purchases and sales of securities, there seems to be "little practical point in denying the existence of such an action under § 17." SEC v. Texas Gulf Sulphur Co., supra, 401 F.2d at 867 (Friendly, J. concurring).
Two approaches to § 17(a) have been suggested which would permit private actions while avoiding disruption of the statutory scheme of the 1933 act by duplicating the express civil remedy of § 12 without its restrictions. The first approach, developed by several courts which have implied a private right of action under § 17(a), limits recovery under § 17(a) to cases in which the plaintiff alleges and proves fraud. The express civil remedy of § 12 applies to cases of innocent or negligent misstatements in which the reduced burden of proof on the plaintiff is subject to the specific restrictions of the section concerning persons who may sue or be sued, statute of limitations, etc. Section 17(a) affords a private right of action free from the limitations of § 12 because the section refers to conduct involving fraud where the plaintiff has the more difficult burden of proof. Weber v. C.M.P. Corporation, 242 F. Supp. 321 (S.D.N.Y. 1965); Thiele v. Shields, supra, 131 F. Supp. at 419-420; Fischman v. Raytheon Mfg. Co., supra, 188 F.2d at 787, n. 2 (dictum).
However, it has been noted that all of the language of § 17(a) does not refer to misrepresentations amounting to fraud. Although §§ 17(a)(1) and 17(a)(3) refer to fraud, § 17(a)(2) uses language similar to that of § 12(2) concerning innocent or negligent misrepresentation. The distinction between § 17(a)(2) and the other clauses of § 17(a) was recognized in Trussell v. United Underwriters, Ltd., 228 F. Supp. 757 (D. Colo. 1964), in which the court held that § 12(2) creates an express civil remedy for violations of § 17(a)(2) but that there is no private remedy for violations of §§ 17(a)(1) and 17(a)(3). See also III Loss, Securities Regulation (2d ed. 1961) pp. 1785-1786.
The second approach, suggested by defendants, would subject a private right of action under § 17(a) to the specific limitations imposed upon an action under § 12 which, for purposes of this case, would include the requirement of privity. If we accept the view that a private right of action under §§ 17(a)(1) and 17(a)(3) requires proof of fraud and therefore does not create a remedy which duplicates the one provided by § 12, there is no justification for implying the limitations of § 12 into a private action under these two clauses of § 17(a). However, there is justification for subjecting a private action under § 17(a)(2) to the limitations of § 12 in order to avoid creating a remedy which is similar in scope to § 12 but free of its express restrictions.
We agree with Judge Friendly that given the private right of action under § 10(b) there is little practical point in denying such an action under § 17(a). However, we are also persuaded that we should not permit a private action under § 17(a) to circumvent the express civil remedies of the Securities Act. It may well be that the developing case law concerning § 10(b) and Rule 10b-5 will so expand the available remedies for securities violations that the limitations contained in the 1933 act will no longer have significance in securities litigation. Nevertheless, we believe that the deliberate restrictions on claims for relief in the 1933 act should be preserved at least insofar as we are called upon to interpret the scope of sections of that act. We conclude that §§ 17(a)(1) and 17(a)(3) permit private actions for fraud in the offer or sale of securities and that § 17(a)(2) permits private actions subject to the limitations of § 12.
Plaintiffs' complaint alleges fraud and therefore asserts a valid claim under §§ 17(a)(1) and 17(a)(3). We therefore deny defendants' motion to dismiss plaintiffs' complaint insofar as it asserts claims under these two clauses of § 17(a). However, we grant defendants' motion insofar as plaintiffs' complaint asserts a claim under § 17(a)(2), which is subject to the limitations of § 12, because plaintiffs have failed to allege privity necessary to support a claim under § 12.
C. Tender and Damages
Defendants argue that all claims under the Securities Act should be dismissed because plaintiff Dorfman has not tendered her securities as required by § 12(2) and neither plaintiff can establish that he has suffered any damages as a result of the defendants' alleged violations of the act. Dorfman alleges that she retains her securities. Therefore, her only remedy under § 12(2) is recission for which tender is a precondition. Pfeffer v. Cressaty, supra. However, we have held that plaintiffs' complaint fails to state a claim under § 12(2) although we have upheld the complaint insofar as it asserts a claim for fraud under §§ 17(a)(1) and 17(a)(3). Therefore, the question before us is whether a plaintiff who alleges a violation of § 17(a) and who has retained the securities is subject to the specific remedy provided by § 12(2).
We hold that the implied private action for fraud under § 17(a) is not limited to the specific remedy of recission for plaintiffs who retain their securities as required under § 12. Just as we found no justification for implying the § 12 limitations on persons who may be sued, etc. into § 17(a) actions where the plaintiff has the greater burden of proof to establish fraud, we similarly find no justification for implying § 12 limitations on relief. We hold that a plaintiff who retains securities may sue for damages under §§ 17(a)(1) and 17(a)(3). Therefore, Dorfman's failure to allege tender of her securities does not defeat her claim under § 17(a).
Defendants' argument that neither plaintiff can establish damages given the present market value of the securities is not properly before the court. Defendants base their position on matters outside the pleadings which we may not consider on a motion to dismiss under F.R. Civ. P. 12(b)(6). We also note that the issue of the proper measure of damages will have to be decided in connection with plaintiffs' claim under § 10(b) of the Exchange Act which is not challenged by defendants' present motion. We therefore deny defendants' motion to dismiss on this ground, without prejudice to their right to renew their motion at an appropriate time.
II. Exchange Act
A. Section 9(a)(4)
Defendants argue that plaintiffs have failed to state a claim under § 9(a)(4)
of the Exchange Act because the section only applies to misleading statements or omissions made concerning "any security registered on a national securities exchange" and plaintiffs have conceded that the Pennco bonds were not listed on a national securities exchange when the offering circular containing alleged misstatements was distributed. Defendants contend that the following section of the complaint establishes that the bonds were not listed on a national securities exchange when they were issued:
"25. * * * In addition, shortly after the initial issuance of the debentures herein described, the debentures were listed and traded on a national securities exchange, to wit, the New York Bond Market."
Plaintiffs first argue that although the Pennco bonds were initially issued on the over-the-counter bond market, the over-the-counter market is a national securities exchange under the Exchange Act. We reject this contention as contrary to the language of the Exchange Act which clearly distinguishes between securities exchanges which become national securities exchanges pursuant to the registration provision outlined in § 6(a) and the over-the-counter markets which are subject to regulation pursuant to § 15.
Plaintiffs next argue that even if the Pennco bonds were not registered on a national securities exchange at the time the allegedly misleading offering circular was distributed, the offering circular was outstanding when the bonds were so listed and constituted a continuing statement which subjects the defendants to § 9(a)(4) liability. Defendants contend that plaintiffs' argument is contrary to the language of the statute and we agree. The language of § 9(a)(4) indicates that statements which allegedly are misleading are to be evaluated as of the time they are made.
"It shall be unlawful * * * to make, regarding any security registered on a national securities exchange, * * * any statement which was at the time and in the light of the circumstances under which it was made, false or misleading * * *." (Emphasis added.)