Petition — Churchill Forest Industries (Manitoba), Ltd. v. Securities & Exchange Commission
Supreme Court brief1977
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IN THE "=
Supreme Court of the United Bue is wor
October Term, 1976
MICHAEL RODAK, JR., CLE
No. —_
CuHuRCHILL Forest INpustriES (MANiToBA) Ltp., CHURCHILL
Puce Mit Lrp., TecHNoputp INCORPORATED, STEPHEN E.
Mocuary, JAMES M. Brown, Jr., CHESTER CHASTEK, RIVER
SAWMILLS CoMPANY and BLuge CONSTRUCTION CORPORATION,
Petitioners,
against
SECURITIES AND EXCHANGE COMMISSION,
Respondent.
PETITION FOR A WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
— -— =
—— — —_—-———
|
GERALD WALPIN
575 Madison Avenue
New York, New York 10022
Attorney for Petitioner
Of Counsel: Stephen E. Mochary
—- CoLin FREUND
Lewis & CoHEN
Marc RowIn 76- ] 28]
and
STEPHEN E. MocHary
Barry H. GARFINKEL
919 Third Avenue
New York, New York 10022
Attorney for Petitioners
Churchill Forest Industries
(Manitoba) Ltd., Technopulp
Incorporated and Churchill
Pulp Mill Lid.
SKADDEN, Arps, SLATE,
MEAGHER & FLom
Douc.tas M. Kraus
and
Pitney, Harpin & Kipp
Cryve A. SzucH
Dickinson R. DEBEVOISE
744 Broad Street
Newark, New Jersey 07102
Attorney for Petitioners
Chester Chastek, James M. Brown, Jr.,
River Sawmills Company and
Blue Construction Corporation
RrKer, DANZIG, SCHERER & DEBEVOISE
ALvin WEISS
TABLE OF CONTENTS
Opinions Below .
Jurisdiction ..
Question Presented .
Statutes and Regulations Involved
Statement of the Case .
Reasons for Granting the Writ .
A. Conflict Among the Circuits _
1. Second Circuit Decisions .
2. Eighth Cireuit Decision
3. Ninth Cireuit Decisions .
4. Other District Court Decisions
5. Summary ......... SR, SLES eae
B. Conflict With Decisions of This Court
C. Important Question Not Yet Decided by This
I III aN Ne ES PE A A
SEE OTA ae
Appendices
A—Opinion of the Court of Appeals, January 14,
ASCII ERO IE RE ack MF eee ae a
B—Opinion of the District Court Dismissing
Original Complaint, March 11,1975 __
C—Opinion of the District Court Dismissing
Amended Complaint, November 17, 1975
D—Statutes and Regulations Involved .........
PAGE
Al
Ali
Ad84
A40
It
TABLE OF AUTHORITIES
PAGE
Cases:
Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2d
Cir.), cert. denied sub nom. Bersch v. Arthur An-
dersen & Co., 423 U.S. 1018 (1975) 6, 7, 8, 9, 10, 12,
13, 15, 23
Benz v. Compania Naviera Hidalgo, S.A., 353 U.S. 138
RRNA TICS enc Ae AORN ne a
Des Brisay v. The Goldfield Corp., [Current] CC
Fed. Sec. L. Rep. 195,868 (9th Cir. See 15
Finch v. Marathon Securities Corp., 316 F. Supp. 1345
_. « eae ae 12
F.0.F. Proprietary Funds, Ltd. v. Arthur Young &
Co., 400 F. Supp. 1219 (S.D.N.Y. ae 12,13
Foley Bros., Inc. v. Filardo, 336 U.S. 281 (1949) ......... 20
Garner v. Pearson, [1973-74] CCH Fed. Sec. L. Rep.
994,549 (M.D. Fla.1974) 0 16
Henry v. Richardson-Merrell, Inc., 508 F.2d 28 (3d
SRNL Se eR iniceal Si eranagte OI Ree 17, 22
IIT v. Vencap, Ltd., 519 F.2d 1001 (2d Cir. 1975) 6,7, 8, 10,
11, 12, 13
Investment Properties Int’l Ltd. v. 1.0.S., [1970-71]
CCH Fed. See. L. Rep. $93,011 (S.D.N.Y. 1971),
aff’d on expedited appeal without opinion (Docket
No. 71-593, 2d Cir. 1972)
Kook v. Crang, 182 F. Supp. 388 (S.D.N.Y. 1960) ..... 12, 23
Lauritzen v. Larsen, 345 U.S. 571 I is
——
Leasco Data Processing Equipment Corp. v. Maxwell,
468 F.2d 1326 (2d Cir.1972) rads 11
Manus v. The Bank of Bermuda, Ltd., [1971-72] CCH
Fed. See. L. Rep. 193,299 (S.D.N.Y. 1971)... 12
McCulloch v. Sociedad Nacional de Marineros de
Honduras, 372 U.S. 10 (1963) tts 21
Iit
PAGE
New York Central R. Co. v. Chisholm, 268 U.S. 29 me
| EE a aca i ig
Recaman v. Barish, 408 F. Supp. 1189 (E.D. Pa. 1975) 17
Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) . a 19
Securities and Exchange Commission Vv. ving
Growth Co., S.A. (Costa Rica), 391 F. Supp. 59 i
|) St & — 7arereaees eesnsceensenneennennssenee
seentinn and Exchange Commission v. Gulf or
continental Finance Corp., 223 F. Supp. 987 (S.D. m
* er svssnsneennsnnnnnnneeesssnsen cesses
Securities and Exchange Commission Vv. United Finan- .
cial Group, Inc., 474 F.2d 354 (9th Cir. 1973) ..... - 5)
Selas of America (Nederland) N.V. v. Selas Corp. o
America, 365 F. Supp. 1382 (E.D. Pa. 1973) cease
Selzer v. The Bank of Bermuda, Ltd., [1974-75] CCH *
Fed. Sec. L. Rep. 194,876 (S.D.N.Y. 1974) . eee
Sinva, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, a
Inc., 253 F. Supp. 359 (S.D.N.Y. 1966) . eee
Sinva, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, ‘
Inc., 48 F.R.D. 385 (S.D.N.Y. RSS -
Strassheim v. Daily, 221 U.S. 280 (1911) 0...
The Bremen v. Zapata Off-Shore Co., 407 US. 1 -
(1972) ooeceeecseecssescsseesseccaneenneerseeesesconseennennneennnsten I -
ASS Eee TSE:
homsen v. Cayser, 243 U.S. 66 (1 Roose
ar y. Anthes Imperial Ltd., 473 F.2d 515 (8th “™ ™
1973) . , Raha ane
United States v. Clark, 359 F.Supp. 131 (S.D.N.Y.
BOTB) nnn scassseccnscsssccscssessnnssscraresnsennsesnsenssensennceneenseeneenneyn
United States v. Sisal Sales Corp., 274 U.S. 268 (1927) 20
Watson v. Employers Liability Assurance Corpora-
tion, Ltd., 348 U.S. 66 ( 1954) Fp Lae s
Wilko v. Swan, 346 U.S. 427 (1953). Het pee Sa
Miscellaneous:
Wall Street Journal, January 21, 1977, at 4, col, 3 ........ 23
a
IN THE
Supreme Court of the United States
October Term, 1976
No.
rr i
CuurcHit Forest Inpustries (Manitos+) Lop., CouRcHILL
Putp Muu Lrp., Tecunoputp Incorpoxatep, STEPHEN E.
Mocuary, James M. Brown, Jr., Cuester CuasTeK, River
Sawmitts Company and Biue Construction CorpPorRaTION,
Petitioners.
against
SEcuRITIES AND ExcHance CoMMISSION,
Respondent.
PETITION FOR A WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Petitioners pray that a writ of certiorari issue to review
the judgment of the United States Court of Appeals for
the Third Circuit entered in this action on January 14, 1977.
Opinions Below
The opinion of the Court of Appeals, which is not yet
officially reported, is annexed as Appendix A. The two
opinions of the United States District Court for the Dis-
2
tri i
re 7 fre Jersey (a) dismissing the original complaint
at 391 F. Supp. 1167), and (b) dismissing the
amended complaint (unr
eported
dices B and C respectively, ), are annexed as Appen-
filed within ‘90 da
: ys of that date The jurjeajet: ‘
Court is invoked under 98 U.S.C. 12540) adn
Question P resented
(a) which, plaintiff concedes
pact, either on American
ties markets, but rather
» had no domestic im-
citizens or domestic securi-
Statutes and Regulations Involved
Sections 17(a), 20(b) and 22 of the Securities Act of
1933, 15 U.S.C. §§77q(a), 77t(b) and 77v, and sections
10(b), 21(e) and (f), and 27 of the Securities Exchange Act
of 1934, 15 U.S.C. §$78j(b), 78u(e) and (f), and 78aa, and
Securities and "xchange Commission Rule 10b-5, 17 C.F.R.
240.10b-5, which are involved in this action, are set forth
verbatim in Appendix D.
Statement of the Case
This action was commenced by the Securities and Ex-
change Commission (‘‘SEC’’) on January 17, 1974 against
Alexander Kasser* and petitioners (‘‘defendants’’), charg-
ing them with violating the anti-fraud provisions of the
federal securities laws. The SEC sought an injunction
against all defendants, restraining them from further viola-
tions of the securities laws, and an accounting and disgorge-
ment by certain defendants of all amounts received by them
as a result of the alleged fraud.
The fraud, as alleged in the amended complaint,** oc-
curred in connection with the development of a forestry
products complex at The Pas, Manitoba, Canada. The only
party allegedly defrauded is specified to be the Manitoba
Development Fund (‘‘MDF’’), a Crown corporation
* Kasser, who is the alleged principal wrongdoer, is not in the
United States and the SEC has not effected service on him.
** The District Court found that the amended complaint “merely
restates in more lengthy fashion the substance of the SEC’s initial
complaint” (A34). (References bearing the prefix “A” refer to the
pages of the appendices to this petition.) Unless otherwise noted,
only the allegations of the amended complaint will be discussed.
4
formed by the Province of Manitoba to promote industrial
and regional development in that foreign province. The
nature of the alleged fraud was identical in both counts
of the amended complaint: the MDF was fraudulently
induced to enter into investment contracts with two non-
public companies which had agreed to develop parts of
the complex, defendant Churchill Forest Industries (Mani-
toba) Ltd. (‘‘CF1’’), a privately-owned Manitoba corpo-
ration (Count I), and defendant River Sawmills Com-
pany (‘‘River’’), a privately-owned Delaware corporation
(Count II). The investment contracts involved deben-
tures of both CFI and River, acquired by MDF pur-
suant to a formula under which MDF purchased a certain
amount of debentures for each dollar of equity capital in-
vested in CFI and River. The alleged wrongdoing, in es-
sence, involved misrepresentations concerning the amount
of equity capital actually invested, the non-independent re-
lationship of various of the parties involved in the develop-
ment, and the use made of monies invested by the MDF.
The amended complaint made clear that the essence of
this alleged fraud took place in Manitoba: the MDF, a
Manitoba government corporation, was the only allegedly
defrauded party, and it received the CFI and River deben-
tures in Manitoba in exchange for funds paid by it in
Manitoba. The SEC expressly conceded that the alleged
fraud had no effect in the United States (A24 n.1).
There were three trust indentures and four written
agreements relevant to the debentures purchased by the
MDF. All three trust indentures were executed in Mani-
toba or Italy, and each contained a provision that it was
to be construed in accordance with Manitoban law. The
5)
amended complaint expressly alleged that three of the
four agreements referred to therein were executed in Eu-
rope; no allegation was made as to the fourth except that
it was ‘‘caused’’ to have been entered into in the United
States. Three of these four agreements, including the latter
one, expressly provided that they were to be construed in
accordance with Manitoban law; a fourth agreement did not
contain a choice-of-law provision, although it expressly pro-
vided that ‘‘where sums of money are mentioned in this
Agreement, they shall always mean Canadian funds pay-
able at par in the City of Winnipeg in the Province of
Manitoba.’’
Notwithstanding the absence of effect in the United
States, the consummation of the purchase and payment
therefor in Canada, and the Manitoban choice-of-law pro-
visions in controlling documents, the SEC sought to invoke
United States jurisdiction on the basis of allegations of
miscellaneous acts in the United States, including: negotia-
tion of agreements; making of misrepresentations; use of
United States mail; transmittal to the United States by de-
fendants of proceeds they received in Canada; transmittal
of funds from the United States to Canada; and the main-
tenance of books and records in the United States.
Defendants moved to dismiss for lack of subject matter
jurisdiction; for the purposes of that motion, the factual
allegations of the complaint were taken as true.
The original complaint was dismissed by the District
Court for lack of subject matter jurisdiction on March 11,
1975, with leave granted to file an amended complaint. The
court found that this action ‘‘involves essentially foreign
transactions without impact in this country”’’ and that ‘‘the
6
essentially foreign nature of the transactions here at issue
is not materially altered by the various miscellaneous acts
allegedly committed locally in furtherance of the scheme’’
(A32).
The SEC then filed its amended complaint, which was
also dismissed by the District Court for lack of subject
matter jurisdiction on November 17, 1975. The District
Court stated that the denial of jurisdiction in this action
was consistent with the recent decisions of the Court of
Appeals for the Second Cireuit in IJT v. Vencap, Ltd., 519
F.2d 1001 (1975), and Bersch v. Drexel Firestone, Inc., 519
F.2d 974, cert. denied sub nom. Bersch v. Arthur Andersen
é Co., 423 U.S. 1018 (1975).
On January 14, 1977, the Court of Appeals for the Third
Circuit reversed the decision of the District Court. The
Court of Appeals, while noting the lack of impact of the
alleged fraud on American investors or domestic securities
markets, sustained jurisdiction on the ground that ‘‘the
federal securities laws do grant jurisdiction in trans-
national securities cases where at least some activity de-
signed to further a fraudulent scheme occurs within this
country’’ (AQ).
Reasons for Granting the Writ
As hereinafter discussed, each of the following bases
warrants granting this petition: conflict among the circuits ;
conflict with relevant decisions of this Court; and, to the
extent it is held that no prior decision of this Court
has decided the issue, this petition presents an important
question of law not yet determined by this Court.
A. Conflict Among the Circuits
In holding here that ‘‘the federal securities laws do
grant jurisdiction in transnational securities cases where
at least some activity designed to further a fraudulent
scheme occurs within this country’’ (A9), even though
the alleged fraud was addressed only to a foreign govern-
mental entity, was consummated outside the United States
and was concededly without impact on American investors
or American securities markets, the Third Circuit conflicts
with prior decisions of every circuit court—the Second,
EKighth and Ninth—and numerous district courts which
have decided this issue.
1. Second Circuit Decisions
The Second Circuit’s most recent decisions on this issue
were in two opinions, issued on the same day, in Bersch v.
Drexel Firestone, Inc., 519 F.2d 974 (2d Cir.), cert. denied
sub nom. Bersch v. Arthur Andersen & Co., 423 U.S. 1018
(1975), and JIT v. Vencap, Ltd., 519 F.2d 1001 (2d Cir.
1975).
The Second Circuit’s decisions in Bersch and IIT conflict
with the Third Circuit’s here, since the Second Circuit re-
jected the concept—on which the Third Circuit relied here
—that subject matter jurisdiction exists over sales of secu-
rities to foreigners abroad, whenever, to quote the Third
Circuit’s opinion, ‘‘at least some activity designed to fur-
ther a fraudulent scheme occurs within this country.’’
Significantly, although the Second Circuit rejected the view
subsequently adopted by the Third Circuit here, the Second
Circuit recognized that even its decisions went beyond prior
holdings on the subject. Thus, the Second Circuit in these
8
opinions expressly stated that (a) prior decisions required
proof of impact on domestic investors or securities markets
in order to sustain jurisdiction (Bersch, 519 F.2d at 987
n.29); (b) both Bersch and IIT claim to ‘‘extend . . . the ap-
plication of the securities laws to transnational transactions
beyond prior decisions’’ (J/T, 519 F.2d at 1018; see also
Bersch, 519 F.2d at 987); (c) the court was ‘‘unable’’ to
‘*point to language in the statutes, or even in the legislative
history, that compelled’’ the court’s extension of jurisdic-
tion (Bersch, 519 F.2d at 993) ; (d) ‘‘reasonable men might
conclude that [jurisdictional] coverage’’ was less than was
outlined in the two opinions (Bersch, 519 F.2d at 993); and
(e) LIT was ‘‘sui generis’’ (IIT, 519 F.2d at 1019).
Analysis of the facts in Bersch demonstrates its conflict
with the Third Circuit here. The Bersch court noted the
existence of numerous acts committed within the United
States, of a nature substantially similar to those alleged
in the amended complaint here: meetings ‘‘in New York on
numerous occasions to initiate, organize and structure”’ the
fraudulent offering; retention of a New York law firm which
‘‘had numerous meetings’’; retention of New York account-
ants; drafting and delivery of drafts of the fraudulent rep-
resentations in New York; and ‘‘accounts for the proceeds
of the’’ fraud ‘‘were opened at the Bank of New York and
the proceeds in dollars were to be deposited there’’ (519
F.2d at 985 n.24). The Bersch court even assumed ‘‘there
was some mailing... into the United States’’ of the fraud-
ulent misrepresentations ‘‘and some reliance on them’’
(Id. at 991).
Despite these numerous acts within the United States,
the Second Circuit in Bersch denied subject matter juris-
9
4
diction in so far as the fraud involved ‘‘sales of securities
to foreigners outside the United States’’ (519 F.2d at 993).
It did so by establishing three tests for subject matter juris-
diction dependent on the citizenship and situs of the al-
legedly defrauded party: (1) federal jurisdiction exists
over ‘‘sales of securities to Americans resident in the
United States whether or not acts ... of material im-
portance occurred in this country’’; (2) federal jurisdiction
exists over losses from ‘‘sales of securities to Americans
resident abroad if, but only if, acts . . . of material im-
portance in the United States have significantly contributed
thereto’’; and (3) federal jurisdiction does not exist over
losses from ‘‘sales of securities to foreigners outside the
United States unless acts . . . within the United States
directly caused such losses.’’ Jd. at 993. Viewed against
that third test for sales of securities to foreigners abroad
(the only test relevant here), the Second Circuit found the
various miscellaneous acts within the United States—even
more significant than those present here—did not ‘‘directly
eause’’ the losses, and thus were insufficient to sustain
jurisdiction. The Second Circuit therefore reversed the
lower court’s decision that there was jurisdiction as to
such plantiffs.*
* Bersch involved an offering of stock in a Canadian corporation,
via American and foreign brokers, to Americans and foreigners living
abroad and, apparently, Americans residing in the United States.
The Second Circuit held that the various acts within the United
States were sufficient to sustain jurisdiction over sales to Americans
both in the United States and abroad, but insufficient on sales to
foreigners abroad—i.e., these acts within the United States were of
“material importance” that “significantly contributed” to the losses
(the test on sales to Americans abroad), although they did not
“directly cause” the losses (the test on sales to foreigners abroad).
Here, while finding it unnecessary to decide the issue, in view of its
very broad holding on jurisdiction, the Third Circuit questioned
“whether it can be convincingly maintained that [miscellaneous] acts
within the United States did not directly cause any extraterritorial
losses” (A12).
10
Significantly, the Second Circuit quoted with approval
the following portion of Investment Properties Interna-
tional, Lid. v. 1.0.8., Ltd., [1970-71] CCH Fed. Sec. L. Rep.
793,011 (S.D.N.Y. 1971), aff’d on expedited appeal without
opinion (Docket No. 71-593, 2d Cir. 1971)—-which is directly
contrary to the Third Circuit’s opinion here:
‘Tf there is no such domestic impact from a sub-
stantially foreign transaction, United States courts
have no reason to become involved, and compelling
reason not to become involved, in the burdens of en-
forcement and the delicate problems of foreign rela-
tions and international economic policy that extra-
territorial application may entail.’’ Jd. at p. 90,735
(emphasis in original).
The JIT decision, issued by the same Second Circuit
panel simultaneously with the Bersch decision, must be
presumed to be consistent with Bersch. While IIT is less
elucidating of the Second Circuit position, both because the
Second Circuit described that case as ‘‘suwi generis’’ and
found the record incomplete, thus requiring a remand to
fill that void, that opinion, too, contains language in conflict
with the Third Circuit’s holding here. Thus, the J/T
opinion states that subject matter jurisdiction is not created
merely because preparatory acts occurred in the United
States (519 F.2d at 1018). Further, the J7T opinion empha-
sized that ‘‘the securities laws are not to apply in every in-
stance where something has happened in the United
States’’; rather, the determination must take into account
how ‘‘large the gap between the something and a consum-
mated fraud’’ and how ‘‘negligible the effect in the United
States or on its citizens.’’ [bid. (emphasis added). And the
a
11
IIT opinion expressly labels as ‘‘weak with respect to sub-
ject matter jurisdiction,’’ an alleged fraud against ‘‘a highly
sophisticated [foreign] investor, advised by experienced
counsel ... [who] had participated to some extent in the
drafting’’ of the agreements (id. at 1011-12)—exactly what
is alleged here and yet held sufficient for jurisdiction by the
Third Circuit.
Both prior Second Circuit decisions and subsequent
decisions by district courts in that circuit support the con-
clusion that the Second Circuit’s view conflicts with the
Third Circuit’s holding that jurisdiction exists over ‘‘trans-
actional securities cases where at least some activity de-
signed to further a fraudulent scheme occurs within this
country.’’
For example, in Leasco Data Processing Equipment
Corp. v. Maxwell, 468 F.2d 1326 (2d Cir. 1972), the Second
Circuit indicated that ‘‘some activity’’ within the United
States is insufficient to support jurisdiction, by stating that
jurisdiction would not exist if foreign businessmen ‘‘met
in New York for convenience and”’ one foreign businessman
‘‘fraudulently induced the [other] to make purchases of
[foreign] securities’ in other countries. Jd. at 1338.
Further, the Second Circuit explained there that jurisdic-
tion over a sale of securities consummated abroad could
not be based solely on domestic activities involving mis-
representations in the United States, meetings in, telephone
calls to and from, and mailings to and from the United
States, and the execution of the contract of sale in the
United States. Rather, jurisdiction was upheld there only
12
because such activities within the United States were com-
bined with impact on domestic investors.*
A Second Circuit district court opinion following Bersch
and J/T demonstrates a continued rejection of the view that
*‘some activity’’ in the United States is sufficient for juris-
diction. Thus, in F.0.F. Proprietary Funds Ltd. v. Arthur
Young € Co., 400 F.Supp. 1219 (S.D.N.Y. 1975), the court,
relying on Bersch and IIT, denied subject matter jurisdic-
tion over an alleged securities fraud, despite substantial
conduct in the United States, including drafting of the
misrepresentations, making of the decision to sell the securi-
ties, making of decisions as to use of proceeds of the alleged
fraud, and sales activities. The court recognized that the
activity in the United States would permit the conclusion
that the defendants ‘‘operating from the United States, al-
legedly devised and carried out a scheme to sell debentures
issued and guaranteed by American companies.’’ Id. at
1222. Yet, looking to the essentials of the transaction, the
* Other decisions by the district courts in the Second Circuit, prior
to Bersch and IIT, rejected the “some activity” test on which the
Third Circuit decision here rests. For example, in Kook v. Crang,
182 F.Supp. 388, 390 (S.D.N.Y. 1960), the court denied jurisdiction
despite use of United States mail and telephone, and other domestic
activity, since the “essentials of [the] transactions’”—the place where
the binding commitment was made and where the exchange of
securities for money occurred—were in Canada. Accord, Sinva, Inc.
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 F.R.D. 385
(S.D.N.Y. 1969) (jurisdiction denied since essentially foreign trans-
action despite defendant’s arranging for and obtaining payment in
New York ; see prior opinion at 253 F.Supp. 359, 367) ; Selzer v. The
Bank of Bermude, Ltd. [1974-75] CCH Fed. Sec. L. Rep. $94,876 at
p. 96,996 (S.D.N.Y. 1974) (extraterritorial jurisdiction requires both
“some significant connection in the violations with the United States”
and that “the effects of the violations are detrimental to American in-
vestors”’) ; Manus v. The Bank of Bermuda, Ltd., [1971-72] CCH
Fed. Sec. L. Rep. $93,299 (S.D.N.Y. 1971); Finch v. Marathon
Securities Corp., 316 F.Supp. 1345 (S.D.N.Y. 1970); Investment
Properties Int'l, Ltd. v. 1.0.S., Ltd., supra.
13
court dismissed the complaint for lack of jurisdiction since
the debentures, which were the subject of the alleged fraud,
‘‘were offered only to purchasers outside the United States
... and were issued to raise capital for foreign investment.”’
Id. at 1223. The controlling fact was that the conduct di-
rectly causing the loss—the sale of the debentures, based on
information communicated to the purchasers—occurred out-
side the country; all other acts of ‘‘operating’’ from, and
‘‘devis[ing] and carr[ying] out [the] scheme’’ in, the
United States, were held to be ‘‘ ‘mere preparation’ of the
fraud’’ which, the court held, under J/7, cannot sustain
subject matter jurisdiction. Jd. at 1222-23. The Third Cir-
cuit here, on substantially identical facts—an alleged fraud,
only part of which was allegedly devised in and carried out
from the United States, involving the sale of debentures
abroad to a foreign entity in order to raise capital for
foreign investment—reached a diametrically opposite re-
sult, indicating the clear conflict between the two circuits.”
2. Eighth Circuit Decision
The Eighth Circuit, in Travis v. Anthes Imperial Ltd.,
473 F.2d 515 (8th Cir. 1973), indicated that ‘‘some activity”’
in the United States was not sufficient to create subject
matter jurisdiction; rather, it held, both domestic impact
and ‘‘significant conduct’’ (id. at 524) in the United States
* The Third Circuit recognized that its decision here was not con-
sistent with the holdings in //T and Bersch. While calling [JT “more
supportive of subject-matter jurisdiction here” (A8), it noted that
IIT expressly denied that jurisdiction would exist merely because
some activity occurred in the United States, where that activity was
“mere preparatory activit[y]” as distinguished from the ration
of fraudulent acts themselves” (A10). And as to Bersch, the Third
Circuit conceded Bersch was contrary in denying jurisdiction where
the purchasers were foreigners living abroad (A11-12).
14
were required. The Travis court found domestic impact due
to the ‘‘substantial’’ effect on the value of the stock held by
Americans resident in the United States. Jd. at 528. In
sustaining jurisdiction, it quoted with approval from the
Second Circuit decision in Leasco, that ‘‘the scales are
tipped in favor of’’ subject matter jurisdiction ‘‘ because
misrepresentations were made in the United States.’’ Id.
at 526. Obviously, such ‘‘tipp[ing] in favor of jurisdic-
tion’’ involves the combination of two factors—domestic
impact and domestic conduct—neither one by itself being
sufficient for jurisdiction. For if the misrepresentations
within the United States were sufficient by themselves to
sustain jurisdiction, the Travis court would not have been
required to discuss the domestic impact, and the opinion
could have been limited to a one-sentence reference to the
domestic conduct. Indeed, the Travis court’s holding that
‘‘some activity’’ within the United States is not sufficient is
made clear in its statement that jurisdiction would not have
existed in that case if, instead of the consummation—the
purchase of stock in a Canadian corporation—having oc-
curred in the United States, the ‘‘ American citizens [had]
gone to Canada and purchased [the] stock.’’ 7d. at 528.
3. Ninth Circuit Decisions
In an enforcement action brought by the SEC against
a Delaware corporation, the Ninth Circuit refused to rely
solely on admitted use of interstate commerce facilities to
sustain jurisdiction, preferring instead to ‘‘focus .. . upon
{[defendants’] activities within the United States and the
impact of those activities upon American investors.’’ Se-
curities and Exchange Commission vy. United Financial
15
Group, Inc., 474 F.2d 354, 356-57 (9th Cir. 1973) (emphasis
added).*
The Ninth Cireuit’s view that extraterritorial jurisdic-
tion over an essentially foreign fraud exists only if a
domestic impact is shown was reiterated in a decision
rendered only ten days after the Third Circuit’s decision
here. Des Brisay v. The Goldfield Corp. [Current] CCH
Fed. Sec. L. Rep. 95,868 (9th Cir. 1977). Although some
activity in furtherance of the alleged fraud occurred in the
United States, the Ninth Circuit ignored such conduct as a
basis for jurisdiction, relying instead on the fact that the
fraud had ‘‘an adverse impact on domestic securities mar-
kets’’ since the stock involved was listed on the American
Stock Exchange (id. at p. 91,193). Significantly, the Ninth
Circuit felt compelled to distinguish Bersch v. Drexel Fire-
stone, Inc., supra, where jurisdiction was not upheld over a
fraud in so far as it involved sales of securities to foreign-
ers outside of the United States, on the ground that, since
the stock in Bersch was not ‘‘listed on an American securi-
ties exchange,’’ there was no domestic impact (id. at p.
91,194 n.4). Application of the Ninth Circuit reasoning
in Des Brisay to the instant facts, where the absence of
domestic impact is conceded by the SEC, would result in
a finding that no jurisdiction exists here—directly contrary
to the Third Circuit’s holding.
* The SEC had urged that the mere use of the facilities of inter-
state commerce would sustain jurisdiction. The Ninth Circuit found
it unnecessary to decide that contention, preferring instead to rest
its decision on the combination of domestic activity and domestic im-
pact.
16
4. Other District Court Decisions
While no other circuit court has considered this issue,
decisions of other district courts heighten the need for this
Court to determine the conflict of holdings caused by the
Third Circuit in this action.
In Securities and Exchange Commission v. Gulf Inter-
continental Finance Corp., 223 F.Supp. 987 (S.D. Fla.
1963), the court did not base jurisdiction on the use of
United States mails, but upheld jurisdiction over a mainly
Canadian sale of securities by a Canadian corporation
organized by United States citizens, due to finding domestic
impact of misrepresentations to American citizens in the
United States. Id. at 994, 995.
For other district court opinions in conflict with the
Third Cireuit’s decision here, see Securities and Ex-
change Commission vy. Capital Growth Co., S.A. (Costa
Rica), 391 F. Supp. 593, 597 (S.D.N.Y. 1974) (jurisdiction
exists if there was ‘‘significant conduct’’ in the United
States or ‘‘extraterritorial conduct which was harmful to
and which had an impact upon United States investors’’) ;
Garner v. Pearson, [1973-74] CCH Fed. See. L. Rep. 94,549
at p. 95,906 (M.D. Fla. 1974) (jurisdiction found because
fraud had a ‘‘significant impact on American investors’’) ;
Selas of America (Nederland) N.V.v. Selas Sorp. of Amer-
ica, 365 F.Supp. 1382, 1386 (E.D.Pa. 1973) (jurisdiction
upheld where ‘‘sufficient conduct took place within the
U.S.’’ and the transaction had ‘‘significant impact on
American securities markets’’) ; United States v. Clark, 359
F.Supp. 131 (S.D.N.Y. 1973) (jurisdiction upheld because of
‘‘substantial detrimental effects on the interests of Amer-
ican investors’’). See also the cases cited at pp. 12-13 supra.
17
Significantly, prior to the Third Circuit’s decision in
this action, but after the Second Cireuit’s opinions in IIT
and Bersch, another district court within the Third Cireuit
dismissed a securities fraud complaint for lack of subject
matter jurisdiction despite activity within the United
States, including defendants’ obtaining payments in the
United States, and plaintiffs’ accompanying defendants’
salesmen to the United States to make withdrawals from a
United States bank to pay for an additional purchase.
Recaman vy. Barish, 408 F.Supp. 1189 (E.D. Pa. 1975).
5. Summary
The Third Circuit decision here is in conflict with every
prior decision of other circuits and with numerous prior
decisions of district courts. This conflict, created by the
decision below, should be resolved by this Court.*
B. Conflict With Decisions of This Court
While the present issue has not been expressly posed to
this Court, prior decisions of this Court, both in a recent
decision in which this issue was implicitly decided and in
* Interestingly, the Third Circuit itself, as recently as 1975, stated
that a “long series of Supreme Court cases has held that before a
jurisdiction can seek extraterritorial application of its laws, it must
have a substantial interest in the party whom the statute seeks to pro-
tect. . . . Where no such overwhelming interest in the parties
is present, however, the Supreme Court has refused to allow the
extraterritorial application of a local statute. In Lauritzen v. Larsen
345 U. S. 571 . . . (1952), the Supreme Court overturned a trial
court’s application of the Jones Act to a Danish seaman injured in
Cuban waters who had signed an employment contract in an American
port. Accord, Home Ins. Co. v. Dick, 281 U.S. 397 . . . (1929).”
is) v. Richardson-Merrell, Inc., 508 F.2d 28, 39 n.25 (3d Cir.
18
decisions on extraterritorial jurisdiction of other statutes,
conflict with the Third Circuit’s decision in this action.
The issue of the extraterritorial jurisdiction of the
securities acts, while not expressly posed, implicitly had to
have been decided by this Court in Scherk v. Alberto-
Culver Co., 417 U.S. 506 (1974), where the defendant, rely-
ing on a pre-dispute arbitration agreement, had sought to
stay a securities fraud action pending arbitration. Pre-
viously, in Wilko v. Swan, 346 U.S. 427 (1953), this Court
had held that a lawsuit within federal securities acts juris-
diction may not be stayed for arbitration. Hence, a deter-
mination whether federal securities acts jurisdiction existed
over the transaction alleged in Scherk was crucial to the
motion to stay the court action pending arbitration.*
This Court recognized that the transactions in Scherk
involved substantial activity within the United States, in-
cluding the conducting of negotiations in the United States
(td. at 508) and the making of ‘‘fraudulent representations
and omissions . . . within the jurisdiction of the United
States’ (id. at 522; dissent). However, looking to the
essentially foreign nature of the transaction, ‘‘a truly in-
ternational agreement,’’ the subject matter of which con-
cerned investments ‘‘primarily situated in European coun-
tries’’ (id. at 515), with an impact on foreign business, not
_ * The district court in Scherk had held that securities acts juris-
diction existed on the dispute and thus stayed the arbitration, sistas
on Wilko v. Swan, and denied a motion to dismiss for lack of subject
matter jurisdiction. While the arbitration stay was immediately ap-
pealable, the denial of the motion to dismiss obviously was not, and
therefore the “contention” that “the complaint be dismissed because
the federal securities laws do not apply to this international transac-
tion, cf. Leasco Data Processing Equipment Corp. v. Maxwell, 468
F.2d 1326 (CA2 1972) .. . [was] not before this Court.” Scherk y
Alberto-Culver Co., 417 U.S. at 516 n.9.
19
domestic securities markets, this Court refused to stay
arbitration, thus implicitly finding that there was no subject
matter jurisdiction. To paraphrase this Court’s recitation
of the criteria in Scherk, id. at 515, here too:
the negotiations leading to the signing of the contract
... took place in the United States, Switzerland and
Italy, among other countries. ... Most significantly,
the subject matter of the contracts concerned a Cana-
dian provincial government entity’s purchase of de-
bentures to finance the development of a forestry
complex situated in Canada.
Yet, despite these almost identical facts, the Third Circuit
held here that the securities acts were applicable, while this
Court in Scherk implicitly decided to the contrary.
Interestingly, the dissent in Scherk, which believed that
the arbitration should have been stayed because the dispute
was within securities acts jurisdiction, recognized that some
conduct within the United States, by itself, could not sus-
tain §10(b) jurisdiction. Thus, the dissent stated that
‘<(fJederal jurisdiction under the 1934 Act will attach only
to some international transactions.’’ Id. at 534 (emphasis
added). The elements noted by the dissent which, when
added to conduct within the United States, would establish
§10(b) jurisdiction are ‘‘defrauded American investors’’
(id. at 529) and ‘‘economic impact of the alleged fraud...
within the United States’’ (id. at 529-30 n.8)—neither of
which exists here.
In opinions on the analogous issue of extraterritorial
jurisdiction of other federal statutes, this Court has held
that ‘‘some conduct’’ within the United States is insufficient
to sustain jurisdiction in the absence of domestic impact.
20
In Foley Bros., Inc. v. Filardo, 336 U.S. 281 (1949),
this Court, before considering the extraterritorial jurisdic-
tion of the specific federal statute there involved, made the
general observation, applicable to all federal legislation,
that all federal statutes were to be construed ‘‘to apply
only within the territorial jurisdiction of the United
, States, . . . based on the assumption that Congress is
primarily concerned with domestic conditions.’’ Jd. at 285.
Then, this Court turned to the specific issue there involved:
the applicability of the eight-hour law to the employment of
an American citizen by an American contractor on a foreign
construction project. There was no dispute that the plain-
tiff American citizen employee had contracted in the
United States for such employment before traveling from
the United States to the foreign construction project, and
that the relevant written document had been executed in
the United States. Yet, since performance was to be
abroad, this Court held that it was an essentially foreign
transaction over which no subject matter jurisdiction
existed. _
This Court relied on impact within the United States
—not just conduct within the United States—in upholding
subject matter jurisdiction of the antitrust laws over mul-
tinational transactions. In United States v. Sisal Sales
Corp., 274 U.S. 268 (1927), the defendants, Mexican and
American corporations, were charged with restraining the
importation of sisal from Mexico to this country. The con-
spiracy was entered into in the United States and acts in
furtherance of the conspiracy took place in the United
States and Mexico. Jurisdiction was upheld because acts
took place in this country which ‘‘brought about forbidden
21
results within the United States.’’ Jd. at 276. See also
Thomsen v. Cayser, 243 U.S. 66 (1917).
In Lauritzen v. Larsen, 345 U.S. 571 (1953), this Court
refused to extend the application of the Jones Act to a for-
eign seaman injured on a foreign ship in foreign waters,
even though the employment contract had been signed in
the United States. Cf. New York Central R. Co. v. Chis-
holm, 268 U.S. 29 (1925) (this Court refused to apply
the Federal Employers’ Liability Act extraterritorially
where an American employee of an American railroad was
killed in Canada on board a New York-Montreal train).
In McCulloch v. Sociedad Nacional de Marineros de Hon-
duras, 372 U.S. 10 (1963), this Court held that the National
Labor Relations Act did not apply extraterritorially. In
that case, an American union sought to invoke provisions
of the Act against a foreign ship, owned by a foreign sub-
sidiary of an American company, manned by foreign sea-
men represented by a foreign union; the ship travelled
regularly between Central American and United States
ports. While noting that Congress could have constitu-
tionally extended the Act to foreign ships while in Amer-
ican waters, this Court held that Congress intended the Act
to protect American workers only and was inapplicable to
foreign workers. See also Benz v. Compania Naviera Hi-
dalgo, S.A., 353 U.S. 188 (1957), for the same result con-
cerning the Labor Management Relations <Act.
These prior decisions of this Court required something
more than ‘‘some’’ conduct within the United States to sus-
tain subject matter jurisdiction—they required domestic
impact as well.* Indeed, as quoted supra, p. 17n., the Third
* This Court has mandated the same prerequisite to the extra-
territorial application by a state of its statutes to multi-state activity.
See, e.g., Strassheim v. Daily, 221 U.S. 280 (1911) ; Watson v. Em-
ployers Liability Assurance Corporation, Ltd., 348 U.S. 66 (1954).
22
Cireuit itself recognized that a ‘‘long series of Supreme
Court eases has held’’ that extraterritorial jurisdiction does
not exist unless the jurisdiction seeking such extraterrito-
rial application of the law in question has ‘‘a substantial
interest in the party whom the- statute seeks to protect.’’
Henry v. Richardson-Merrell, Inc., supra, 508 F.2d at 39
n.25. Yet, by upholding jurisdiction here, on the basis of
‘‘some activity’’ within the United States, over a transac-
tion without any domestic impact, the Third Cireuit has
ignored and decided contrary to the ‘‘long series of Su-
preme Court cases’’ referred to in //enry and which are
discussed above.
C. Important Question Not Yet Decided by This Court
We believe, as discussed in the preceding portion of this
petition, that this Court has implicitly decided the issue here
involved, contrary to the Third Cireuit’s decision in this
action. If this Court believes that its prior decisions did
not definitively decide the issue of the extraterritorial
jurisdiction of the federal securities acts, we believe this
important question should now be decided by this Court.
This issue is one that is arising with increasing fre-
quency in our courts. In part, this is due to what this
Court has recognized to be the increasingly international
character of the American economy :
‘‘For at least two decades we have witnessed an
expansion of overseas commercial activities by business
enterprises based in the United States. The barrier of
distance that once tended to confine a business concern
to a modest territory no longer does so.’’ The Bremen
v. Zapata Off-Shore Co., 407 U.S. 1, 8 (1972).
With this increase in international transactions by Amer-
icans has come an increase in allegations of wrongdoing,
23
including securities frauds, by Americans. Since the first
reported decision on the extraterritorial scope of the fed-
eral securities laws in 1960, Kook v. Crang, supra, the num-
ber of such decisions has markedly increased, almost in geo-
metric proportions.
The Director of the SEC’s Enforcement Division has
been quoted as saying that the Third Circuit’s decision here
is ‘‘ ‘extremely important’ for the agency and would help
it pursue ‘a 11umber of other cases’ where foreign investors
allegedly were defrauded by U.S. citizens.’’ Wall Street
Journal, January 21, 1977, at 4, col. 3.
The question ‘‘whether Congress would have wished the
precious resources of United States courts and law en-
forcement agencies to be devoted to’’ protecting foreign
investors in cases where there is no impact on the United
States (Bersch v. Drexel Firestone, Inc., supra, 519 F.2d at
985) is an important question which should be decided by
this Court at this time.*
* This issue is ripe for decision now, despite the fact that it arises
on a motion to dismiss and the case has been remanded for pre-trial
proceedings and a trial. No factual findings are required since, for
urposes of the motion to dismiss, no dispute exists on the relevant
acts: the identity of the sole injured party, the MDF; the consum-
mation of the allegedly fraudulent transactions abroad; the foreign
purpose for which the proceeds were to be used; the contents of
relevant documents; and the activity involved within the United
States. During oral argument before the Third Circuit, counsel for
both parties expressly stated, in response to a question from the court,
that a remand to obtain additional facts would add no material facts
and that, therefore, the issue was ripe for decision on the present
record. If the Third Circuit’s ruling remains undisturbed, a full trial
would be required; if the decisions of the other circuits and the
ay of prior decisions of this Court were held controlling, dis-
missal of the complaint here without the time and expense of a trial
would be required. Hence, if petitioners are correct in their position
that no subject matter jurisdiction exists, they would be severely
prejudiced by being required to expend substantial amounts of time
and money in preparing for and defending in a trial on the merits,
when that could be avoided by an immediate decision by this Court.
24
Conclusion
For the foregoing reasons, this petition for a writ
of certiorari should be granted.
Respectfully submitted,
GERALD WALPIN
575 Madison Avenue
New York, New York 10022
Attorney for Petitioner
Stephen E. Mochary
Of Counsel:
RosENMAN COLIN FREUND
Lewis & CoHEN
Marc RowIin
and
STEPHEN E. Mocuary
Barry H. GARFINKEL
919 Third Avenue
New York, New York 10022 ES
Attorney for Petitioners APPENDIC
Churchill Forest Industries
(Manitoba) Ltd., Technopulp
Incorporated and Churchill
Pulp Mill Ltd.
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
Dovuc.tas M. Kraus
and
Pitney, Harpin & Kipp
Criyve A. SzvucH
Dickinson R. DEBEVOISE
744 Broad Street
Newark, New Jersey 07102
Attorney for Petitioners
Chester Chastek, James M. Brown, Jr.,
River Sawmills Company and
Blue Construction Corporation
RrKer, DANzIG, SCHERER & DEBEVOISE
ALVIN WEIsS
APPENDIX A
Opinion of the Court of Appeals,
January 14, 1977
UNITED STATES COURT OF APPEALS
For tHe Turrp Circuit
No. 76-1332
- > +l} <> {ee
Securities and Exchange Commission,
Appellant,
v.
Alexander Kasser, Stephen E. Mochary, Tecknopulp In-
corporated, Churchill Forest Industries (Manitoba) Ltd.,
Churchill Pulp Mill Ltd., James M. Brown, Jr., Chester
Chastek, River Sawmills Company & Blue Construction
Corporation, (Defts. in D. C.) Betram Verkaufs-AG, (Addl.
Deft. on cross claim in D. C.)
— a <i
On Appeal from the United States District Court
for the District of New Jers.y (Newark)
Civil Action No. 74-90
Argued November 8, 1976
Before: Apams and Werts, Circuit Judges, and
Foce., District Judge*
OPINION OF THE COURT
(Filed Jan 14 1977)
* Sitting by designation.
A2
Appendia A
Avams, Circuit Judge.
The central issue in this case is whether the Securities
and Exchange Commission (SEC) may invoke the jurisdic-
tion of the federal courts over defendants who have alleg-
edly engaged in fraudulent conduct within the United
States, when the sole victim is a foreign corporation and
when the purported fraud had little, if any, impact within
this country.
I.
For the purpose of this appeal, the allegations of the
amended complaint are deemed to be true and will serve
as the factual base with which to resolve the jurisdictional
issues raised here.’ Inasmuch as the district court aptly
summarized the facts proffered by the pleadings, we need
not narrate them at length.? Rather, we shall outline only
those facts that are necessary for our decision.
Basically, the SEC avers that the defendants engaged in
a scheme to defraud and make misrepresentations to the
Manitoba Development Fund (‘‘Fund’’) with respect to the
purchase and sale of various securities, including invest-
ment contracts, debentures and stock, both preferred and
common. The Fund, the sole victim of the fradulent con-
duct, is a corporation wholly owned by the Province of
Manitoba, Canada. It was formed to interest private enter-
prise in the creation of a forestry development in that
province.
1. See Lasher v. Shafer, 460 F.2d 343, 344 (3d Cir. 1972);
org | v. Budzanoski, 457 F.2d 1245, 1249 (3c Cir.), cert. denied,
409 U.S. 853 (1972).
2. The opinion of the district court is reported at 391 F. Supp.
1167 (D.N.J. 1975). That opinion was wriiten in connection with
the dismissal of the original complaint. The aniended complaint,
filed by leave of the district court, also was dismissed in an opinion
that is unreported. For the text of the unreported opinion, see Ap-
pendix at 264-70. The basis for the dismissais of both complaints is
exactly the same—to wit, a lack of subject-matter jurisdiction over
the securities fraud alleged to have been devised by the defendants.
ee ee ee ee
A3
Appendix A
According to the SEC, Kasser and his co-defendants in-
duced the Fund to enter into investment contracts with and
acquire debentures of two defendant corporations, Church-
ill Forest Industries (‘‘CFI’’) and River Sawmills Com-
pany (‘‘River’’). These two corporations as well as sev-
eral others involved in the allegedly fraudulent dealings
were largely owned and dominated by Kasser. While CFI
was a Canadian corporation with offices in Montclair, New
Jersey, River was a Delaware corporation with offices at the
same location. Apparently, the Fund entered into the con-
tracts and acquired the debentures based on false repre-
sentations that Kasser and his associates, or corporations
that they controlled, had invested and would invest capital
in equity securities of CFI and River over and above the
proceeds obtained from debenture sales to the Fund.
Under the investment contracts, the Fund was to make
loans to CFI and River in exchange for the debentures.
Each loan disbursement would be granted only upon certifi-
cation that the defendants or their controlled corporations
had effected the required equity investments. Both the
loans and the equity proceeds were to be spent to establish
the forestry development. However, the defendants never
made, nor did they intend to make, the equity investments.
Instead, they recirculated the proceeds of the loans and
debenture transactions in a ‘‘ponzi’’-like scheme: the de-
fendants made the purported equity investment not with
additional capital but with the very money previously made
available by the Fund.
The fraud was implemented, in part, by ‘*iaundering”’
the Fund’s loan disbursements through various corpora-
tions and bank accounts in the United States, Canada, and
Switzerland. Over several years, the Fund invested rough-
ly $45,000,000 in debt securities issued by CFI and River,
and these payments were made, it is asserted, because of
continuous misrepresentations to and concealment of mate-
A4
Appendix A
rial facts from the Fund. The defendants falsely repre-
sented that substantial equity capital had been invested in
CFI and River and spent for development of the forestry
complex. Moreover, they diverted much of the money in-
vested in CFI and River to their own personal use. As a
result, CFI and River have become bankrupt.
Transnational in character, the fraudulent transactions
arranged by the defendants spanned at least two continents.
But it is clear that a number of acts were committed within
the United States. In its opinion, the district court ex-
pressly noted that the following conduct had occurred in
this country: (1) various negotiations; (2) execution of
one of the investment contracts in New York; (3) utilization
of the instrumentalities of interstate commerce (e.g., tele-
phones and mails) to further the scheme; (4) incorporation
of defendant companies in the United States, or at least the
establishment of corporate offices; and (5) use of the New
York office of a Swiss bank as a conduit for moneys received
from the Fund.* Other activities taking place within the
United States, according to the complaint but not mentioned
by the district court, include (1) the maintenance of books
and records in this country; (2) drafting of agreements
executed elsewhere ;° and (3) transmittal of proceeds from
the transactions to and from the United States.* In short,
there was significant conduct which formed part of the
defendants’ scheme that did oceur within this country.
By contrast, it is questionable whether any effect in the
United States was wrought by the alleged fraudulent ac-
tivities of the defendants. The SEC really does not claim
that there was any such effect. Apparently, none of the
3. 391 F. Supp. at 1176.
a See Amended Complaint at 7, 23-25 (Appendix at 129, 145-
5. See, e.g., Amended Complaint at 9-15 (Appendix at 131-37).
6. See, e.g., Amended Complaint at 19-20 (Appendix at 141-42).
ee ee ae
A5
Appendix A
securities was traded on any American exchange, nor did
such sales have any measurable impact on domestic mar-
kets. In addition, no sale was made to any resident or
citizen of this country, the sole victim of the defendants
being the Fund, a Canadian corporation.
The SEC brought this action in the New Jersey district
court, alleging that the defendants, individual and corpo-
rate, violated various antifraud provisions of the Securities
Act of 1933 and the Securities Exchange Act of 1934.’ It
sought injunctions against any further violations as well as
ancillary relief. However, the district court dismissed the
complaint with prejudice, holding that it lacked subject-
matter jurisdiction over the alleged fraud. The SEC then
filed the present appeal in this Court.
Since we believe that a district court does have jurisdic-
tion in an SEC suit for injunctive relief under the federal
securities laws, given circumstances such as are presented
here, we reverse and remand.
Il.
In dismissing the SEC’s complaint for injunctive relief,
the district court concluded that it lacked subject-matter
jurisdiction over the alleged fraudulent activities. That
court bottomed dismissal on the ground that the claimed
fraud entailed ‘‘essentially foreign transactions without
impact in this country.’** The district judge reasoned that
7. The SEC contends that the defendants violated §17(a) of the
Securities Act of 1933, 15 U.S.C. §77q(a) ; §10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. §78j(b) ; and Rule 10b-5, 17 CFR
240.10b-5, the latter having been promulgated by the SEC pursuant to
§10b of the 1934 Act.
The SEC brought its action under the jurisdictional provisions
of the 1933 and 1934 Acts governing injunctions : §20(b) of the Secu-
rities Act of 1933, 15 U.S.C. §77t(b) and §21 of the Securities Ex-
change Act, 15 U.S.C. §78u.
8. 391 F. Supp. at 1177.
A6
Appendix A
conduct without such effect is insufficient for jurisdiction
to attach. Even though this premise constituted the essence
of its decision to dismiss, the court assumed that conduct
without effect in the United States could give rise to juris-
diction. But the trial judge stated that the intranational
conduct of the defendants here consisted merely of ‘‘miscel-
laneous acts,’ not substantial enough to alter the foreign
nature of the transaction. In their briefs and at oral argu-
ment, defendants in large part adopted the analysis of the
district judge.
Although this case presents a relatively new legal prob-
lem, several opinions already have addressed similar mat-
ters.’° They, and their underlying principles, suggest that
the district court’s position is too restrictive and that juris-
diction should vest.
Just recently, this Court in Straub v. Vaisman & Co.™
considered the jurisdictional aspects of transnational secu-
rities fraud. There, an American broker-dealer engaged in
fraudulent sales of securities to nonresident foreigners. <A
unanimous panel of this Court found jurisdiction under the
1933 and 1934 Acts. Speaking for the panel, Judge Weis
posited that ‘‘[c]onduct within the United States is alone
9. Id. at 1176.
10. Straub v. Vaisman & Co., 540 F.2d 591 (3d Cir. 1976) ; IIT
v. Vencap, Ltd., 519 F.2d 1001 (2d Cir. 1975); Bersch v. Drexel
Firestone, Inc., 519 F.2d 974 (2d Cir.), cert. denied sub nom.
Bersch v. Arthur Andersen & Co., 423 U.S. 1018 (1975), Leasco
Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326 (2d Cir.
1972). See also Travis v. Anthes Imperial, Ltd., 473 F.2d 515 (8th
Cir. 1973).
For commentary discussing some of these cases, see ¢.g., Note,
Extraterritorial Application of §10(b) of the Securities Exchange
Act of 1934—The Implications of Bersch v. Drexel Firestone, Inc.,
and IIT v. Vencap, Ltd., 33 Wasn. & Lee L. Rev. 397 (1976):
Note, American Adjudication of Transnational Securities Fraud, 89
Harv. L. Rev. 553 (1976).
11. 540 F.2d 591 (3d Cir. 1976).
AT
Appendix A
sufficient from a jurisdictional standpoint to apply the fed-
eral [securities] statutes. ...’’!”
It could be argued that Straub differs somewhat from
the case at hand. The stock in the Straub fraud was traded
on an American OTC exchange, unlike the securities here
which were not so traded. Frequently, trading on an ex-
change has helped to undergird findings of jurisdiction in
other transnational fraud cases.'* Where a stock exchange
is involved, courts have found sufficient impact in the United
States to sustain jurisdiction. In addition, there may have
been slightly more conduct in the United States in Straub
than in the present case, for Judge Weis said that the panel
was ‘‘not here faced with a predominantly foreign trans-
action.’’** Despite these possible variations, however,
Straub indicates that jurisdiction does exist in this case.
This is so because Judge Weis flatly proclaimed that con-
duct in this country, standing alone, is enough for jurisdic-
tion to attach under the federal securities laws.”
12. Id. at 595.
In so stating, Judge Weis referred to the Restatement (Second)
of Foreign Relations Law of the United States $17(a) (1965) :
A state has jurisdiction to prescribe a rule of law (a) attaching
legal consequences to conduct that occurs within its territory,
whether or not such consequences are determined by effects of
the conduct outside the territory... .
While §17 speaks to the permissible limits of an exercise of juris-
diction by this country, the Straub panel evidently concluded that
Congress sought to employ its power to a considerable extent where
securities transactions were concerned.
13. See, e.g., Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir.
1968) ; Kook v. Crang, 182 F. Supp. 388 (S.D.N.Y. 1960).
14. 540 F.2d at 595.
15. It should be noted that the district judge rendered both of his
opinions before Straub, and so there may be some question whether
he would have decided the present case as he did had he had the
benefit of the subsequent opinion of this Court.
A8
| Appendix A
Perhaps the leading opinions which have delved into the
problem of jurisdiction in transnational securities fraud
eases are 1JT vy. Vencap, Ltd.’° and Bersch v. Drexel Fire-
stone, Inc.""—Second Circuit decisions written by Judge
Friendly. Of these two cases, J]T is more supportive of
subject-matter jurisdiction here. In JIT, the alleged securi-
ties fraud arose out of negotiations outside the United
States. These negotiations led to the sale in the Bahamas
of preferred stock in Vencap, a Bahamian corporation
whose shares were not traded on any American exchange,
to IIT, a Luxembourg investment trust. While the Second
Circuit intimated that the defendants may well have en-
gaged in sufficient conduct in this country to justify subject-
matter jurisdiction under the Securities Acts,'® the Court
nonetheless remanded for additional findings as to the ex-
tent and nature of the intranational fraudulent activities.
Even so, JIT is quite pertinent to the present appeal.
In suggesting that jurisdiction might exist in JT, Judge
Friendly made several asseverations which are very dam-
aging to the position of defendants here. He expressly
noted that there was ‘‘little factual support for the view
that ‘defendants’] activities had a significant effect in the
United States ... .’"'* Despite the atsence of impact
within the United States, Judge Friendly declared that
jurisdiction still could exist. In so doing, he essentially
rejected the position taken by the defendants in the case
before us, i.e., that substantial or even some impact in this
country is a prerequisite to jurisdiction over extraterri-
torial securities transactions.
16. 519 F.2d 1001 (1975).
17. 519 F.2d 974 (1975).
18. The Court stated, for example that there was “an abundance
of American activity... .” 519 F.2d at 1018.
19. Id. at 1016. (Emphasis added).
A9
Appendix A
As critical as may be the rejection of an ‘‘effect’’ re-
quirement is the following declaration in JIT:
We do not think Congress intended to allow the United
States to be used as a base for manufacturing fraudu-
lent security devices for export, even when these are
peddled only to foreigners. * * * it is hard to believe
that Congress meant to prohibit the SEC from policing
[such] activities within this country... .*°
While the defendants here contend that this language con-
stitutes dicta, it sets forth a sound proposition, and one
which we now adopt.
In our view, the federal securities laws do grant juris-
diction in transnational securities cases where at least some
activity designed to further a fraudulent scheme occurs
within this country. There is nothing in §10(b) or its
companion anti-fraud provisions to thwart their application
to fraudulent transactions when the actual locus of the
harm is outside the territorial limits of the United States.
Indeed, by their own terms, the anti-fraud laws suggest
that such application is proper. The securities acts ex-
pressly apply to ‘‘foreign commerce,’’ thereby evincing a
Congressional intent for a broad jurisdictional scope for
the 1933 and 1934 Acts.” Moreover, §10(b) and its related
provisions seem to be largely concerned with conduct, hav-
20. Id. at 1017.
21. We note, for example, the preambles to both Acts indicate
that they are to apply to transactions in “interstate and foreign com-
merce... .” 48 Stat. 74 (1933); 48 Stat. 881 (1934). Similarly,
the term “interstate commerce” is defined in both enactments as
covering any trade, commerce, transportation and communication
with “any foreign country.” Section 2(7) of the Securities Act of
1933, 15 U.S.C. §77(b) (7) ; §3(a) (17) of the Securities Exchange
Act of 1934, 15 N.S.C. §78c(a)(17). Unfortunately, the legislative
history is silent respecting the jurisdictional scope questions at issue
here.
A10
Appendia A
ing no requirement that accomplishment of the attempted
fraud be a precondition to statutory liability.”
We are, like the JJT court, skeptical that Congress
wished to preclude all SEC suits for injunctive relief where
the victim of a fraudulent scheme happens to be foreign
or where there was insubstantial impact on the United
States. Consequently, we decline to immunize, for strictly
jurisdictional reasons, defendants who unleash from this
country a pervasive scheme to defraud a foreign corpora-
tion. This would appear to be especially appropriate where
the corporation is owned by a foreign governmental subdi-
vision of a neighboring nation.
The IIT court did narrow its decision somewhat by say-
ing: ‘‘Our ruling on this basis of jurisdiction is limited to
the perpetration of fraudulent acts themselves and does not
extend to mere preparatory activities or the failure to pre-
vent fraudulent acts where the bulk of the activities were
performed in foreign countries ... .’’
In this case the defendants claim that their allegedly
fraudulent conduct occurred primarily outside the United
States. The district court embraced the defendants’ con-
tention in its original opinion, viewing the securities
transactions as being ‘‘essentially foreign.’’ Thereafter,
in dismissing the amended complaint, the trial judge not
22. Rule 10b-5, 17 CFR 240.10b-5, for example, prohibits any
person participating in securities transactions falling within interstate
commerce, from “employ|ing| any device, scheme or artifice to de-
fraud” or “engag[ing] in any act, practice or course of business which
operates or would operate as a fraud. . . .” (emphasis added)
Similar language also is present in §17(a) of the 1933 Act, 15 U.S.C.
§77(g) (a) and in §10(b) of the 1934 Act, 15 U.S.C. §78(j) (b).
Also relevant here is SEC v. Capital Gains Research Bureau
375 U.S. 180, 191-92 (1963), in which the Supreme Court held tha:
the Commission need not prove that any investor has sustained loss
as a result of a defendant’s fraudulent activities in order to secure
injunctive relic‘.
23. 519 F.2d at 1018.
iT
All
Appendix A
only reaffirmed his initial position, but also sought to cir-
cumvent J17, which had been decided shortly after the filing
of the first opinion in this case. While the district court
emphasized the above-quoted statement in JIT, which some-
what restricted the scope of that decision, we do not be-
lieve that J/T may be disposed of by mere reference to such
language. In our view, the conduct of the defendants here
cannot be deemed to be ‘‘mere[ly] preparatory’’ to fraudu-
lent acts committed outside this country, for it was much
more substantial than the United States-based activities in
IIT. Consequently, it would appear that JJT supports
jurisdiction over this SEC suit primarily for injunctive
relief.”
Bersch v. Drexel Firestone, Inc.™ is not quite as ap-
posite as JIT to the case at bar, even though the Bersch
court found jurisdiction in part. This is so since some of
the Bersch victims were resident Americans, and therefore,
unlike in J7T and our case, there was a definite impact on
investors in this country. The Second Circuit did not, how-
ever, accord jurisdiction in Bersch over the claims of non-
24. See Opinion of District Court (unreported) at 3-4, Appendix
at 267-68.
25. The findings of the district court on remand as to the nature
and extent of the //T defendants’ conduct in this country as set forth
at 411 F. Supp. 1094 (S.D.N.Y. 1975).
26. In his JIT opinion, Judge Friendly makes frequent reference
to Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d
1326 (2d Cir. 1972). In Leasco, an American corporation alleged that
defendants had fraudulently induced it to purchase stock of a British
corporation at exorbitant prices. The transaction occurred in England,
and the stock was not registered nor traded in the United States.
Nevertheless, the Second Circuit found subject-matter jurisdiction
because the defendants had engaged in conduct in this country essen-
tial to furtherance of the fraud. It indicated that “significant” intra-
national conduct would be “‘sufficient”’ for subject-matter jurisdiction.
See 468 F.2d at 1334.
27. 519 F.2d 974 (1975).
A12
Appendia A
resident and foreign plaintiffs. Even so, Bersch does con-
tain statements which buttress the result that we reach in
this case.
Significantly, the Bersch court said that ‘‘the antifraud
provisions of the federal securities laws . . . do not apply
to loss from sales of securities to foreigners .. . unless acts
... Within the United States directly caused such losses.’
Citing this statement, the defendants here claim that the
losses of the Fund were not ‘‘directly caused’’ by acts
within the territorial limits of this country. They postulate
that conduct in Bersch similar to some of the conduct in our
case, namely, meetings, drafting of agreements, bank trans-
actions and mailings, was deemed insufficient to vest juris-
diction over the foreign plaintiffs in that situation.
Nevertheless, it appears that there was much more
United States-based activity in the present case than in
Bersch, including, inter alia, the execution of a key invest-
ment contract in New York as well as the maintenance of
records in this country by both American and foreign
corporations, records that were crucial to the consumma-
tion of the fraud. Not only do we believe that the sum total
of the defendants’ intranational actions was substantial,
but we also question whether it can be convincingly main-
tained that such acts within the United States did not
directly cause any extraterritorial losses. Rather, it is
evident that the defendants’ conduct occurring within the
borders of this nation was essential to the plan to defraud
the Fund. As a result, there is little in Bersch which stands
against jurisdiction in the instant case, even in spite of the
fact that the sole victim of the fraud was a Canadian
corporation.
In sum, the prior pronouncements of this Court and
those of the Second Circuit, a court with especial expertise
28. Id. at 993.
OO A EE
iris
A13
Appendix A
in matters pertaining to securities,” lend great support for
a holding of jurisdiction here. Straub, IIT and, to a lesser
extent, Bersch together indicate that such a ruling is the
appropriate one. While those cases diverge somewhat from
the factual setting present here, the differences do not, in
our view, militate against reinstatement of the SEC’s
complaint seeking injunctive and ancillary relief.
III.
From a policy perspective, and it should be recognized
that this case in a large measure calls for a policy deci-
sion,” we believe that there are sound rationales for
asserting jurisdiction. First, to deny such jurisdiction may
embolden those who wish to defraud foreign securities pur-
chasers or sellers to use the United States as a base of
operations. By sustaining the decision of the district court
as to the lack of jurisdiction, we would, in effect, create a
haven for such defrauders and manipulators. We are re-
luctant to conclude that Congress intended to allow the
United States to become a ‘‘Barbary Coast,’’ as it were,
harboring international securities ‘‘pirates.’’
We also are concerned that a holding of no jurisdiction
might induce reciprocal responses on the part of other na-
tions. Some countries might decline to act against indi-
viduals and corporations seeking to transport securities
frauds to the United States. Such parties may well be
outside the ambit of the power of our courts. For foreign
nations to adopt the position that the defendants are urging
this Court to take would enable defrauders beyond the
29. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723,
762 (1975) (Blackmun, J., dissenting). Blackmun referred to the
Second Circuit as “ ‘the Mother Court’ in [the securities] area of the
ose
30. See Straub v. Vaisman & Co., 540 F.2d 591, 595 (3d Cir.
1976).
—-—-e2 ee ae Gg ———<--
Al4
Appendix A
reach of our courts to escape with impunity. By finding
jurisdiction here, we may encourage other nations to take
appropriate steps against parties who seek to perpetrate
frauds in the United States. Accordingly, our inclinations
towards finding jurisdiction are bolstered by the prospect
of reciprocal action against fraudulent schemes aimed at
the United States from foreign sources.
As a final policy justification for asserting jurisdiction
here, we register the opinion that the anti-fraud provisions
of the 1933 and 1934 Acts were designed to insure high
standards of conduct in securities transactions within this
country in addition to protecting domestic markets and
investors from the effects of fraud. By reviving the com-
plaint in this case, this Court will enhance the ability of the
SEC to police vigorously the conduct of securities dealings
within the United States. Such a result would appear to
comport with the basic purposes of the federal statutes.
IV.
It should be noted that reinstatement of the SEC’s
complaint does not dispose of the question of subject-
matter jurisdiction once and for all. Rather, that issue may
be raised again should the proofs at trial fail to correspond
to or verify the factual allegations submitted by the SEC.
If it should be disclosed that the allegedly fraudulent con-
duct of any of the defendants within this country was non-
existent or was so minimal as to be immaterial, then the
district court, or this Court on appeal, may be warranted in
dismissing the action for want of jurisdiction.*' As stated
earlier, the decision we reach today rests upon the assump-
tion that the facts tendered by the SEC are true.
The order of dismissal of the district court will be
reversed and the matter remanded to that court for further
proceedings consistent with this opinion.
31. See Leasco Data Processing Equipment Corp. v. Maxwell,
468 F.2d 1326, 1330 (1972).
+ ea en Od he lina tae tla
EE
ee
Al5
APPENDIX B
Opinion of the District Court Dismissing
Original Complaint, March 11, 1975
UNITED STATES DISTRICT COURT
District or New JERSEY
Civil Action No. 74-90
EE 2 Of
Securities and Exchange Commission,
Plaintiff,
v.
Alexander Kasser, Stephen E. Mochary, Technopulp In-
corporated, Churchill Forest Industries (Manitoba) Ltd.,
Churchill Pulp Mill Ltd., James M. Brown, Jr., Chester
Chastek, River Sawmills Company, and Blue Construction
Corporation,
Defendants.
——E ae
Wuippte, Chief Judge
The plaintiff Securities and Exchange Commission in-
stituted this action for injunctive and other relief against
nine individual and corporate defendants. As set forth in
detail infra, the complaint alleges numerous violations of
Section 17(a) of the Securities Act of 1933, 15 U.S.C. ¢77q
(a), and Section 10(b) of the Securities Exchange Act of
1934, 15 U.S.C. §78j(b), together with Rule 10b-5 there-
under, 17 CFR 240.10b-5. Additionally, there is a cross-
claim in the cause which is not material at this stage of the
proceedings.
Al6
Appendiz B
With the exception of Alexander Kasser, who has yet
to be served with process, all of the defendants have moved
for dismissal of the complaint pursuant to Fed. R. Civ. P.
12(b)(1), asserting lack of subject matter jurisdiction.
Should this Court deny those motions, defendants Brown,
Chastek, River Sawmills Co. and Blue Construction Corpo-
ration have filed several alternative motions of which only
the following are presently under consideration: (1) that
the Manitoba Development Corporation (the allegedly de-
frauded Canadian entity) be joined as a party, or failing
such joinder, that the action be dismissed for failure to
join an indispensable party; and (2) that plaintiff’s de-
mand for an accounting and restitution by defendant
Brown to the Manitoba Development Corporation be
striken. Consideration of the remaining motions has been
deferred pending disposition of the applications which are
presently before the Court.
I. THE COMPLAINT
For the purposes of this motion, all well pleaded allega-
tions of the complaint must be accepted as true. Sabolsky
v. Budzanoski, 457 F.2d 1245, 1249 (3rd Cir.), cert. denied,
409 U.S. 853 (1972); Lasher v. Shafer, 460 F.2d 343, 344
(3rd Cir. 1972).
Count I of the complaint indicates that during the
mid-1960’s the Canadian provincial government of Mani-
toba sought to interest private enterprise in the creation
of a forestry complex at The Pas, Manitoba. An organiza-
tion called the Manitoba Development Fund (hereinafter
M.D.F.), row known as the Manitoba Development Corpo-
ration, was created by the government to oversee the
development and financing of the project. In 1965 Monoca,
A.G., a Swiss corporation allegedly owned and controlled
by defendant Alexander Kasser, a United States citizen,
received an option to develop the complex. Oskar Reiser, a
2 ete
A ee wemern me
A17
Appendix B
Swiss national, negotiated the option on behalf of Monoca
A.G. which, according to the complaint, purported to repre-
sent diverse European and American investors in the pulp
and paper industry.
In January 1966, negotiations were held in New York,
New York between Reiser and Manitoba officials concerning
plans for the forestry project. On February 24, 1966 the
Province of Manitoba signed an agreement in Canada with
defendant Churchill Forest Industries (Manitoba), Ltd.
(hereinafter C.F.I.). Under that contract C.F.I. was
granted timber concessions in exchange for its commitment
to develop, own, and operate the forestry complex. C.F.I.
had been incorporated in Canada and was represented to
be a subsidiary of Monoca. The defendant Kasser, however,
allegedly concealed his complete ownership of both corpora-
tions.
The complaint asserts that in furtherance of the scheme
defendant Kasser and others fraudulently induced the
M.D.F. to enter an investment contract with C.F.I. That
contract, entitled a Master Finance Agreement, was nego-
tiated partially in New York but was executed in Canada on
November 19, 1966. The agreement provided for the estab-
lishment of a forestry complex to be owned and operated
by C.F.I. Financing for the project was to emanate princi-
pally from the M.D.F., but C.F.I. was required as a condi-
tion of the agreement to furnish substantial amounts of its
own invested equity capital. The Master Finance Agree-
ment defined said equity capital as money paid in cash for
shares of C.F.I. stock, and expressly excluded the use of
retained earnings and government grants under the so-
called Canadian Area Development Incentives Act (herein-
after A.D.A.).
The very substance of the fraud upon which the
complaint is based stems from alleged violations of this
provision in the Master Finance Agreement. The defend-
A18
Appendix B
ants, according to the complaint, used elaborate and com-
plex methods of concealing the true nature of the purported
equity capital investment in C.F.L.
By way of background, the complaint avers that
Kasser’s only role in the preliminary negotiations was that
of president of the defendant Technopulp Incorporated
(hereinafter Technopulp), a New Jersey corporation.
When the Master Finance Agreement was signed, the
M.D.F.. approved a May 1966 engineering and management
services contract signed by Kasser for Technopulp and
Reiser for C.F.I., which was represented by defendants to
be an arms-length transaction. Furthermore, the M.D.F.
executed an agreement with Monoca A.G. in which Monoca
represented that it would invest a minimum of $5,000,000
in C.F.I. stock by March 31, 1971. As in the Master Finance
Agreement, the consideration for these shares was not to
come from retained earnings of C.F.1. or from A.D.A.
grants. Monoca claimed that it had a substantial interest
in C.F.I. and that it would fully disclose any change in
corporate ownership. Mr. Kasser was represented as hav-
ing only a minor shareholder interest in Monoca. This
so-called ‘‘Monoca Agreement’’, like the other contracts
with the M.D.F., was not executed in the United States.
The complaint alleges further that, in employment of
the scheme, defendants Kasser and Stephen Mochary, a
New Jersey attorney, incorporated the defendant Churchill
Pulp Mill, Ltd. (hereinafter Churchill Pulp) in Nevada
during June 1969. On June 15, 1969 Technopulp and C.F.I.
were consolidated in Churchill Pulp as wholly owned sub-
sidiaries, a structural change which according to the allega-
tions was never disclosed to the M.D.F. Through this
device, it is asserted that the defendants were able to
‘‘channel’’ loan disbursements from the M.D.F. and earn-
ings from the project into purported investments in C.F.I.
stock.
oer
eT ER RE Se
ne 2 od Set ORR ee
Al19
Appendix B
It appears that Churchill Pulp, through an assignment
to it by Kasser of his rights to C.F.I. stock, became re-
sponsible for investing the $5,000,000 in equity capital to
which Monoca had agreed in the Monoca contract. This
assignment was allegedly confirmed in a letter mailed by
Mochary from Montelair, New Jersey to Kasser, whose
address is not given. It is alleged that the M.D.F. was
never informed of either assignment. As indicated infra,
Churchill Pulp was eventually to hold the C.F.I. stock
through its nominee, the Swiss Bank Corporation.
Paragraph 33 of the complaint contains allegations as
to the ‘‘mechanics’’ of funneling M.D.F. money into C.F.I.
stock in order to satisfy the requirements of the Master
Financing Agreement. The defendants are claimed to have
engaged in direct ‘‘reeycling’’ of monies advanced as loans
by the M.D.F. The scheme allegedly operated in the follow-
ing manner: After having requisitioned certain monies
from the M.D.F. to purportedly pay development costs,
C.F.I. would deposit money in the Royal Bank of Canada
at Winnipeg, Manitoba in an amount equal to the required
percentage of equity investment for the requisition. When
the Royal Bank confirmed that it received a deposit desig-
nated for stock purchases, the Canadian C.F.I. attorney
would certify to the M.D.F. that such funds were received
and would issue an appropriate amount of C.F.I. stock in
the name of the Swiss Bank Corporation. The M.D.F.
would then authorize disbursements of the loan requisition,
and C.F.I. would complete the cycle by issuing debentures
to the M.D.F. for the loan. While paragraph 33 does not
specifically allege that the monies deposited in the Royal
Bank were part of the same funds disbursed by the M.D.F.,
there are generalized allegations to that effect contained
elsewhere in the complaint. It is thus assumed for the
purpose of this motion that the same monies paid to C.F.I.
in Canada were henceforth transferred to the Royal Bank
as purported equity investments.
A20
Appendix B
Another aspect of the scheme involved the New York
office of the Swiss Bank Corporation into which defendants
Kasser and Mochary allegedly channeled funds from the
middle of June, 1969 until March of 1970. The Swiss Bank
was instructed in letters from Mochary to transfer this
money by wire from New York to the Royal Bank of Canada
in Winnipeg, Manitoba, for the purchase of C.F.I. stock in
the Swiss Bank’s name. The Swiss Bank held this stock as
nominee for Churchill Pulp, whose beneficial ownership
was never disclosed to the M.D.F. The complaint asserts
that over $3,000,000 in purported stock purchases were
routed from Mochary’s Montclair, New Jersey office to the
New York conduit, and then by wire to the Royal Bank in
Winnipeg. Approximately $1,700,000 of this sum was al-
legedly contributed by Technopulp in the form of dividends
to its parent, Churchill Pulp.
The first count of the complaint indicates that a total of
more than $38,000,000 was advanced by the M.D.F. to
C.F.I. in the form of ‘‘loan disbursements and working
capital loans’’. Defendants issued and delivered C.F.I.
debentures to the M.D.F. in the total face amount of
$40,700,000. In late 1970, C.F.I. defaulted on its interest
payments and a receivership action was instituted in Janu-
ary, 1971. The M.D.F. was awarded all of its remaining
assets by the Court of Queen’s Bench in November, 1973.
Count II of the S.E.C.’s complaint alleges similar fraud-
ulent acts on the part of the following defendants: Kasser,
Mochary, James M. Brown, Jr., Chester Chastek, River
Sawmills Company, a Delaware corporation (hereinafter
River) and Blue Construction Corporation, a Delaware
corporation (hereinafter Blue). The events contained in
this Count occurred from January 1968 until January 16,
1974, the date of the complaint.
The details of the alleged fraud follow a pattern similar
to the acts described in the first count. In early 1968, the
EPL
A21
Appendix B
M.D.F. began to explore the economic feasibility of con-
structing a large sawmill at The Pas, Manitoba. For various
reasons, the M.D.F. insisted on independent ownership of
this project. In the summer of 1968, Kasser brought to-
gether the M.D.F. and defendant James M. Brown, Jr., who
was chairman of a_ well-established, successful lumber
operation called the Pack River Company which owned
sawmills in the United States and Canada. Together with
Kasser, Brown represented to the M.D.F. that he was
willing to invest substantial sums of his own money and
to assume the ownership and development of the sawmill.
In January, 1968, according to the complaint, defendants
KXasser, Brown and Chester Chastek had met in Montclair,
New Jersey to formulate a plan for developing the sawmill.
Kasser and Brown agreed that the project would be a joint
venture and that Kasser would lend Brown one-half of the
front money to promote the operation. Furthermore, River
would own the sawmill while Blue would construct a smaller
mill for Churchill Pulp and would be the parent corporation
for River.
In February, 1968, Kasser sent Brown a check for
$25,000 to assist in the formation of Blue and was given the
option to convert this loan into half the equity securities
of Blue. During the same month, C.F.I. contracted with
Blue in Montclair, New Jersey for the construction of a
small sawmill at The Pas for the sum of $3,900,000. Ata
Sicily, Italy meeting in April, 1968, the defendants agreed
to apply profits from the small sawmill toward equity in the
larger project, with the balance of such equity to be pro-
vided through a Swiss bank loan. In late June, River
entered into a construction contract with Blue for the
large sawmill. The complaint does not specify where this
contract was executed.
On September 25, 1968, in Montclair, New Jersey,
Kasser, Brown and Chastek caused River to enter into a
a ee
A22
Appendia B
Master Finance Agreement with the M.D.F. for develop-
ment of the large sawmill project. As in its agreement
with C.F.L, the M.D.F. promised to furnish the major
portion of financing in installments which would be matched
by proportionate contributions from River’s equity. River
also agreed to apply for an A.D.A. grant. Funds from this
grant, as well as retained earnings, were expressly pro-
scribed as contributions to River’s equity capital. In
negotiating with the M.D.F., the defendanis represented
that River was an affiliate of Brown’s Pack River Com-
pany. To substantiate that representation, special sta-
tionery was allegedly printed in New Jersey for Pack
River, denoting the defendant River as an affiliated com-
pany.
According to the complaint, the defendants fraudulently
requisitioned from the M.D.F. $7,899,356 in four install-
ments during the period from March 11, 1969 until March
26, 1970. Each time a disbursement was sought, the de-
fendants are alleged to have created the false appearance
that an additional increment in equity funds had been re-
ceived by River. For example, the complaint asserts that
on or about March 11, 1969, the defendant Chastek tele-
phoned the M.D.F. from Spokane, Washington and falsely
represented that River had received the $500,000 in stock
purchases necessary under the Master Finance Agreement
for requisition of funds. He later confirmed that repre-
sentation by letter mailed from Spokane to Winnipeg. To
substantiate the claim, $500,000 had been deposited in
River’s account with the Royal Bank Corporation loan
and other money from Blue bank accounts in Seattle,
Washington. Following the deposit by M.D.F. of $2,000,000
in River’s Canadian account, Chastek directed the Royal
Bank by telephone to transfer the funds to River’s account
at the Chemical Bank New York Trust Company in New
York City. When the money was received by wire in
ee as a een
TE iti Se OR nt iL Ore ot
pee eee Por oe Gove, Sees
A23
Appendix B
New York, Alexander Kasser’s personal accountant di-
rected that it be transferred from River’s account to that
of Blue Construction Corporation. Blue thereupon repaid
the Swiss Bank loan which originated the transaction.
Similar requisitions were allegedly obtained in August
and October, 1969, and in March of 1970. On two occasions,
the initial $500,000 placed in River’s account was obtained
from the account of Blue at the Swiss Bank’s New York
office. The source of Blue’s funds is alleged to have been
a previous M.D.F. advance. With respect to the August
disbursement, the source of that initial sum was a loan
from Technopulp Machinery, Inc., a New Jersey corpora-
tion controlled by Alexander Kasser. The complaint alleges
that in each transaction, the M.D.F. funds eventually ended
up in Blue’s New York account.
Pursuant to this scheme, the defendants issued and de-
livered to the M.D.F. debentures of River with a face
amount of approximately $9,600,000. The equity securities
allegedly issued by River were valued at approximately
$9,600,000.
When the defendants sought another requisition in
April, 1970, the M.D.F. refused to release the monies until
River had accounted for the loans already received. A\I-
though defendants assertedly attempted to create a false
appearance of equity investment similar to those described
above, the funds were never released. The River operation
was shut down in June, 1970. Because River defaulted on
its interest payments to the M.D.F. later that year, a
receivership action was instituted in the Court of Queen’s
Bench in January, 1971. M.D.F. was awarded all of River’s
remaining assets by that court in November, 1973. It is
alleged that the simultaneous defaults of River and C.F I.
were in furtherance of the scheme designed by the de-
fendants.
A24
Appendix B
Il. SUBJECT MATTER JURISDICTION
This Court’s determination of the various motions to
dismiss is dependent upon the resolution of a singular yet
delicate issue: whether Congress, in enacting the securities
legislation, intended to confer upon the federal courts
jurisdiction to entertain actions involving the particular
facts alleged in the Commission’s complaint.
The basic thrust of defendants’ argument is that the
transactions alleged in the complaint were essentially
foreign in nature having no significant impact on either
the domestic investing public or the domestic securities
markets. Absent the existence of such impact, it is urged
that this Court is deprived of subject matter jurisdiction
notwithstanding the various allegations of miscellaneous
activities occurring within the United States. Conceding
that there has been no direct impact,’ the Commission
nevertheless asserts that the federal courts are vested with
jurisdiction where a scheme to defraud foreign entities is
devised in this country by Americans who utilize the means
of interstate commerce to achieve their objectives. For the
reasons hereinafter stated, it is concluded that the com-
plaint fails to invoke the subject matter jurisdiction of this
Court; therefore, the defendants’ motions to dismiss will be
granted.
At the heart of the jurisdictional issue is of course the
language of the statutes under which this action was insti-
tuted. Section 17(a) of the Securities Act of 1933 (here-
inafter Securities Act) provides:
(a) It shall be unlawful for any person in the offer or
sale of any securities by the use of any means or in-
struments of transportation or communication in inter-
1. During oral argument on the motions, Mr. Sullivan, counsel
for the Commission, acknowledged “Again, I will say that as far [as]
direct impact on our securities markets are concerned, there is no
direct impact.”
A25
Appendix B
state commerce or by the use of the mails, directly or
indirectly —
(1) to employ any device, scheme or artifice to
defraud, or
(2) to obtain money or property by means of any
untrue statement of a material fact necessary
in order to make the statements made, in the
light of the circumstances under which they
were made, not misleading, or
(3) to engage in any transaction, practice, or course
of business which operates or would operate as
a fraud or deceit upon the purchaser.
Section 10(b) of the Securities Exchange Act of 1934
(hereinafter Exchange Act), also cited in the complaint,
contains a similar provision making it unlawful for any
person
by the use of any means or instrumentality of interstate
commerce...
(b) to use or employ, in connection with the purchase
or sale of any security registered on a national se-
curities exchange or any security not so registered,
any manipulative or deceptive device or contrivance
in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate
in the public interest or for the protection of investors.”
In support of its position, the Commission emphasizes
the words ‘‘any person’’ and ‘‘any securities’’ in those
2. Since the statute is not self-executing, Rule 10b-5 was
promulgated by the Commission. Jurisdiction, however, is unaffected
by the language of that Rule.
A26
Appendix B
statutes, the reference to ‘‘foreign commerce’” in the pre-
ambles to each, and the definition of interstate commerce
in each as including trade, commerce, transportation, or
communication ‘‘between any foreign country and any
State.’’ Securities Act §2(7) ; Exchange Act §3(a)(17). On
the surface, the cited language reveals only that, when
measured against the facts in this ease, Congress did not
prescribe an immediate jurisdictional solution to this prob-
lem of transnational law. As the Court of Appeals for the
Second Circuit observed in the noted case of Leasco Data
Processing Equipment Corp. v. Maxwell, 468 F.2d 1326,
1334 (2nd Cir. 1972):
(T]he language of §10(b) of the Securities Exchange
Act is much too inconclusive to lead us to believe that
Congress meant to impose rules governing conduct
throughout the world in every instance where an
American company bought or sold a security.
At this juncture, it should be noted parenthetically that the
vast majority of decisions in which similar jurisdictional
issues have arisen, many of which are cited infra, involved
section 10(b) of the Exchange Act and Rule 10b-5. The
jurisdictional principles applicable to those provisions are
identical to the principles which relate to section 17(a) of
the Securities Act; hence any reference herein to one
statute shall be deemed applicable to the other.
As early as 1909, the United States Supreme Court an-
nounced a presumption against the extraterritorial applica-
tion of federal legislation. In American Banana Co. v.
United Fruit Co., 213 U.S. 347 (1909), the Court found
that the Sherman Antitrust Act could not be applied to
3. For example, the preamble to the Securities Act states that
the Act is intended to “provide full and fair disclosure of the character
of securities sold in interstate and foreign commerce and through the
mails, and to prevent frauds in the sale thereof and for other pur-
poses.”
inet ON
A27
Appendix B
an action between two American corporations in which the
plaintiff did not allege that defendants’ activities had a
substantial effect within the United States. In United
States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir.
1945), Judge Learne’ Hand reiterated that
[w]e should not impute to Congress an intent to punish
all whom its courts can catch, for conduct which has no
consequences within the United States.
148 F.2d at 443. See also Blackmer v. United States, 248
U.S. 421, 437 (1937) ; Restatement ( Second) of the Foreign
Relations Law of the United States §38 (1965). in the
realm of economic regulation, where Congress is primarily
concerned with domestic affairs, the presumption against
extraterritorial application is particularly strong. be
Foley Bros., Inc. v. Filardo, 336 U.S. 281, 285 (1949). t is
now abundantly clear, however, that the presumption may
be rebutted so as to permit the assumption of jurisdiction
where there are allegations that the extraterritorial conduct
produced domestic impact which is violative of federal law.
United States v. Aluminum Co. of America, supra; Strass-
heim v. Daily, 221 U.S. 280, 285 (1911).*
is i “objective” itorial principle of juris-
_ This is the so-called “objective territori
pen found in gover vee a, > a ~
jectiv incipl ires that defendants
ony ts aan pon sol effects within the forum aan It .
reflected in the Recmeaet (omens ) of bay tee sap : — ss
i inciples have been widely
si pt eager oo aa need not be dealt with here. 7 .
Note, 7 Vand. J. Trans. L. 770 (1974) ; Note, 8 Tex. Intl. Re
(1973) : Note, 10 Colum. J. Trans. L 1 50 (1971 ) and int = titude
itatic in. Noteworthy is the observ ’
ch a in onion pos “harsh” results in earlier ve
— been wacened by subsequent decisions such as Fay Ls
} i he Court agrees that ju
analysis contained infra discloses, t rt ag bee gonna
to include a variety of situations, bu pre
a a chan See Leasco Data Processing E ng
Cor v. Marwell, 468 F.2d 1326 (2d Cir. 1972) ; Vanity A rt
Tee 7. Eaton Co., 234 F.2d 633 (2d Cir.) cert. denied, 352 U.S.
871 (1956).
A28
Appendix B
; The Commission urges this Court to utilize the juris-
dictional principle embodied in the Restatement (Second) of
Foreign Relations Law of the United States §17(a) (1965) :
A state has jurisdiction to prescribe a rule of law (a)
attaching legal consequences to conduct that occurs
within its territory, whether or not such consequences
are determined by the effects of the conduct outside
the territory .. 5
The Court agrees that on its face the Restatement approach
would appear to permit the exercise of jurisdiction where,
as here, conduct has occurred within United States borders.
As defendants assert, however, it is essential to distinguish
between the permissible limits of jurisdictional power rec-
ognized by international law and the extent to which
Congress has chosen to implement that power. In short,
the question of extraterritorial application in this case is
one of municipal, rather than international law. United
States v. Aluminum Co. of America, supra at 148 F.2d 443.
In Leasco Data Processing Equipment Corp. v. Maxwell,
supra, the Court considered the Restatement in depth and
observed:
Conduct within the territory alone would seem sufficient
from the standpoint of jurisdiction to prescribe a rule.
It follows that when, as here, there has been significant
conduct within the territory, a statute cannot properly
be held inapplicable simply on the ground that, absent
the clearest language, Congress will not be assumed to
have meant to go beyond the limits recognized by
foreign relations law... .
5. This section states the “subjective” territorial Pro) of
jurisdiction. See, e.g. Note, 69 Colum. L.
a ge lg g um Rev. 94 (1969) and
220 EA. nce wel ae
A29
Appendix B
Up to this point we have established only that, because
of the extensive acts alleged to have been performed
in the United States, considerations of foreign rela-
tions law do not preclude our reading §10(b) as ap-
plicable here. The questior. remains whether we should.
468 F.2d at 1334-35.
With this background in mind, it is essential to juxta-
pose the underlying purposes of the securities fraud legisla-
tion in order to place the facts of this case in their proper
perspective. It is beyond dispute that the principal objec-
tive is protection of American purchasers who are exposed
to fraudulent offers or sales of securities in interstate
commerce.
In Shoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir.
1968), the Second Circuit considered this objective in terms
of its transnational application:
We believe that Congress intended the Exchange Act
to have extraterritorial application in order to protect
domestic investors who have purchased foreign securi-
ties on American Exchanges® and to protect the do-
mestie securities market from the effects of improper
foreign transactions in American securities.
405 F.2d at 206.
The latter part of that statement is reflective of de-
fendants’ position in the instant case: Congress did not
intend to confer jurisdiction on the federal courts over an
essentially foreign transaction in American securities un-
less that transaction has an impact on domestic investors
or securities markets. This Court agrees with that conten-
tion.
6. In Leasco, supra, the Court reviewed the statute and legislative
history and concluded that the protection is not limited to the
organized markets. In light of that extensive review, this Court need
not reexamine the legislative history.
A30
Appendiz B
Curiously, both plaintiff and defendants rely on many
of the same authorities to support their respective claims.
The Commission asserts that applicable precedent requires
only that there be a use of the jurisdictional means in
connection with fraudulent conduct, regardless of the non-
existence of impact or effects in this country. As de-
fendants suggest, a careful review of comparable decisions
in which jurisdiction has been sustained discloses a requi-
site effect or impact upon American investors or securities
markets in addition to the use of interstate commerce
facilities by the defendants. Hence these cases are clearly
distinguishable since there is concededly no impact in the
case at bar. See e.g., Securities and Exchange Commission
v. United Financial Group, Inc., 474 F.2d 354 (9th Cir.
1973); Shoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir.
1968), rev’d in part on other grounds en bane, 405 F.2d 215,
cert. denied, 395 U.S. 906 (1969).
In Leasco Data Processing Corp. v. Maxwell, supra,
upon which all of the parties heavily rely, the court clarified
its view thusly:
[W]e doubt that impact on an American company and
its shareholders would suffice to make the statute ap-
plicable if the misconduct had occurred solely in Eng-
land, we think it tips the scales in favor of applicability
when substantial misrepresentations were made in the
United States.
468 F.2d at 1337. See also Travis vy. Anthes Imperial Ltd.,
473 F.2d 515, 526 n.21 (8th Cir. 1973), in which Canadian
defendants had defrauded American shareholders of a
Canadian corporation:
[T]he transaction involved is one which to a significant
degree has taken place within the United States, has
caused injury to United States investors, and the juris-
I ee ee ee a ee ed -
ee
A aabalsls Widetile wide Pe ne
A31
Appendix B
diction is grounded on more than an incidential use of
the mails or the facilities of interstate commerce.
Cf. Roth v. Fund of Funds, Ltd., 405 F.2d 421 (2d Cir.
1968), cert. denied, 394 U.S. 975 (1969). Although the
Commission vigorously urges that it is controlling, Securt-
ties and Exchange Commission v. Gulf Intercontinental
Finance Corp., 223 F. Supp. 987 (S.D. Fla. 1963) is likewise
distinguisha!:'!e. The Court there found that, while no
Americans had purchased stock as a result of the allegedly
fraudulent offers, American investors had undoubtedly
been exposed to the offers on a wide scale. Jurisdiction
was thus proper since the Court found that the securities
laws clearly apply to the offer of foreign securities within
the United States. The complaint in this case is utterly
devoid of similar allegations.
Defendants have alluded to the following persuasive
language in Investment Properties International, Ltd. v.
1.0.8., Ltd., CCH Fed. Sec. L. Rep. {93,011 at 90,727 (S.D.
N.Y. 1971) aff’d mem, Docket No. 71,572 (2d Cir. 1971):
[A]lthough the behavior of a defendant, including its
connection to the United States and to the domestic
securities market and exchanges, is relevant in deciding
whether an extraterritorial transaction comes within
the jurisdiction of the Act, the main consideration
appears to be: Does the transaction have some signi-
ficant impact on the domestic securities market or on
domestic investors, and is extraterritorial application
therefore necessary to protect securities trading in the
United States and/or American investors?
It is of course clear in the case sub judice that there is no
showing of domestic impact caused by the allegedly fraudu-
lent conduct of the defendants. On this basis alone, it
cannot fairly be said that Congress intended to reach these
transactions in the anti-fraud legislation. The Court’s in-
A32
Appendix B
quiry, however, must go one step further in order to
determine whether the activities conducted by the American
defendants in the United States, though concededly without
effect here, were sufficient to give rise to jurisdiction.
In the opinion of this Court, the essentially foreign
nature of the transaction here at issue is not materially
altered by the various miscellaneous acts allegedly com-
mitted locally in furtherance of the scheme. To reiterate,
those activities include the following: (1) meetings were
held in the United States as part of negotiations; (2) a
New York office of the Swiss Bank Corporation was used
as a conduit for the transfer of funds, although only a
relatively small portion of those funds was actually so
transferred through that bank; (3) one Master Finance
Agreement was executed in New York; (4) defendants
incorporated most of the corporations in this country and
discussed their plans in New Jersey; and, (5) the means of
interstate commerce (mails, telephone and telegraph) were
employed in furtherance of the scheme. While these do-
mestic activities, in particular the use of American corpora-
tions, cannot be ignored, the Court is nonetheless satisfied
that the case before it involves essentially foreign transac-
tions without impact in this country.
A single Canadian entity has invested in debt securities
of closely held corporations. The securities were never
traded in or even exposed to American markets or in-
vestors. Moreover, the securities were given in exchange
for funds to be used exclusively in the development of a
Canadian forestry complex. The principal issuer of those
securities was a Canadian corporation which allegedly
transferred the M.D.F. money directly to a Canadian bank,
without the use of American conduits. All but one of the
contracts involved were executed outside the country. The
existence of American defendants notwithstanding, this
Court concludes that it was not the intent of Congress to
a
Die
A33
Appendix B
include essentially foreign transactions such as these within
the ambit of the federal anti-fraud legislation. See Invest-
ment Properties International, Ltd. v. 1.0.S., supra; Manus
v. Bank of Bermuda, Ltd., CCH Fed. Sec. L. Rep. $93,299
(S.D.N.Y. 1971); Finch v. Marathon Securities Corp., 316
F. Supp. 1345 (S.D.N.Y. 1970) ; Sinva, Inc. v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 48 F.R.D. 385 (S.D.N.Y.
1969) ; Kook v. Crang, 182 F. Supp. 388 (S.D.N.Y. 1960).
In conclusion, it should be noted that the Court recog-
nizes the seriousness of the allegations against these de-
fendants and the potential ramifications of this decision.
Furthermore, it is entirely possible that there exists a
legitimate governmental interest in applying the securities
legislation to Americans who fraudulently issue securities
in essentially foreign transactions. However, the Court
remains convinced that this is not the proper forum for
adjudication of the controversy. Accordingly, the motions
to dismiss will be granted.
Ill. REMAINING MOTIONS
In light of the Court’s disposition of the jurisdictional
motions, it is of course unnecessary to consider any of the
remaining motions in the cause.
Defendants shall submit an appropriate order.
No Costs.
/s/ Lawrence A. WHIPPLE
LawrENcE A. WHIPPLE
Chief Judge, U.S.D.C.
Dated: March 11, 1975
A34
APPENDIX C
Opinion of the District Court Dismissing
Amended Complaint, November 17, 1975
UNITED STATES DISTRICT COURT
District or New JERSEY
Civil Action No. 74-90
2
Securities and Exchange Commission,
Plaintiff,
v.
Alexander Kasser, Stephen E. Mochary, Technopulp In-
corporated, Churchill Forest Industries (Manitoba) Ltd.,
Churchill Pulp Mill Ltd., James M. Brown, Jr., Chester
Chastek, River Sawmills Company, and Blue Construction
Corporation,
Defendants.
Wuipr.e, Chief Judge
This case is before the Court on defendants’ motions
to dismiss the plaintiff Securities and Exchange Commis-
sion’s amended complaint. The facts are set forth in the
Court’s opinion in Securities and Exchange Commission v.
Kasser, 391 F. Supp. 1167 (D.N.J. 1975). Having reviewed
the amended complaint, this Court finds that said complaint
contains no new allegations of domestic impact and merely
restates in more lengthy fashion the substance of the SEC’s
initial complaint.
~ beth ene et a te
a nN oh wae
A35
Appendix C
In opposing defendants’ motions to dismiss, the SEC
merely restates its position that this Court has subject
matter jurisdiction of an action by the SEC where the de-
fendants’ allegedly used the United States as a base to
defraud foreign investors even in the absence of direct
impact on domestic investors or the domestic securities
markets. In effect, the SEC seeks to have this Court
reconsider its opinion of March 11, 1975, granting de-
fendants’ motions to dismiss the SEC’s initial complaint.
In support of its position, the SEC relies on the Second
Circuit’s recent decision in IJT v. Vencap, Ltd., 519 F.2d
101 (2d Cir. 1975). A review of that case and its companion
ease, Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2d
Cir. 1975), however, demonstrates that the Second Circuit’s
recent development of the law is not inconsistent with this
Court’s opinion of March 11, 1975.
In JIT, the defendant Pistell was a United States citizen
living in the Bahamas. He formed Vencap, Ltd., as a
Bahamian corporation to engage in the venture capital
business. He and an associate purchased control in Vencap
for about $1,000.00. Pistell then persuaded an executive of
the Investors Overseas Services, Ltd., (IOS) mutual fund
complex to invest about $30,000.00 of ILT (an IOS sub-
sidiary) funds in preferred stock of Vencap. There was
some evidence that the stock subscription agreement had
been drafted in New York. Following the sale of the stock
by Vencap, Pistell allegedly siphoned money from Vencap
through fraudulent schemes. The schemes allegedly in-
volved transactions in New York.
On appeal, the Second Circuit first found that there had
been no ‘‘substantial effect’’ upon United States investors
or securities markets for purposes of subject matter juris-
diction. 519 F.2d at 1016-17. However, the Court stated
that the absence of such effect did not necessarily defeat
jurisdiction, where the fraudulent activity complained of
A36
Appendix C
was conducted in the United States. 519 F.2d at 1017.
But the Court was very careful to limit its holding, stating:
Our ruling on the basis of jurisdiction is limited to the
perpetration of fraudulent acts themselves and does
not extend to mere preparatory activities ... where the
bulk of the activity was performed in foreign countries.
... Admittedly, this: distinction is a fine one. But...
the line has to be drawn somewhere if the securities
laws are not to apply in every instance where some-
thing has happened in the United States, however
large the gap between the something and a consum-
mated fraud and however negligible the effect in the
United States or on its citizens.
019 F.2d at 1018 (emphasis added).
Admittedly, the ITT holding ‘‘goes beyond any case yet
decided.’’ Bersch, supra, 519 F.2d at 987. However, even
given the extension, J7T does not require a different deci-
sion in this case. The Second Circuit carefully pointed out
in its opinion that it would uphold jurisdiction only if the
fraudulent acts were performed in the United States.
[The Court was unable to issue a definitive holding because
the record was unclear as to exactly what fraudulent acts
had been committed in New York]. In Kasser, however, the
alleged fraud was consummated in Canada where the
Manitoba Development Fund (MDF) transferred funds to
defendants in exchange for debentures. The activities
conducted in the United States were more in the nature of
preparatory activities than was the case in JJT. Kasser
involves a situation where the gap is large ‘‘between the
[local acts] and a consummated fraud,’’ and where the
‘‘effect in the United States or on its citizens’’ is miniscule.
IIT, supra, 519 F.2d at 1018.
An examination of this Court’s ruling in Kasser in light
of IIT would be incomplete without consideration of the
companion case to IIT, Bersch v. Drexel Firestone, Inc.,
tee ir
A37
Appendia C
519 F.2d 974 (2d Cir. 1975). In Bersch, IOS, Ltd., an
entity primarily engaged in the sale and management of
mutual funds, entered into a scheme whereby each of IOS’s
subsidiaries would go public. The prospectus specified that
the offering was made only to employees and others having
an interest in IOS and further stated that the offering was
not to be made in the United States. Subsequently, the
price of shares plummeted to nearly zero, and the holders
of the stock (all foreign citizens) brought suit under the
Securities Act.
The trial judge found that there had been extensive
activities within the United States, including, inter alia,
1) representatives of IOS, its underwriters, attorneys and
accountants met in New York on numerous occasions to
initiate, organize and structure the offering; 2) parts of
the prospectus were drafted in New York; 3) accounts
for the proceeds of the underwriting were opened in New
York. 519 F.2d at 985 n.24. On appeal the Second Circuit
ruled that such activities did not suffice to confer subject
matter jurisdiction. The Court regarded the fraud as
having occurred when the allegedly false and misleading
prospectuses were issued. The prospectuses were in all
instances issued in foreign cities, e.g., London, Brussels,
Toronto, hence the fraud was essentially foreign in nature.
The Court stated:
[Wle see no reason to extend [the JIT holding] to
cases where the United States activities are merely
preparatory ... and are relatively small in comparison
to those abroad.
519 F.2d at 987 (emphasis added). In further explicating
its holding, the Court hypothesized a situation strikingly
similar to that in Kasser. The Court stated:
Assuming that there were no American purchasers
and that the underwriting related, for example, to a
A38
Appendiz C
large [foreign industrial company clearly identified
with a] foreign country rather than with the United
States .. . we do not believe the activities in the
United States . . . would justify an American court
in taking jurisdiction in a suit for damages by foreign
plaintiffs.
019 F.2d at 986-987. In Kasser, there were no American
citizens defrauded and the fraud related to a large foreign
entity (MDF) clearly identified with Canada rather than
with the United States. In this situation Bersch suggests
jurisdiction is inappropriate.
This Court’s reading of JJT and Bersch is supported
by the recent decision in F.0.F. Proprietary Funds, Ltd. v.
Arthur Young & Co., et al. Civ. No. 73-3282 (S.D.N.Y.,
September 24, 1975). In F.O.F. Judge Bonsal dismissed
for lack of subject matter jurisdiction a complaint charging
securities acts violation, where many acts were alleged to
have occurred in the United States. The acts alleged in-
cluded: 1) the securities that were the subject of the
alleged fraud were debentures of a United States corpora-
tion; 2) the misleading offering circular was drafted and
reviewed by the defendants in New York; 3) the sale of
the securities was authorized in the United States; 4) de-
cisions as to the use of the proceeds of the alleged fraud
were made in the United States; and 5) certain sales
activities occurred in the United States. The Court con-
cluded that under the 7/7 /Bersch analysis subject matter
jurisdiction did not exist because the alleged fraudulent
transaction was ‘‘predominantly foreign.’’ Slip Opinion
at 8. The Court characterized the activity in the United
States as merely preparatory to the actual fraud, which
involved the acquisition abroad by a foreign corporation of
stock in reliance on offering certificates distributed abroad,
resulting in the plaintiff incurring losses abroad. Id. at 8-9.
As in F.O.F., the alleged fraud in Kasser involved mis-
A39
Appendia C
representations made abroad to a foreign corporation,
resulting in the defrauded entity incurring losses abroad.
This Court concludes that plaintiff SEC’s amended
complaint construed in light of the Second Circuit’s recent
decisions in JJT and Bersch is insufficient to confer subject
matter jurisdiction over this suit. Accordingly, defendants’
motions to dismiss the amended complaint will be granted.
No costs to any of the parties.
Defendauis shall submit an appropriate order.
/s/ Lawrence A. WHIPPLE
Lawrence A. WHIPPLE
Chief Judge, U.S.D.C.
Dated: November 17, 1975.
A40
APPENDIX D
Statutes and Regulations Involved
Sections 17(a), 20(b) and 22 of the Securities Act of
1933, 15 U.S.C. §§77q(a), 77t(b) and 77(v), provide as
follows:
Section 17. (a) It shall be unlawful for any person in
the offer or sale of any securities by the use of any means
or instruments of transportation or communication in inter-
state commerce or by the use of the mails, directly or
indirectly—
(1) to employ any device, scheme or artifice to defraud,
or
(2) to obtain money or property by means of any untrue
statement of a material fact or any omission to state a
material fact necessary in order to make the statements
made, in the light of the cireumstances under which they
were made, not misleading, or
(3) to engage in any transaction, practice, or course of
business which operates or would operate as a fraud or
deceit upon the purchaser.
Section 20. (b) Whenever it shall appear to the Com-
mission that any person is engaged or about to engage in
any acts or practices which constitute or will constitute a
violation of the provisions of this title, or of any rule or
regulation prescribed under authority thereof, it may in
its discretion, bring an action in any district court of the
United States, United States court of any Territory, or the
district court of the United States for the District of Colum-
bia to enjoin such acts or practices, and upon a proper
showing a permanent or temporary injunction or restrain-
ing order shall be granted without bond. The Commission
A41
Appendix D
may transmit such evidence as may be available concerning
such acts or practices to the Attorney General who may, in
his discretion, institute the necessary criminal proceedings
under this title. Any such criminal proceeding may be
brought either in the district wherein the transmittal of the
prospectus or security complained of begins, or in the dis-
trict wherein such prospectus or security is received.
Section 22. (a) The district courts of the United States,
the United States courts of any Territory, and the district
court of the United States for the District of Columbia shall
have jurisdiction of offenses and violations under this title
and under the rules and regulations promulgated by the
Commission in respect thereto, and, concurrent with State
and Territorial courts, of all suits in equity and actions at
law brought to enforce any liability or duty created by this
title. Any such suit or action may be brought in the district
wherein the defendant is found or is an inhabitant or trans-
acts business, or in the district where the oifer or sale took
place, if the defendant participated therein, and process in
such cases may be served in any other district of which the
defendant is an inhabitant or wherever the defendant may
be found. Judgments and decrees so rendered shall be sub-
ject to review as provided in sections 128 and 240 of the
Judicial Code, as amended (U. S. C., title 28, sees. 225 and
347.) No case arising under this title and brought in any
State court of competent jurisdiction shall be removed to
any court of the United States. No costs shall be assessed
for or against the Commission in any proceeding under
this title brought by or against it in the Supreme Court or
such other courts.
(b) In case of contumacy or refusal to obey a subpena
issued to any person, any of the said United States courts
within the jurisdiction of which said person guilty of con-
tumacy or refusal to obey is found or resides, upon applica-
tion by the Commission may issue to such person an order
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Appendix D
requiring such person to appear before the Commission,
or one of its examiners designated by it, there to produce
documentary evidence if so ordered, or there to give evi-
dence touching the matter in question; and any failure to
obey such order of the court may be punished by said court
as a contempt thereof.
Sections 10(b), 21(e) and (f), and 27 of the Securities
Exchange Act of 1934, 15 U.S.C. §§78j(b), 78u(e) and (f),
and 78aa, provide as follows:
Section 10. It shall be unlawful for any person, directly
or indirectly, by the use of any means or instrumentality
of interstate commerce or of the mails, or of any facility of
any national securities exchange—
* * *
(b) To use or employ, in connection with the purchase
or sale of any security registered on a national securities
exchange or any security not so registered, any manipula-
tive or deceptive device or contrivance in contravention of
such rules and regulations as the Commission may pre-
scribe as necessary or appropriate in the public interest or
for the protection of investors.
Section 21. (e) Upon application of the Commission the
district courts of the United States, the United States
District Court for the District of Columbia, and the United
States courts of any territory or other place subject to the
jurisdiction of the United States shall also have jurisdiction
to issue writs of mandamus, injunctions, and orders com-
manding (1) any person to comply with the provisions of
this title, the rules, regulations, and orders thereunder, the
rules of a national securities exchange or registered securi-
ties association of which such person is a member or person
associated with a member, the rules of a registered clearing
agency in which such person is a participant, and the rules
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Appendia D
of the Municipal Securities Rulemaking Board, or any
undertaking contained in a registration statement as pro-
vided in subsection (d) of section 15 of this title, (2) any
national securities exchange or registered securities asso-
ciation to enforce compliance by its members and persons
associated with its members with the provision of this title,
the rules, regulations, and orders thereunder, and the rules
of such exchange or association, or (3) any registered clear-
ing agency to enforce compliance by its participants with
the provisions of the rules of such clearing agency.
(f) Notwithstanding any other provision of this title,
the Commission shall not bring any action pursuant to sub-
section (d) or (e) of this section against any person for
violation of, or to command compliance with, the rules of a
self-regulatory organization unless it appears to the Com-
mission that (1) such self-regulatory organization is unable
or unwilling to take appropriate action against such person
in the public interest and for the protection of investors, or
(2) such action is otherwise necessary or appropriate in the
public interest or for the protection of investors.
Section 27. The district courts of the United States, the
district court of the United States for the District of
Columbia, and the United States courts of any Territory or
other place subject to the jurisdiction of the United States
shall have exclusive jurisdiction of violations of this title
or the rules and regulations thereunder, and of all suits in
equity and actions at law brought to enforce any liability
or duty created by this title or the rules and regulations
thereunder. Any criminal proceeding may be brought in the
district wherein any act or transaction constituting the
violation occurred. Any suit or action to enforce any
liability or duty created by this title or rules and regula-
tions thereunder, or to enjoin any violation of such title or
rules and regulations, may be brought in any such district
or in the district wherein the defendant is found or is an
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Appendia D
inhabitant or transacts business, and process in such cases
may be served in any other district of which the defendant
is an inhabitant or wherever the defendant may be found.
Judgments and decrees so rendered shall be subject to re-
view as provided in sections 128 and 240 of the Judicial
Code, as amended (U.S. C., title 28, sees. 225 and 347). No
costs shall be assessed for or against the Commission in
any proceeding under this title brought by or against it in
the Supreme Court or such other courts.
Securities and Exchange Commission Rule 10b-5, 17
C.F.R. 240.10b-5, provides as follows:
It shall be unlawful for any person, directly or in-
directly, by the use of any means or instrumentality of
interstate commerce, or of the mails, or of any facility of
any national securities exchange,
(a) to employ any device, scheme, or artifice to de-
fraud,
(b) to make any untrue statement of a material
fact or to omit to state a material fact necessary in
order to make the statements made, in the light of the
circumstances under which they were made, not mis-
leading, or
(c) to engage in any act, practice, or course of busi-
ness which operates or would operate as a fraud or
deceit upon any person,
in connection with the purchase or sale of any security.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.