.

Argued En Banc and Submitted April 21, 1987.

Decided July 30, 1987.

Leonard B. Simon, San Diego, Cal., for plaintiffs-appellants.

Daniel R. Murdock, Herbert M. Wachtell, New York City, and Camden M. Hall, Michael Sandler, Foster, Pepper & Riviera, Seattle, Wash., for defendants-appellees.

Before GOODWIN, KENNEDY, ANDERSON, TANG, NELSON, NORRIS, HALL, WIGGINS, BRUNETTI, KOZINSKI, and THOMPSON, Circuit Judges.

Appeal from the United States District Court for the Western District of Washington.

CYNTHIA HOLCOMB HALL, Circuit Judge:

I.

Between 1977 and 1981, the Washington Public Power Supply System (WPPSS) sold bonds with a face value of $2.25 billion to finance construction of two nuclear power plants. In 1982 WPPSS ceased construction of these plants and thereafter defaulted on the bond payments. In 1983 plaintiffs-appellants, purchasers of WPPSS bonds, filed a class action, on behalf of themselves and all others who purchased the bonds between February 23, 1977 and June 15, 1983, against WPPSS and nearly 200 other defendants alleging that the bonds were sold "on false pretenses" in violation of both federal and state securities laws.

District Judge Richard Bilby denied a motion by the defendants to dismiss the plaintiffs' claims under section 17(a) of the Securities Act of 1933, 15 U.S.C. Sec. 77q(a). Thereafter, Judge Bilby noted that he must recuse himself. The case was then transferred to District Judge William Browning, who vacated Judge Bilby's ruling on the section 17(a) claims. Judge Browning concluded that "in litigation as massive and complex as this, a record as unimpeachable as possible was essential." In re Washington Public Power Supply System Securities Litigation, 623 F.Supp. 1466, 1470 (W.D.Wash.1985). He therefore decided to "revisit" Judge Bilby's substantive rulings, including the ruling on section 17(a). Id.

On December 3, 1985, Judge Browning granted the defendants' motion to dismiss all section 17(a) claims. Id. at 1474-76. Judge Browning certified his interlocutory order for immediate appeal pursuant to 28 U.S.C. Sec. 1292(b), stating that his ruling was "in apparent conflict with existing Ninth Circuit authority, and it involves a controlling issue of law as to which there is substantial ground for difference of opinion, and an immediate appeal may materially advance the litigation." Id. at 1476. Plaintiffs timely petitioned this court for permission to file an interlocutory appeal, which petition this court granted.

Plaintiffs then moved this court for summary reversal of the district court's order dismissing their section 17(a) claims. This court granted the plaintiffs' motion for summary reversal relying on Mosher v. Kane, 784 F.2d 1385 (9th Cir.1986), and Stephenson v. Calpine Conifers II, Ltd., 652 F.2d 808, 815 (9th Cir.1981). Thereafter we granted a suggestion for rehearing en banc to decide whether to overrule these two cases. Having considered the briefs and oral argument, we address the following question: Will a private action lie under section 17(a) of the Securities Act of 1933, 15 U.S.C. Sec. 77q(a)?

II.

In our earlier decisions of Stephenson, 652 F.2d at 815, and Mosher, 784 F.2d at 1390 n. 9, we had found the existence of a private right of action under section 17(a). ¹ Plaintiffs contend that these decisions were correctly reasoned and that the principle of stare decisis weighs against reaching a contrary holding in the absence of Supreme Court guidance on the issue. Bearing this in mind, we now reexamine the reasoning supporting Stephenson and its progeny and we review the impact that those cases have had on the jurisprudence of our circuit. We conclude the Stephenson and Mosher were incorrectly decided and are no longer controlling precedent in this circuit.

In Stephenson, we were presented with an appeal from a summary judgment for the defendants in a private action for damages brought under various sections of the federal securities laws. The plaintiffs' fourth cause of action alleged a claim under section 17(a). After stating that the Supreme Court had not decided the issue, we held that a private right of action existed because of authority for that proposition emanating from the Second Circuit. Stephenson, 652 F.2d at 815 (citing Kirshner v. United States, 603 F.2d 234, 241 (2d Cir.1978), cert. denied, 442 U.S. 909, 99 S.Ct. 2821, 61 L.Ed.2d 274 (1979); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 867 (2d Cir.1968) (Friendly, J., concurring), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969)).

In reaching this conclusion, we did not fully examine the reasons underlying the Second Circuit's ruling nor did we apply the Supreme Court's analysis in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975). In particular, in Stephenson our court did not consider (1) Judge Friendly's reliance on the assumed applicability in section 17(a) cases of the scienter standard required in private actions under section 10(b) of the Securities Exchange Act of 1934 and (2) the implications of the Supreme Court's adoption of a scienter standard for use in section 17(a)(1) cases and a negligence standard for use in actions brought under sections 17(a)(2) and (3), as set forth in Aaron v. SEC, 446 U.S. 680, 701-02, 100 S.Ct. 1945, 1958, 64 L.Ed.2d 611 (1979). Our court also did not engage in any attempt to distinguish among the three subsections of section 17(a) in order to discern whether a private action could exist for one subsection but not for another. Indeed, with the exception of the citation to sister circuit authority, we did not engage in any attempt to analyze the intent of Congress with respect to the existence of private actions under section 17(a). ²

We now recognize that our court's citation to Second Circuit authority misinterpreted that authority. In Stephenson, we quoted language appearing in Kirshner which itself was a flawed restatement of the issue addressed by Judge Friendly in his Texas Gulf Sulphur concurrence. Stephenson and Kirshner relied solely on a portion of the following argument from Texas Gulf Sulphur:

Once it had been established, however, that an aggrieved buyer has a private action under Sec. 10(b) of the 1934 Act, there seemed little practical point in denying the existence of such an action under Sec. 17--with the important proviso that fraud, as distinct from mere negligence, must be alleged.

401 F.2d at 867. In Stephenson, our court misquoted Judge Friendly, as did the Second Circuit in Kirshner, omitting "the important proviso that fraud, as distinct from mere negligence, must be alleged." See Stephenson, 652 F.2d at 815; Kirshner, 603 F.2d at 241.

The omission has grown in importance as the standard of conduct governing actions under the federal securities laws has become more refined. In Aaron, 446 U.S. at 695-97, 100 S.Ct. at 1955-56, the Supreme Court held that negligence--and not scienter- --suffices to support a SEC injunction action under sections 17(a)(2) and (a)(3). ³ The Aaron decision suggests that if section 17(a) could support any implied action, a scienter standard would govern only a private section 17(a)(1) action. As the Supreme Court earlier held, a private section 10(b) action is governed by the scienter standard only because Congress so intended. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 208-10, 96 S.Ct. 1375, 1388-89, 47 L.Ed.2d 668 (1976). Since the Aaron Court held that the language of section 17(a) revealed that Congress did not intend to limit sections 17(a)(2) and (3) to actions alleging scienter, the same rule should apply to private actions.

In Stephenson, we relied on "the minimal differences between Sec. 17(a) of the 1933 Act and Sec. 10(b) of the 1934 Act." 652 F.2d at 815. ⁴ Aaron dispels any expectation of uniformity in the treatment of section 17(a) and section 10(b). 446 U.S. at 695-97, 100 S.Ct. at 1955-56. The difference in the standards would have the practical effect of eliminating any need to show scienter or, for that matter, to proceed under section 10(b). The likelihood that these differences would have such an important practical effect existed at the time Stephenson was decided. However, because our opinion relied categorically on citations to Kirshner and Texas Gulf Sulphur, it is apparent that we did not perceive the problem. Although we were not aware of it at the time, in establishing a private right of action under sections 17(a)(2) and (3), for which an allegation of fraud would likely not be required, our court was exceeding the limits of the cited authority and embarking on a course fraught with danger.

We relied on Stephenson in two later cases without any significant reexamination of the issue. In Feldman v. Simkins Industries, Inc., 679 F.2d 1299, 1305 (9th Cir.1982), we stated that for purposes of disclosure duties, sections 10(b) and 17(a) could be viewed as "coterminous." In Mosher, 784 F.2d at 1390 n. 9, after recognizing the fact that various circuits have split on the issue, we followed Stephenson and recognized an implied right of action because we believed that it was "the better view." It is evident, however, that neither of the cases we have decided since Stephenson add support to its holding. In fact, the three cases, Stephenson, Feldman, and Mosher, are properly treated as turning solely on a misreading of Second Circuit authority which has been undermined by the Supreme Court's decision in Aaron. ⁵

III.

The Supreme Court, in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), set out the analysis to be applied in determining whether a private remedy is implicit in a statute not expressly providing one:

First, is the...