Touche Ross & Co. v. Redington
442 U.S. 560 (1979)
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Rule of Law:
A private cause of action cannot be implied from a federal statute unless there is affirmative evidence that Congress intended to create such a remedy. The central inquiry is one of congressional intent, not whether a private remedy is desirable or consistent with the statute's purpose.
Facts:
- Weis Securities, Inc. (Weis) was a securities brokerage firm registered with the Securities and Exchange Commission (SEC).
- Weis retained Touche Ross & Co., a firm of certified public accountants, to serve as its independent auditor from 1969 to 1973.
- Touche Ross conducted audits of Weis's books and prepared annual financial reports required to be filed with the SEC under § 17(a) of the Securities Exchange Act of 1934.
- Officers at Weis conspired to conceal substantial operating losses during its 1972 fiscal year by falsifying the financial reports filed with regulatory authorities.
- Touche Ross allegedly conducted an improper audit and certified these falsified financial statements.
- In 1973, Weis's true financial condition was discovered, leading to its insolvency and liquidation.
- The liquidation revealed that Weis's assets were insufficient to make its customers whole.
- The Securities Investor Protection Corporation (SIPC) advanced $14 million to a trustee, Redington, to satisfy customer claims, but millions of dollars in claims remained unsatisfied.
Procedural Posture:
- The Securities Investor Protection Corporation (SIPC) and the Trustee for Weis's liquidation, Redington, filed a lawsuit for damages against Touche Ross in the U.S. District Court for the Southern District of New York.
- The District Court dismissed the complaint, holding that no private cause of action could be implied from § 17(a) of the Securities Exchange Act of 1934.
- SIPC and Redington, as appellants, appealed the dismissal to the U.S. Court of Appeals for the Second Circuit.
- A divided panel of the Second Circuit reversed the District Court, finding that an implied private right of action exists under § 17(a) for customers against accountants.
- Touche Ross, as petitioner, sought and was granted a writ of certiorari by the U.S. Supreme Court.
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Issue:
Does § 17(a) of the Securities Exchange Act of 1934, which requires brokerage firms to maintain records and file reports with the SEC, create an implied private cause of action for damages against an accounting firm that improperly audits those reports?
Opinions:
Majority - Justice Rehnquist
No. Section 17(a) of the Securities Exchange Act of 1934 does not create an implied private cause of action for damages. The court's task is limited solely to determining whether Congress intended to create such a private right of action. The plain language of § 17(a) simply requires regulated entities to keep records and file reports; it neither confers rights on any private parties nor proscribes any conduct as unlawful. The statute is forward-looking, designed to provide regulators with information to prevent insolvency, not to provide a retrospective damages remedy after insolvency occurs. Furthermore, the legislative history is entirely silent on the matter, and implying a remedy from congressional silence is a hazardous enterprise. The statutory structure of the 1934 Act also weighs against implication, as other sections of the Act (§§ 9(e), 16(b), 18(a)) expressly provide for private remedies, demonstrating that Congress knew how to do so when it wished. The Court's analysis must adhere to a stricter standard for implying private causes of action than in prior cases like J.I. Case Co. v. Borak, focusing exclusively on congressional intent.
Concurring - Justice Brennan
No. A cause of action should not be implied under § 17(a). Under the test from Cort v. Ash, when a statute clearly does not create a federal right in favor of the plaintiff and there is no indication of legislative intent to create such a remedy, the remaining factors of the test cannot by themselves be a basis for implying a private right of action. Here, § 17(a) does not grant an especial benefit to a particular class, and there is no evidence of legislative intent to create a remedy, which is dispositive.
Dissenting - Justice Marshall
Yes. A private cause of action for damages should be implied under § 17(a). Applying the four factors from Cort v. Ash supports this conclusion. First, § 17(a) was enacted for the "protection of investors," making the customers of brokerage firms a class for whose especial benefit the statute was enacted. Second, while the legislative history is silent, the existence of other express remedies is not a sufficient reason to deny one here, especially since the express remedy in § 18(a) protects a different class of plaintiffs (purchasers and sellers) from a different harm. Third, implying a remedy is consistent with the legislative scheme because it would supplement SEC enforcement and incentivize accountants to perform their duties properly. Finally, the cause of action is not one traditionally relegated to state law. The majority misapplies precedent and disregards the clear protective purpose of § 17(a).
Analysis:
This case marks a significant retrenchment from the Court's previous willingness to imply private rights of action under federal statutes. It effectively shifts the analysis away from the four-factor balancing test of Cort v. Ash toward a much more stringent, almost exclusive, focus on congressional intent. The decision signals that unless the statutory text or legislative history provides clear evidence that Congress intended to create a private remedy, courts should not create one. This has made it substantially more difficult for private plaintiffs to sue for violations of federal statutes that do not contain an express private right of action, narrowing a major avenue of federal litigation.
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