The Supreme Court, in a decision with potentially far-reaching impact on consumer rights, ruled yesterday that people defrauded by their investment advisers have no right to sue for damages under federal investment laws.
The court left such anti-fraud actions to the government, which has acknowledged its inability to fully police the growing number of investment advisers in the securities industry.
In a 5-to-4 decision, the court held that an individual can not sue for damages under the Investment Advisors Act unless Congress clearly said he could, either expressly in the law or through an interpretation of its intent.
While the court yesterday only interpreted the single act in question, legal scholars familiar with regulatory law suggested that the methodology used by the court has significant potential impact on numerous regulatory statutes.
Many of those laws are silent on the question of the individual's -- as opposed to the regulatory agency's -- right to sue for damages. The discretion has been left to the courts, using a number of guidelines including a reading of Congress' intent.
Yesterday's decision -- in the case of Transamerica Mortgage Advisors, Inc., versus Harry Lewis -- appeared to make an interpretation of Congress' intent the paramount, if not the only, factor to be used when the law itself is silent.
Congress' very silence on the question, wrote Justice Potter Stewart for the majority, is the surest sign that it never intended to allow such suits. Other securities statutes expressly authorize such suits, the majority decided.
"The fact that it enacted no analogous provisions" in the Investment Advisors Act "strongly suggests" that it had no intention of dong so.
"'When Congress wished to provide a private damage remedy, it knew how to do so and did so expressly,'" Stewart wrote, quoting from a similar decision last term, Touche Ross versus Redington.
Yesterday's opinion, according to knowledgeable lawyers, fleshes out the Touche Ross decision, which held that an individual had no right to sue for damages for violations of reporting provisions in the Securities Exchange Act.
The decision yesterday prompted a vigorous dissent from Justice Byron R. White, joined by Justices William Brennan, Thurgood Marshall and John Paul Stevens.
"The silence of the Act is not an automatic bar to private actions," the dissent said. Granting the right to sue would be in addition, "not only consistent with the legislative goal of preventing fraudulent practices by investment advisers, but also essential to its achievement."
". . . In the absence of a private right of action for damages," the dissent said, "victimized clients have little hope of obtaining redress for their injuries."
The case, Transamerica Mortgage Advisors, Inc., et al versus Lewis, stemmed from a 1974 suit filed in California under the Investment Advisors Act by Harry Lewis, a shareholder in a real estate investment trust which he alleged had been defrauded by advisor, Transamerica.
Lewis asked the court to void the trust's contract with Transamerica and award damages to stockholders.
The Supreme Court yesterday did permit a private suit for cancellation of the contract. That was implied, though not set out expressly, in the law, it said.
Overruling the Ninth U.S. Circuit Court of Appeals, however, the Supreme Court prohibited the more important damage claim.