DocketNumber： 212, Docket 75-7203
Judges： Mansfield, Timbers, Gurfein
Filed Date： 5/16/1978
Status： Precedential
Modified Date： 11/4/2024
Of the several questions presented under the antifraud provisions of the federal securities laws, those under the Investment Advisers Act of 1940 appear to be of first impression at the appellate level
• The appeal is from a judgment entered in the Southern District of New York, Robert L. Carter, District Judge, 392 F.Supp. 740, dismissing the complaint, on cross-motions for summary judgment, in an action to recover damages for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970), and of Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 (1976); and alleged violations of Section 206 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6 (1970), and of Rule 206(4)-l thereunder, 17 C.F.R. § 275.206(4) (1976).
The essential questions presented and our rulings thereon are as follows:
(1) Whether the complaint states a claim upon which relief can be granted under Section 10(b) of the 1934 Act and Rule 10b-5.
We hold it does not.
(2) Whether defendants who are general partners of the investment partnership are investment advisers within the meaning of Section 202(a)(ll) of the Advisers Act.
We hold they are.
(3) Whether there is an implied private right of action for damages under the Advisers Act.
We hold there is.
(4) Whether the complaint alleges compensable damages under the Advisers Act.
We hold it does.
(5) Whether the complaint states a claim upon which relief can be granted under Section 206 of the Advisers Act and Rule 206(4)-l.
We hold it does.
We affirm the dismissal of the Exchange Act claim; but as to the dismissal of the Advisers Act claim, we reverse and remand for trial.
I. FACTS
The following summary of the essential facts is believed necessary to an understanding of our rulings on the questions presented.
Plaintiffs Robert Abrahamson and Marjorie Abrahamson, husband and wife, were limited partners of defendant Fleschner Becker Associates (FBA), an investment partnership, from its inception on July 1, 1965 until they withdrew on September 30, 1970.
Defendants Malcolm K. Fleschner (Fleschner) and William J. Becker (Becker) are
In late 1964 and in 1965 plaintiffs had several conversations with Fleschner who expressed his intention of forming an investment partnership. He told plaintiffs that the partnership would have a conservative investment policy. Plaintiffs expressed their concern for financial security and conservatism in their investments.
By a partnership agreement dated July 1, 1965, FBA began as a small partnership. The original partners consisted of one general partner (Fleschner) and eight limited partners (plaintiffs, four members of Fleschner’s family and two others). Plaintiffs’ initial contribution was $150,000.
FBA grew rapidly. By April 1, 1966 it had two general partners and thirty-five limited partners; and by October 1, 1968 it had three general partners and sixty-six limited partners. Each partner had an account which represented the appreciated value of his contributions to the pooled funds, less withdrawals and certain fees. By October 1, 1968 FBA’s assets were approximately $60 million.
For managing the partnership investments, the general partners received substantial fees. They were paid 20% of FBA’s net profits and net capital gains for each fiscal year. In addition, the partnership agreement of October 1, 1968 provided for an annual salary of $25,000 for each general partner who managed the partnership’s investments.
The limited partners did not participate in managing the partnership’s investments. A limited partner could withdraw all or part of the balance in his capital account at the end of any fiscal year (September 30), provided that he gave the required advance notice. Prior to October 1, 1968, 30 days notice was required; thereafter, 60 days notice was required. There were similar notice requirements for withdrawal from membership in the partnership.
With the increase in the number of limited partners and the concomitant increase in the size of the firm’s assets, certain changes were made in the structure of the partnership. The original July 1, 1965 partnership agreement was superseded by a new agreement dated April 1, 1966 which in turn was superseded by the October 1, 1968 agreement. The principal change effected by the 1966 agreement was the addition of Becker as a general and managing partner and the inclusion of additional limited partners. The 1968 agreement, in addition to authorizing salaries of $25,000 per year for those general partners who managed the partnership’s investments, included Ehrlich as a general partner; added a large number of limited partners; expanded and detailed the stated purposes of the partnership; and made a number of other changes referred to below.
During the period plaintiffs were limited partners of FBA the general partners mailed monthly reports to all of the firm’s limited partners. These reports were concise, two paragraph statements which set forth the percentage increase or decrease in the value of the firm’s investments for the year to date and compared this performance with Standard & Poors 500 Stock Average.
The reports also included statements of the firm’s investment policy. Between November 1967 and April 1968 the reports repeatedly represented that FBA was maintaining a “low risk stance” and .“a most conservative posture.”
In addition to the monthly reports, during 1967 and 1968 Goodkin mailed to the
Despite the representations in the monthly reports that FBA’s investments were most conservative and of low risk, between September 1967 and September 1968 the firm increased its investments in unregistered securities from approximately 15% to approximately 72% of its portfolio. Between September 1968 and September 1969 the firm’s investments in unregistered securities fluctuated from about 72% to 88% of its portfolio.
In either December 1969 or January 1970 plaintiffs received the financial report for the fiscal year ending September 30, 1969. This report was not prepared by Goodkin, but by another accounting firm. A footnote to this report disclosed that approximately 77% ($30,411,868) of FBA’s total investments in securities ($39,355,310) consisted of unregistered securities. The firm’s total assets as of September 30, 1969 were $51,747,995.
Plaintiffs first learned of FBA’s substantial investments in unregistered securities from the September 30, 1969 report. Having received this report in December 1969 or January 1970, it was too late for them to withdraw from the firm, in accordance with the partnership agreement, at the end of the fiscal year which ended September 30, 1969. Plaintiffs did withdraw at the end of the following fiscal year, on September 30, 1970. This was the earliest they could withdraw their investments or as partners under the terms of the partnership agreement.
During the five year period they were limited partners, both plaintiffs received substantial net profits.
Both plaintiffs claim that as of late 1968 their investments were worth considerably more than indicated by the firm’s financial reports, and that the firm incurred substantial losses on its investments in unregistered securities. Without apportioning between losses sustained from investments in unregistered securities and other losses,
Plaintiffs commenced the instant action in the Southern District of New York on January 25, 1971. Jurisdiction was invoked under Section 27 of the Exchange Act, 15 U.S.C. § 78aa (1970), and Section 214 of the Advisers Act, 15 U.S.C. § 80b-14 (1970). The complaint embodies the claims stated above and summarized in our prior opinion. 537 F.2d 27.
II. EXCHANGE ACT CLAIM
We need not tarry with plaintiffs’ claim under Section 10(b) of the 1934 Act and Rule 10b-5 for we find that each of the arguments urged by plaintiffs in support of that claim is without merit.
First, in an effort to meet the requirement of Section 10(b) and Rule 10b-5 that they must allege a fraud “in connection with the purchase or sale of any security,”
Second, plaintiffs argue that they are entitled to recover under Section 10(b) and Rule 10b-5 because they were fraudulently induced not to sell their partnership interests. They say that they would have withdrawn from the firm in 1968 if defendants had not misrepresented the true nature of the firm’s investments at that time. The short answer to this branch of plaintiffs’ argument is that the requirement of fraud in connection with the purchase or sale of a security is not satisfied by an allegation that plaintiffs were induced fraudulently not to sell their securities. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737-38 (1975).
We affirm the dismissal of plaintiffs’ Exchange Act claim.
We come next to what we consider to be the chief question presented on this appeal — whether the complaint states a claim upon which relief can be granted under Section 206 of the Investment Advisers Act of 1940 (the Act)
The subordinate questions which we must consider in connection with this claim are (1) whether any of the defendant general partners are “investment advisers” within the meaning of Section 202(a)(ll) of the Act,
For the reasons below, we answer each of these questions in the affirmative. Accordingly, we reverse the dismissal of the Advisers Act claim and remand the case for trial on that claim.
(1) “Investment Advisers” Under Section 202(a)(ll)
Turning first to the threshold question whether any of the general partner defendants are “investment advisers” with
It is clear from the record that the general partners received substantial compensation for managing the limited partners’ investments. Each of the three partnership agreements in effect between 1965 and 1970 provided that the general partners would be paid for their services 20% of the firm’s net profits and net capital gains for each fiscal year. In addition, the partnership agreement of October 1,1968 authorized an annual salary of $25,000 for each general partner who managed investments.
Since the general partners received compensation for their investment services, the only remaining inquiry under the statute is whether they were “engage[d] in the business of advising others” with respect to investments. On two independent grounds, we believe they were.
First, the monthly reports which contained the alleged fraudulent representations were reports which provided investment advice to the limited partners. The general partners’ compensation depended in part upon the firm’s net profits and capital gains. These in turn were affected by the size of the total funds under their control. The monthly reports were an integral part of the general partners’ business of managing the limited partners’ funds. In deciding whether or not to withdraw their funds from the pool, the limited partners necessarily relied heavily on the reports they received from the general partners.
Second, wholly aside from the monthly reports, we believe that the general partners as persons who managed the funds of others for compensation are “investment advisers” within the meaning of the statute. This is borne out by the plain language of Section 202(a)(ll) and its related provisions, by evidence of legislative intent and by the broad remedial purposes of the Act.
The Investment Companies Act of 1940 and the companion Investment Advisers Act (Title II of the same enactment) were among statutes designed to eliminate certain abuses in the securities industry which were found to have contributed to the stock market crash of 1929 and the depression of the 1930s. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963). The 1940 legislation was based upon exhaustive studies by the SEC which culminated in a number of extensive reports on investment trusts, investment companies and investment advisers. The Investment Companies Act and the Advisers Act were intended to cover important areas of the securities industry which had not been covered by the earlier statutes. The Investment Companies Act is concerned with investment companies and other persons, including certain investment advisers, who deal with investment companies. The Advisers Act covers all investment advisers.
As stated in Section 201 of the Advisers Act, 15 U.S.C. § 80b-l (1970), that Act was based upon the findings and recommendations set forth in an SEC Report on investment counsel and advisory services. Securities and Exchange Commission, Investment Counsel, Investment Management, Investment Supervisory and Investment Advisory Services, H.R.Doc. No. 477, 76th Cong., 2d Sess., 1 (1939) (hereinafter “SEC Report”). The SEC Report referred to two types of investment advisers: (1) those with management powers over their clients’ funds and the power to make purchases and sales for their clients (“discretionary”), and (2) those who merely made recommendations to their clients (“advisory”). SEC Report at 13. It noted the conspicuous need for regulation of individuals “who may solicit the funds of the public to be controlled, managed, and supervised . . . .” (emphasis added) SEC Report at 28. The report made it clear that its findings and recommendations were intended to cover persons who made purchases and sales of securities with their clients’ funds.
The House and Senate Committee reports also make clear the intent of Congress. The Report of the Senate Committee on Banking and Currency which accompanied the bill to the Senate floor stated:
*871 “The report of the Commission to the Congress and the record before the committee is clear that the solution of the problems and abuses of investment advisory services — individuals and companies which either handle pools of liquid funds of the public or give advice with respect to security transactions — cannot be effected without Federal legislation.
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Virtually no limitations or restrictions exist with respect to the honesty and integrity of persons who may solicit funds to be controlled, managed, and supervised.” (emphasis added) S.Rep. No. 1775, 76th Cong., 3d Sess., 21 (1940).14
Similarly, the House Committee on Interstate and Foreign Commerce noted in its report the need to regulate firms which “managed, supervised, and gave investment advice” with respect to clients’ funds. H.R. Rep. No. 2639, 76th Cong., 3d Sess., 27 (1940).
In short, as for legislative intent, we believe that the SEC Report, together with the House and Senate Reports, make it clear that Congress intended to reach persons who receive compensation for investing funds of their clients.
Moreover the plain language of Section 202(a)(ll) and related provisions of the Act bear out this legislative intent. Section 202(a)(ll) includes any person who “advises” others with respect to investments. Section 203(c)(1)(D), 15 U.S.C. § 80b-3(c)(l)(D) (1970), requires the investment adviser to disclose the nature and scope of his “authority . . . with respect to clients’ funds and accounts” in his registration statement. And Section 205, 15 U.S.C. § 80b-5 (1970), establishes certain standards for investment advisers with respect to “investment advisory contracts” which include contracts “to act as an investment adviser or to manage any investment or trading account . . . .” These provisions reflect the fact that many investment advisers “advise” their customers by exercising control over what purchases and sales are made with their clients’ funds.
We hold that the defendant general partners of FBA are investment advisers within the meaning of Section 202(a)(ll) of the Act.
As with other provisions of the federal securities laws under which the courts have found implied private rights of action, Section 206 of the Advisers Act does not expressly authorize private actions. We therefore must decide whether a private right of action is to be implied under that section. For the reasons below, we hold that it is.
The Supreme Court has recognized in a variety of contexts that private rights of action may be implied in favor of the intended beneficiaries of a statute where necessary to implement the statute’s underlying purposes. Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 13 n.9 (1971); J. I. Case Co. v. Borak, 377 U.S. 426 (1964); Tunstall v. Brotherhood of Locomotive Firemen and Enginemen, 323 U.S. 210 (1944); Texas & Pacific R.R. v. Rigsby, 241 U.S. 33 (1916). Cf. Bivens v. Six Unknown Named Agents, 403 U.S. 388 (1971); Bell v. Hood, 327 U.S. 678 (1946).
There are compelling reasons why the courts have been particularly willing to recognize private rights of action under the antifraud provisions of the federal securities laws. Those provisions are designed to protect specific classes of injured parties. Moreover the SEC — the agency charged with administration and enforcement of the federal securities laws — does not have sufficient resources alone to enforce the many provisions of the statutes. Absent judicial recognition of private rights of action, the federal securities laws most assuredly would fail to provide the effective regulation over the securities industry which Congress intended. In finding an implied right of action under Section 14(a) of the 1934 Act, the Supreme Court held in J. I. Case Co. v. Borak, supra, 377 U.S. at 432, that “Private enforcement . . . provides a necessary supplement to Commission action”, and went on to state:
“[I]t is the duty of the courts to be alert to provide such remedies as are necessary to make effective the congressional purpose.” Id. at 433.
Applying these principles, the courts of appeals consistently have recognized an implied right of action under the Investment Companies Act — the companion
Against this background, we turn to the question whether a private right of action should be implied under Section 206 of the Advisers Act.
In Cort v. Ash, 422 U.S. 66, 78 (1975), the Supreme Court suggested that the following factors be considered in determining “whether a private remedy is implicit in a statute not expressly providing one”:
“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?” (emphasis in original)
We believe that each of these factors point unmistakably toward recognition of an implied right of action under Section 206 of the Advisers Act. See Piper v. Chris Craft Industries, Inc., 430 U.S. 1, 37-45 (1977).
The purpose of the Advisers Act was “to protect the public and investors against malpractice by persons paid for advising others about securities.”
Congress enacted the Advisers Act, as it had earlier securities legislation, mindful of the need for federal regulation of the securities industry. As the Senate Committee Report emphasized:
“The nature of the functions of investment advisers, their increasing widespread activities, their potential influence on security markets and the dangerous potentialities of stock market tipsters imposing upon unsophisticated investors, convinces the committee that protection of investors requires the regulation of investment advisers on a national scale.
The report of the Commission to the Congress and the record before the committee is clear that the solution of the problems and abuses of investment advisory services . . . cannot be effected without Federal legislation." (emphasis added) S.Rep. No. 1775, 76th Cong., 3d Sess. 21 (1940).
As stated above, the courts consistently have recognized that the Commission’s resources are inadequate to the task of policing alone the federal securities laws. In enacting the 1940 legislation, Congress intended to provide effective federal regulation of an important segment of the securities industry. Failure to recognize a private right of action under the Advisers Act would effectively frustrate that purpose. We hesitate to reach such a result absent clear evidence from the Act’s legislative history that private actions were not intended.
Turning to related provisions of the Advisers Act, Section 215(b), 15 U.S.C. § 80b-15(b) (1970), provides that any contract in violation of the Act shall be void. As the courts have held in construing nearly identical provisions of the other securities acts, the language of Section 215(b) strongly suggests that a private remedy should be implied and that such a remedy would be consistent with the other provisions of the Act. Fischman v. Raytheon Mfg. Co., supra, 188 F.2d at 787 n.4; Kardon v. National Gypsum, Co., supra, 69 F.Supp. at 514; see Slavin v. Germantown Fire Ins. Co., 174 F.2d 799, 815 (3 Cir. 1949).
In arguing that a private right of action should not be recognized under the Advisers Act, appellees point to the difference between the language found in the jurisdictional provision of the Advisers Act and similar provisions of other securities acts.
“The district courts of the United States . . . shall have jurisdiction of violations of this subchapter or the rules, regulations, or orders thereunder, and, concurrently with State and Territorial courts, of all suits in equity to enjoin any violation of this subchapter or the rules, regulations or orders thereunder.”
By contrast, Section 22 of the 1933 Act, 15 U.S.C. § 77v (1970), Section 27 of the 1934 Act, 15 U.S.C. § 78aa (1970), and Section 44 of the Investment Companies Act, 15 U.S.C. § 80-a-43 (1970), provide that the district courts shall have jurisdiction of “all suits in equity and actions at law brought to enforce any liability or duty created by” those Acts.
Appellees argue that the omission of any reference to “actions at law” in Section 214 manifests a legislative intent to preclude private rights of action under the Advisers Act. We disagree. In our view, the reason for this omission is that each of the other Acts whose jurisdictional provisions refer to “actions at law” contains one or more sections expressly granting injured parties a private right of action for damages.
There is not a shred of evidence in the legislative history of the Advisers Act to support the assertion that Congress intentionally omitted the reference to “actions at law” in order to preclude private actions by investors. Section 214, like the jurisdictional provisions of the other securities acts, was drawn to provide jurisdiction over actions expressly authorized by the statute. Far from indicating that Congress ever considered the matter of private actions in drafting Section 214, the only legislative history indicates that Congress attached no great importance to its omission. In their only references to Section 214, both the Senate and House Reports stated that the enforcement provisions of the Advisers Act were “generally comparable” to those of the Investment Companies Act, whose jurisdictional provision contains the “actions at law” language. S.Rep. No. 1775, 76th Cong., 3d Sess., at 23 (1940); H.R.Rep. No. 2639, 76th Cong., 3d Sess., at 30 (1940).
In dealing with private rights of action under other securities acts, courts have referred to the “actions at law” language under the jurisdictional provisions to indicate the overall structure of those acts. But the “actions at law” language has never been relied upon as evidence that Congress explicitly considered the matter of private damage actions under the particular substantive provision in question. Had Congress provided explicitly for private damage actions it would be unnecessary to consider whether the remedy should be judicially implied. Indeed, under the anti-fraud provisions of other securities acts courts have recognized the absence of any legislative intent either to create or to deny private rights of action for damages. Here, as under the other statutes, it is clear that Congress simply did not consider the matter.
The Supreme Court, in considering a different issue under the Advisers Act in SEC v. Capital Gains Research Bureau, Inc., supra, 375 U.S. at 195, emphasized that the Act should “be construed like other securities legislation ‘enacted for the purpose of avoiding frauds,’ not technically and restrictively, but flexibly to effectuate its remedial purposes.” (footnote omitted). We find that particularly cogent here where we are asked to determine whether there should be a private right of action to recover damages for what may be clear violations of the Act. Moreover, mindful of the Supreme Court’s admonition in J. I. Case Co. v. Borak, supra,
We hold that there is an implied private right of action under Section 206 of the Advisers Act.
Appellees contend that plaintiffs have not alleged compensable damages under the Advisers Act. They argue that plaintiffs themselves were neither purchasers nor sellers of securities and that their claims are speculative because they are based upon the assertion that plaintiffs would have withdrawn from FBA earlier had they been told the truth about the partnership’s investments. We disagree.
At the outset, we find no basis for appellees’ assumption that plaintiffs’ only alternative, had they learned the truth earlier about FBA’s high percentage of investments in unregistered securities, was to withdraw their funds. Plaintiffs might have tried to persuade the general partners to conform the firm’s investments to the conservative policy they had represented. Failing that, plaintiffs might have mobilized the other limited partners to exert pressure on the general partners.
We find appellees’ reliance upon Blue Chip Stamps v. Manor Drug Stores, supra, on this aspect of the instant case to be misplaced.
The Blue Chip decision was based on the express language of Section 10(b) and Rule 10b-5 requiring a fraud “in connection with the purchase or sale oí any security.”
Acceptance of appellees’ contention, moreover, would lead to a construction of the Advisers Act clearly inconsistent with the intent of Congress. As indicated above, Congress intended to protect investors against frauds committed by investment advisers who managed their clients’ funds, as well as frauds committed by advisers who did not make purchases and sales for their clients. If the claims of a client whose adviser managed his funds were to be held to be too speculative simply because the client failed to allege that he would have taken some remedial action if he had known the truth, a large segment of those investors whom Congress meant to protect would be excluded from the Act’s coverage. To accept appellees’ contention would lead to the incongruous result that an investor’s claims would be speculative even if the adviser had made fraudulent statements to conceal the fact that he was stealing his client’s funds.
We believe that the differences in the language and purposes of Section 10(b) of the 1934 Act and Section 206 of the Advisers Act distinguish the instant case from Blue Chip. We also note that the policy considerations expressed in Blue Chip lend no support to appellees’ arguments.
We hold that plaintiffs have alleged damages compensable under Section 206 of the Advisers Act.
IV. MEASURE OF DAMAGES ON REMAND
In view of our remand for trial on the Advisers Act claim, we believe that the district court is entitled to some guidance on the proper measure of damages.
We do not agree with the district court’s holding, 392 F.Supp. 740, that, since plaintiffs realized a net profit on their overall limited partnership investment, they failed to prove damages compensable under the federal securities laws.
This is not to say, however, that a plaintiff may recover for losses, but ignore his profits, where both result from a single wrong. In determining on remand whether plaintiffs have sustained any damages from the alleged fraudulent investments, the district court should determine, first, at what point defendants’ representations became fraudulent due to the increasing proportion of portfolio investments in unregistered securities. The court then should compute the total net losses on all holdings of unregistered securities due to changes in price after that date. Finally, the court should determine what proportion of FBA’s holdings was inconsistent with representations
We of course do not intimate any views as to whether plaintiffs in fact have sustained any damage and, if so, how much. All we hold is that they are entitled to their day in court and an opportunity to prove, if they can, their claim under the Advisers Act.
Affirmed as to the dismissal of the Securities Exchange Act claim; as to the dismissal of the Investment Advisers Act claim, reversed and remanded for trial.
We note that about the time our Court unanimously denied rehearing en banc in the instant case the Fifth Circuit held that there is an implied right of action for damages under § 206 of the Advisers Act. Wilson v. First Houston Investment Corp., 566 F.2d 1235 (5 Cir. 1978).
. We assume familiarity with our prior opinion in this case, 537 F.2d 27, and that of the district court, 392 F.Supp. 740.
. For examples of these representations in the monthly reports, see the district court opinion, 392 F.Supp. at 742 n. 2.
. Unregistered securities are securities which are not registered with the Securities and Exchange Commission. They have only a limited market and are subject to restrictions as to further sale.
. In their complaint in the instant action, plaintiffs alleged that during the period they were limited partners the firm made between 40 and 80 separate purchases of unregistered securities, including the securities of more than 40 different issuers. They alleged that most of these purchases took place after 1967.
. See the schedule set forth in the district court opinion, 392 F.Supp. at 743, showing plaintiffs’ capital contributions, interim withdrawals, final distributive shares and net profits.
. Plaintiffs claim that they are entitled to recover the difference between what they received when they withdrew from the partnership in 1970 and what they would have received had they withdrawn as of September 30, 1968. Accordingly they did not attempt an apportionment between losses attributable to excessive investments in unregistered securities and losses from unchallenged investments.
. This is the familiar provision of both Section 10(b) and Rule 10b-5. Obviously, the fraud alleged by plaintiffs was not “in connection with” either their initial investment in the partnership on July 1, 1965 or their withdrawal from the firm on September 30, 1970.
. The principal modifications relied on by plaintiffs in their effort to show that the September 30, 1968 partnership agreement fundamentally changed the nature of their investment were: expansion of the general partners’ authority to invest in other businesses and to make loans; authorization of $25,000 per year salaries for managing partners; shortening of the notice requirement for year end withdrawals of capital; provision for automatic termination of the partnership after ten years; and authorization for amendment of the partnership agreement by a vote of one-half of the limited partnership interests and two-thirds of the general partnership interests, rather than by the Executive Committee of the general partners as before.
. Our affirmance of the dismissal of the Exchange Act claim is on the ground that the complaint fails to state a claim upon which relief can be granted — not on the ground relied upon by the district court for dismissal, namely, that, since plaintiffs had realized a net profit on their overall limited partnership investment,
. Section 206 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6 (1970), in relevant part provides:
“It shall be unlawful for any investment adviser by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly—
(1) to employ any device, scheme, or artifice to defraud any client or prospective client;
(2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client;
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(4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4), by rules and regulations, define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.”
. Rule 206(4)-1, 17 C.F.R. § 275.206(4)-l (1976), in relevant part provides:
“(a) It shall constitute a fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of section 206(4) of the Act, for any investment adviser, directly or indirectly, to publish, circulate or distribute any advertisement:
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(5) Which contains any untrue statement of a material fact, or which is otherwise false or misleading.
(b) For the purposes of this section the term ‘advertisement’ shall include any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers (1) any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (2) any graph, chart, formula, or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (3) any other investment advisory service with regard to securities.”
. Section 202(a)(ll) of the Investment Advisers Act, 15 U.S.C. § 80b-2(a)(ll) (1970), in relevant part provides:
“ ‘Investment adviser’ means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities
. It was the Advisers Act claim to which we invited the parties and the SEC as amicus curiae to address their supplemental briefs when we filed our interim opinion following oral argument of this appeal. 537 F.2d at 28. We express our appreciation for the helpful briefs from counsel for all parties and the SEC in response to our invitation.
Likewise we invited the parties and the SEC as amicus curiae, in connection with appellees’ petitions for rehearing, to file further supplemental briefs on the issue of whether the general partners of defendant Fleschner Becker Associates were investment advisers within the meaning of the Advisers Act (the issue dealt with below in section III(l) of this opinion). Such further supplemental briefs were filed and considered by us. The petitions for rehearing were denied and the panel opinions were adhered to.
. In its general statement on the background to the Advisers Act, the Senate Report stated:
“Similarly, it is difficult definitely to estimate the amount of funds under the influence or control of investment advisers. However, some idea of the size of the funds administered by investment advisers may be deduced from the fact that 51 firms for which information was obtainable by the Commission managed, supervised and gave investment advice with respect to funds aggregating approximately $4,000,000,000.” (emphasis added) S.Rep., supra at 21.
. In 1960 and again in 1970, Congress considerably broadened the coverage of the Advisers Act. The Senate Report accompanying the bill which contained the 1960 amendments to the Act stated, with particular application here:
“There are at present over 12‘A million individuals in the United States who own corporate securities, nearly double those in 1952. It has been noted that this new group offers strong temptation to confidence men and swindlers who may give them biased advice or misuse their funds or securities.” (emphasis added) S.Rep. No. 1760, 86th Cong., 2d Sess. 4 (1960), reprinted in [1960] U.S. Code Cong. & Admin.News, at 3502.
. Defendant Harry Goodkin & Company argues that, since it was not an “investment adviser” it cannot be held liable for aiding and abetting a fraud committed by those who were investment advisers. Goodkin points out that Section 206 applies only to an investment adviser and that Section 202(a)(ll)(B) excludes from the definition of an investment adviser an accountant acting in the practice of his profession. We agree that the exemption excludes an accountant’s usual activities from the scope of the Act and excludes the accountant from coverage under the registration provisions and many of the other regulatory provisions of the Act even if the accountant is employed by an investment adviser. But the exemption does not shield the accountant from liability under the antifraud provisions of the Act if the accountant aids and abets an investment adviser with knowledge that his conduct is assisting an investment adviser in defrauding a client. Cf. Section 209(e) of the Act, 15 U.S.C. § 80b-9(e) (1970), which authorizes the SEC to seek injunctive relief and, if necessary, to recommend criminal proceedings against those who “aid, abet [or] counsel” violations of the Act. In view of the limitation of Section 206 to investment advisers, however, we believe that before Goodkin can be held liable as an aider and
Whether Goodkin is liable for aiding and abetting the investment advisers is one of the issues to be determined at trial pursuant to our remand.
As to whether FBA itself is a proper defendant with respect to the Advisers Act claim, for aught that appears in the record before us, we have serious doubts. The general partners as individuals, not FBA as an entity, were the investment advisers. If upon remand, and after a hearing, the district court finds no more than the record now discloses with respect to the liability of FBA itself under the Advisers Act claim, it should dismiss as against the firm.
. The SEC has submitted to Congress a number of proposed amendments to the Advisers Act. One would provide explicitly for private actions under the Advisers Act. See Investment Advisers Act Release No. 491, 8 SEC Docket 744 (December 15, 1975). In announcing its proposal, the SEC repeated its view that the existing language was sufficient to imply a private right of action. Its proposal was intended to put to rest those few decisions which had found no implied right of action.
In the two district court cases in this Circuit in which the issue has been considered, the court has held that an implied right of action exists under the Advisers Act. Jones v. Equitable Life Assurance Society, 409 F.Supp. 370 (S.D.N.Y.1975); Bolger v. Laventhol, Krekstein, Horwath & Horwath, 381 F.Supp. 260 (S.D.N.Y.1975). Accord, Angelakis v. Churchill Management Corp., CCH Fed.Sec.L.Rep. 11 95,285 (N.D.Cal.1975). Contra, Gammage v. Roberts, Scott & Co., CCH Fed.Sec.L.Rep. 11 94,761 (S.D.Cal.1974); Greenspan v. Eugene Campos Del Toro, 73-638-Civ. (S.D.Fla. May 17, 1974).
The commentators who have reviewed these decisions agree that a private right of action should be implied under the Advisers Act. Note, Private Causes of Action Under Section 206 of the Investment Advisers Act, 74 Mich.L. Rev. 308 (1975); Lybecker, Advisers Act Developments, 8 Review of Securities Regulations 927, 934 (April 23, 1975); Note, Bolger v. Laventhol, Krekstein, Horwath & Horwath: Private Rights of Action Under the Investment Advisers Act, 48 Temple L.Q. 433 (1975).
. S.Rep. No. 1760, 86th Cong., 2d Sess., 1 (1960).
The House Committee Report which accompanied the 1940 bill stated:
“The essential purpose of title II of the bill is to protect the public from the frauds and misrepresentations of unscrupulous tipsters and touts and to safeguard the honest investment adviser against the stigma of the activities of these individuals by making fraudulent practices by investment advisers unlawful.” H.R.Rep. No. 2639, 76th Cong., 3d Sess., at 28 (1940).
. Appellees also argue that recognition of a private right of action would be inconsistent with Section 209(e) of the Act and other enforcement provisions which provide that the Commission “may in its discretion bring an action” for injunctive relief. We find no merit in this argument. The enforcement powers given the Commission under the Advisers Act are virtually identical to those of the other securities acts under which we have recognized implied private rights of action. Unlike the Securities Investor Protection Act, which was involved in Securities Investor Protection Corp. v. Barbour, 421 U.S. 412 (1975), the Advisers Act in general, and the antifraud provisions in particular, do not manifest a specific legislative intent to restrict enforcement to the Commission. Here, private suits would be consistent with Commission action. The provision allowing the Commission the usual discretion to sue simply makes it clear that the SEC is not compelled to sue in every case. Indeed it would be extraordinary for Congress to require an agency to bring enforcement proceedings in every instance. The Court in Barbour distinguished J. I. Case Co. v. Borak, where the Court had found private suits a necessary supplement for — rather than a hindrance to — Commission action. 421 U.S. at 423.
. See Sections 11 and 12 of the 1933 Act, 15 U.S.C. §§ 77k and 77l (1970); Sections 9(e), 16(b) and 18 of the 1934 Act, 15 U.S.C. §§ 78i(e), 78p(b) and 78r (1970); Sections 16(a)
. As originally introduced in the House and Senate, the proposed Advisers Act merely incorporated the jurisdictional provision of the Investment Companies Act. Section 203 of S. 3580 and H.R. 8935. The Investment Companies Act, in turn, had adopted the same language as found in Section 25 of the Public Utility Holding Company Act of 1935, 15 U.S.C. § 79y. Section 40(a)(1) of S. 3580 and H.R. 8935. As reported out of the committees, the bills omitted all references to other statutes; and the Advisers Act was given its own jurisdictional provision which did not contain any reference to “actions at law brought to enforce any liability . . . .”
. We need not decide whether the language of Section 214 which grants to the district courts jurisdiction over “violations of this subchapter or the rules, regulations, or orders thereunder” might cover private damage actions. See Bolger v. Laventhol, Krekstein, Horwath & Horwath, supra, 381 F.Supp. at 264. Courts have implied private rights of action under statutes which have no separate jurisdictional provision for civil damage suits. Texas & Pacific R.R. Co. v. Rigsby, supra, 214 U.S. at 39; Odell v. Humble Oil & Refining Co., 201 F.2d 123, 126 (10 Cir. 1953); Narramore v. Cleveland, C.C. & St.L. Ry. Co., 96 F. 298, 300 (6 Cir. 1899). Moreover, the general federal question jurisdictional provision, 28 U.S.C. § 1331 (1970), would apply here. See Brown v. Bullock, supra, 294 F.2d at 418.
. Our concurring-dissenting colleague, in a characteristically thoughtful and innovative opinion, urges that a private right of action for damages should not be implied under the Advisers Act. We suggest that Judge Gurfein’s opinion be read in the light of the following observations.
First, the basic premise of the dissent is the assumption that the Advisers Act was intended to provide “a compulsory census of investment advisers, and not ... a pervasive regulatory scheme.” (emphasis added) Post, 879, 883. A careful reading of the Advisers Act shows that, as enacted, it requires far more than a census. As the last of the series of federal securities laws enacted between 1933 and 1940, it is an integral part of a comprehensive regulatory scheme intended by Congress to eliminate certain abuses in the securities industry. The Supreme Court in SEC v. Capital Gains Research Bureau, Inc., supra, in referring to a fundamental purpose of the Advisers Act and its relationship to the other federal securities regulatory acts, stated:
“The Investment Advisers Act of 1940 was the last in a series of Acts designed to eliminate certain abuses in the securities industry, abuses which were found to have contributed to the stock market crash of 1929 and the depression of the 1930’s. It was preceded by the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the Trust Indenture Act of 1939, and the Investment Company Act of 1940. A fundamental purpose, common to these statutes, was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry. As we recently said in a related context, ‘It requires but little appreciation ... of what happened in this country during the 1920’s and 1930’s to realize how essential it is that the highest ethical standards prevail’ in every facet of the securities industry. Silver v. New York Stock Exchange, 373 U.S. 341, 366.”’ (footnotes omitted) 375 U.S. at 186-87.
Second, while we do not claim the expertise of our dissenting colleague concerning hedge funds, post, 879, & n. 1, 884, we do suggest that much of the speculation of the dissent with respect to the investment policy of the general partners as managers of the fund (e. g. whether the partnership “was going to operate in the most speculative of investment activities”, post, 884) and the intentions of plaintiffs in becoming limited partners, might better await the trial on the merits to which we have held plaintiffs are entitled. For after all, the posture of the case as it came to us from the district court was the dismissal of the complaint on the ground that plaintiffs realized a net profit on their overall limited partnership investments and therefore failed to prove damages compensable under the federal securities laws. 392 F.Supp. 740. While this holding of the district court is rejected, all we hold with respect to plaintiffs’ Advisers Act claim is that they are entitled to their day in court and an opportunity to prove their claim. Post, 879. At that time, when the credibility of witnesses can properly be determined, many of the speculative factual issues suggested by the dissent appropriately can be resolved.
Finally, and perhaps of chief significance, the dissent does not dispute the eloquent absence of evidence that Congress ever considered allowing damages, as distinguished from injunctive relief, under the Advisers Act. The question of damages was not considered because the matter of a private right of action was not considered. The dissent’s massive reliance upon the omission of the “actions at law” language in the Advisers Act and its inclusion in the jurisdictional provisions of other statutes, we think is misplaced. Judicially implied private rights of action have been recognized under various sections of the securities laws even though those sections, unlike other sections of the same statutes, contain no explicit provision for private actions. Here likewise there is no evidence that the omission was meant to exclude private actions. In this respect the present case is plainly different in a significant legal respect from National R. R. Passenger Corp. v. National Ass’n of R. R. Passengers, 414 U.S. 453 (1974), relied upon by the dissent, where “the legislative history of the Amtrack Act provide[d] a clear and convincing expression of Congress’ intent to preclude anyone except the Attorney General and in certain situations an employee or his duly authorized representative from maintaining an action under the Act against petitioners” (414 U.S. at 465 (Justice Brennan concurring)), and transportation policies not pertinent here militated in favor of such a limitation. No such history or policies are to be found here.
. The holding in Blue Chip was that persons who claimed that they had been fraudulently induced not to purchase securities were not within the class of persons protected by Section 10(b) of the 1934 Act and Rule 10b-5, under which recovery is limited to funds “in connection with the purchase or sale” of securities. In reaffirming the doctrine of Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2 Cir.), cert. denied, 343 U.S. 956 (1952), the Court also stated that “actual shareholders in the issuer who allege that they decided not to sell their shares because of an unduly rosy representation or a failure to disclose unfavorable material” might not be able to sue under Section 10(b) and Rule 10b-5. Blue Chip Stamps v. Manor Drug Stores, supra, 421 U.S. at 737-38.
. In interpreting the express language of Section 10(b) and Rule 10b-5 in Blue Chip, the Court expressed concern about suits by persons who neither purchased nor sold securities but who claimed that they would have purchased or sold securities but for false representations made by someone whom they might not even have known. The Court noted that the “purchase or sale” requirement protected against vexatious suits by a potentially limitless class of plaintiffs and avoided the difficult questions of determining whether a plaintiff
Far from holding that claims of persons who were neither purchasers nor sellers would be too speculative under the other securities acts, the Court interpreted the express language of Section 10(b) and Rule 10b-5. And the Court expressly noted that many of the other securities acts have no “purchase or sale” requirement. 421 U.S. at 733-34.
. Even the claims of a person who has purchased or sold securities are not free of uncertainties. A purchaser or seller necessarily alleges that he would not have made the purchase or sale had he known the true facts.
Although the claims of persons who neither purchased nor sold securities, in individual cases, may be less speculative than the claims of actual purchasers or sellers, Blue Chip weeds out suits by persons who may have had no interest in a security until discovering that someone has made a fraudulent statement which may give rise to a lawsuit. In view of the settlement value of a securities suit, this is an important consideration. Obviously an investor who has paid for the advice of his adviser is not the type of disinterested by-stander at whom the Blue Chip decision was primarily aimed.
. It is important to note that there is no issue in this case as to whether an investor may recover for negligent misrepresentations by his investment adviser. See Ernst & Ernst v. Hochfelder, supra; Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1298-1301 (2 Cir. 1973) (distinguished in Ernst & Ernst v. Hochfelder, supra, 425 U.S. at 209 n. 28); SEC v. Capital Gains Research Bureau, Inc., supra. Plaintiffs here have alleged that defendants’ misrepresentations were intentional. Whether defendants thought that the price of the unregistered securities would rise or not has no bearing on the issue of scienter. Although the general partners’ own funds were part of FBA’s pooled assets, they would be liable under Section 206 if they intentionally deceived the limited partners to prevent the limited partners from withdrawing their contributions or for any other reason. Ernst & Ernst v. Hochfelder, supra. Scienter does not require a showing of intent to cause a loss to a plaintiff. SEC v. Capital Gains Research Bureau, Inc., supra, 375 U.S. at 192 n. 39.
. The cut-off price for such unregistered securities in the portfolio at the time plaintiffs withdrew should be the value assigned to such securities by the general partners, since that presumably is what plaintiffs received. This would provide the closing out price for loss-netting purposes with respect to securities remaining in the portfolio at the time of plaintiffs’ withdrawal.