The Supreme Court relieved accounting firms of a major legal worry yesterday by ruling, 7 to 1, that allegedly misleading audits of securities firms don't open them to lawsuits by the firms' customers.
No private cause of action for damages is implied by the 1934 Securities and Exchange Act's Section 17(a), which requires broker-dealers to file accurate and complete reports as prescribed by the Securities and Exchange Commission, the court held.
The ruling overturned the 2d U.S Circuit Court of Appeals in a case involving claims of $65 million against Touche Ross & Co., one of the accounting professions's "Big Eight" firms.
From 1969 to 1973, it had been retained by Weis Securities, Inc. As Weis' independent certified public accountant, Touche Ross audited the brokerage firm's records and prepared its Section 17(a) reports and its responses to financial questionnaires required by the New York Stock Exchange of it members.
In 1973, the SEC and the exchange learned that Weis was in precarious financial straits and that it and some of its officers had violated the 1934 law.
At the same time, the Securities Investor Protection Corp., a quasi-government body whose members include virtually all broke-dealers, asked a federal judge for a decree declaring Weis' customers to be in need of the Securities Investor Protection Act.
The judge granted the decree and named Edward S. Regington to act as trustee in the liquidation of the Weis business - the largest liquidation under the investor-protection law since its enactment in 1970.
Redington found the cash and securities on hand insufficient to make whole the customers who had left assets or deposits with Weis. As a result, SIPC advanced $14 million to Redington - enough to satisfy within legal limits the claims of approximately 34,000 Weis custormers and Creditors. Millions of dollars in additional customer claims remained unsatisfied.
In 1976, SIPC and Redington sued Touche Ross for $65 million, alleging that certain Weis officers had conspired to conceal substantial operating losses in 1972 by falsifying financial reports required by Section 17(a) to be filed with regulatory authorities.
Seeking to make the accounting firm liable, they charged that it had i,mproperly audited and certified the 1972 Weis financial statements and responses to the stock-exchange questionnaire.
In so doing, the complaint alleged Touche Ross had breached its duties to the SIPC, Redington, and others and had prevented Weis' true financial condition from becoming known until it was too late for remedial action that might have forestalled insolvency.
Redington asked for $51 million on behalf of Weis in its own right and on behalf of the customers of the firm whose property he was unable to return. SIPC asked for $14 million, mainly as refunds for the monies it paid out under the investor-protection law.
U.S. District Judge Inzer B. Wyatt, dismissed the claim. The plaintiffs were seeking relief on the theory that Section 17(a) implied they had a right to seek damages, but such a right doesn't exist, he said.
A divided panel of the 2d Circuit disagreed, holding that Section 17(a) imposed the duty on accountants alleged by SIPC and Redington.
In the opinion for the Supreme Court Justice William H. Rehnquist wrote:
"The ultimate question is one of congressional intent, not one of whether this court thinks it can improve upon the statutory scheme that Congress enacted.
"SIPC and the trustee contend that the result we reach sanctions injustice. But even if that were the case, the argument is made in the wrong forum, for we are not at liberty to legislate. If there is to be a federal damage remedy under these circumstances, Congress must provide it."
Justice Thurgood Marshall dissented. Justice Lewis F. Powell Jr. did not participate.