TRANSAMERICA MORTGAGE ADVISORS, INC. v. LEWIS

Transcript: 

Argument of John M. Anderson

Chief Justice Warren E. Burger: The case is submitted.

We'll hear arguments next in Transamerica Mortgage Advisors against Lewis.

We'll just give the audience a few minutes to clear, counsel.

I'm just really not interested in implied causes of action.

I think you may proceed whenever you're ready Mr. Anderson.

Mr. Anderson: Thank you.

Mr. Chief Justice and may it please the Court.

The case now before the Court Transamerica Mortgage Advisors versus Lewis presents a narrow technical question of law and a broad important question of judicial policy.

The question of law presented is whether Section 206 of the Investment Advisers Act of 1940 affords of private right of action.

The question of judicial policy presented is whether this Court should imply a private right of action under the Advisers Act and then leave to further litigation resolution of such questions as who may bring the action, who may be the defendant, who may be sued for what breaches of what duties as well questions of reliance, causation and intent.

This Court is being asked to interpret the statute but I submit that it is being asked in a larger sense to assess its law in the application of federal securities laws.

This Court is not being asked to deny relief to those clients of Investment Advisers who have been victims of the Advisers deceit or negligence.

Ample federal and state remedies already exist for the redress of the grievances by clients of Investment Advisers.

This Court is not being asked to read the Investment Act narrowly or restrictively in violation of the principal announced in the Borak case.

We do simply urge that this Act be read at it was written by the Congress and as it has been amended.

The facts of this case briefly are as follows.

The case came to Court in April 1973 with the suit by the plaintiff and respondent, Harry Lewis, asking legal and equitable relief for alleged violations of the Investment Advisers Act.

The lawsuit was cast as both a derivative action on behalf of Mortgage Trust of America, a real estate investment trust and as a class action on behalf of the shareholders of Mortgage Trust of America.

The petitioners moved to dismiss the complaint for failure to state a claim and argued that since Mortgage Trust of America wasn't is a mortgage lender which does not deal in securities within the meaning of the federal securities law.

It was not subject to the Investment Advisers Act at 1940 that further, since Transamerica Mortgage Advisors is not a public investment adviser in any sense of those words, it's not subject to the Act.

We further argued that the respondent had failed to make proper demand on the trustees of Mortgage Trust of America and finally, we argued that the Advisers Act does not afford a private right of action in any of that.

The District Court noted the petitioner's arguments or had what we're called the substantial merit but ruled that since the Advisers Act does not afford a private right of action, there was no need to decide the other arguments advanced.

On appeal, petitioners again argued that the investment Advisers Act does not apply to the petitioners or the facts in this case and that there is no private right of action in any event.

Justice Potter Stewart: Is the question whether or not there's a private right of action or whether or not there's a private right of action for money damages?

Mr. Anderson: The question is whether or not there's a private right of action.

The question is recently post in the petition for cert Mr. Justice Stewart, was whether or not there was a private right of action impairing the brief, we know the question to whether private right of action for money damages.

Justice Potter Stewart: And thereby incurred the attack from your adversary?

Mr. Anderson: That is correct.

The reason for the narrowing of the question which I believe to be proper within the meaning of the Court's rules was that the Court of Appeal decision which is in question here from the Ninth Circuit was based on and simply incorporated the decision of the Second Circuit in the case called Abrahamson versus Fleschner, and that case was devoted exclusively to the consideration of whether or not there was a private right of action for damages.

Equitable issues were not present in that case or equitable claims are not present.

And for that reason, we know that also because much of the claim for equitable relief in this case seemed to be moot and for that reason we deemed that to be the issue.

Nonetheless, we, Mr. Justice Stewart has suggested incurred the raft of our opponents in their brief and for that reason in our reply brief, we adjust the problem across the board broadly both equitable and legal relief.

Justice Potter Stewart: And that is the question as described in your petition for certiorari --

Mr. Anderson: That is correct.

Justice Potter Stewart: -- and you agree now that that is the question before the Court.

Mr. Anderson: Yes, Mr. Justice Stewart, that's the question that's before the Court.

Returning to the chronology of events that bring us here on appeal to the Court of Appeals for the Ninth Circuit --

Justice Byron R. White: But I take it -- I get it from your position that you've come out differently on the equitable and legal questions or not?

Mr. Anderson: No, we do not come out differently on equal -- the equity or legal questions, Mr. Justice White.

Justice Byron R. White: But you argued that you've -- you just but you just argued the legal question in your opening brief.

Mr. Anderson: That is correct and we did for the reason explained to Mr. Stewart because of the incorporation of the decision in the Abrahamson case.

But to be clear and to emphasize the question before the Court is whether there is a right to legal or equitable relief by implication under the Advisers Act.

Justice Byron R. White: And you -- and you think you must come up the same on both issues, legal and equitable.

Mr. Anderson: I'm not sure to what extent they are connected and I'm not sure that this Court couldn't theoretically at least make a distinction between the right to money damages and the right to equitable relief in the case.

But I will agree with our opponents that that would be an anomalous result and I think would lead to more difficulties than it would solve.

Justice William H. Rehnquist: Well -- but doesn't some of the language of the Act itself where it talks about jurisdiction of suits and equity and not mention law suggest that there may be a dichotomy there?

Mr. Anderson: It may suggest that but I think the reading of the Act as a whole suggest that in particularly the language which follows the expression suits an equity Mr. Justice Rehnquist suggest that that is because the Act as a whole is due to enforcement by the Securities and Exchange Commission.

And that Commission as being given broad power to seek injunctive relief and I think that's the reason for that particular provision on the Act, a point which I will stress later in this argument.

Chief Justice Warren E. Burger: Wouldn't it be more likely that the public authority would seek the equitable relief than private in the general run of cases?

Mr. Anderson: Yes, I think that is probably the case.

However, I do not believe that the limitation of the language to suits and equity suggests that the Congress meant to imply a right to equitable relief, I think quite the opposite.

I think that the -- as suggested by some of the legislative history --

Justice Potter Stewart: As the Congress intended to create a private right of action for equitable relief.

Mr. Anderson: That's correct.

That's correct, Mr. Justice Stewart.

Justice Potter Stewart: That clearly is a provision for suits for equitable relief brought by the enforcing agency.

Mr. Anderson: That is correct.

Justice Harry A. Blackmun: Is there any exemption, you feel we have to decide the equitable feature here?

Mr. Anderson: Yes, the equitable issue is before the Court.

It is a prayer or an aspect of the prayer in the complaint which was filed in this case and this counsel for the respondent correctly point out it is an aspect of the prayer which of the relief which they sought and so I think it's properly before the Court.

Justice Harry A. Blackmun: That is not my question, now my question is do we have to decide it?

Mr. Anderson: Since that the issue before the Court is whether there's an implied right of action in composing both legal and equitable relief, the answer would be yes.

I think that the answer is before that it has to be decided by the Court.

Justice Harry A. Blackmun: And yet your question presented in your own belief is this, may a private right of action at law for damages be implied under the Investment Advisers Act?

Mr. Anderson: Yes, Mr. Justice Blackmun, the reason for that again was because in the decision which was subject to appeal here namely the Ninth Circuit decision in this case simply incorporated a Second Circuit decision in the same called Abrahamson versus Fleschner.

And in that particular --

Justice Harry A. Blackmun: It has to deal with that case and I'm asking again, whether we have to decide the equity aspect to us?

Mr. Anderson: My view --

Justice Harry A. Blackmun: Why should we decide this in the first place?

Why should we decide --

Mr. Anderson: I don't want to be presumptuous to suggest what the Court has to do.

It's my view that the question of both legal and equitable relief is before the Court.

Chief Justice Warren E. Burger: But there isn't any compulsion on the Court to treat them on an all or nothing basis, is there?

Mr. Anderson: No, Mr. Chief Justice, I think there's not such compulsion.

However, it would seem to me that to the extent that we are seeking to solve problems here that it might be helpful to litigants at large if there was some indication of the Court's views on the subject --

Justice Potter Stewart: And in your submission, no valid distinction can be made.

Mr. Anderson: I believe that to be the case.

I think for example here that the problem that could be -- that might be pointed put by that kind of distinction is illustrated by this very case in which the respondent seeks recisionary rights and incidental damages.

And it seems to me that that sort of runs together the issue to such an extent that it would be very difficult to be tried to separate them out.

Justice Thurgood Marshall: Are you sure that the equitable is not moot?

Mr. Anderson: The equitable relief entails in the first sentence a prayer that an advisory contract be enjoined from renewal or enforcement.

It has in fact been renewed since the beginning of his litigation --

Justice Thurgood Marshall: I see.

Mr. Anderson: -- and so and there's been no effort to seek preliminary or interim relief by the respondent so I take that it has -- it's moot to that extent.

Justice John Paul Stevens: Mr. Anderson, isn't it also true that the -- both equitable and legal claims asserted and the District Judge dismissed the entire complaint?

Mr. Anderson: That is correct.

That is correct.

And it is also true that in the Ninth Circuit decision, the Court talks of both legal and equitable relief notwithstanding the fact that it was simply incorporating the decision or ruling of the Second Circuit in the Abrahamson case.

In the appeal to the Ninth Circuit, we argued again that the facts of this case do not lend themselves to application of the Advisers Act in any event and that there was no private right of action.

The Court of Appeals declined to decide the other issues advanced and with one judge dissenting ruled that the implication of a private right of action for injunctive relief and damages under the Advisers Act in favor of appropriate plaintiffs is necessary to achieve the goals of Congress in enacting the legislation.

The Court of Appeals opinion as I indicated simply adopts wholesale.

The opinion of the Second Circuit both the majority opinion and the dissenting opinion in the case of Abrahamson versus Fleschner.

Now, it seems to me that the resolution of this case entails first, consideration of the special wording of the Advisers Act.

And I want to stress that the Advisers Act is unique among all the federal securities acts in the grant of jurisdiction not simply in limiting to the question of actions at -- or the elimination of expression actions of law but in the phrase which follows that.

And I wish to emphasize this because it has not been a matter of extended treatments on the brief.

But in the Advisers Act, the jurisdictions conferred “of all suits and equity to enjoin any violation of the Act.”

It does not confer jurisdiction over actions of law or actions other than suits and equity to enjoin all of the other federal securities laws.

The 33 Act, the 34 Act and the other security action question also refer to jurisdiction of all suits and equity and actions at law brought to enforce any liability or duty created.

There is a significant and I believe to be important distinction in the nature of the jurisdiction which is conferred between the 1940 Act and the 1933 and the 1934 Act in particular.

The second matter which I believe must be resolved here is the consideration of the factors that pointed out in this of course 1975 opinion, the case of Cort versus Ash in which the Court specified or suggested factors to be considered in determining whether or not an act not expressly providing the private right of action would nonetheless afford implication.

In doing that kind of analysis which I do not intend to date to belabor the -- it seems to me that the most important aspect to that is attention to the legislative history.

The legislative history of the Investment Advisers Act belies any suggestion that Congress thought initially or has thought since that it ought it to be the basis for private right of action.

And finally, I would submit that the Court ought to consider the results it would follow if this Court were to imply a private right of action under the Advisers Act.

The original legislation in 1940 began with an FCC Bill which contains standard jurisdictional language which included reference to jurisdiction over suits and equity and actions at law.

The same language that was in the 1933 and the 1934 Act.

Following negotiation and hearing, a compromise was reached and arranged on various aspects of the Bill.

And one of the changes made was that the language actions at law with respect to duties and violations of the act was eliminated and we are now have the statute which is before us which refers only to suits and equity to enjoined any violation of the Act.

Secondly, and there's another important distinction.

From it's inception in 1940, the Investment Advisers Act has never had any provision for express civil liability.

Unlike that 1993 Act and unlike the 1934 Act, the Investment Advisers Act does not provide any express liability in any of its provisions.

In 1960, the Advisers Act was amended and the Securities and Exchange Commission was given additional enforcement powers.

But the grant and jurisdiction or the limitation of jurisdiction if you will was not changed, it remained the same.

And in 1970, there was I believe to be the most important and direct announcement by the Congress as to the meaning or intention with respect to the Advisers Act when the Congress added a private right of action to the companion statute, that's the Investment Company Act at 1940.

And they added an express private right of action to that legislation and further specified in adding that express right of action who may be the plaintiff, who may be the defendant.

The nature of the duty that would be violated giving rights to the action, they allocated the burden of proof, they establish evidentiary standards and finally they prescribe the damages which may be recovered.

This was all done in 1970 at the time amendments were being made to both the Investment Company Act and the Investment Advisers Act.

No creation of express civil liability, no creation of an express private right of action was had under the Advisers Act even though it was done very specifically and deliberately under the Investment Company Act.

Justice Byron R. White: Well, was it proposed?

Mr. Anderson: It was proposed by the FCC at various times and including in 1970 but there was no action taken on it and as my colleague, the attorneys for the respondent remind us we're not to make much of silence, I gather.

But the fact is that it has been proposed and was most recently proposed as a matter of fact in 1976 by the Securities and Exchange Commission and there's been no action taken on.

I'd like to turn now if I may to the results that would follow if this Court were to imply a private right of action.

Because of the special wording of the Investors Advisers Act, it would create at a minimum a hornet's nest of litigation because it cannot help it but create a series of unanswered questions.

The Investment Advisers Act Section 206, the basis for the claim of an implied right of action in this case refers to wrongdoing against clients of Investment Advisers or prospective clients.

The keywords of course are prospective clients.

And the first question it must come to mind is what is meant by prospective clients?

I submit that the use of that phrase is consistent with conferral of authority and jurisdiction on the Securities and Exchange Commission to seek relief against Investment Advisers who are soliciting business going after business.

It is, I think equally inconsistent with the notion that it could be from that could be implied a right of private right of action.

The first question being of course, who are prospective clients of Investment Advisers?

Chief Justice Warren E. Burger: So that would be equitable relief only, wouldn't it?

Mr. Anderson: It might -- yes, Mr. Chief Justice and it may suggest equitable relief only but I think it raises the problem which this Court addressed in the Blue Chip Stamp case namely, who are this class of people who might be clients of the Investment Advisers.

And it seems to me that the use of prospective clients belies any suggestion that was intended that this Act confer jurisdiction on people who could claim that they might have been an Adviser a client of the Investment Adviser if they but known what good advice or what bad advice he was going to give.

I mean it seems to me that it simply creates an open-ended class of plaintiffs without limits as Judge Gurfein suggested in his dissent in the Abrahamson case.

Justice John Paul Stevens: Mr. Anderson, on that point as I recall the beginning of your argument, you said there were state and federal remedies available to clients, investors advisers who have been defrauded.

What are the federal remedies that are available to clients?

Mr. Anderson: Yes.

Mr. Justice Stevens, the most obvious limit would come to mind would be that in the event, a client of an investment adviser purchase a stock and in connection with that purchase, the investment adviser had acted intentionally deceitful with respect to representations about the stock.

It would seem to me that the client would have a claim under Rule 10 (b) or a Rule 10 (b) (5) under the 1934 Act.

Justice John Paul Stevens: I see.

They don't have a remedy for violation of Section 206 or whatever number this is?

Mr. Anderson: Well, the question of course before the Court is whether or not they would have if they imply a private right of action.

I'm suggesting that there is a remedy.

There is a remedy available at present --

Justice John Paul Stevens: For violations other than the ones that are alleged in this complaint.

Mr. Anderson: That's -- that's correct --

Justice John Paul Stevens: Defines from another provision --

Mr. Anderson: That's right.

And it is significant Mr. Justice Stevens that in this case, there is no allegation of a purchase or sale.

We're dealing instead with a fact situation which has been characterized at the conclusion of the complaint as being by its nature fraudulent, deceitful or in violation of the Act.

The second result of implying a private right of action here is to leave open the question of prospective defendants Section 206 speaks of those who aid or bet in the familiar language.

And therefore, I submit that the question not only is open as to who may sue but who may be a defendant.

At least open also the question of reliance and causation and at least open the question of intent which this Court dealt with in the Hochfelder case.

Now, the potential reach of a private action under the Advisers Act is illustrated by this very case.

It is alleged here that the advisor to a real estate investment trust has violated the Advisers Act.

There is no allegation that the wrongdoing occurred in connection with the purchase or sale or any securities.

There is no allegation that the acts of trustee petitioner constituted willful deception.

There is no allegation here of intentional concealment of any material facts.

The complaint simply constitutes a description of facts, facts which were revealed and in fact reported to the FCC in registration statements and then characterized as being in violation of the Act under Section 206.

I would submit that in the consideration of whether or not the language land itself to implication of a private right of action.

The Court be mindful of the fact that if a private right of action were to be implied in this case, it would open the door to the avoidance of the limitations on private security actions which has been recognized by this Court.

Limitations with respect to whether or not there was a purchase or sale.

A limitation recognized in the Blue Chip Stamp case.

It would permit disregard of the requirement that the plaintiff alleged and proved intent to defraud and deceive.

A limitation recognized in the Hochfelder case.

It would permit disregard of the requirement that there be willful deception not just reach of fiduciary duty.

A limitation recognized in the Santa Fe, Industries versus Green case.

I will reserve the remaining time.

Thank you.

Argument of Eric L. Keisman

Chief Justice Warren E. Burger: Mr. Keisman.

Mr. Keisman: Mr. Chief Justice, may it please the Court.

In sharing our time with the Securities and Exchange Commission, we will concentrate our all aspects of the case except the third of the Cort against Ash criteria.

The necessity or the importance of supplementation of Government activity which area would be covered primarily by the Government in the time it has to argue.

We would like to state first by re-identifying this case.

The complaint in this action is primarily and always was a classic bill inequity seeking a declaration of rightness of a contract between an investment adviser and the advisee to wit the Mortgage Trust of America which we've called in our brief MTA.

It also seeks restitution of the consideration paid under that contract.

On the grounds, that the contract was at all times in violation of the Investment Advisers Act at 1940 including Section 206 and of course that relief arises under 215 Bill of the Act providing the contracts in violation of the Act to practices under contracts and violation of the Act are void.

This is the primary relief sought in this action and always was.

Now, the respondent has said, some of this is moot because we never sought preliminary relief even though the contract has been re-moot.

It was rather difficult to move for preliminary injunction on the basis on the complaint.

It's been dismissed for one subject matter jurisdiction.

The equitable relief sought is in no sense moot, it is the Government of the action.

The Court of Appeals for the Ninth Circuit ruled the sense very narrowly and quite properly it reached only the issue otherwise before it.

The District Court had dismissed the complaint for one of subject matter jurisdiction, finding that there was no private right of action under the Advisers Act no matter how cast.

And the Court of Appeals disagreed and therefore it reversed and said that in the proper case there could be a private right of action for injunctive relief, equitable relief or damages and it got no farther.

It adopted the rational of Abrahamson because Abrahamson is a very, very different case.

Abrahamson was a suit that could only be characterized as suit at worth the money damages arising out of participations in a hedge fund.

And this Court denied certiorari in that case, in Abrahamson and as we have said in our brief, we respectfully contend that this would be a peculiar case and at most a futile record in which to attempt to re-litigate Abrahamson.

Justice William H. Rehnquist: Well, what -- what intimation do you draw from our denial of certiorari in Abrahamson?

Mr. Keisman: I draw, I believe Mr. Justice Rehnquist no improper intimation it holds nothing.

It holds, I believe only that the Court did not consider that case of sufficient importance to warrant at the time it's reviewed.

Justice William H. Rehnquist: Mr. Justice Frankfurter used to say four justices didn't vote to grant.

Mr. Keisman: Quite so, Mr. Justice Rehnquist.

What I'm saying here, however, is that this is not Abrahamson and the petitioners to a certain degree seemed to stress that they like to re-litigate all the questions in Abrahamson.

But those questions aren't here.

This is not a suit primarily from money damages.

This suit does not raise the question whether in order for there to be subject matter jurisdiction.

This Court must allow an action cast in law.

This is not to say that we don't think it is proper to imply such as an action and I will get within the next couple of minutes to the question where there anything at all much as anything important is to be drawn from whatever happen to Section 214 as the Advisers Act in the few weeks that it was considered by a committee but presented really nearly to the floor after some rather rapid redrafting in the summer of 1940.

But at the very least, the relief we say a bill in equity which what this case is lies.

Now, we have agreed that the Cort against Ash criteria that is the Commission have agreed to cast argument among those lines.

And we think the first of the criteria expressed by this Court whether the statute in question was passed for the special benefit of a particular class of persons and whether as this Court itself explained that, that means whether it creates a federal right.

Now, we think that in this instance that the Advisers Act creates a federal right on behalf of the clients of Investment Advisers within the context of the advisory relationship.

It is obvious and manifest and we're not going to belabor it what is in our brief.

This Court itself from the Capital Gains Research Bureau case analyzed the meaning based on debt the passage of the Advisers Act.

Nothing has happened in the interim to change that analysis.

Congress was concerned about the relationship interest they say between the advisor and the client advisee.

It was not concerned in passing the Advisers Act in all due respect to petitioners with the purchase and sale of securities by the advisor on behalf of the advisee.

It was concerned and it was seriously concerned with the relationship interest they say.

One of the things in the legislative history perhaps, very significant in this case which one of the things Congress expressed its concern about in both the Senate Reports and House Report was the kind of compensation arrangements that advisors dealt with themselves with their advisees.

Were they as the FCC have warned in this 1939 state dealing themselves compensation arrangements which encourage them to go out to and take onto investors.

Now, the most common in those days were contingent ones which are of course prohibited as to registered advisors.

More common today and the -- were yesterday is another brief era of the ascendancy of the real estate investment trust was the compensation contract based at least in part upon undisbursed commitments which encourage the practice of heavy forward committing, borrowing (Inaudible), with incurring reverse leverage so that in order to expand your fee base you borrowed money for more than you could get for it if you had committed sufficiently.

Now, of course much of that is no longer important in the investment community.

But the interface relationship, the way a compensation arrangement in a designed was definitely a concern of both Houses Congress at least the cognizant committees in 1939 and 1940.

Now, the special benefit whether was no other beneficiary of this Act except of course for the sovereign interests in that integrity of securities markets in the health of the capital markets.

The class of persons whether individual or corporate or some other kind of entity to be protected and Congress said it again and again each of the reports in the hearings and Senator Wagner's statements was to protect the investors.

This is obvious.

What form of remedies they might seek is no part of the question much less the answer?

Once the federal right is created, it is nothing uncommon for the legislature to leave a method of its protection to the courts.

We contended it has long been accepted by legislatures that the special genius for designing remedy is judicial.

Very often the legislative attempt to foresee what kinds of violations of the general terms of the statute will occur.

Justice William H. Rehnquist: You say once a federal right has been created, do you mean once a federal private right has been created or just once the federal prohibition has been enacted?

Mr. Keisman: I begin with once a federal prohibition.

I'm not trying to imply my conclusion and my premises Mr. Justice Rehnquist.

I'm saying that federal positive law enacted by the Congress says that, practices that operate as a fraud or deceit by advisors upon advisees.

At the very least, if they're in the contractual relationship result in void contracts, and a void contract not only under this Court's comment in Deckert against Independent Shares, the Second Circuit's holding in Goldstein against Groesbeck, and this Court commented part and again in the Blue Chip case.

Void means voidable at the instance of the party aggrieved.

No other meaning is current or has been within the century in the Anglo-American legal system.

It does not mean that the contract is void at the option of the Government.

I believe this Court has made that clear nor does it mean that the contract is void if none tries to do anything about it.

It has frequently been read that void means voidable in a way this reduces the strictures.

The party aggrieved if it so wishes can seek not to take its remedy.

It must assert its remedy.

Justice Potter Stewart: Or can defend --

Mr. Keisman: It can defend --

Justice Potter Stewart: -- on the ground that it has no obligation because the contract is void.

Mr. Keisman: Mr. Justice Stewart, that isn't a reading for which even the petitioner has been able to cite any authority.

If they --

Justice Potter Stewart: Now, when I went to law school, it was considered there was some difference between voidable and void.

Now, perhaps, that difference has been blurred in the in so many years.

Mr. Keisman: Well, I respectfully submit that this Court's interpretation, its proper interpretation of Section like 250 and this Section 29 (b) of the Exchange Act and the Second Circuit's interpretation of 26 of the Public Utility Holding Company Act require a vast change in the law if we're now to say, oh no, all 250 (b) means that it can be used defensively.

Those who make the statute meaningless--

Justice William H. Rehnquist: Are you talking about this Court's interpretation of last few years or over a period of the generation?

Mr. Keisman: Well, the first statement which I'm well aware of Mr. Justice Rehnquist is in Deckert which in turn cites authority as to the meaning of these provisions of the securities laws and it says that they're voidable at the instance of the party aggrieved is that it's also the teaching of Groesbeck.

Justice Potter Stewart: I think the reasoning of the very first, I think it's the first case, that it might have private right of action in the sec -- and other provisions of the securities laws was in the Kardon case and that did rely greatly on this Floyd idea, didn't it to apply --

Mr. Keisman: I think it was an alternate holding In Kardon.

I believe that the holding in Kardon relied most strictly on the then doctrine of the restatement of torts, simply what we've contended in our brief is the proposition that the Court property starts with.

Justice Potter Stewart: Then back to Safety Appliance Acts and so on.

Mr. Keisman: The Safety Appliance Act, Rigsby, and of course way back to Couch against Steel and Dean Thayer's commentaries that when federal positive law is created -- right positive law is created thing such an act or omission is criminal or otherwise wrongful as against such persons.

Then it's the most natural thing in the world for the civil process as well as the sovereign penal process to imply a remedy with respect to thereto to the party aggrieved.

Now, the petitioners here we think recognize this because they met a method exigesis upon a free word admission from Section 214, the special federal question jurisdiction subsection.

As we believe we have developed perhaps some of those two exhaustively in our brief Section 214 as known to floors no legislative history worthy of the name.

Section 214 as known to the floors of the House and the floor of the Senate as described to it in the Committee Reports that came to the floor is described as being comparable to the provisions containing the Investment Company Act.

Whether every Section entitled to the Advisers Act after Section 207 is so described comparable.

If a member of the Senate or a member of the House going more than ordinary curious, I might have try to the legislative history of the Investment Company Act to the Senate and House support on this as happen one as thus, same package.

And then he would have been told that Section 44 of the Companies Act contained the usual provision about jurisdiction.

Now if the intent of Congress is the intent of either House and not the intent of some draftsmen working for someone on same said Committee.

Then, the reasonable interpretation of the intent of the sovereign body of Congress with respect to 214 as what it intended to do what it had done before.

Now, it suggested to it and even if a member read the Committee Reports and read the Committee Hearings.

There was nothing in any of those that carried the remotest suggestion that anyone had ever made a conscious change.

They're meant to do anything other than what they had done before.

There is no factual historical explanation that says why at some point on some day 214 was drawn precisely the way it was.

Historically, the most rational is that for a long time as went to the rapid spring and summer 1940 drafting these laws, large pieces of Title I and Title II the formal theses jurisdiction venue offenses procedure had been picked up from the 1935 Act in and put in badly.

Perhaps, this is a way of saving time.

There was apparently some desire to get this work done.

At some point--

Justice Potter Stewart: Which was 1935 Act?

Mr. Keisman: I'm sorry, the Trust Indenture Act.

Justice Potter Stewart: Oh!

I see.

Mr. Keisman: At some point, the industry protested that this Bill was sloppy in effect.

This was what actually happened that Title I and Title II should be separated that Section should be written.

One of three sections were written and we have a committee print pops up now with sections all neatly done for Title I and Title II.

No comment on any of them; not the slightest on the floor.

Now, to create a monumental doctrine to say that the Advisers Act shall be different from all their acts because of this bit of draftsman's trivia and against with the floors of each House that enacted this Bill without substantial dissent were told is an excuse for an exegesis.

It is now a valid reason for an exegesis for different result for change and the consequences of the board heavy front provision of the Advisers Act as opposed to the consequences of Section 10 (b) or more to the point Rule 10 (b) (5).

Justice John Paul Stevens: Mr. Keisman, just going back to your broader point for the word there's wrong, there's going to be a remedy basically, what do you do with Piper against Chris-Craft?

Mr. Keisman: In Piper, this Court came to the conclusion that a defeated tender offeror in that capacity was not a member of the class protected by the Williams Act.

Mr. Justice Stevens, I'm aware that you did not concur in that position but I think that the cases are nonetheless distinguishable as they didn't come down or as we contend this one should come down.

In that, there was an argument and the argument was recognized and to put another weapon in the hands of a company seeking to take over another as it were the predator was to take the balance in the way different than Congress had in mind.

The Williams Act was enacted because the Congress expressed great concern at the rush.

Companies, conglomerates, other aggressive corporations to take over others.

The Williams Act was passed, of course what makes it a more difficult.

Now, if the predator as it were could sue not only his competitor but it's the logic appeared to be could assume the target company.

If it fought back hard and slipped into some of our mission in the race and then perhaps seven to 10 days it takes to mount what the Financial Press used to call the Saturday Night Special.

While the target companies resistance might be weakened beyond a reason, the fear that a well-mounted and powerful attacks even to take you over it.

Well, the management may not fight back anyway.

If they do fight back because for some reason for saying, well, no, we're not going to give any of the predator a chance to use Williams Act in any way predator's on his own.

This is not this case, here we have --

Justice John Paul Stevens: The difference you're saying and is that dealt with for whom the cause of action may be applied or as this deals with whether any may be applied to --

Mr. Keisman: Yes, Mr. Justice Stevens.

So they -- though the result expressed in terms of Court criterion for whether this should be remitted to the state court, we submitted we've argued in our brief for actual words of conclusion that riding on the conclusion as to criterion number one that the overall was not within the class protected and that really could perhaps have been the end of it.

Now, in the time remaining I would simply like to stress that the problems, the tremendous policy problems start to arrive out of allowing federal protection of an advisee by his advisor for breach of what Congress recognized was a fiduciary relationship.

And a fiduciary relationship a federal concern this Court pointed that out in Green against Santa Fe.

Congress has superimposed under a new fiduciary relationship positive one with respect to what is the breach of this kind of fiduciary duty.

We respectfully submit that this easy job of the federal judiciary.

As to limitations, as to scienter, again, the Second Circuit knows all about scienter.

It decided Abrahamson.

It also decided Drexel.

Scienter has always been a part of fraud point.

As to whether things --

Justice William H. Rehnquist: The Second Circuit knew all about Piper and Chris-Craft too, didn't it?

Mr. Keisman: Well, it may have erred Mr. Justice Rehnquist in that case but we respectfully suggest that as to the proper elements in the 206 offense there's no reason to think to the Second Circuit would be any more open-ended that it was under 10 (b) (5), the Williams Act was something rather new at the time, sir.

We respectfully suggest that these problems are the problems that are properly those of the District Courts to delineate the elements.

They are not before this Court and they are not in the record.

We have very little of a record here of pleading dismissed for one of jurisdiction.

If this is not the job of the central judiciary, we respectfully suggest that at least went in some doubt as to what that job is.

The pretended harsh of the flooded litigation -- no, petitions are found perhaps 15 cases in 7 years.

The judicial conference reports that 130,000 private federal civil actions were found last year.

The number of times that the federal judiciary would have to concern itself about fraudulent conduct by an interstate advisor by an advisor-advisee investors on the national scale very small probably less frequently there has to consider the terrible burden of doing a litigation under Section 1 of the Sherman Act.

The burden isn't there.

The Hochfelder problem isn't there, The Blue Chip problem isn't there.

The universe of clients are people in a contractual relationship.

A prospective client who doesn't enter into relationship isn't going to be defrauded.

That's a chivalrous.

We're not going to have suits for damages arising out of the false advertisement for taut sheet that someone didn't buy.

Prospective client could be defrauded if he becomes a client, perhaps that it may become a client.

But the problem isn't really there.

The problem is it's fictional.

This is fictional as the asserted datum of which this Court was presented -- with regard to suits against real estate trust as we put it out, the only verifiable datum.

The only reported case cited is mis-cited.

One case presented as involving an unjust settlement as it happens we we're able to inspect the file because my friend is counsel for the plaintiff there.

And the case was settled after the trustees and the trust fund it settled.

There is no problem of burden and there is a duty in the Court which we respectfully submit should be met.

Argument of Ralph C. Ferrara

Chief Justice Warren E. Burger: Very well.

Mr. Ferrara.

Mr. Ferrara: Mr. Chief Justice, may it please the Court.

The Securities and Exchange Commission believes that an implied remedy for damages caused by violations of the anti-fraud provisions of the Investment Advisers Act is consistent with the Act's legislative scheme and necessary to achieve effectively its goals.

As you have already heard, a primary congressional purpose underlying the enactment of the Investment Advisers Act particularly its anti-fraud provisions was to eliminate fraud in overreaching by investment advisers abuses which had compromised the interest of advisory clients and derogation of the delicate fiduciary nature of an advisory relationship.

Judicial recognition of an implied rate of action here will effectuate that congressional goal.

Far from interfering with the Act's regulatory scheme or its enforcement by the Commission in the manner explicitly provided for in the statute, Section 206, I'm sorry, implying a right of action under Section 206 the Advisers Act would serve as necessary supplement to governmental action.

Without a private remedy, statutory objectives would be frustrated congressionally provided protections for advisory clients will be significantly diminished.

Like Section 10 (b) of the Securities and Exchange Act, Section 206 of the Advisers Act is a general anti-fraud provision and across the board prohibition of the countless varieties of deceptions and cutting devices to which clients have investment advisers might be subjected and all who need the statutory definition of advisor including those who are exempt from registration by the Commission are covered.

Section 206 is therefore a provision intended and structured by the legislators to provide broad protections to the clients of investment advisers.

To the clients of investment advisers, Congress clearly articulated a federal right in that special class.

Because of this specific congressional purpose, Section 206 in some respects is more limited than the anti-fraud provisions of Section 10 (b) of the Exchange Act.

For example, Section 206 is limited in its applicability to an advisor's relationship with his client.

On the other hand, the limitations contained in Section 10 (b) at the fraud being connection with the purchase and sale of a security is not a prerequisite since Congress recognized that fraud by advisor may take forms which should not always directly relate to the purchase and sale of securities.

Thus, the legislative history of the Act repeatedly emphasizes the need to protect the special class of clients from unscrupulous and fraudulent practices.

By 1940 of course, Congress had enacted a full panoply of securities lost which were in part designed to prevent fraudulent practices yet Congress proceed the deficiency and the legislative scheme and that it was not as effective at it could be in preventing the types of abuses that a grown up in the investment advisory field.

Congress intended to remedy this deficiency and this Court has directed lower courts that it is their duty to provide such remedies are necessary to effectuate the congressional purpose.

It is therefore significant to the Commission that each of the three appellate courts that have considered the issue presented here and the overwhelming number of district courts that have done so have concluded that a private remedy is both appropriate and necessary to achieve the goals underlying the Investment Advisers Act.

And as the Fifth Circuit has stated in the Wilson case, there are no less drastic and more closely tailored means by which to do so.

We submit that the many Courts that have considered this issue have been faithful to the Court's direction.

There are, as this Court has pointed of course, circumstances in which a private remedy would not only fail to contribute to furthering the legislative scheme but would also actually interfere with Congress' intent.

But we do not have in these circumstances we do not have in this case an assertion of a private remedy by one that the statute was meant to regulate as we had in the Piper case.

Here the clients of the advisers were intended to benefit from the statute and that's who's bringing the action nor do we have a situation in which private enforcement would not be harmonious with the exercise of the enforcement powers entrusted to governmental agencies as well as the case in Amtrak and Barbour.

It has been the Commission's consistent experience that even where allegations in the separate private damage action parallel the Commission action and on enforcement proceeding, private remedies do not interfere with their own enforcement activities and of course many private actions are brought where the Commission does not or because of limited resources could not institute its own proceeding.

We recognize of course, that in administrative institutional invitations alone do not justify the implication of private remedies but an appreciation of the dimensions of the enforcement fraud problems faced by the Commission and how that problem has changed through the years is useful to an understanding of the depths of the problems that are faced today.

As in Borak, one measure of the necessity for a private action is to provide, I should say, is provided by the scope of the practical problems that the agency faces in attempting to administer the Act.

In 1940, the investment adviser industry was indeed to fledgling profession that emerged in response to depression and the public's perceived need for investment expertise to supervise his investments.

But that fledgling profession has experience dramatic growth since 1940 and recent statistics indicate that that is a continuing trend.

In 1941, barely 750 advisers registered with the Commission under the Investment Advisers Act as compared to approximately 6,000 broker dealers that were registered with the Commission back in 1941.

Currently, the Commission's records put the number of registered investment adviser and that is not the entire universe of adviser but the number of registered investment advisers at 5500, almost equaling the number of registered broker dealers.

Perhaps, even more indicative of the importance of the advisory industry to the nation's affairs international economy is the growth of the assets under advisement.

Well the number of adviser's increases sevenfold since 1941, the amount of assets under advisement has increase 50 times.

Today, there are $200 billion under advisement and it must be taken into account that unlike overseeing and disciplining the broker dealer community where the Exchange Act provided for a commission and self-regulatory partnership and enforcing the Act, the Commission must bear the primary responsibility for regulating and enforcing the provisions of the Investment Advisers Act.

Moreover, the enforcement of role, as I said a moment ago, extends to all those who meet the definition of adviser including the many advisers who exempt from the Act's registration provisions.

For various reasons not limited to the scarcity of available resources, the Commission must carefully choose the cases it brings.

Even in those cases, it does bring moreover, it is normally impossible for the Commission to obtain redress for undue to investors.

As Mr. Justice Stevens had pointed out, it is fundamental to our adversary system that selfish interests of litigants provide the best guarantee that a claim will be effectively asserted.

Certainly, it is true that there is no placement so effective as the one whose pocketbook is affected by the degree to which he enforces the law.

As we have pointed out, many of the reasons was compelled like a conclusion that a private rate of action should be available on the Advisers Act also, I'm sorry, I mean the Exchange Act also militate for the conclusion that a private action should be provided under the Advisers Act.

Justice Byron R. White: You don't draw any distinction between legal and equitable plan?

Mr. Ferrara: Well, indeed I suppose the Commission would prefer to see the case decided on the narrowest ground.

Principally because we have been told and we understand that implied actions are not favored.

However, I think that in this case, although the relief prayed for is basically equitable relief, damages are also prayed for and we thank that it probably this would be a good time to resolve the question of whether there is an implied remedy under the investment Advisers Act then --

Justice Potter Stewart: I don't think that quite answer my Brother White's question, as I understood his question that is in your submission, do you think there is a valid there is a valid distinction or a valid distinction can be made between the two actions?

Mr. Ferrara: Yes, a distinction --

Justice Potter Stewart: (Voice Overlap) by the statute just as Judge Gurfein did in dissenting in the Second Circuit --

Justice Byron R. White: And your brief -- and your brief seems to indicate that?

Mr. Ferrara: That's right.

No, indeed the distinction could be drawn, Judge Gurfein in dissenting in the Abrahamson case in the footnote seemed to suggest that have the Abrahamson case been an equitable action or an action for equitable relief, that action might have gone forward and be implied under Section 206 and to this --

Justice Byron R. White: Also in the text of a dissenting opinion, I think that seem --

Mr. Ferrara: Yes and in this action sensed the principally prayed for as an junction, recession, restitution, on accounting as well as damages.

Justice Byron R. White: Well, tell me though, tell me why you think in terms of whether there's an implied private cause of action, there could be some of the distinction drawn.

I'm not talking about the jurisdiction as whether there might be some difference as to whether you needed the jurisdictional amount.

But I'm talking about the private cause of action.

Mr. Ferrara: Yes.

As Mr. Justice Stewart pointed out in assisting me in clarifying my response to you, the Commission believes that this case could be decided solely by treating the equitable question, unless you have to be.

Now if the Court, --

Justice Byron R. White: You haven't answered my question yet.

Mr. Ferrara: I understand that.

If the Court chose to decide the action just in the basis of the equitable or chose to decide the case, I simply the --

Justice Byron R. White: Well, let me put to you differently.

Why should you get a different and how could you get a different answer on the legal side and on the equitable side in terms of the private cause of action?

Just briefly.

Mr. Ferrara: Briefly.

We would follow the direction of Mr. Chief Justice Burger and the Piper case where he asked as one of the criteria that we utilize.

In that case, if there was a less drastic means by which to provide the remedies that were needed to fulfill the congressional purpose and Mr. Justice Burger might say in analogy to Piper case --

Justice Byron R. White: How about the Commission?

Mr. Ferrara: We would agree that if the Court shows a less drastic, if the Court (Voice Overlap)

Justice Byron R. White: What do you urge the Court to do?

Mr. Ferrara: We urge the Court to find an implied right of action under Section 206 of the Advisers Act.

But should the Court choose to find --

Justice Byron R. White: For what?

Both legal and equitable?

Mr. Ferrara: For legal and equitable relief, however --

Justice Byron R. White: And you think the Act should be construed that way?

Mr. Ferrara: We do indeed.

However, we recognize that should the Court wish to find only that an equitable remedy should be implied under Section 206 it could do so.

Chief Justice Warren E. Burger: Equitable remedies sometimes don't put any money in anyone's pocket, is that so?

Mr. Ferrara: Indeed they do not --

Chief Justice Warren E. Burger: The Commission isn't so much concerned about putting money in people's pocket so as stopping a wrongdoing that's ongoing, isn't that --

Mr. Ferrara: That's correct, we generally see --

Justice Potter Stewart: But you told us very briefly that your argument is based upon the economic motivation of private parties.

Mr. Ferrara: I'm sorry?

Justice Potter Stewart: A great deal of your argument is based upon the (Inaudible) list provided by the economic motivation of private parties.

Mr. Ferrara: That's correct.

Justice Potter Stewart: The economic motivation has to do with putting money in people's pocket, generally.

Mr. Ferrara: The -- the protection of the economic interest of clients is the very point of prohibitions against adviser fraud.

Mr. Chief Justice, the Commission normally seeks prospective equitable relief in getting an injunction.

A private litigant seeking equitable relief oftentimes as in this case would seek rescission, reinstitution, and accounting and to some extent reinstitution is the equitable analogue, I believe, of damages.

Justice John Paul Stevens: Mr. Ferrara --

Mr. Ferrara: Yes?

Justice John Paul Stevens: Which any of the four factors identified in Cort against Ash would suggest that one could draw a distinction between legal and equitable remedies?

Mr. Ferrara: The -- Mr. -- it would be the third, sir that is whether or not the action was consistent with the underlying legislative scheme.

That is the way that --

Justice John Paul Stevens: Are you suggesting then that perhaps an equitable action is consistent but a damage action might be inconsistent.

Mr. Ferrara: No, but I'm suggesting is that in providing a gloss over the four-part Cort test and the Piper case, I believe that this Court suggested in focusing on Cort factor three, that is whether the action is consistent.

This Court asked an additional question and that is, whether or not the action, a private action could go forward in a less drastic fashion than to seek for legal damages and since there was no response in that case they found in part that the third fact to the Cort test had not been met.

I think in this case, should the Court wish to take that approach, should that Court raised to provide that gloss of Piper on Cort against Ash, it could decide at a minimum, the third degree or third criteria of the Cort test could be met by providing equitable relief.

However, we believe that the Court should decide the broader question and that is whether there is an implied right of action generally under the Investment Advisers Act.

Rebuttal of John M. Anderson

Chief Justice Warren E. Burger: Very well.

Do you have anything more, Mr. Anderson?

Mr. Anderson: May it please the Court.

Chief Justice Warren E. Burger: You have eight minutes and if you needed, we'll ran through your rebuttal entirely before the break.

Mr. Anderson: Thank you Mr. Chief Justice.

Let me be as brief as I can.

The omission of the phrase action at law in and of itself is not as significant as the omission of the phrase action at law brought to enforce in the liability or duty created.

Those words do not appear in the Investment Advisers Act of 1940.

They do appear in the 1933 Act and in the 1934 Act.

I think that is the omission which is significant.

There are a limited number of --

Justice John Paul Stevens: I thought they appear in the 33 and 34 Acts as those Acts have express action at law available for remedy.

Mr. Anderson: Yes, that's correct.

I was not --

Justice John Paul Stevens: There is no such express action of law available under the statutes?

Mr. Anderson: Yes that is correct.

However, in the 33 and 34 Act where there are creations of express rights of action.

Those provisions providing those express rights of action create and have in them those very sections conferral of jurisdiction and so it seems to me that the significance is not the omission of the inclusion for that purpose but to suggest a broader range of remedies available.

There are a few numbers of suits against Real Estate Investment Trust because of the uncertainty as to whether or not a private right of action exists under this Act.

That I think is the answer to the fact that they are only some 15 suits that we've been able to find in recent years.

As the Court may know the district courts have been divided on this issue and all of the Courts of appeals which have conceded this, there has been a strong dissent.

With respect to Judge Gurfein's comment that there might be equitable relief available, it should be pointed out that equitable relief has an issue was not in that case but more importantly, I think it would be anomalous for this Court to conclude that there might be equitable relief because the existence of equitable relief presupposes, under standard equitable principles the existence or the absence of adequate legal relief and I think it would be on that technical legal ground, it would be inconsistent to do so but more importantly as we point out in this case since there is a prayer here for rescission, the line between equitable relief and money damage relief is bound to be blurred.

The Securities and Exchange Commission refers to the only other case in which this Court has considered the Investment Advisers Act namely the Capital Gains case.

In the Capital Gains case, this Court held that the Commission need not show intentional rueful misconduct the old fashioned fraud in order to obtain an injunction.

Are we to understand from that that a private litigant seeking injunctive relief also would not have to sell old fashioned fraud, intentional conduct and if that is the case, does it not undermine this Court's ruling in the Hochfelder case where the limitation on the kind of conduct that could be proscribed.

The argument is made in this case that the Advisers Act at least provides for equitable relief that is based on Section 215 (b) of the Advisers Act and as we submit and discuss at length in the red reply brief that argument is base on misreadings of that section and does not account for the fact that that section was undoubtedly based on state law in which the voidability provision was available as a defense for someone seeking to enforce an adviser contract did not confer necessarily or by experience a right to affirmative action.

The Advisers Act, unlike the 1933 and 1934 Act does not purport to regulate the marketing of securities generally.

It is aimed to the small specific segment of the securities industry.

It is aimed instead at its special relationship rather than arrange of transactions and we submit that that he used 1933 and 1934 Act principles in wholesale interpretation of the Advisers Act simply because they are both of three, are all three are federal securities law is misleading and inappropriate given their different aims and different purposes.

Accepting the premise that the Advisers Act was intended to protect clients of investment advisers, it is ironic I think, that if this Court were to imply a private right of action under that Act, it would plunge those litigants, those claimants, those clients of investment advisers into years of unknown litigation.

And I say unknown as to who may bring the suit, who may be a defendant, who may be sued, what are the standards for causation, and what are the questions for intent.

How much more it would benefit the investors -- how much more would benefit the clients of investment advisers if the federal court which will leave to Congress the task of weighing and considering those very questions as the Congress itself did in 1970 and its evaluation of the Investment Company Act.

It seems to me that the beneficiaries of the Act, namely the clients of investment advisers would benefit more from refusing to imply a right -- a private right of action here and allowing the Congress to weigh and to evaluate the remedies before opening the door to witless, protracted, private litigation in the federal courts.

Thank you.

Chief Justice Warren E. Burger: Thank you gentlemen.

The case is submitted.