Touche Ross & Company v. Redington

PETITIONER: Touche Ross & Company
LOCATION: Lee County Courthouse

DOCKET NO.: 78-309
DECIDED BY: Burger Court (1975-1981)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 442 US 560 (1979)
ARGUED: Mar 26, 1979
DECIDED: Jun 18, 1979

Arnold I. Roth - for petitioner
James B. Kobak, Jr. - for respondent Redington
Philip R. Forlenza - for respondent, Securities Investor Protection Corp

Facts of the case


Media for Touche Ross & Company v. Redington

Audio Transcription for Oral Argument - March 26, 1979 in Touche Ross & Company v. Redington

Warren E. Burger:

The case is submitted.

We'll hear arguments next in Touche Ross against Redington.

Mr. Roth, I think you may proceed whenever you're ready.

Arnold I. Roth:

Mr. Chief Justice, and may it please the Court.

Section 17 (a) of the Securities Exchange Act of 1934 requires broker-dealers to make such reports as the SEC may require.

And Section 18 (a) provides an expressed damage remedy to purchasers and sellers of securities who relied upon misstatements in those Section 17 (a) reports.

The primary issue here is whether in light of the limited expressed damage remedy in Section 18 (a), whether Section 17 (a) itself also provides an additional implied private right of action in favor of costumers of brokerage firms who are not purchasers and sellers against accountants who audit the Section 17 (a) reports that contain the misstatements.

There are also two subsidiary issues here which the Court need reach only if it does find that Section 17 (a) creates an implied private right of action.

The first of those subsidiary questions is whether a trustee liquidating the business of a defunct brokerage firm pursuant to the Securities Investors Protection Act of 1970 is entitled to assert the Section 17 (a) rights of action that belong to costumers of the brokerage firm whose property he has been unable to return in the course of the liquidation.

The second subsidiary issue is whether costumers of the brokerage firm who have been compensated with money obtained from the Securities Investor Protection Corporation retain any Section 17 (a) rights, and if so is SIPC subrogated to those rights.

It is the position of petitioner, Touche Ross that there is no implied private right of action under Section 17 (a) in favor of brokerage firm, costumers or anyone else, and that such a right of action would be inconsistent with the statutory scheme, the evident legislative intent and the purposes of the statute.

It is also our position that even if you assume there to be such an implied right of action that neither the trustee nor SIPC may assert that action.

Now, this case and those issues arise out off the failure in May of 1973 of a brokerage firm called Weis Securities, and its subsequent liquidation under the Securities Investment Protection Act or SEPA as I will refer to it.

Weis at that time was a member the New York Stock Exchange and had approximately 35,000 costumers.

In April or May of 1973 the SEC and the New York Stock Exchange learned that officers of Weis had been falsifying the books and financial records of Weis so as to conceal a deteriorating financial condition.

The officer's scheme had commenced in early 1972 and had continued on until the spring of 1973, and upon discovery of the scheme in May of '73 upon SIPC's act application, the District Court in the southern district of New York ordered the liquidation of Weis and appointed the trustee.

The liquidation is ongoing and SIPC is said to have advanced $14 million in that liquidation for the purpose of paying off costumer claims.

Among the reports falsified by the Weis officers were the Weis financial reports for its fiscal yearend in May 26, 1972, the reports for a yearending about a year before the actual liquidation.

Reports which were filed with the SEC pursuant to Section 17 (a) of the 1934 Act and the implementing regulation Rule 17a-5.

Touche Ross, the petitioner here performed the annual audit with respect to those reports, but that audit failed to detect the misstatements in those reports.

According to the trustee in SIPC here in this case, Touche Ross failed to detect the misstatement because its audit was conducted in a negligent, reckless, careless, unskilled and grossly negligent manner.

It is also asserted that because the misstatements went undetected, the Weis officers were enable to continue until spring of '73 their scheme of concealing the ever increasing losses that were the result of the mismanagement by those officers.

SIPC and the trustee also alleged that had Touche Ross discovered the misstatements, effective remedial action could have been taken, the force liquidation avoided or its consequences reduced.

On the basis of those assertions, SIPC and the trustee commenced two separate lawsuits against Touche Ross.

Harry A. Blackmun:

At that point Mr. Roth did the Government appear below?

Arnold I. Roth:

I'm sorry Your Honor?

Harry A. Blackmun:

Did the United States Government appear below in any capacity at all?

Arnold I. Roth:

Your Honor, the SEC appeared in the Second Circuit, is that --

Harry A. Blackmun:

And they're not here however.

Arnold I. Roth:

They are not here Your Honor.