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Walck v. American Stock Exchange Inc.

September 1, 1982

WALCK, LYNN G., PLAINTIFF ON BEHALF OF HIMSELF AND REPRESENTATIVELY ON BEHALF OF HIMSELF AND OTHER SIMILARLY SITUATED
v.
AMERICAN STOCK EXCHANGE, INC. AND NEW YORK STOCK EXCHANGE, INC. LYNN G. WALCK, APPELLANT IN NO. 82-1051; WALCK, LYNN G., PLAINTIFF ON BEHALF OF HIMSELF AND REPRESENTATIVELY ON BEHALF OF HIMSELF AND OTHER SIMILARLY SITUATED V. AMERICAN STOCK EXCHANGE, INC. AND NEW YORK STOCK EXCHANGE, INC. APPELLANTS IN NO. 82-1052



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

Author: Aldisert

Before: ALDISERT and WEIS, Circuit Judges, and RE, Chief Judge.*fn*

Opinion OF THE COURT

ALDISERT, Circuit Judge.

The plaintiff appeals from a judgment on the pleadings in favor of the defendants, the New York Stock Exchange and the American Stock Exchange, in an action under federal securities law. The major questions presented are whether §§ 6 and 7 of the Securities Exchange Act of 1934 implicitly authorize private civil actions for damages against a registered stock exchange based on failure to enforce its own rules and federal margin requirements. We also must consider claims brought under §§ 9 and 10 of the Exchange Act, SEC Rule 10b-5, rules promulgated by the appellee Exchanges, and Pennsylvania common law. We hold that Congress did not create private rights of action by implications in §§ 6 and 7, that neither Congress nor the Exchanges implicitly authorized private actions against an Exchange for failure to enforce its own rules, that the complaint fails to state a claim under § 10 and Rule 10b-5, that the § 9 claim is barred by the time limitation of § 9(e), and that the district court properly dismissed the pendent state claims; and we affirm the judgment below in all respects.

I.

Because the case comes to us on appeal from a judgment on the pleadings pursuant to Rule 12(c), F.R. Civ.P., we assume the truth of all material allegations of the complaint.*fn1 Appellant Lynn G. Walck was a customer of the securities brokerage firm of Edwards & Hanly (E&H), now bankrupt, which was a member of the appellee New York and American Stock Exchanges. E&H in 1969 began to promote aggressively the purchase of Trans-Lux Corporation common stock, recommending to Walck and other customers that they utilize the full amount of margin purchasing power available in their accounts for this purpose.*fn2 E&H sold numerous shares of Trans-Lux; between March 1971 and June 1973 the number of Trans-Lux shares in E&H accounts increased from 151,637 to 500,406, and its share of Trans-Lux equity from 14.95% to 24.6%.*fn3

The price of Trans-Lux stock began an extended and steady decline in early 1973, causing a number of E&H accounts to become under-margined. E&H requested additional margin deposits of numerous customers in May 1973, but several customers, including Walck, failed to meet the call. E&H continued to send margin calls, but it liquidated none of the accounts holding Trans-Lux. In August 1973, as the market for Trans-Lux continued to decline, E&H began searching for a buyer to purchase in a black the shares in its under-margined accounts; and in January 1974 it sold 146,300 shares to the Trans-Lux Corporation at a substantial loss. After E&H credited its customers' accounts withthe proceeds of the sale, there remained in aggregate $506,429 debit balance in the accounts sold out; and E&H thereafter attempted to collect the deficiencies from its customers.*fn4

Walck filed an action against E&H in March 1974, alleging violations of the Securities Act of 1933, the Securities Exchange Act of 1934, SEC Rule 10b-5, Federal Reserve Board Regulation T, and common laws . Walck v. Edwards & Hanly, Civ. No. 74-664 (E.D.Pa. filed March 19, 1974). In September 1975, before the case came to trial, E&H petitioned for reorganization under Chapter XI of the Bankruptcy Code. The Bankruptcy Court then stayed further prosecution of Walck's action against E&H. In re Edwards & Hanly, Bank. No. 76 B 1807-G (S.D.N.Y. Sept. 15, 1976) (stay order).

Frustrated in his attempt to obtain relief from E&H, Walck commenced the present action against the appellee Exchanges, seeking actual and punitive damages on January 13, 1977. He alleges inter alia that appellees violated § 6 of the Exchange Act by failed to enforce their own rules against E&H, that they violated § 7 by failing to enforce Regulation T, and that they violated and aided and abetted violations by E&H of §§ 9 and 10(b) and Rule 10b-5. The complaint avers that the Exchanges were aware of the "enormous concentration in Trans-Lux shares in [E&H] customer accounts" as early as January 1971; and it charges that between 1971 and 1974 E&H and appellees "intentionally, willfully and deliberately with scienter" failed to notify and "affirmatively concealed" from E&H's customers that E&H was accumulating a large and illiquid block of Trans-Lux stock in their accounts, that many of the accounts were under-margined because of the concentrations of Trans-Lux stock therein, that Trans-Lux was in violation of several Exchange Rules relating to margin collateral and supervision and suitability of customer purchases, and that the market price of Trans-Lux stock was being further depressed by E&H's efforts to liquidate its under-margined accounts in a block.

The district court granted appellant's motion for class certification but thereafter, by orders entered May 15 and December 18, 1981, granted appellees' motion for judgment on the pleadings and dismissed the complaint. Citing recent Supreme Court decisions, the court rejected Walck's arguments that § 6 and 7 of the Exchange Act and the Rules of the Exchanges implicitly authorize private damages actions. It dismissed the § 10(b) - Rule 10b-5 claim on the grounds that the Exchanges have no independent duty to disclose member violations to their customers and that the Exchanges cannot be held liable as aiders and abettors because their alleged assistance comprised "mere inaction or silence." It denied appellees' motion for summary judgment on the § 9 claim, finding triable factual issues material to the question of tolling the statute of limitations; but it thereafter dismissed this claim for the same reasons that had led to dismissal of the § 10(b) claim.Having dismissed all of appellant's federal claims pursuant to Rule 12(c), the court declined to exercise pendent jurisdiction over Walck's common law fraud and contract claims and dismissed the complaint in its entirety.Walck appeals on behalf of himself and the class. We have jurisdiction under 28 U.S.C. § 1291.

II.

The first question is whether an investor has an implied right of action for damages against a registered stock exchange under § 6 of the Exchange Act, 15 U.S.C. § 78f, based on the failure of the exchange to enforce its own rules. Because all relevant events concluded in 1974, we apply the statute as it then existed and not as amended in 1975.*fn5 The central inquiry is whether Congress intended to create a private damages remedy by implication, "not one of whether this Court thinks that it can improve upon the statutory scheme that Congress enacted into law," Touche Ross & Co. v. Redington, 442 U.S. 560, 578, 61 L. Ed. 2d 82, 99 S. Ct. 2479 (1979); and our primary tool for determining congressional intent is the four-factor test enunciated in Cort v. Ash, 422 U.S. 66, 78, 45 L. Ed. 2d 26, 95 S. Ct. 2080 (1975). See Redington, 442 U.S. at 575-76; Zeffiro v. First Pennsylvania Banking and Trust Co., 623 F.2d 290, 296 (3d Cir. 1980), cert. denied, 456 U.S. 1005, 102 S. Ct. 2295, 73 L. Ed. 2d 1299, 50 U.S.L.W. 3947 (1982).

A.

Section 6*fn6 provides for SEC registration of any securities exchange that complies with stated requirements, upon a finding that it "is so organized as to be able to comply with the provisions of this title and the rules and regulations thereunder and that the rules of the exchange are just and adequate to insure fair dealing and to protect investors." The exchange's rules must provide "for the expulsion, suspension, or disciplining of a member for conduct or proceeding inconsistent with just and equitable principles of trade," and it must agree "to comply, and to enforce so far as is within its powers compliance by its members, with the provisions of this title . . . and any rule or regulation . . . thereunder." Compliance with § 6 is mandated by § 5, 15 U.S.C. § 78e, which forbids securities transactions on an unregistered exchange.

appellant contnds that an investor injured by an exchange's violation of the registration requirements of § 6 -- more precisely, by the exchange's failure to enforce its own rules against an errant member broker -- has an implied right of action under that section to recover his damages from the exchange. We turn to that contention.

B.

In Cort v. Ash the Court stated that "several factors are relevant" in determining whether Congress has created a private remedy by implication:

First, is the plaintiff "one of the class for whose especial benefit the statute was enacted," -- that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? And finally, is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law?

422 U.S. at 78 (citations omitted). The Court has modified this test in more recent decisions, chiefly by emphasizing that although each of the factors is relevant, they are not necessarily "entitled to equal weight," Redington, 442 U.S. at 575, and that the test was not designed for mechanical application but as a tool to be employed in the paramount inquiry after Congress' intent, see, e.g., California v. Sierra Club, 451 U.S. 287, 293, 68 L. Ed. 2d 101, 101 S. Ct. 1775 (1981); ...


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