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September 9, 1974


The opinion of the court was delivered by: Will, District Judge.


The plaintiff herein, Donald J. Reid, brings this action under § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), charging that the defendant fraudulently induced him to purchase 50,000 shares of Class B stock of Scope Research, Inc., an Illinois corporation, for $15,000. Alleging that certain instrumentalities of interstate commerce were used, the plaintiff paraphrases the statutory language of § 17(a) in claiming that the defendant delivered certain false and misleading financial statements upon which the plaintiff detrimentally relied when entering into the purchase. As redress for the alleged fraud, the plaintiff seeks rescission of the contract, $15,000 in actual damages, and $45,000 in punitive damages.

The defendant has responded by filing a motion to dismiss, raising the following four grounds: (1) the plaintiff may not bring a private action for damages based upon § 17 of the 1933 Securities Act; (2) the transaction did not involve the use of any of the instrumentalities of interstate commerce required for federal jurisdiction under the 1933 Act; (3) the complaint is insufficient as it fails to comply with the particularity requirement of Rule 9(b) of the Federal Rules of Civil Procedure; and (4) punitive damages are not recoverable under the 1933 Act. We find that the defendant's first contention, that no private right of action may be based upon § 17, is persuasive, and accordingly the plaintiff has no standing to bring the action in its present form. Because this ground effectively disposes of the entire matter, we need not consider the substantial questions surrounding the interstate nature of the transaction, or the adequacy of the plaintiff's complaint. Nor do we reach the well settled proposition that punitive damages are unavailable for a violation of the 1933 Act. Globus v. Law Research Service, Inc., 418 F.2d 1276 (2d Cir. 1969), cert. denied 397 U.S. 913, 90 S.Ct. 913, 25 L.Ed.2d 93 (1970).

Section 17(a) provides:

    (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.

It is readily apparent that there is no express private civil remedy provided for in § 17(a). Statutory construction and legislative history also negates the argument that there is an implied right of action. Viewing the 1933 Act in its entirety, both §§ 11 and 12 contain express provisions for civil remedies, which creates the reasonable inference that the absence of such a remedy in § 17 was not an oversight or the product of inartful draftsmanship. Rather, as expressed by Judge Friendly in his concurring opinion in SEC v. Texas Gulf Sulfer Co., 401 F.2d 833 at 867 (2d Cir. 1968), cert. denied sub nom, Coates v. SEC, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1968):

  [T]here is unanimity among the commentators,
  including some who were in a peculiarly good
  position to know, that § 17(a)(2) of the 1933 Act
  — indeed the whole of § 17 — was intended only to
  afford a basis for injunctive relief and, on a
  proper showing, for criminal liability, and was
  never believed to supplement the actions for
  damages provided by §§ 11 and 12. See Landis,
  Liability Sections of the Securities Act, 18
  Am.Acct. 330, 331 (1933); Douglas and Bates,
  Federal Securities Act of 1933, 43 Yale L.J. 171,
  181-82 (1933); Loss, 3Securities Regulation 1785-86
  (1961). When the House Committee Report listed the
  sections that "define the civil liabilities imposed
  by the Act" it pointed only to §§ 11 and 12 and
  stated that "[t]o 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." H.Rep. No.
  85, 73d Cong., 1st Sess. 9-10 (1933).
  Professor Loss reads the section similarly, lending considerable credence to the statements of Commissioner Landis who played a dominant role in the drafting of the 1933 Act. In a November 1933 address, Commissioner Landis commented:
  The suggestion has been made on occasion that
  civil liabilities arise also from a violation of
  Section 17, the first subsection of which makes
  unlawful the circulation of falsehoods and
  untruths in connection with the sale of a
  security in interstate commerce or through the
  mails. But a reading of this section in the light
  of the entire Act leaves no doubt but that
  violations of its provisions give rise only to a
  liability to be restrained by injunctive action
  or, if wilfully done, to a liability to be
  punished criminally.

Loss goes on to stress that there is a significant difference between the 1934 Securities and Exchange Act, which does have a private right of action, and § 17 of the 1933 Act.

  It is one thing to imply a private right of
  action under § 10(b) or the other provisions of the
  1934 Act, because the specific liabilities created
  by §§ 9(e), 16(b), and 18 do not cover all of the
  variegated activities with which the act is
  concerned. But it is quite another thing to add an
  implied remedy under § 17(a) of the 1933 Act to the
  detailed remedies specifically created by §§ 11 and
  12. The 1933 Act is a much narrower statute. It
  deals only with disclosure and fraud in the sale of
  securities. It has but two important substantive
  provisions, §§ 5 and 17(a). Noncompliance with § 5
  results in civil liability under § 12(1). Faulty
  compliance results in liability under § 11. And §
  17(a) has its counterpart in § 12(2). It all makes
  a rather neat pattern. Within the area of §§ 5 and
  17(a), §§ 11 and 12 (unlike §§ 9(e), 16(b) and 18
  of the 1934 Act) are all-embracing. This is not to
  say that the remedies afforded by §§ 11 and 12 are
  complete. But the very restrictions in those
  sections and the differences between them . . .
  make it seem less justifiable to permit plaintiffs
  to ...

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