The opinion of the court was delivered by: PARKER
In this private federal securities laws litigation, filed by the Wachovia Bank and Trust Company and other plaintiffs
(the Wachovia plaintiffs), two questions are presented for the Court's resolution. First, do the plaintiffs have implied causes of action under § 17(a) of the Securities Act of 1933 (1933 Act)
and §§ 10(b), 13(a) and 14(a) of the Securities Exchange Act of 1934 (1934 Act)?
Second, is this private action, brought under these statutory sections, barred by the applicable statute of limitations and, if so, is there an independent cause of action based on common law fraud, breach of fiduciary duty and legal malpractice?
These issues have been raised by the law firm of White & Case, Marion J. Epley, a partner, and the accounting firm of Peat, Marwick, Mitchell & Co. (Peat Marwick).
The defendants have moved for judgment on the pleadings under Rule 12(c), Federal Rules of Civil Procedure, or alternatively to dismiss the complaint with prejudice under Rule 12(b)(6).
The Court has considered the various memoranda, affidavits and exhibits filed as well as the oral argument of counsel. For the reasons set forth herein the Court finds that plaintiffs have stated a private cause of action under § 17(a) of the 1933 Act and § 10(b) of the 1934 Act and, therefore, defendants' motion for judgment on the pleadings on the issue of implied causes of action is denied. However, the Court agrees with the defendants on the statute of limitations issue and concludes that the federal claims asserted by plaintiffs are time-barred and the remaining claims must be dismissed for lack of pendent jurisdiction.
In late 1969 when the economic fortunes of the National Student Marketing Corporation (NSMC) were most favorable and the reports on its financial operations extremely optimistic, the Wachovia plaintiffs purchased at a private placement nearly five million dollars worth of that corporation's stock. The terms of the purchase were governed by two contracts between the parties, dated December 17, 1969. White & Case, acting as NSMC's counsel, drafted a Common Stock Purchase Agreement and issued a legal opinion to plaintiffs. Peat Marwick, the independent auditor of NSMC, certified the annual financial statements and played a role in preparation of interim financial reports and documents filed with the Securities and Exchange Commission (SEC).
In February of 1970, almost immediately following the Wachovia transaction, NSMC's fortunes suffered a sharp reversal and the stock's market price dropped markedly.
Shortly thereafter, in early 1970, two civil actions arising out of the collapse were filed in the Southern District of New York federal court. Garber v. Randell, (March 2, 1970); Lipsig v. National Student Marketing Corp., (May 15, 1970) (naming Peat Marwick as defendant). In early 1972, a third action was filed in the Southern District, Natale v. National Student Marketing Corp., (February 18, 1972) (naming White & Case as defendant).
Also, on March 19, 1970, a civil complaint was filed in the Southern District of Texas federal court. Stuckey v. National Student Marketing Corp., (March 19, 1970). While White & Case and Peat Marwick were not parties in either Garber or Stuckey, the complaints outlined the alleged fraudulent scheme and financial manipulation that underlie the Wachovia complaint. A complaint was also filed in October 1971 in the Southern District of Ohio, Monroe v. Peat, Marwick, Mitchell & Co., alleging that the accountants aided and abetted others in misrepresenting Student Marketing's financial condition.
Despite this turn of events, more than three years elapsed after their December 1969 purchase before the Wachovia plaintiffs sought relief. On January 29, 1973, their original complaint was filed seeking damages from NSMC, several of its officers and employees; Peat Marwick, the partner in charge of the Washington, D.C., office, Anthony M. Natelli; and the auditor, Joseph Scansaroli. The complaint charged those named defendants with a conspiracy to defraud and violations of applicable federal securities laws in connection with plaintiffs' purchase of NSMC common stock in 1969.
The complaint did not include any common law counts.
On January 27, 1973, two days before this suit was filed, the Wachovia plaintiffs and the attorney-defendants entered into a letter agreement that the statute of limitations would be tolled for two years from that date as to them.
By its terms, however, no claims could be asserted which were then barred by any applicable provision of law.
It was not until May 28, 1975, that the Wachovia plaintiffs amended their original complaint to include White & Case and Epley as defendants. The amended complaint charges those attorneys with various securities laws violations in addition to common law fraud, breach of fiduciary duty and legal malpractice.
In addition to the motions of the attorney and accountant defendants addressed in this opinion, the Wachovia plaintiffs seek to amend the original complaint, largely to raise common law fraud claims against Peat Marwick and the other remaining original defendants. Also before the Court is a motion of the defendant Roger O. Walther, a principal executive officer of NSMC and a major participant in its operations. He seeks to amend his answer to raise the statute of limitations defense.
THE IMPLIED CAUSES OF ACTION ISSUE
In seeking dismissal of all claims asserted under § 17(a) of the 1933 Act and §§ 10(b) or 14(a) of the 1934 Act,
the defendants contend in substance that since certain provisions of the securities laws expressly provide private remedies for the conduct alleged here, the Wachovia plaintiffs cannot bypass the substantive and procedural limitations of those provisions by basing their claims for relief on judicially implied causes of action under the above-cited provisions. Resort to the express remedies is now time-barred and thus dismissal of the present implied claims would effectively foreclose any recovery under the federal securities laws. Plaintiffs strenuously object that their allegations encompass conduct which is not covered by the express provisions and which clearly falls within the recognized scope of implied causes of action.
Initially, it should be noted that defendants do not contest the implication of a private remedy under all circumstances, and for good reason, since an implied right of action has been recognized repeatedly under § 10(b), See e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975). With less frequency and certitude, such an action has also been sanctioned under § 17(a), See e.g., Daniel v. International Brotherhood of Teamsters, 561 F.2d 1223, 1244-45 (7th Cir. 1977), Cert. granted, 434 U.S. 1061, 98 S. Ct. 1232, 55 L. Ed. 2d 761 (1978); Forrestal Village, Inc. v. Graham, 179 U.S.App.D.C. 225, 551 F.2d 411, 413 (1977); But see Shull v. Dain, Kalman & Quail, Inc., 561 F.2d 152, 159 (8th Cir. 1977), Cert. denied, 434 U.S. 1086, 98 S. Ct. 1281, 55 L. Ed. 2d 792 (1978). Rather, the defendants urge that where an express remedy covers the conduct alleged, judicial implication of a cause of action is not necessary to effectuate the goals of the securities laws. See Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477, 97 S. Ct. 1292, 51 L. Ed. 2d 480 (1977); Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 41, 97 S. Ct. 926, 51 L. Ed. 2d 124 (1977). Thus, they do not appear to argue that implied actions under § 17(a) or § 10(b) are inapplicable to the conduct alleged, but only that such implied remedies are unnecessary under the facts and circumstances here presented since express remedies were available if the plaintiffs had chosen to use them.
Defendants contend that § 18(a) of the 1934 Act
and § 12(2) of the 1933 Act
provide remedies for the misstatements and omissions alleged by plaintiffs. Specifically, they assert that most, if not all, of the materially false and misleading statements are substantially contained in documents filed with the SEC and are thus subject to the remedy provided by § 18(a). Insofar as certain statements may not be contained in such filed documents, they urge that § 12(2) provides an adequate remedy.
This Court is not persuaded that these express remedies suffice to effectuate congressional intent, as indicated by the securities laws, to proscribe the type of fraudulent conduct alleged here. With limited exceptions, plaintiffs do not allege reliance upon documents filed with the SEC and, contrary to the position of defendants, such reliance is essential to recovery under § 18(a). Heit v. Weitzen, 402 F.2d 909, 916 (2d Cir. 1968), Cert. denied, 395 U.S. 903, 89 S. Ct. 1740, 23 L. Ed. 2d 217 (1969); Gross v. Diversified Mortgage Investors, 438 F. Supp. 190, 195 (S.D.N.Y.1977). The fact that statements similar to those alleged by plaintiffs were also contained in documents filed with the SEC is insufficient; absent reliance upon the filing of the statements with the Commission, § 18(a) is inapplicable.
In addition, plaintiffs have alleged materially false statements which were never contained in a document filed with the SEC and thus are clearly exempt from § 18(a) liability.
Defendants respond that the remedy for such nonfiled statements rests with § 12(2). That provision, however, contains a number of restrictions, based in large part on the fact that it reaches even negligent misstatements and omissions, and is not directed solely at the intentional fraud alleged here. It appears doubtful that Congress intended victims of intentional fraud to be limited to the negligence remedy provided by § 12(2). Moreover, there is some question whether the section applies to the present defendants since they were not "sellers" of the securities in question. See e.g., In re Equity Funding Corp. of America Securities Litigation, 416 F. Supp. 161, 181 (C.D.Cal.1976). While such a restriction is appropriate in a negligence context, it clearly is unwarranted here where the participants are charged with intentional fraud.
In short, it appears that neither § 18(a) nor § 12(2) provides the plaintiffs with adequate remedies. If the Court were to recognize defendants' solution, the plaintiffs would be relegated to state courts to pursue their claims based on common law fraud. Such a suggestion needs little discussion. The gravamen of plaintiffs' complaint is that defendants participated in a scheme to manipulate the national market for NSMC stock through the broad dissemination of materially false and misleading statements concerning NSMC. Such conduct is ...