OAKES, Circuit Judge:
On cross appeals from a judgment of the United States District Court for the Southern District of New York, Lawrence W. Pierce, Judge,
Rolf is an ophthalmologist from Shaker Heights, Ohio. Long an investor and an aggressive trader in the stock market, he began his association with Eastman Dillon Union Securities & Co., BEDCO's predecessor firm, in 1963 when he entrusted a discretionary account to S. Logan Stirling, a partner of the firm. The value of Rolf's portfolio at that time was approximately $400,000. In March of 1969 Stirling was forced to retire owing to ill health. At the end of April, a BEDCO partner assigned the Rolf account to Stott, a registered representative with the firm for 11 years during 4 of which he was a manager of BEDCO branch offices. Stott then telephoned Rolf and offered his services. Rolf, however, wanted an investment advisor to manage his account, not simply a broker. Stott, therefore, at Rolf's request, supplied the names of two investment advisors. Rolf ultimately interviewed and selected Yamada, one of the "new breed" of young money-managers
The district court found that Rolf's investment intent was to combine Yamada's and Stott's strengths into a "Stirling-type" operation, 424 F.Supp. 1021, 1028 (1977). By combining Yamada's youth and zeal with Stott's reliability and supervision, Rolf hoped to realize, as he had with Stirling's advice, substantial capital gain in an investment program emphasizing preservation and augmentation of capital. In furtherance of these investment objectives, Rolf executed a broad authorization giving his investment advisor, Yamada, full trading discretion. Rolf left the account and its accompanying trading commissions with Stott and BEDCO in return for Stott's supervision of Yamada.
On May 9, 1969, the date of the trading authorization, Rolf's equity in his portfolio stood at $1,423,000. The portfolio consisted of 21 good quality, listed securities and the warrants of two companies.
With the rash of new, unfamiliar securities which found their way into Rolf's portfolio, Rolf became concerned and sought assurances from Stott as early as July, 1969. Specifically Rolf wished to ascertain that Yamada's purchases were consistent with the former's investment goals and strategy. To assuage Rolf's fears, the district court found, Stott undertook a handholding operation whereby Stott would reassure Rolf of Yamada's competence whenever Rolf questioned it. Id. at 1031. For example, when in August, 1969, Yamada decided to purchase nearly $400,000 in Delanair stock, Rolf checked with Stott who assured the doctor that if Yamada recommended the stock, then it was safe to proceed.
By March 29, 1970, the value of Rolf's portfolio had dropped to $446,000 of which nearly one-half was tied up in Delanair. In early April, Rolf complained to Stott who began to assume the posture that he was a mere "order taker." Rolf disagreed with this self-description, asking Stott to "work closely with Aki," and reminded Stott that Stott was his "man in N.Y." Id. at 1032-33. Later, on December 14, 1970, Rolf again asked Stott to "keep [his] pulse on the situation."
The district court discredited Stott's testimony that he was not involved in the management of Rolf's portfolio specifically finding that Stott was in fact so enmeshed. Id. at 1028, 1030, 1031. Stott and Yamada were in daily contact. Stott made numerous recommendations to Yamada for Rolf accounts using BEDCO research analysis, id. at 1030, but never counseled against a Yamada purchase. Id. at 1033. And most
The district court's finding on the question of Stott's attitude toward the quality of the purchases is not altogether clear. The lower court states on the one hand that it gives "some weight to Yamada's statement that Stott referred to the stocks in the Rolf account as `junk,'" i.e., of very low quality. Id. at 1033 (emphasis added). But the Judge goes on to conclude "that Stott did indeed consider many of the securities to be `junk' and that he told this to Yamada." Id.
The district court unequivocally found, however, that Yamada was engaged in fraudulent stock manipulations, of which Stott was ignorant. The district court also concluded unambiguously that Yamada's overall management of the account was fraudulent in nature, over and above the specific manipulations of which Stott was unaware. Id. at 1043. Stott was of course knowledgeable that many of the securities purchased for Rolf were highly speculative, "high-fliers." Id. at 1035. Nevertheless, neither Stott nor BEDCO ever identified any security as unsuitable for Rolf. Id. at 1036. Stott's services to Rolf consisted solely of certain "buy" recommendations, executing transactions and performing the accompanying paperwork. The court concluded that
Id. at 1042.
District Court Holding
The district court based liability on alternative legal theories. The first was that Stott owed a fiduciary duty to Rolf which he breached; that by virtue of that breach Stott aided and abetted Yamada's fraud and was therefore liable under § 10(b) of the SEA, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10(b)-5; and that BEDCO's liability for Stott's participation in Yamada's fraud derives alternatively from the common law doctrine of respondeat superior or the securities law doctrine of controlling persons liability, § 20(a), SEA, 15 U.S.C. § 78t(a). The district court also rested liability on an implied private cause of action from violations of NYSE Rule 405 and the NASD constitution, Article III, Section 2.
Standard of Review
At the outset, we note that the evidence in this case against Stott, while not overwhelming, is substantial. We are bound by the district court's findings, as we discern them, on the basis of the clearly erroneous rule. Fed.R.Civ.P. 52(a); see United States Steel and Carnegie Pension
There is no doubt that Yamada perpetrated a gross fraud upon Rolf in violation of § 10(b) and Rule 10b-5. We conclude that Stott, by virtue of assurances of confidence in Yamada and in Yamada's investment decisions and by virtue of his reckless disregard of whether those assurances were true or false and of substantial evidence that Yamada was improperly and fraudulently managing Rolf's account, participated in and lent assistance to the fraud upon Dr. Rolf. The reasoning which leads us to this conclusion follows.
1. Reckless disregard of truth or falsity as constituting scienter. The starting point is Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). In Hochfelder, the Supreme Court explicitly failed to decide whether § 10(b) and Rule 10b-5 may, in appropriate circumstances, give rise to aiding and abetting liability and, if so, the elements of such a cause of action. Id. at 192 n. 7, 96 S.Ct. 1375. Although the Supreme Court has, therefore, not passed on the issue, our court has adopted the position that § 10(b) and Rule 10b-5 do permit the imposition of aiding and abetting liability. Hirsch v. DuPont, 553 F.2d 750, 759 (2d Cir. 1977); see Brennan v. Midwestern United Life Insurance Co., 417 F.2d 147 (7th Cir. 1969), cert. denied, 397 U.S. 989, 90 S.Ct. 1122, 25 L.Ed.2d 397 (1970); Note, Accountants' Liabilities for False and Misleading Financial Statements, 67 Colum.L.Rev. 1437, 1448 (1967). Of course, the basic holding of Hochfelder, that scienter is an element of the § 10(b)/Rule 10b-5 cause of action,
The question then becomes precisely what level of scienter is required in this type of 10b-5 case and whether the district court's findings indicate that plaintiff's proof satisfies that standard. We conclude on one of the questions left open by Hochfelder, 428 U.S. at 194 n. 12, 96 S.Ct. 1375, that at least where, as here, the alleged aider and abettor owes a fiduciary duty to the defrauded party,
First, by leaving open the possibility that recklessness might satisfy the scienter requirement, the Supreme Court recognized that in certain instances a recklessness standard might be appropriate.
Second, on a linguistic level, the term scienter
Id. (footnotes omitted). It is unquestionable that the common law has served as an interpretive source of securities law concepts. See Holdsworth v. Strong, 545 F.2d 687, 693-94 (10th Cir. 1976), cert. denied,
Third, it is consistent with, if not demanded by, precedent in this circuit
2. Other elements of aiding and abetting liability. Given, then, that we find aider and abettor liability appropriate under § 10(b) and given that we believe at the very least that fiduciaries have acted with scienter when they have been reckless, we pass to the other well-established elements of the aiding and abetting cause of action. The first element that a plaintiff must prove is that the primary party, here Yamada, as distinguished from the secondary aiding and abetting party, committed a securities law violation. Woodward v. Metro Bank of Dallas, supra, 522 F.2d at 95; see SEC v. Coffey, 493 F.2d 1304, 1316 (6th Cir. 1974), cert. denied, 420 U.S. 908, 95 S.Ct. 826, 42 L.Ed.2d 837 (1975); cf. Landy v. Federal Deposit Insurance Corp., 486 F.2d 139, 162 (3d Cir. 1973) (requiring "independent wrong" instead of independent securities law violation), cert. denied, 416 U.S. 960, 94 S.Ct. 1979, 40 L.Ed.2d 312 (1974). The district court found, and we see no basis for concluding otherwise, that Yamada's overall management of the account in violation of his fiduciary duties owed by reason of the investment advisory agreement was fraudulent. 424 F.Supp. at 1043. Indeed the district court called Yamada's handling of the account a "gross fraud." Id. Moreover, Stott and BEDCO in their brief acknowledge that Yamada committed securities fraud. Their very purpose is to point the finger at Yamada in order to exonerate Stott. Brief for Defendants-Appellees-Cross-Appellants at 28, 34, 42, 44, 47. There is therefore no reason to analyze Rolf's portfolio on a stock by stock basis to determine which purchases and sales constituted frauds upon Rolf, a more specific and particularized investigation which we might have to undertake if Yamada had merely manipulated two or three stocks without engaging in a more exhaustive and all-encompassing web of fraud.
The second requirement for establishing the aiding and abetting violation is Stott's knowledge of Yamada's fraud. We have indicated above that the scienter element may be satisfied by proof of reckless conduct. While the evidence in this case is not overwhelming, we believe it is sufficient to sustain Judge Pierce's findings on the basis of the clearly erroneous rule.
Reckless conduct is, at the least, conduct which is "highly unreasonable" and which represents "an extreme departure from the standards of ordinary care . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." Sanders v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir. 1977).
The third and final requirement to establish the aiding and abetting violation is that Stott rendered substantial assistance to Yamada in the fraudulent mismanagement of Rolf's portfolio. One commentator has suggested that substantial assistance might include "repeating . . . misrepresentations (or aiding in their preparation), by acting as conduits to accumulate or distribute securities, by executing transactions or investing proceeds, or perhaps by financing transactions." 2 A. Bromberg, Securities Law § 8.5 (515) (1974). In this case, Stott's assistance was both active and passive. He processed many of the relevant securities orders; he reassured Rolf of Yamada's competence; and he either recklessly failed to learn of or failed to disclose Yamada's web of fraud. See Woodward v. Metro Bank of Dallas, supra, 522 F.2d at 96-97. The effect of Stott's "hand-holding operation" was to prevent Rolf from discovering Yamada's fraud. Stott's acts, therefore, were a substantial causal factor in the perpetuation of Yamada's fraud and in the cumulation of Rolf's losses. See Landy v. Federal Deposit Insurance Corp., supra, 486 F.2d at 163. We therefore affirm the trial court's judgment to the extent that it found Stott an aider and abettor of Yamada's fraud.
While there is disagreement among the circuits
We are not capable of precisely measuring Rolf's damages on this appeal, although we do not think that they were so speculative as to compel resort solely to damages as in a churning case, for commissions paid the broker (and interest thereon). Accordingly, we remand to the district court to determine damages in accordance with the guidelines set forth below.
Finally, we request the district judge to reconsider his decision on the question of prejudgment interest in view of our obvious conclusion that Rolf was deprived of a principal sum. See Nelson v. Hench, 428 F.Supp. 411 (D.Minn.1977). While such an award is a matter of judicial discretion, Blau v. Lehman, 368 U.S. 403, 414, 82 S.Ct. 451, 7 L.Ed.2d 403 (1962); Norte & Co. v. Huffines, 416 F.2d 1189, 1191-92 (2d Cir. 1969), cert. denied sub nom. Muscat v. Norte & Co., 397 U.S. 989, 90 S.Ct. 1121, 25 L.Ed.2d 396 (1970), it is not unreasonable to request the district judge to set forth his reasons should he again deny prejudgment interest. See Wessel v. Buhler, 437 F.2d 279, 284 (9th Cir. 1971).
Judgment affirmed in part and remanded.
MANSFIELD, Circuit Judge (dissenting):
I must respectfully dissent.
The majority holds a registered representative (Stott) and his employer (BEDCO) liable under § 10(b) and Rule 10b-5 to their customer (Rolf) for losses suffered by the customer upon purchases and sales of securities executed at the direction of Rolf's own independent investment adviser (Yamada) pursuant to written discretionary authority from Rolf instructing Stott and BEDCO to follow Yamada's orders. This result is achieved on the grounds that (1) the investment advisor (Yamada) was committing various frauds on the customer (Rolf), and (2) the broker (Stott), although he knew nothing of the frauds, "aided and abetted" Yamada's conversion of Rolf's account to unsuitable securities by "holding the hand" of Rolf pursuant to an oral agreement to "look after" Rolf's account and by assuring him of Yamada's competence as an investment counsel.
The majority views Yamada's investment of the account in unsuitable securities as fraud in and of itself and Stott's state of mind as recklessness amounting to a deliberate intent to deceive. All of this is too much for me to accept. The majority not only patches together watered-down notions of fraud and scienter in arriving at a result indistinguishable in any significant respect from that reversed by the Supreme Court in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), but also overlooks findings below and undisputed evidence that foreclose Rule 10b-5 liability.
With regard to the "fraud" by Yamada that Stott is held to have aided and abetted, Judge Pierce found, and the majority here seems to agree, that "Stott did not know of the direct frauds which Yamada was perpetrating on Rolf" — such as the investment adviser's manipulation of the public market price of certain securities obtained for Rolf's account and the use of the purchasing power of that account to make purchases of securities that might improve the price for others. Nor is there any basis for a finding that Stott shut his eyes to any such manipulation or use of Rolf's account to help others. Indeed, it is undisputed that at all pertinent times Yamada's reputation as an investment adviser was excellent and his successful accomplishments in the trade were well known. Even on the majority's "aiding and abetting" theory, therefore, Stott could not be held responsible for Yamada's manipulations, since they were not known to Stott and would not have been readily apparent upon exercise of due diligence, including compliance with New York Stock Exchange Rule 405 ("know your customer" rule).
Because even the majority concedes that "Stott was ignorant" of Yamada's "stock manipulations," it becomes important to determine what was the fraud "aided and abetted" by Stott through some "reckless disregard" on his part. The majority opinion,
Even assuming arguendo that the investment of a customer's funds in unsuitable securities could on occasion rise to the level of Rule 10b-5 fraud, the majority errs in concluding that Stott's conduct, principally his assurances regarding Yamada's competency as investment counsel, coupled with Stott's personal belief that some of the investments were "junk," establishes recklessness equivalent to an intentional and deliberate participation in or aiding and abetting of such "fraud." In my view this determination violates fundamental principles established by the Supreme Court in Ernst & Ernst v. Hochfelder, supra, and stems from an erroneous concept of "recklessness" or "reckless disregard" of material facts.
In Hochfelder the Court reversed a decision of the Seventh Circuit which had held "that one who breaches a duty of inquiry and disclosure owed another is liable in damages for aiding and abetting a third party's violation of Rule 10b-5 if the fraud would have been discovered or prevented but for the breach. 503 F.2d 1100 (1974)." 425 U.S. at 191, 96 S.Ct. at 1380 (emphasis added). The Supreme Court held that proof of scienter, i. e., an "intent to deceive, manipulate or defraud," was essential and that this element was not satisfied by proof of negligence or breach of a duty to inquire. It left open the "question whether, in some circumstances, reckless behavior" might be treated as the equivalent of scienter, 425 U.S. at 194 n. 12, 96 S.Ct. at 1381.
While Hochfelder did not clarify entirely the meaning of scienter, it did make clear that the failure of a fiduciary or accountant to fulfill a "common-law and statutory duty of inquiry," 425 U.S. at 192, 96 S.Ct. at 1380, which would reveal fraud on someone else's part, is not without more the equivalent of scienter as defined by the Court. Since Hochfelder we have reiterated that
See also Hirsch v. du Pont, 553 F.2d 750, 759 (2d Cir. 1977) ("knowing assistance of or participation in a fraudulent scheme gives rise to liability under § 10(b) as an aider and abettor . . . knowledge of the fraud . . . is indispensable"); Kerbs v. Fall River Indus., Inc., 502 F.2d 731, 739-40 (10th Cir. 1974); SEC v. Coffey, 493 F.2d 1304, 1316 (6th Cir. 1974), cert. denied, 420 U.S. 908, 95 S.Ct. 826, 42 L.Ed.2d 837 (1975). Accordingly, in my view, before "reckless disregard" may be
Judged by this standard, the facts as stated by the majority fail to support a conclusion that Stott participated in any fraud with the scienter required by Hochfelder. As proof that Stott "rendered substantial assistance to Yamada in [his fraud]," the majority relies upon Stott's processing of Yamada's securities orders given pursuant to his discretionary authorization from Rolf, Stott's representations to Rolf to the effect that Rolf could depend on his adviser's judgment, and Stott's failure to disclose Yamada's fraud (i. e., the purchase of low-grade securities). However, the majority is vague as to how any of this conduct can be said to have been undertaken with the "reckless disregard" that must be treated as the equivalent of knowledge of Yamada's fraud. Apparently, the theory of the majority opinion is that Stott's continuing expressions of confidence in Yamada and his willingness to accept the adviser's orders were reckless in view of his "[awareness] that the quality of the securities being purchased by Yamada was very low." The opinion describes Stott's reassurances regarding Rolf's reliability as having been made "conclusorily . . . without investigation and with utter disregard for whether there was a basis for the assertions." Likewise, it states that Stott "either recklessly failed to learn of or failed to disclose Yamada's web of fraud" — again referring only to the purchase of unsuitable securities. However, even conceding that Stott believed some or many of Yamada's purchases to be "junk", it would have required a considerable investigation for him to determine whether Yamada's widely-recognized reputation for brilliance was unwarranted or whether the ratio of risk to return on Rolf's portfolio as a whole was consonant with the doctor's investment objectives. A failure to perform such an investigation without more does not, after Hochfelder, establish scienter.
Sympathetic as I am to vigorous enforcement of the antifraud provisions of our federal securities laws, I cannot subscribe to a process of extrapolation, approved by the majority opinion, whereby Yamada's investment of Rolf's account in unsuitable securities is elevated to the level of Rule 10b-5 fraud and Stott's personal belief that some of the investments were "junk" is recognized as a sufficient basis for concluding that he acted with scienter. Reasoning along these lines, the majority has ended up with a holding that is virtually indistinguishable from that reversed in Hochfelder. A broker (Stott) is held liable under Rule 10b-5 for negligence in failing to make an adequate inquiry into the investments recommended by the plaintiff's investment adviser (Yamada), who turned out to be dishonest even though widely acclaimed as a competent and successful investment adviser at the time. In short, stripped of its conclusory characterizations, the majority opinion would barely make out a case of negligence on the part of Stott, much less one of his deliberately shutting his eyes to facts that would have revealed the "fraud" on Yamada's part. When additional lower court findings and undisputed evidence, unmentioned or glossed over by the majority, are taken into account, the failure to make out a case of "fraud" based on unsuitable investments or aiding and abetting of that fraud by recklessness becomes apparent. In the first place, Dr. Rolf was no novice or "babe in the woods" in the investment field. He had had 19 years of experience, including
The picture that emerges from these and other statements made by Rolf is one of a sophisticated investor in securities who was well aware of the difference between gilt-edge, relatively safe securities, on the one hand, and speculative "high fliers," on the other, and who had determined to get richer quick by choosing an aggressive program involving high-risk, OTC stocks in the hope that his adviser would succeed in picking a few big winners, but well aware of the pitfalls that were involved.
From this record it is small wonder that when introduced by Stott to a couple of prospective investment advisers, whom he personally interviewed, he chose 26-year old Yamada, "one of the `new breed' of young money-managers who had emerged as highly successful in the stock market" during the late 1960s by dealing in special situations, mutual funds, new issues, hedge funds and assorted speculative ventures.
The tenuousness of holding Stott liable as an aider and abettor is further underscored by the anomalous nature of his responsibilities toward Rolf, once Rolf had chosen Yamada rather than BEDCO to advise him as to his investments. The oral Rolf-Stott arrangement, according to Judge Pierce's findings, was that while Yamada alone would have discretionary responsibility with respect to what was to be bought and sold for Rolf's account, Stott would "supervise his [Rolf's] account and Rolf understood that Stott was to look after his interests." In such a context the role of overseer, in the absence of some fixed written delineation of authority and responsibility, borders on the meaningless.
If Rolf had looked to Stott and BEDCO for investment counsel, as he had to Stirling, Stott would undoubtedly have learned more about Rolf's investment objectives and maintained for him a portfolio of securities with which BEDCO's experts were intimately familiar. As it was, Stott was justified in relying upon Yamada's expertise with respect to the securities recommended by him. Although Stott may have personally thought that some of the latter were "junk" or "high fliers" it must be remembered, first, that Yamada then enjoyed an excellent reputation as a successful adviser. Once a student at the Harvard Business School, he had risen rapidly to the position of officer in the investment banking firm of Kuhn Loeb & Co., described by Judge Pierce "as a conservative and prestigious firm which generally handled `triple-A' clients," where Yamada developed "expertise in research and `special situations'." Yamada had then left Kuhn Loeb to form a partnership with others, including Keither Funston, former President of the New York Stock Exchange, John Burns, former President of RCA and Chairman of the Board of Cities Service, and J. Richardson Dilworth, head of the Rockefeller Brothers Fund. Yamada was well known in the securities field, managed approximately $20 million for customers and was in daily consultation with numerous securities firms. Rolf himself, an experienced trader on his own behalf, after personally interviewing Yamada was favorably impressed by him as "very brilliant and capable."
In short, although Rolf later testified, after Yamada's advice had proved disastrous, that he had "expected BEDCO to look after his account," (emphasis added), Rolf never put this in writing or defined precisely what was to be BEDCO's area of responsibility other than to keep him advised as to what securities were being purchased and sold for the account. On the contrary, by letter dated May 9, 1969, to BEDCO Rolf directed, "You will kindly follow his [Yamada's] instructions in every respect concerning my account with you . . . as he may order and direct." Rolf had what amounted to a custody account with BEDCO. When it came to investment decisions, although Stott (whom Rolf had never met and hardly knew) made recommendations to Yamada, it was clear that Yamada was in command.
Against such a background, I fail to find any substantial basis for holding that Stott's assurances to Rolf, made long prior to the time when Yamada's fraud and manipulations became known, regarding Yamada's competence and Stott's expressions of opinion to the effect that if Yamada recommended certain investments they must be all right, constituted aiding and
An analysis of the securities issues purchased by Yamada for Rolf reveals that many of the investments, although they declined in market value when the bloom faded on the bull market, were concededly not unsuitable, that others were listed on major stock exchanges, and that some "unsuitable" issues turned out to be profitable. Of the 40-odd security issues purchased for Rolf's account which form the basis of his claim, the district court found that Stott had "either recommended or was somewhat involved with the decision to purchase the following twelve."
Under these undisputed circumstances, including Yamada's investment of a substantial portion of Rolf's account in apparently suitable securities, I cannot share the majority's conclusion that investment of the balance in securities labelled unsuitable by an expert witness amounts to fraud, much less that Stott's conduct aided and abetted such "fraud." I favor holding a broker to his duties under Rule 405, for violation of which remedies are provided by the New York Stock Exchange, N.Y.S.E. Constitution Art. VIII, Rules 481, et seq. (providing for arbitration of disputes between member firms and others) and §§ 6, 13 (authorizing suspension, expulsion, fines and censure), and an investment adviser for fraud in violation of the Investment Advisors Act, see Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir. 1977). But to hold that investment of a customer's account in unsuitable securities constitutes § 10(b) fraud and that a broker who executes orders given by an investment adviser pursuant to his discretionary authority may be held liable as an aider and abettor of such fraud, places an
Nor do I agree with the district court's view that an implied right of action for damages in favor of Rolf may be based on Stott's alleged violations of N.Y.S.E. Rule 405
Applying these guidelines, it is not at all clear that Rule 405 or Art. III, § 2, were intended solely for the particular benefit of investors. Indeed, they appear designed as much to protect brokers from being victimized by unscrupulous customers. See Landy v. FDIC, 486 F.2d 139, 166 (3d Cir. 1973), cert. denied, 416 U.S. 960, 94 S.Ct. 1979, 40 L.Ed.2d 312 (1974). To imply a damages remedy based on nonfeasance or gross negligence would, moreover, run counter to the principles of Hochfelder and possibly inhibit the NYSE and NASD from promulgating additional standards for the guidance of their members. In short, NYSE and NASD rules are not the same for the purpose of implied remedies as SEC rules. See Jenny v. Shearson, Hammill & Co., [1974-75 Transfer Binder] Fed.L.Sec.Rep. (CCH) ¶ 95,021, at 97,582 (S.D.N.Y. 1975); Plunkett v. Dominick & Dominick, 414 F.Supp. 885 (D.Conn. 1976). Lastly, whatever obligation might be imposed by rule on a broker dealing solely with his customer, the interposition of an investment adviser with the sole discretionary authority to determine what investments shall be made for the customer weighs against extending any liability of the broker that might otherwise be implied on the basis of a direct broker-customer relationship.
For these reasons, I would reverse the judgment of the district court and remand with directions to enter judgment in favor of the defendants dismissing the action.
425 U.S. at 199, 96 S.Ct. at 1384 (footnote omitted). However, at another point in the opinion, footnote 12 is appended to the language "allegation of `scienter' — intent to deceive, manipulate, or defraud." Id. at 193, 96 S.Ct. at 1381. Footnote 12 then recognizes that "[i]n certain areas of the law recklessness is considered to be a form of intentional conduct for purposes of imposing liability for some act." Id. at 194 n. 12, 96 S.Ct. at 1381.
The Hochfelder opinion also noted:
425 U.S. at 201, 96 S.Ct. at 1385 (emphasis added). The Court seems to have recognized that scienter is not a rigid concept encompassing only the definitive intent to accomplish a specific purpose. A less definitive mental state — recklessness — would seem to suffice in certain circumstances and does not run afoul of Hochfelder's admonition that liability not be imposed for "negligent conduct alone." Id. See generally, Note, Recklessness Under Section 10(b): Weathering the Hochfelder Storm, 8 Rutgers Camden L.J. 325, 342-45 (1977).
See Restatement (Second) of Torts § 526(b), Comment at 60 (1965).
Some courts, albeit in different securities law contexts, have used technical computations to limit recoveries to actual damages. See Mills v. Electric Auto-Lite Co., 552 F.2d 1239, 1248 (7th Cir. 1977) (technical damages formula to measure fairness of merger), cert. denied, ___ U.S. ___, 98 S.Ct. 398, 54 L.Ed.2d 279 (1977) (No. 77-331); Bonime v. Doyle, 416 F.Supp. 1372, 1377, 1386 (S.D.N.Y.1976) (factoring out of damages computation "losses attributable to `unique characteristics of a particular . . ..'" by using two indices composed of stocks of comparable value to the stock at issue); Feit v. Leasco Data Processing Equipment Corp., 332 F.Supp. 544, 586 (E.D.N.Y.1971) (reducing trading losses by decline in the Standard & Poor's Daily Stock Price Index). Feit has been criticized for utilizing a "broad-based index" without considering whether the index as a whole was similar in nature to the security under consideration. Reder, Measuring Buyers' Damages in 10b-5 Cases, 31 Bus.Law. 1839, 1850 (1976). Here, of course, Rolf's portfolio consisted of numerous stocks. At the outset of Yamada's stewardship, they were of generally high quality. If the district judge should determine that, when the aiding and abetting period began, the quality of stocks in the portfolio was such that a broad-based index would not be representative of those stocks, then he may select a more appropriate gauge, perhaps a portion of an index, perhaps a composite of indices, perhaps expert opinion. See generally, Mullaney, supra note 21, at 288-90.