# Petition — Churchill Forest Industries (Manitoba), Ltd. v. Securities & Exchange Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_1431%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1977 - **Citation:** 431 U.S. 938 ## Text 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 ‘ +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 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 A42 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 A43 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 \ | A44 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. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_1431%3A1. Public record. Not legal advice.