The opinion of the court was delivered by: GILES
Various defendants have filed motions to dismiss the amended complaint in this action. For the reasons which follow, their motions shall be granted in part and denied in part.
This now complex securities fraud case had rather humble beginnings. On June 25, 1982, Murray Kimmel filed a four page, two count complaint against John Peterson, alleging a violation of section 10(b), Rule 10b-5 and common law fraud. However, this relative simplicity was short-lived. On September 10, 1982, an amended complaint was filed. Dr. Kimmel was joined by four other plaintiffs -- his wife and children -- in suing sixteen defendants. The amended complaint, stretching some thirty four pages, contains twelve counts which allege violations of sections 11, 12(2), 15 and 17(a) of the Securities Act of 1933, 15 U.S.C. § 77k, 77 l (2), 77o, 77q(a) (1976), sections 10(b) and 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j; 78t (1976), as well as claims under the Racketeer Influenced and Corrupt Organizations Act of 1970 ["RICO"], 18 U.S.C. § 1961-68 (1976). Pendent state claims include common law fraud, misrepresentation, negligence, infliction of emotional distress, and a count under the Pennsylvania Securities Act, Pa. Stat. Ann. tit. 70 § 1-201 et seq. (Purdons 1982-1983 Supp.).
Taking as true the well-pled allegations in the complaint, as I must on a motion to dismiss,
the factual scenario giving rise to this litigation may be summarized as follows: Dr. Kimmel responded to an advertisement in a financial journal placed by Muir, an investment banking and brokerage firm.
He was contacted by defendant Peterson, one of Muir's brokers, and Dirks, a partner in and manager of Muir. Kimmel related that he had a thriving medical practice and wanted to make some prudent investments. As a busy physician, he had little time to follow the wanderings of the stock market. Therefore, he needed a broker upon whom he could rely heavily to choose investments. He emphasized that although he was seeking investments which would be profitable, they must be safe. Peterson and Dirks detailed their expertise in the area and assured him that all investments chosen would be thoroughly investigated to ensure their safety.
The fraudulent activities alleged fall into two related categories. The first involves the types of securities purchased by defendants. Despite Kimmel's admonitions, Peterson acquired highly speculative stock for the account. Many of the high risk purchases were new issues underwritten by Muir. Kimmel was often consulted and urged to purchase these securities on the basis of insufficient, false or misleading information. The prospectus contained similarly deficient information, causing artificial overvaluation and thus manipulation of the market for these securities. In addition, Kimmel was advised to increase his holdings by purchasing stock on margin, without being apprised of the accompanying risks. In essence, Dirks and Peterson actively ignored Kimmel's wishes, utilizing his money to inure to the benefit of Muir.
The second category of alleged fraudulent transactions relates to the evolution of the relationship between Kimmel and Muir. On the advice of Peterson and Dirks, Kimmel became a subordinated creditor of Muir. Defendants continually tried to convince him that Muir was a safe investment, pointing to its famous general partners, such as Mario Andretti, Jimmy Connors and John Denver. When Peterson invited the Kimmel family to the Montreal Grand Prix, Mario Andretti was introduced as a general partner of Muir and did not protest or deny the title.
Thereafter, Peterson and Dirks tried to persuade Kimmel to increase his holdings in Muir, again representing it to be a safe investment. This time, Kimmel became a limited partner with an investment of an additional $200,000. However, defendants did not disclose the risks inherent in this investment or the fact that Muir was fast becoming a vehicle for the underwriting of speculative new issues. The complaint further alleges a course of fraudulent conduct surrounding Kimmel's partnership interest in Muir, all revolving about the non-disclosure of crucial information on the firm's financial health. For example, it is alleged that a financial statement misrepresented Muir's status by failing to reflect the overvaluation of the new issues. An increased investment of $450,000.00 which was to be applied to Kimmel's subordinated loan was, without his knowledge, used to increase his partnership interest. Unfavorable publicity caused Kimmel to once again inquire into the safety of his investments. Even after Muir had called in the Securities and Exchange Commission, Peterson still insisted that all investments were safe. On August 17, 1981, Muir closed and a trustee was appointed. It was only then that Peterson advised Kimmel to remove his investments from Muir. However, by that point, he was unable to save his investments. Both Dirks and Peterson promised to reimburse Kimmel for part of his losses; however, both refused to put that promise in writing or honor it.
Although Peterson and Dirks allegedly were principally responsible for these events, many Muir associates and affiliates were also implicated. As a result of defendants' activities, the Kimmels lost their life savings and allegedly suffered tremendous mental anguish. In addition, the funds earmarked for their children's educations were lost.
Peterson moves to dismiss, or in the alternative, for a more definite statement. In support of his motion, he raises four grounds: (1) the entire complaint lacks adequate specificity; (2) there is no private right of action under section 17(a) of the Securities Act of 1933; (3) the RICO count should be dismissed for failure to state a cause of action and (4) the count claiming infliction of emotional distress should also be dismissed for failure to state a cause of action. Raymond and Jessie Dirks move to dismiss, relying upon the grounds and arguments offered by Peterson. Mario Andretti also moves to dismiss for failure of the amended complaint to state a cause of action against him.
Peterson argues that the complaint lacks the specificity required under Rule 9(b) of the Federal Rules of Civil Procedure. In support of his claim that the complaint is so vague that it defies intelligent response, Peterson cites the absence of details surrounding each securities transaction. In addition, the complaint is assailed for its use of "information and belief" pleading. Plaintiffs counter, asserting that the complaint gives defendants adequate notice with sufficient detail to allow them to answer. Responding to the "information and belief" contention, plaintiffs argue that the matters are peculiarly within defendants' knowledge. Moreover, it is a "technical point of pleading," see Plaintiffs' Memorandum in Opposition to the Motion to Dismiss at 10, and plaintiffs offer to stipulate with defendants to remove the offending language and stand on their allegations in the complaint.
Rule 8(a) of the Federal Rules of Civil Procedure sets the general tone of the federal pleading rules. Unlike its pleading predecessors, the Federal Rules require only "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a). Rule 9(b) articulates a stricter standard to be applied when alleging fraud. It requires "the circumstances constituting fraud . . . [to] . . . be stated with particularity." Fed. R. Civ. P. 9(b). Reconciling these two rules to strike a sound balance is not an easy task. See Credit Finance Corp., Ltd. v. Warner & Swasey Co., 638 F.2d 563, 566 (2d Cir. 1981); Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 378-80 (2d Cir. 1974), cert. denied, 421 U.S. 976, 44 L. Ed. 2d 467, 95 S. Ct. 1976 (1975). However, the oft quoted language from Wright and Miller endeavors to explore the rationale behind Rule 9(b): "It is a serious matter to charge a person with fraud and hence no one is permitted to do so unless he is in a position and is willing to put himself on record as to what the alleged fraud consists of specifically." 5 C. Wright & A. Miller, Federal Practice and Procedure, § 1298 at 413 (1969) (footnotes omitted) see Segal v. Gordon, 467 F.2d 602, 607 (2d Cir. 1972). In Segal, the Second Circuit attempted to articulate a standard, noting that "10b-5 violations will not pass scrutiny if they do not allege with some specificity the statements allegedly constituting fraud." 467 F.2d at 607. The court went on to note that "mere conclusory allegations . . . are insufficient." Id. Accord Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 115 (2d Cir. 1982); Mauriber v. Shearson/American Express, Inc., 546 F. Supp. 391, 393 (S.D.N.Y. 1982); Merrill Lynch, Pierce, Fenner & Smith v. Del-Valle, 528 F. Supp. 147, 149 (S.D. Fla. 1981). The pleading must apprise the defendants of the substance of plaintiffs' claim with sufficient detail to enable the defendants to answer. See, e.g., Gottreich v. San Francisco Investment Co., 552 F.2d 866 (9th Cir. 1977); Landmark Savings & Loan v. Rhoades, 527 F. Supp. 206, 207 (E.D. Mich. 1981); Beascoechea v. Sverdrup & Parcel Assoc., Inc., 486 F. Supp. 169, 174 (E.D. Pa. 1980). However, this rule is not to be applied with draconian strictness. As the court in Beascoechea, noted, Rule 9(b) "must be read in conjunction with the liberal pleading rules, which eschew technicalities." 486 F. Supp. at 174. Similarly, in Adair v. Hunt International Resources Corp., 526 F. Supp. 736 (N.D. Ill. 1981), after noting that Rules 8 and 9 are to be "read together," the court stated; "with these principles in mind, the purpose of Rule 9 becomes clear. Rule 9 lists the actions in which slightly more is needed for notice." 526 F. Supp. at 744 (quoting Tomera v. Galt, 511 F.2d 504, 508 (7th Cir. 1975)) (emphasis in original).
After reviewing the amended complaint, I conclude that the dictates of Rule 9(b) have been satisfied. With respect to the purchase of securities, other than the interests in Muir, the complaint identifies the parties and their roles in the transactions involved. Dr. Kimmel's request for safe investments is emphasized and the repeated breaches of his trust are detailed. Specific acts of knowing misrepresentations and omissions are alleged. As defendant points out, the complaint does fail to describe each of the alleged transactions by date, name of stock, amount and purchase price. Defendant fears that the complaint "encompasses every single stock transaction engaged in by Kimmel from 1978 to August 1981." See Defendants' Memorandum in Support of the Motion to Dismiss at 12-13. This may well be the case. Yet, dismissal is not warranted. This case does not involve one or two or even ten isolated allegations of fraud, but rather over two years of continued fraudulent securities transactions. The complaint contains more than mere conclusory allegations of wrongdoing. It details a course of conduct during which defendants invested Dr. Kimmel's money for their own or Muir's benefit. Concerns over frivolous assertions of fraud, which originally prompted the enactment of Rule 9(b), do not apply here. Plaintiff has alleged far more than boilerplate claims of misrepresentation. The basic charge is very specific -- managing Dr. Kimmel's entire investment portfolio in a manner involving great risk without his knowledge and against his express wishes. I find the complaint adequately places defendants on notice and allows them to respond.
As regards the allegations surrounding the loans to and interest in Muir, their specificity is sufficient. The complaint sets out dates, the sums lent, the express representations made by defendants and why those representations were fraudulent.
Generally, allegations plead on "information and belief" do not satisfy the specificity requirements of Rule 9(b). 2A Moore's Federal Practice para. 9.03 (2d ed. 1982). However, the objective of this rule may be satisfied if the allegations are accompanied by a statement of the facts upon which the belief is founded, see Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir. 1974), cert. denied, 421 U.S. 976, 44 L. Ed. 2d 467, 95 S. Ct. 1976 (1975). The rule may also be relaxed as to matters within the adverse party's knowledge, although some courts have required an accompanying statement of facts as well. See Segal, 467 F.2d at 608; Arpet Ltd. v. Homans, 390 F. Supp. 908, 913 (W.D. Pa. 1975). The amended complaint does detail the factual allegations upon which the beliefs are grounded and much of the substance of the allegations is within defendants' knowledge. Moreover, plaintiffs have stated that they are willing to strike the offending language and stand on their allegations. Plaintiff's Memorandum in Opposition of the Motion to Dismiss at 10-11. In light of that concession, defendants' objections are moot. Since I conclude that the amended complaint in no way offends Rule 9(b), defendants' motion to dismiss on this ground shall be denied.
B. Section 17(a) of the Securities Act of 1933
Plaintiffs' complaint contains a count brought under section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q (1976). Defendants argue that there is no private cause of action under that section and, as an unspoken corollary, urge that one should not be implied. Although the numerical weight of authority is in favor of implying a private right of action,
neither the Third Circuit nor the Supreme Court has spoken. See Aaron v. SEC, 446 U.S. 680, 689, 64 L. Ed. 2d 611, 100 S. Ct. 1945 (1980) (declining to rule on the issue); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 733-34, 44 L. Ed. 2d 539, 95 S. Ct. 1917 n.6 (1975) (same). This is a difficult issue, especially in light of the implication of a private right of action under section 10(b) on the one hand, and the Supreme Court's recent retrenchment from the implication of private remedies on the other. See, e.g., Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 24, 62 L. Ed. 2d 146, 100 S. Ct. 242 (1979) (refusal to imply private remedy under section 206 of the Investment Advisors Act); Touche Ross & Co. v. Redington, 442 U.S. 560, 570-71, 61 L. Ed. 2d 82, 99 S. Ct. 2479 (1979) (refusal to imply private right of action under section 17(a) of the Securities Exchange Act of 1934). See also Walck v. American Stock Exchange, Inc., 687 F.2d 778, 780 (3d Cir. 1982) (no implied right of action under sections 6 and 7 of the Securities Exchange Act of 1934). But see Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 102 S. Ct. 1825, 1847-48, 72 L. Ed. 2d 182 (1982) (private cause of action implied under the Commodities Exchange Act).
A majority of the courts which have implied a private right of action under section 17(a) have done so with little discussion or analysis. In the first case to imply a private remedy, Osborne v. Mallory, 86 F. Supp. 869 (S.D.N.Y. 1949), the court simply paralleled section 17(a) to section 10(b), deciding that if a private right existed under the latter, it should also exist under the former. 86 F. Supp. at 879. More recent decisions cite only to Judge Friendly's concurrence in SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, sub nom., Coates v. SEC, 394 U.S. 976, 22 L. Ed. 2d 756, 89 S. Ct. 1454 (1969), where he noted that although a private remedy was never intended, "there seemed little practical point in denying the existence of such an action under § 17 . . . once it had been established . . . that an aggrieved buyer has a private action under § 10(b) of the 1934 Act." 401 F.2d at 867. See, e.g., Stephenson v. Calpine Conifers II, Ltd., 652 F.2d 808, 815 (9th Cir. 1981); Kirshner v. United States, 603 F.2d 234, 241 (2d Cir. 1978). In Newman v. Prior, 518 F.2d 97 (4th Cir. 1975), the Fourth Circuit concluded a private right of action should be implied by merely citing to an earlier case, Johns Hopkins University v. Hutton, 488 F.2d 912 (4th Cir. 1973), which had assumed without discussion the existence of a private remedy. Newman, 518 F.2d at 99. In sharp contrast, many of those who refuse to imply a private right of action have written scholarly and persuasive opinions. See, e.g., Landry v. All American Assurance Co., 688 F.2d 381 (5th Cir. 1982); Hill v. Der, 521 F. Supp. 1370 (D. Del. 1981); Reid v. Mann, 381 F. Supp. 525 (N.D. Ill. 1974). On the basis of statutory construction and the superior reasoning of those courts who follow the minority rule, I decline to imply a private cause of action under section 17(a) of the 1933 Act.
Before embarking on the familiar Cort v. Ash, 422 U.S. 66, 45 L. Ed. 2d 26, 95 S. Ct. 2080 (1975) analysis, a historical note will lend perspective to the issue. As one court observed: "the main reason for the somewhat awkward development of the law under § 17(a) of 1933 Act is the fact that it has traditionally lived in the shadow of another area of securities law: Rule 10b-5." Landry, 688 F.2d 381, 386 (5th Cir. 1982). A private right of action was initially implied under section 10(b) of the Securities Exchange Act of 1934, and its implementing rule, 10b-5, 17 C.F.R. § 240.10b-5 (1982), in this district. Kardon v. National Gypsum, 69 F. Supp. 512, 513-14 (E.D. Pa. 1946). For several decades thereafter, the parameters of this cause of action were defined largely by the lower federal courts. See generally, Wachovia Bank and Trust Corp. v. National Student Marketing Co., 209 U.S. App. D.C. 9, 650 F.2d 342, 351 and 351 n.20 (D.C. Cir. 1980), cert. denied, 452 U.S. 954, 101 S. Ct. 3098, 101 S. Ct. 3099, 69 L. Ed. 2d 965 (1981). When the Supreme Court finally considered the issue, it affirmed the implication of a private right of action without much discussion. See Superintendent of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6, 13, 30 L. Ed. 2d 128, 92 S. Ct. 165 n.9 (1971). However, the Supreme Court later characterized this decision as mere acquiescence to a twenty-five year tradition established by the lower federal courts. See Cannon v. University of Chicago, 441 U.S. 677, 690-93, 60 L. Ed. 2d 560, 99 S. Ct. 1946 n.13 (1979); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975). Therefore, the private remedy under section 10(b) was essentially thrust upon a Court unwilling to overturn twenty-five years worth of precedent.
Until recently section 10(b) was an extremely broad remedy -- lacking the internal restrictions found in the express remedy provisions.
The judicially evolved cause of action was even being utilized as a vehicle for the redress of breaches of state-created fiduciary duties. See Superintendent of Insurance, 404 U.S. at 10-12. However, the Supreme Court intervened and began to narrow the scope of the remedy. In Blue Chip Stamps, the Court ruled that an individual must be either a purchaser or seller of securities in order to have standing under section 10(b).
421 U.S. at 754-55. In Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977), the Supreme Court ruled that essentially state created causes of action for mismanagement and other breaches of fiduciary duties were not cognizable under section 10(b). Santa Fe, 430 U.S. at 477, 479-80. Perhaps most importantly, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976) added a scienter requirement to the section 10(b) cause of action.
As it has now become more difficult to state a cause of action under section 10(b), plaintiffs are turning increasingly to the heretofore ignored anti-fraud provisions of section 17(a). Section 17(a) is not limited to fraud in the purchase or sale of securities, see note 9 supra. Most importantly, it appears that scienter is not required to state a cause of action under section 17(a)(2) or (a)(3). In Aaron v. SEC, 446 U.S. 680, 64 L. Ed. 2d 611, 100 S. Ct. 1945 (1980), in the context of an SEC enforcement action, the Court held that scienter was required under section 17(a)(1), but not under subsections (a)(2) or (a)(3). 446 U.S. at 697. It is, as the Landry Court noted; "doubtful that a different interpretation would be given if an implied private cause of action is found to exist," 688 F.2d at 387. Compare Aaron v. SEC, 446 U.S. at 695. (scienter required in SEC injunctive suit under Rule 10b-5) with Ernst & Ernst, 425 U.S. at 201 (scienter required in private cause of action under 10b-5). Thus, the implication of a private right of action under section 17(a) would allow and encourage the total circumnavigation of the new restrictions the Court has placed on a section 10(b) cause of action.
(a) It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly --
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
15 U.S.C. § 77q (1976). This anti-fraud provision is found in the Securities Act of 1933, flanked by the express private remedy provisions of sections 11 and 12. The latter provisions are complex and carefully crafted, containing internal defenses and restrictions unknown to section 17(a). For example, although section 11 is triggered by negligent conduct, a potential defendant, other than the issuer, is granted a "due diligence" defense. Section 11(b), 15 U.S.C. § 77k(b) (1976). In addition, a defendant may be absolved of liability under section 11(a) if it can be proven that the plaintiff knew about the misstatement or omission. 15 U.S.C. § 77k(a). The same is true under section 12(2) and liability thereunder is limited to the victim's immediate seller. Section 12(2) also contains a due diligence defense. 15 U.S.C. § 77 l. By contrast, section 17(a) is written as an absolute liability provision and its language is sufficiently broad to encompass all of the behavior addressed by sections 11 and 12.
In determining whether to imply a private right of action, the touchstone is Congressional intent -- "not whether this court thinks it can improve upon that statutory scheme that Congress enacted into law." Touche-Ross & Co. v. Redington, 442 U.S. 560, 578, 99 S. Ct. 2479, 61 L. Ed. 2d 82 (1979). See also Walck v. American Stock Exchange, Inc., 687 F.2d 778, 782 (3d Cir. 1982). In order to divine this Congressional intent, the Court established a four prong analysis in Cort v. Ash, 422 U.S. 66, 45 L. Ed. 2d 26, 95 S. Ct. 2080 (1975). This analysis asks:
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 in Redington indicated that while all four factors are relevant, they are not accorded equal weight. The first three, which more directly impact upon Congressional intent, are more important. Redington, 442 U.S. at 575-76.
By proscribing fraudulent activities in the offer or sale of securities, section 17(a) was obviously enacted to prevent fraud, thus protecting potential victims. Accord Hill v. Der, 521 F. Supp. 1370, 1376 (D. Del. 1981). See also Transamerica, 444 U.S. at 24 (section 206 of Investment Advisors Act, worded much like section 17(a), designed to benefit a particular class); Walck v. American Stock Exchange, Inc., 687 F.2d 778, 783 (3d Cir. 1982) (section 6 of the 1934 Act, setting registration standards for securities exchanges, was enacted to protect investors). In United States v. Naftalin, 441 U.S. 768, 60 L. Ed. 2d 624, 99 S. Ct. 2077 (1979), the Court reviewed the legislative history behind section 17(a) and concluded that its purpose was "to protect the investing public and honest business. . . ." 441 U.S. at 775-76 (quoting S. Rep. No. 47, 73d Cong., 1st Sess., 1 (1933)). Accord, Reid v. Mann, 381 F. Supp. 525, 526 (N.D. Ill. 1974). Thus, I find that the first prong of the Cort test is satisfied -- plaintiff, as an investor, is a member of the class "for whose especial benefit the statute was enacted."
However, "the mere fact that the statute was designed to protect [investors] does not require the implication of a private cause of action for damages on their behalf . . ." Walck, 687 F.2d at 783-84 (quoting Transamerica Mortgage Advisors v. Lewis, 444 U.S. 11, 24, 62 L. Ed. 2d 146, 100 S. Ct. 242 (1979) (citations omitted)).
The second factor under Cort is whether there is any legislative intent to create or deny a cause of action. The legislative history of the 1933 Act indicates that sections 11 and 12 were perceived as the only civil liability provisions of the statute. See SEC v. Texas Gulf Sulphur, 401 F.2d 833, 867 (2d Cir.), cert. denied sub nom., Coates v. SEC, 394 U.S. 976, 22 L. Ed. 2d 756, 89 S. Ct. 1454 (1968) (Friendly, J., concurring) (citing H. Rep. No. 85, 73d Cong., 1st Sess. 9-10 (1933)). Accord, Landry, 688 F.2d at 389 and n. 35; Dyer v. Eastern Trust and Banking Co., 336 F. Supp. 890, 904-05 (D. Me. 1971); Ruder, Civil Liability Under Rule 10b-5: Judicial Revision of Legislative Intent, 57 Nw. U.L. Rev. 627, 656-57 (1963). In addition, the existence of express remedies within the same statute militates against a finding of Congressional intent to imply further remedies. See, e.g., Middlesex County Sewerage Authority v. National Sea Clammers Ass'n, 453 U.S. 1, 14-15, 69 L. Ed. 2d 435, 101 S. Ct. 2615 (1981); Transamerica, 444 U.S. at 19-21; Redington, 442 U.S. at 571-74; Walck, 687 F.2d at 784. This is especially true here, as section 17(a) is sufficiently broad to cover virtually all activities addressed by sections 11 and 12. As mentioned earlier, however, section 17(a) does not have the internal restrictions and defenses found in sections 11 and 12.
Thus, if a private right of action were to be implied under section 17(a), it would become the preferable remedy, rendering sections 11 and 12 entirely superfluous. The complex scheme which Congress wove in the express civil liability sections would be totally undermined. As the Court noted in Redington, it is "reluctant to imply a cause of action in § 17(a) that is significantly broader than the remedy that Congress chose to provide." 442 U.S. at 574. Along the same lines, in Reid v. Mann, 381 F. Supp. 525 (N.D. Ill. 1974) the Court noted that "[to] impose a greater responsibility [than that provided by §§ 11 and 12] . . . would unnecessarily restrain the conscientious administration of honest business with no compensating advantage to the public." 381 F. Supp. at 526 (quoting Texas Gulf Sulphur, 401 F.2d at 867 (Friendly, J., concurring)). This same reasoning led the Supreme Court to require scienter under section 10(b), which again lacks the procedural barriers written into sections 11 and 12. A negligence standard under section 10(b) would similarly eviscerate the structure of the express liability sections, as plaintiffs would always prefer the former to the latter.
See note 10 supra. As noted earlier, if Aaron v. SEC is any indicator, scienter will not be required under section 17(a)(2), and (a)(3). Therefore, the implication of a private remedy under section 17(a) would also undermine the Supreme Court's efforts to narrow the scope of a section 10(b) cause of action. The barriers placed around section 10(b) were established, at least in part, to save the remaining vitality of sections 11 and 12. See Herman, 51 U.S.L.W. at 4102; Ernst & Ernst, 425 U.S. at 210. Thus, the implication of a private cause of action under section 17(a) would not only write sections 11 and 12 out of the statute, but would also render meaningless the Supreme Court's efforts in the 10(b) area.
Interestingly, the language of section 17(a) is very similar to section 206 of the Investment Advisors Act of 1940, a provision under which the Supreme Court refused to imply a private right of action. See Transamerica, 444 U.S. 11, 100 S. Ct. 242, 62 L. Ed. 2d 146 (1979). There, the court decided that the second prong of Cort was not satisfied, noting that the provision was proscriptive and was not intended to create civil liabilities. Id. at 19. Since Congress had provided other judicial and administrative methods for enforcing section 206, the Court stated it was "highly improbable that Congress absentmindedly forgot to mention an intended private action." Id. at 20. This applies with stronger force here, where Congress has indeed provided an explicit private remedy. The Court remarked that "obviously, then, when Congress wished to provide a private damage remedy, it knew how to do so and did so expressly." Id. at 21.
Nor is the third prong of Cort met, which requires consistency with the underlying purposes of the statutory scheme. In Piper v. Chris-Craft Industries, 430 U.S. 1, 51 L. Ed. 2d 124, 97 S. Ct. 926 (1977), the court phrased the inquiry in terms of whether the legislative purposes "are likely to be undermined absent private enforcement" or whether it "is necessary to effectuate Congress' goals." 430 U.S. at 25, 26. Measured against any of those standards, an asserted private right of action under section 17(a) fails. Rendering sections 11 and 12 effectively impotent is neither necessary to, nor consistent with, the legislative purposes of the 1933 Act. In those sections, Congress accorded aggrieved individuals ...