PUBLISH
UNITED STATES COURT OF APPEALS
Filed 11/12/96
TENTH CIRCUIT
BONNIE SONNENFELD, individually
and on behalf of all those similarly
situated; KARL NICOLETTI, on behalf
of himself and all others similarly
situated; HILDA EBLING STOLLER
TRUST, by Hilda Stoller, also known as
Hilda Stoller Milstein; LARRY
RABINOWITZ, on behalf of himself and
all others similarly situated,
Plaintiffs - Appellees,
v. No. 95-1357
No. 95-1431
DENVER, CITY and COUNTY OF, (Consolidated)
Defendant- Appellant,
and
LAZARD FRERES; PRYOR,
MCCLENDON, COUNTS &
COMPANY; GOLDMAN, SACHS &
COMPANY; LS FINANCIAL INC.;
DAIN BOSWORTH, INC.; LEHMAN
BROTHERS, INC.; ARTEMIS CAPITAL
GROUP, INC.; PIPER JAFFRAY, INC.,
Defendants.
Appeal from United States District Court
for the District of Colorado
(D.C. Nos. 95-Z-468, 95-Z-492, 95-Z-548, 95-Z-728)
James M. Lyons (Frederick J. Baumann and JoAnn L. Vogt with him on the brief), of
Rothgerber, Appel, Powers & Johnson, Denver, Colorado, for the appellant.
Sherrie R. Savett, of Berger & Montague, P.C., Philadelphia, Pennsylvania (Genna
Driscoll Kidd, of Berger & Montague, P.C., Philadelphia, Pennsylvania; and Kevin J.
Yourman of Weiss & Yourman, Los Angeles, California, with her on the brief), for the
appellees.
Before HENRY, LOGAN, and BRISCOE, Circuit Judges.
BRISCOE, Circuit Judge.
Plaintiffs brought these four consolidated class actions alleging the City and
County of Denver made false and misleading statements, in violation of § 10(b) of the
Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and Securities Exchange
Commission Rule 10b-5, in the issuance of bonds to finance a new airport. Denver
moved to dismiss, arguing there is no implied private right of action against
municipalities under § 10(b) or Rule 10(b)-5 and that it was immune under the Eleventh
Amendment. Denver appeals the district court's denial of its motion. We have
jurisdiction over the securities law issue under 28 U.S.C. § 1292(b). The Eleventh
Amendment issue is appealable under the collateral order doctrine. See Puerto Rico
Aqueduct and Sewer Authority v. Metcalf & Eddy, 506 U.S. 139 (1993). We affirm.
Implied Private Cause of Action
Denver contends there is no implied private cause of action against municipalities
under § 10b and Rule 10b-5. We disagree.
Section 10(b) makes it unlawful for "any person" to use or employ any
manipulative or deceptive device or contrivance in connection with the purchase or sale
of any security. Section 3(a)(9) (15 U.S.C. § 78c(a)(9)) defines person to include a
"government, or political subdivision, agency, or instrumentality of a government."
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Under this definition, local governments are subject to actions by the SEC to enforce §
10(b) and Rule 10b-5. See In re County of Orange, 61 S.E.C. 310, 1996 WL 34362
(1996).1
Although § 10(b) does not provide an express private cause of action, the existence
of an implied private cause of action under § 10(b) and Rule 10b-5 is so well established
in the courts that its existence is "beyond peradventure." Herman & MacLean v.
Huddleston, 459 U.S. 375, 380 (1983). See Ernst & Ernst v. Hochfelder, 425 U.S. 185,
196 (1976). The implied private cause of action was first recognized in 1946 in Kardon
v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946), and by 1971, in Superintendent
of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 13, n. 9 (1971), the Supreme Court
"confirmed with virtually no discussion the overwhelming consensus of the District
Courts and Courts of Appeals that such a cause of action did exist." Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723, 730 (1975).
However, it was not until 1975 that Congress added governments and political
subdivisions to the definition of person in § 3(a)(9) of the 1934 Act, see Pub. L. 94-29, §
3, 89 Stat. 97 (1975), thereby clearly making it unlawful under § 10(b) for issuers of
municipal bonds to use or employ any manipulative or deceptive device or contrivance in
connection with the purchase or sale of any security. Denver argues Congress did not
1
Although under § 3(a)(12) (15 U.S.C. § 78c(a)(12)) municipal securities are
"exempted securities," § 10(b) applies to fraud in connection with the purchase or sale of
"any security," and is not limited to nonexempt securities. Section 10(b) therefore applies
to transactions in municipal securities, and it is well established that underwriters,
brokers, and dealers in municipal securities may be liable in a private cause of action.
See In re New York City Municipal Securities Litigation, 507 F. Supp. 169, 178-80 (S.D.
N.Y. 1980); Davidson v. Dean Witter Reynolds, 478 F.Supp. 494, 495 (D. Colo. 1979).
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intend to create an implied private § 10(b) cause of action against municipalities when it
expressly subjected governments and political subdivisions to § 10(b).
Here, the district court followed In re Citysource Securities Litigation, 694 F.
Supp. 1069, 1072-75 (S.D. N.Y. 1988), and In re Washington Public Power Supply
System Securities Litigation, 623 F. Supp. 1466, 1477-80 (W.D. Wash. 1985), aff'd on
other grounds 823 F.2d 1349 (9th Cir. 1987), holding that by expressly including
governments and political subdivisions in the definition of person, Congress subjected
municipalities to § 10(b) and the well-established private cause of action under that
section. Most commentators have concluded the 1975 amendment subjects municipalities
to a private cause of action under § 10(b). See, e.g., Robert W. Doty & John E. Peterson,
The Federal Securities Laws and Transactions in Municipal Securities, 71 Nw. U. L. Rev.
283, 286, 294 (1976); Ann J. Gellis, Mandatory Disclosure for Municipal Securities:
Issues in Implementation, 13 J. Corp. L. 65, 67 (1987); Joel Seligman, The Municipal
Disclosure Debate, 9 Del. J. Corp. L. 647, 650-51 n. 14 (1984); Marc I. Steinberg,
Municipal Issuer Liability Under the Federal Securities Laws, 6 J. Corp. L. 277, 279-80
(1980). But see Margaret V. Sachs, Are Local Governments Liable Under Rule 10b-5?
Textualism and its Limits, 70 Wash. U. L. Q. 19 (1992); Thomas J. Schwarz, Municipal
Bonds and the Securities Laws: Do Investors Have an Implied Private Remedy?, 7 Sec.
Reg. L. J. 119 (1979).
We agree with the district court, Citysource, and Washington Public Power. In
determining whether a private cause of action is implicit in a statute not expressly
providing one, the central inquiry is whether Congress intended to create a private cause
of action. Transamerica Mortgage Advisors v. Lewis, 444 U.S. 11, 23 (1979); Touche
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Ross & Co. v. Redington, 442 U.S. 560, 575 (1979). Denver's reliance on Cort v. Ash,
422 U.S. 66 (1975), is misplaced. Cort's four factors have been effectively condensed
into one--whether Congress, expressly or by implication, intended to create a private
cause of action. Transamerica, 444 U.S. at 15-16; Touche Ross, 442 U.S. at 575. See
Thompson v. Thompson, 484 U.S. 174, 189 (1988) (Scalia, J., concurring); Schmeling v.
Nordham, 97 F.3d 1336, 1996 WL 564403 *8-9 (10th Cir. 1996).
In determining whether a private cause of action is implicit in a federal statutory
scheme when the statute by its terms is silent on that issue, the initial focus must be on the
state of the law at the time the legislation was enacted--the "contemporary legal context"
existent when the new law was enacted. See Merrill Lynch, Pierce, Fenner & Smith v.
Curran, 456 U.S. 353, 378. When Congress acts in a statutory context in which an
implied private remedy has already been recognized by the courts, the inquiry is logically
different. Congress need not have intended to create a new remedy since one already
existed. The question is whether Congress intended to preserve or, in this case, to extend
the preexisting remedy. Id. at 378-79. Congress is presumed to be aware of prior judicial
recognition of an implied private cause of action in a statute that does not expressly
provide one. Id. at 379.
In 1975 when Congress enacted the amendment that defined person to include
governments and their political subdivisions and thereby expressly brought municipalities
within the scope of § 10(b), it was well established there was a private right of action
under § 10(b). Moreover, until the Supreme Court decided Cort, 422 U.S. 66, on June 17,
1975, shortly after the 1975 amendment took effect on June 4, 1975, the federal courts,
including the Supreme Court, readily found private causes of action implicit in statutes
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that did not expressly provide them, following the maxim that where there is a right, there
is a remedy. See, e.g., J.I. Case Co. v. Borak, 377 U.S. 426 (1964). Cort marked the
beginning of a more restrictive approach to implied private causes of action. See, e.g.,
Tamar Frankel, Implied Rights of Action, 67 Va. L.Rev. 553 (1981); Dennis Scholl and
Ronald K. Perkowski, An Implied Right of Action Under Section 17(a): The Supreme
Court Has Said "No," But Is Anybody Listening?, 36 U. Miami L. Rev. 41, 57-65 (1981);
Note, Howard v. Pierce: Implied Causes of Action and the Ongoing Vitality of Cort v.
Ash, 80 Nw. U. L. Rev. 722, 766, n. 7 (1985).
We conclude that in the contemporary legal context of 1975, Congress intended by
its 1975 amendment to subject municipalities to the then well-established private right of
action under § 10(b) when it expressly brought municipalities within the scope of that
section. Given the contemporary legal context of the amendment's passage, had Congress
intended there to be no private cause of action against municipalities, it expressly would
have stated such an exemption.
The limited legislative history on this issue does not show that Congress intended
to exempt municipalities from the private cause of action under § 10(b). The Senate
report to the 1975 amendments stated:
B. Regulation of Municipal Securities Professionals-Not Issuers
The Committee is mindful of the historical relationship between the federal
securities laws and issuers of municipal securities. Apart from the general
antifraud provision, municipal securities are exempt from all substantive
requirements. Most significantly, this means that state and local governments do
not have to comply with the registration and disclosure requirements of the
Securities Act of 1933. The bill does not in any way change this pattern, for the
Committee is not aware of any abuses which would justify such a radical incursion
on states' prerogatives.
S. Rep. No. 75, 94th Cong., 1st Sess., 1975 WL 12347 (Leg. Hist.) * 95 (1975).
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(Emphasis added.) The principal concern of Congress in enacting the 1975 amendments
to the securities laws was to regulate underwriters, dealers, and brokers who deal in
municipal bonds. See S. Rep. No. 75. Congress clearly intended that municipalities
would not be subject to the registration and reporting requirements imposed on
underwriters, dealers, and brokers. 15 U.S.C. §§ 78c(d) and 780-4(d). However,
Congress also clearly intended that municipal securities would remain subject to the
antifraud provisions. S. Rep. No. 75, 1975 WL 12347 *91-92, 95.
The legislative history is silent on whether Congress intended municipalities to be
subject to a private cause of action under § 10(b). Although subjecting municipalities to
civil liability for securities fraud under § 10(b) may have "grave political and
constitutional consequences" and could "fundamentally alter the relationship between
elected officials and the electorate," see In re New York Municipal Securities Litigation,
507 F. Supp. 169, 185-86 (S.D. N.Y . 1980), the lack of discussion in the legislative
history is not necessarily anomalous because Congress may well have intended the 1975
amendment to the definition of person as a clarification of existing law.
It was not yet established in 1975 that the phrase "any person" in § 10(b) did not
include issuers of municipal securities. Although under the applicable version of §
3(a)(9) of the 1934 Act (15 U.S.C. § 78c(9)), "person" did not include governments and
political subdivisions, it did include corporations, which arguably could include
municipal corporations. See Brown v. City of Covington, 805 F.2d 1266, 1271-75 (6th
Cir. 1986) (Merritt, J., dissenting). The SEC has taken the position that issuers of
municipal securities have been included in the definition of person since 1934, and were
therefore subject to liability under § 10(b) and Rule 10b-5. See id. at 1273-74; New York
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City, 507 F. Supp. at 183, n. 33; Securities Exchange Act Release No. 11,876, [1975-76
Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 80,333, at 85,826-34 (Nov. 26, 1975).
It is true that courts that have considered the issue of whether a municipality is a
person within the pre-1975 definition in the 1934 Act have concluded § 10(b) was
inapplicable to municipalities. Brown, 805 F.2d at 1268-70; In re New York City, 507 F.
Supp. at 181-82; Woods v. Homes and Structures of Pittsburg, 489 F. Supp. 1270 (D.
Kan. 1980); In re. Equity Funding Corp., 416 F. Supp. 161 (C.D. Cal. 1976); Greenspan
v. Crosbie, 1976 WL 841, Fed. Sec. L. Rep. (CCH) ¶ 95,780 (S.D. N.Y. 1976). They
reason that if Congress had intended to include governments and political subdivisions in
the definition of person, it could have done so expressly as it did in § 2(2) of the 1933 Act
(15 U.S.C. § 77b(2)).
However, these cases had not yet been decided when Congress passed the 1975
amendment and there was some authority suggesting municipalities could be subject to
the well-established private cause of action under § 10(b). In Baron v. Shields, 131 F.
Supp. 370 (S.D. N.Y. 1954), the purchaser of bonds issued by the Bridge Commission of
Bellevue, Nebraska, sued the commission, its members, the members of the securities
firm that sold the bonds, and the salesman for fraud under § 10(b) and Rule 10b-5. In
denying the commission's motion to dismiss, the court stated it was "insignificant" that
the commission was a political subdivision or agency of a state and that the bonds would
be exempted securities under § 3 of the Securities Act of 1933, 15 U.S.C. § 77c, because
§ 10(b) of the 1934 Act applies to sales of "any security." However, the court did not
address whether the commission was a person within the meaning of the 1934 Act.
In the contemporary legal context of 1975, Congress may well have considered the
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change in the definition of person a clarification of existing law rather than a change.
Although that interpretation of the pre-1975 statutes may be incorrect, see, e.g., Brown,
805 F.2d at 1268-70, the issue is not whether Congress correctly perceived the state of the
law, but what its perception of the state of the law was. See Merrill Lynch, 456 U.S. at
378 n. 61.
We conclude Congress intended the 1975 amendment to recognize an implied
private cause of action against municipalities.
Eleventh Amendment Immunity
Denver contends it is an arm of the state entitled to Eleventh Amendment
immunity. We disagree.
Whether a governmental entity is entitled to Eleventh Amendment immunity turns
on the characterization of the entity under state law, the guidance and control exercised by
the state, the degree of state funding, and the entity's ability to provide for its own
financing by levying taxes and issuing bonds. See, e.g., Haldeman v. Wyoming Farm
Loan Bd., 32 F.3d 469, 473 (10th Cir. 1994); Ambus v. Granite Bd. of Educ., 995 F.2d
992, 994-97 (10th Cir. 1993). See Mt. Healthy City School Dist. Bd. of Educ. v. Doyle,
429 U.S. 274, 279-80 (1977). The most important factor in determining whether a
governmental entity is entitled to Eleventh Amendment immunity is whether a judgment
against it would be paid from the state treasury. Hess v. Port Authority Trans-Hudson
Corp., 115 S.Ct. 394, 404 (1994). Cities and counties are not entitled to Eleventh
Amendment immunity. Hess, 115 S.Ct. at 404; Mt. Healthy, 429 U.S. at 280; Mascheroni
v. Board of Regents, 28 F.3d 1554, 1559 (10th Cir. 1994). Cf. Jordano v. Steffen, 787 F.
Supp. 886, 893, n. 11 (D. Minn. 1992) (holding although counties are not normally
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immune under Eleventh Amendment, defendant county was immune because it acted as
agent of state in administering state Medicaid plan and any judgment would be paid by
the state); Oyler v. City and County of Denver, 1990 WL 134485 (D. Colo. 1990) (county
department of social services immune because it acted as agent of state in administering
state welfare programs and received 80 percent of its funding from the state).
However, relying on Pueblo Aircraft Service v. City of Pueblo, 679 F.2d 805 (10th
Cir. 1982), cert. denied 459 U.S. 1126 (1983), Denver contends it is carrying out a state
purpose in building an airport and is therefore an arm of the state entitled to Eleventh
Amendment immunity. Denver's reliance on Pueblo Aircraft Service is misplaced. That
case addressed a city's immunity from the antitrust laws, an entirely different issue.
Although Denver may be carrying out state policy in building an airport, see Colo.
Rev. Stat. Ann. § 41-4-101 (West 1990); Pueblo Aircraft Service, 679 F.2d at 810-11,
under the factors set out in Mt. Healthy and Ambus, it did not thereby become the alter
ego, arm, or instrumentality of the state for purposes of the Eleventh Amendment. As a
constitutionally created home rule city, Denver has a great deal of autonomy in local
affairs. City and County of Denver v. Colorado, 788 P.2d 764 (Colo. 1990); Fraternal
Order of Police v. City and County of Denver, 914 P.2d 483 (Colo. App. 1995), cert.
granted (Colo. March 25, 1996). See Colo. Const. art. 20, § 1; Colo. Rev. Stat. §§ 30-35-
101 through 30-35-202; §§ 31-2-201 - 31-1-202, 31-15-101 through 31-15- 302 (West
1990 and Supp. 1996). Denver has not shown the degree of state funding it receives,
either generally or for the airport. Denver has the power to levy taxes and issue bonds.
Colo. Rev. Stat. §§ 30-20-301 through 30-20-309; 30-35-201(5) and (6); 31-15-302(1)(c)
and (d); 41-4-105, 41-4-203, 41-5-101 (West 1990 and Supp. 1996). Most important,
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Denver has not shown that a judgment against it would be paid out of the state treasury.
The airport bonds are special obligations of the City that in no event "constitute a general
obligation of the City, the State or any political subdivision or agency of the State."
(Appellant's append. 207.) We conclude Denver is not an arm of the state entitled to
Eleventh Amendment immunity.
The judgment of the district court is AFFIRMED.
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