Petition — Cook v. United States

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In The

Supreme Court of the United States

OCTOBER TERM, 1977

x

iS

we

No.

Larry N. Cook,

Petitioner,

UNITED STATES OF AMERICA,

Respondent.

Petition for Writ Of Ceritiorari

To The United States Court

of Appeals For The Fifth Circuit

Gary D. JACKSON

Ricuarp C. JENKINS

Kuent H. Rowron

1600 Adolphus Tower

Dallas, Texas 75202,

Attorneys For Petitioner.

Of Counsel:

JACKSON, JENKINS

AND RowTON

wee ome teen

TABLE OF CONTENTS

Table of Authorities _

Petition for Writ of Certiorari _.

Opinion Below .

Jurisdiction

Question Presented =...

Statutory Provisions Involved __

Statement of the Case —_

Reasons for Granting the Writ __

Conclusion ___

Certificate of Service _

Appendices

A. Opinion, United States Court of nape

for the Fifth Circuit _

B. Statutory Provisions Involved . P oa

ii

TABLE OF AUTHORITIES

Page

Bersch v. Drexel Firestone, Inc., 519 F.2d 974

(2d Cir. 1975), cert. denied, 423 U.S. 1018 (1975) ...... 6, 13

Bowie v. Columbia, 378 U.S. 347 (1964) ee 7

Des Brisay v. The Goldforb Corp.,

549 F.2d 133 (9th Cir. 1977) | | ets ee

Finch v. Marathon Securities Corp.,

316 F. Supp. 1345, (S.D.N.Y. 1970) awe 1]

F.O.F. Proprietory Funds Ltd. v. Arthur

Young & Co., 400 F. Supp. 1219

te nen eee |

Sherk v. Alberto-Culver Co., 417 U.S. 506 (1974) _

Schoenbaum v. Firstbrook, 405 F.2d 200

(2d Cir. 1968), rev'd. in part en banc,

405 F.2d 215 (1969), cert. denied

395 U.S. 906 (1969)

‘SEC vs. Kasser, 548 F.2d 109 (3rd Cir. 1977),

cert. denied sub nom. Churchill Forest Industries

(Manitoba) Ltd. v. Securities and Exchange

Commission, 431 U.S. 938 (1977) _

Selas of America (Nederland) N.V. v. Selas Corp.

of America, 365 F.Supp. 1382 (E.D. Pa. 1973),

Senva, Inc. v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 48 F.R.D. 385 (S.D.N.Y. 1969) .

Travis v. Anthes > Ltd., 473 F.2d 515

(8th Cir. 1973) .. |

United States v. aap Co. of Pare

148 F.2d 416 (2d Cir. 1945)

United States v. Clark, 359 F. Su 131

(S.D.N.Y. 1973) . =

United States v. Sisal Sales ae =

274 U.S. 268 (1927)

(S.D.N.Y. 1975) . ibs diabetiichescetsietaioteicebeins a ae

Foley Bros., Inc. v. Filardo, 336 US. 281 (1949) ._........5, 16

Garner v. Pearson, 374 F. Supp. 591 (M.D. Fla. 1974)... 15

Henry v. Richardson - Merell, Inc.,

508 F.2d 28 (3rd Cir. 1975) - ! 5, 12

Hooker v. Boles, 346 F.2d 285 (4th Cir. 1965) 17

IIT v. Vencapp, Ltd., 519 F.2d 1001

(2d Cir. 1975) — 2

Investment Properties Int’) Ltd. v. I.0.S., (1970-71)

CCH Fed. Sec. L. Rep. {93011 (S.D.N. Y. 1971),

aff’d on expedited appeal without opinion

(Docket No. 71-593, 2d Cir. 1972) . | a

Hook v. Crona, 182 b-SeppeSeOTSTTNY, 1960) | 1]

Teasco Data Processing v. Maxwell,

468 F.2d 1326 (2d Cir. 1972) __. ; 6,15

Mercado v. Rockefeller, 502 F.2d 666 (2d Cir. 1974),

cert. denied 420 U.S. 925 (1975) Zs 17

McCulloch v. Sociedad Nacional de Marineros de

Honduras, 372 U.S. 10 (1963) 16

McCusker v. Capp, 506 F.2d 459 (9th Cir. 1974)... 17

Recaman v. Barish, 408 F. Supp. 1189

(E.D. Pa. 1975) , | 12

son V. aie Liability Assurance

Corporation, U.S. 66 (1954)

14

16

12

o-oo Se

In The

Supreme Court of the United States

OCTOBER TERM, 1977

Larry N. Cook,

Petitioner,

Vv .

Unirep STATES OF AMERICA,

Res pondent.

Petition for Writ Of Certiorari

To The United States Court

of Appeals For The Fifth Circuit

The Petitioner, Larry N. Cook, respectfully prays that a

WRIT OF CERTIORARI issue to review the decision of the

United States Court of Appeals for the Fifth Circuit, which

decision affirmed the decisiou of the trial court. The cecision

of the Fifth Circuit was enterd in this proceeding on May 19,

1978.

OPINION BELOW

The decision of the United States Court of Appeals for the

Fifth Circuit, affirming the decision of the trial court is not yet

reported. The Opinion affirming the decision of the trial court

is included herein as Appendix A.

2

JURISDICTION

On June 24, 1977, Petitioner, after pleading guilty, was sen-

tenced to two five (5) year sentences on one Count for violation

of 18 U.S.C. $§ 1341, 2, for mail fraud and for violation of

15 U.S.C. §§ 77q(a) and 77x (Sections 17 and 24 of the 1933

Securities Act). Jurisdiction of the 1933 Securities Act claim

was questioned in the trial court due to lack of any impact on

any person who was a citizen or resident of the United States.

Further, the issue was appealed to the Fifth Circuit Court of

Appeals. On May 19, 1978, the Fifth Circuit affirmed the judg-

ment of the trial court. The only question before this Court is

subject matter jurisdiction of the 1933 Securities Act question.

This Court’s jurisdiction lies under 28 U.S.C. § 1254(1).

QUESTION PRESENTED

Should the United States Courts exercise subject matter juris-

diction over an alleged violation of 15 U.S.C. $§ 77q(a), and

77x where the indictment alleges fraud only upon foreign

investors and contains no allegations of damage or impa.t,

through the fraud, on domestic investors or the domestic secu-

rities markets.

STATUTORY PROVISIONS INVOLVED

The statutory provisions involved are 15 U.S.C. §§ 77q(a)

and 77x (Sections 17 and 24 of the 1933 Securities Act).

These statutes are set forth in Appendix B of this Petition.

STATEMENT OF CASE

Petitioner entered a guilty plea to Counts 2 and 12 of a 25

count indictment. Counts 2 and 12 charged Petitioner, and

others, with fraud in the offer of sale of securities in violation

3

of 15 U.S.C. §§ 77q(a), 77x and 18 U.S.C. § 2, and with mail

fraud in violation of 18 U.S.C. §§ 1341, 2. Counts 1, 3-11,

and 13-25 of the indictment were dismissed. The Court sen-

tenced Appellant to imprisonment for five years on Count 2 and

for five years on Count 12 to run consecutively to the sentence

on Count 2. Count 2 (the Count involved in this Petition) deals

solely with the sale of securities in the nature of fractional

undivided interests in domestic oil wells to one German investor.

Nowhere in the indictment is there any charge that any sales

were made to any citizen of the United States or that there was

any domestic impact or damage of any kind in the United

States.

The indictment was originally filed on February 10, 1977,

in the United States District Court for the Northern District

of Texas. On April 26, 1977, a revised 25 count indictment

was filed in the same court which superseded the indictment

filed February 10, 197.. The indictment filed February 10,

1977, was ordered dismissed. On March 10, 1977, Defendant

Hesse filed his Motion to Dismiss Counts 2-10 and 11-19, and

on March 14, 1977, Appellant Cook filed his Motion to Adopt

Pleadings of Other Defendants. These motions questioned sub-

ject matter jurisdiction of the 1933 Securities Act. On May 5,

1977, the Government filed its response to Defendants’ Motion

to Dismiss and on May 12, 1977, a hearing was held. At the

hearing, Defendants’ Motion to Dismiss was denied. Petitioner

plead guilty to Count 2 and Count 12 of the indictment and

was accordingly adjudged guilty of the offense of fraud in the

offer of sale of securities in violation of 15 U.S.C. §§ 77q(a),

77x and 18 U.S.C. § 2, as charged in Count 2 of the indictment,

and the offense of mail fraud in violation of 18 U.S.C. $§

4

1341, 2, as charged in Count 12 of the indictment. Sentence

was imposed on June 24, 1977, at five years on each Count,

to run consecutively. Counts 1, 3-11, 13-25 were dismissed.

The Fifth Circuit Court of Appeals affirmed the judgment of

the trial court on May 19, 1978. This Petition is directed solely

at the Fifth Circuit’s Opinion relating to Sections 17 and 24

of the 1933 Securties Act.

REASONS FOR GRANTING THE WRIT

The holding of the Fifth Circuit that subject matter juris-

diction lies with respect to a violation of 15 U.S.C. §§ 77q(a)

and 77x where the transactions involved are transnational with

no domestic impact or damage is incorrect, in conflict with

other circuits and is a question not yet decided by this Court.

The allegations of Count 2 of the indictment allege a device,

scheme, and artifice to defraud in violation of 15 U.S.C. §§

77q(a) and 77x. This alleged fraud was perpetrated solely

upon foreign investors. The indictment is devoid of any allega-

tions that: (a) any sale of securities, alleged therein to have

been fraudulent, was made to a resident or citizen of the United

States; (b) any trading of such securities occurred in or over

any United States securities market; (c) such sales of secu-

rities had any effect on the domestic securities market; or (d)

there was any domestic injury from the sale of such securities.

Rather, the indictment contains allegations of miscellaneous

acts in the United States, including: making of misrepresen-

tations and ommissions; “use of the mails,” transmittal of

funds from the United States to Europe; and the maintenance

of books and records in the United States.

These allegations of miscellaneous acts within the United

—————

5

States do not alter the essentially foreign nature of the trans-

actions alleged in the indictment. Nor do these miscellaneous

acts fill the jurisdictional void created by the absence from the

indictment of any factual allegation of impact on either the

domestic securities markets or the domestic investing public.

Repetition in the indictment of similar such miscellaneous con-

tacts with the United States does not change the lack of interest

of United States Courts in this basically foreign transaction.

Indeed, in Henry v. Richardson-Merell, Inc., 508 F.2d 28, 35 n.

15 (3rd Cir. 1975), the Court stated that contact with a juris-

diction sufficient to apply that jurisdiction’s laws is not estab-

lished “by piling up quantities of contacts.” Only where a

contact gives the state a factual basis to apply its governmental

policy is it deemed relevant to show interest. (emphasis in

original )

It is the proper scope of the criminal sanctions of the Secu-

rities Act, an Act commonly known to have been enacted to

protect the domestic securities market from another crash

similar to that of 1929, which is here contested. The absence

of factual allegations in the indictment that the transactions in

question had any impact, let alone a significant impact, on

either the domestic investing public or the domestic securities

market or that critical facets of the alleged fraud occurred in

the United States mandates a dismissal for lack of subject

matter jurisdiction.

It is now without doubt that federal legislation is to be con-

strued “to apply only within the territorial jurisdiction of the

United States, . . . based on the assumption that Congress is

primarily concerned with domestic conditions.” Foley Bros.,

Inc., v. Filardo, 336 U.S. 281, 285 (1949). Further, federal

6

legislation may not be interpreted to “impute to Congress an

intent to punish all whom its courts can catch, for conduct which

has no consequences within the United States.” United States v.

Aluminum Co. of America, 148 F.2d 416, 443 (2d Cir. 1945)

(Opinion of Judge Learned Hand).

Thus, the argument of the Government that this Court

has jurisdiction despite the lack of any allegation of domes-

tic impact or that the acts within the United States were

the gist of the alleged fraud, ignore the numerous cases which

hold that subject matter jurisdiction depends on whether Con-

gress intended to impose jurisdiction over “predominantly

foreign” transactions, “quite apart from the power of the United

States to impose” jurisdiction. See Bersch v. Drexel Firestone,

Inc., 519 F.2d 974, 985 (2d. Cir. 1975), cert. denied 423 U.S.

1018 (1975); LIT v. Vencapp, Ltd., 519 F. 2d 1001, 1016

(2d Cir. 1975); Leasco Data Processing v. Maxwell, 468 F.2d

1326, 1334-35 (2d. Cir. 1972).

In SEC vs. Kasser, 548 F.2d 109 (3rd. Cir. 1977), cert.

denied sub nom. Churchill Forest Industries (Manitoba) Ltd.

v. Securities and Exchange Commission, 431 U.S. 938 (1977),

the Third Circuit reversed the decision of the district court in

holding that there was no subject matter jurisdiction over the

defendants whose conduct in the United States consisted of:

(1) various negotiations; (2) execution of investment contracts

in the United States; (3) utilization of the instrumentalities of

interstate commerce to further the scheme; (4) incorporation

of the defendant companies in the United States; (5) drafting

of agreements executed abroad; and (6) transmittal of pro-

ceeds from the transactions to and from the United States. The

decision in Kasser was based on three policy decisions: (1) a

7

denial of jurisdiction might embolden those who wish to defraud

foreign securities purchasers or sellers to use the United States

as a base of operations; (2) the possibility of reciprocal re-

ponses on the part of other nations; and (3) a belief that the

anti-fraud provisions of the Securities Act and Exchange Act

(of 1934) were designed to insure high standards of conduct

in securities transactions in the United States in addition to

protecting the domestic securities market.

Kasser, however, was an SEC injunctive action. Thus, if the

SEC did not have access to the Federal Courts, the conduct

complained of therein would have gone unremedied. In the

instant case, where additional criminal violations are alleged

other than those under the securities laws, the foregoing argu-

ment is severely weakened. Moreover, the Kasser opinion relies

on IIT v. Vencap, Ltd., supra, which expressly labels itself as

“sui generis” (supra at 1019). The Kasser opinion, therefore,

ignores substantial case law to the contrary effect. As such, it

effectively operates with regard to the Appellant Cook herein

as an unconstitutional application of an ex-post facto law viola-

tive of the Due Process Clause of the Fifth Amendment. See

Bouie v. Columbia, 378 U.S. 347 (1964).

A review of the relevant case law other than the Aasser

opinion is appropriate to illustrate the deviation in Aasser from

the theretofor established course. Scherk v. Alberto-Culver Co.,

417 U.S. 506 (1974) implicitly involved the extent of the

extraterritorial application of the securities acts. There, the

Court recognized that the transactions there involved had sub-

stantial contacts with the United States, including the conduct-

ing of negotiations in the United States, (supra at 508) and the

making of fraudulent representations and omissions within the

jurisdiction of the United States (supra at 522). Looking to the

essentially foreign nature of the transaction, however, “a truly

international agreement,” the subject matter of which concerned

investments “primarily situated in European countries” (supra

at 515) with an impact on foreign business, not domestic secu-

rities markets, this Court refused to find subject matter juris-

diction under the Securities Exchange Act of 1934.

The lower courts have also addressed the problem of the

applicability of the Act (i.e., subject matter jurisdiction) to

essentially foreign transactions. In Investment Properties Int'l.

Lid., v. 1.0.S., (1970-71) CCH Fed. Sec. L. Rep. [93011

(S.D.N.Y. 1971), aff’d on expedited appeal without opinion

(Docket No 71-593, 2d Cir. 1972) Judge Frankel stated that

the “main consideration” in the determination of whether juris-

diction under the Securities Acts exists over an essentially

foreign transaction was:

(D) does the transaction have some significant 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? If there is no such domestic impact

frora a substantially foreign transaction, United States

Courts have no reason to become involved and compelling

reasons not to become involved, in the burdens of enforce-

ment and the delicate problems of foreign relations and

international economic policy that extraterritorial applica-

tion may entail.

It is significant to note that the Court in IPI, supra, recog-

nized and considered that contacts with and acts within the

United States were involved in furtherance of the alleged

defrauding transactions. These domestic activities, however,

were not central to the alleged fravd and did not alter the

9

essentially foreign nature of the transactions. In that case, the

domestic activities were as follows:

1) the alleged defrauding of American corporate subsi-

diaries of IPI;

2) the alleged fraudulent transfer of securities of United

States corporations by IOS to IPI;

3) allegations that the transaction had been structured in’

the Southern District of New York, through, inter alia,

New York;

4) alleged overreaching and unfair dealings in sales to

foreigners of Florida condominiums developed by a

United States subsidiary of IPI;

5) small purchases of IPI securities in the United States

through two New York brokers, in addition to sales of

securities to United States citizens who were officers,

directors or full-time employees of IOS and its sub-

sidiaries;

6) negotiations and preparation of documents in the

United States to implement alleged fraudulent trans-

actions closed and consummated outside the United

States;

7) retention of United States Counsel and discussions and

correspondence with said counsel in connection with

alleged fraudulent transactions;

8) procuring an allegedly unfair loan for a wholly-owned

United States subsidiary of IPT; and

9) joint purchase by IPI and a United States ban of secu-

rities of a Florida corporation as part of an allegedly

fraudulent deal structured by IOS, in part, by meetings

and mailings in the United States.

Despite the above list of domestic activities, the IPI Court

denied the existence of subject matter jurisdiction since the

determinative questions — involving the essentials of the trans-

actions, the absence of effect on domestic securities markets,

and the absence of injury to United States purchasers — pointed

10

to a foreign juri: *iction, foreign transactions, injury to foreign

purchasers, and no effect on domestic investors or domestic

securities markets.

A fortiori, here, where the only allegedly injured parties are

European investors, no subject matter jurisdiction exists because

the Securities Acts are not applicable to foreign transactions.

Since the indictment does not sufficiently demonstrate, by factual

allegations, the essence of the transactions, recourse is had to

the corresponding SEC injunctive suit, SEC v. HJH, et al, Civil

Action No. CA3-76-1611. In the SEC’s Memorandum in sup-

port of a Preliminary Injunction, the SEC alleges the following

facts:

1) all sales efforts were in Europe (p. 5, 10);

2) newspaper advertisements were placed in European

newspapers (p. 8) ;

3) all investor monies were received in Europe, although

some was subsequently transferred to the United States

(p. 8, 6);

4) the investor contracts were signed in Zurich, (p. 6);

5) existing investors did make trips to the United States

(p. 9);

6) production reports were allegedly mailed from the

United States (p. 11);

7) material misstatements and omissions of material facts

were made at locations unspecified.

Thus, even relying on the SEC’s factual allegations in an

injunctive suit, the domestic activities, when balanced with the

essential foreign nature of the overall transactions, cannot sus-

tain the applicability of the securities acts and therefore sub-

ject matter jurisdiction does not exist. The domestic activities

are qualitatively not as strong as in /P/, supra, and the foreign

nature is more predominate here.

1]

Furthermore, other decisions which have denied the existence

of the applicability of the securities acts over essentially foreign

transactions, despite acts in and connections with the United

States, are further authority for denying jurisdiction here.

In Finch v. Marathon Securities Corp., 316 F. Supp. 1345,

1349 (S.D.N.Y. 1970), the Court dismissed the action and

stated:

. when, as here; (1) the substance of the allegedly

fraudulent conduct occurred outside the United States;

(2) the parties are predominantly foreign; (3) the sub-

ject shares are securities in a foreign corporation neither

registered nor traded on a national securities exchange;

and (4) there is no showing of any domestic injury, it

would appear that the district court is without subject mat-

ter jurisdiction, despite the existence of other less mean-

ingful American-based facts and events.

This is precisely the situation in the instant case.

In Kook v. Crana, 182 F. Supp. 388, 390 (S.D.N.Y. 1960),

the Court addressed the intent of Congress and noted that:

It is a canon of construction that legislation of Congress,

unless a contrary intent appears, is meant to apply only

within the territorial jurisdiction of the United States

(since) Congress is primarily concerned with domestic

conditions.

There, notwithstanding contacts that were sufficient to vest

jurisdiction had there been congressional intent as to the statute’s

applicability, the Court concluded that the essentially foreign

nature of the transaction placed it outside the purview of the

Act and hence subject matter jurisdiction did not exist.

In Sinva, Inc. v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 48 F.R.D. 385 (S.D.N.Y. 1969), the defendant had mis-

applied and appropriated the plaintiff's funds in the United

12

States. Yet, the Court found the transaction to be essentially

foreign and in the absence of any impact on the domestic public

or securities markets, the Act was not applicable and no subject

matter jurisdiction could attach. In Sinva, a foreign plaintiff

had purchased securities on the London exchange through a

Paris office of the defendant New York Stock Exchange broker-

age firm. In the present case no connection with any national

stock exchange or domestic investors is involved. The present

case, surely, is no less foreign’ in nature than was the Sinva

case

F inally, in Henry v. Richardson, 508 F.2d 28 (3rd Cir.

1975), the Third Circuit discussed the extraterritorial effect of

substantive laws generally, stating:

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 protect. For example, in Watson v.

Employers Liability Insurance Corporation, Ltd., 348 U.S.

666 .. . (1954), the Court held a Louisiana statute which

varied contract rights created outside of Louisiana to be

valid under the due process clause because Louisiana had an

overwhelming interest in protection of its own citizens . . .

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. (/d. at

39, n. 25).

(Also see Recaman v. Barish, 408 F. Supp. 1189 (E.D. Pa.

1975) where a securities fraud complaint was dismissed for

lack of subject matter jurisdiction even though there was activity

within the United States, and F.O.F. Proprietary Funds Ltd. «.

Arthur Young & Co., 400 F. Supp. 1219 (S.D.N.Y. 1975),

where the Court dismissed for lack of subject matter jurisdic-

tion a complaint alleging securities fraud because the deben-

13

tures which where the subject of the alleged fraud “were offered

only to purchasers outside the United States . . . and were issued

to raise capital for foreign invesiment” (/d. at 1223).

Moreover, even the decisions in which jurisdiction has been

upheld lend credence to a finding that this Court does not have

subject matter jurisdiction over the instant case. In //T v. Ven-

cap, Ltd., 519 F.2d 1001 (2d Cir. 1975), the alleged securities

fraud stemmed from negotiations outside the United States.

The negotiations led to the sale of preferred stock in Vencap,

a Bahamian corporation whose shares were not traded on any

American exchange, to IIT, a Luxembourg investment trust.

The sale occurred outside the United States. The Court intimated

that the conduct of the defendants may have been sufficient to

justify the imposition of subject matter jurisdiction, but never-

theless remanded for further fact-finding as to the extent and

nature of the fraudulent activities. The Court, however, stated:

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

prevent fraudulent acts where the bulk of the activities

were performed in foreign countries. . . (/d. at 1018).

Here, the bulk of the activities were effectuated outside the

United States. The vast majority of the selling, according to

the indictment and the SEC, occurred in Europe. The advertis-

ing was solely in Europe. Only European investors were con-

tacted. The contracts were entered into in Europe. Only allegedly

preparatory and support activities were effectuated in the United

States.

In Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2d Cir.

1975), cert. denied 423 U.S. 1018 (1975), the Court found

14

jurisdiction only in part. There, some of the victims were Ameri-

cans, and hence there was a definite impact on domestic inves-

tors. No jurisdiction, however, was afforded to the claims of .

the nonresident and foreign plaintiffs. The Court stated that:

. .. the antifraud provisions of the federal securities laws

. . . do not apply to loss from sales of securities to for-

eigners .. . unless acts . . . within the United States directly

caused such losses. (/d. at 993)

The alleged actions of the Appellant Cook in the United States

are not specifically set forth. Indeed, no domestic actions of the

Appellant Cook could be a direct cause of the alleged losses

of foreign investors, as the foreign investors in question suffered

no losses.

In Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir. 1968),

rev'd in part on other grounds en banc, 405 F.2d 215 (1969),

cert. denied 395 U.S. 906 (1969), the Court dealt with applica-

tion of the 1934 Securities Exchange Act, and stated:

We believe that Congress intended the Exchange Act

to have extraterritorial application in order to protect

domestic investors who have purchased foreign securities

on American exchanges and to protect the domestic secu-

rities market from the effects of improper foreign trans-

actions in American securities. (/d. at 206)

We hold that the district court has subject matter juris-

diction over violations of the Securities Exchange Act

although the transactions which are alleged to violate the

Act take place outside the United States, at least when

the transactions involve stock registered and listed on a

national securities exchange, and are detrimental to the

interests of American investors. (Jd. at 208)

y

1S

Thus the Court clearly stated that the injury must be to

citizens of the United States or the domestic securities market

or jurisdiction would not have existed.

Furtuermore, in Des Brisay v. The Goldforb Corp., 549

F.2d 133 (9th Cir. 1977), jurisdiction was upheld over an

alleged fraud because the fraud had an adverse effect on the

Buyers, sellers, and holders of the involved securities which

were registered on the American Stock Exchange. The Court

distinguished Bersch, supra, on the grounds that the stock in

Bersch was not listed on an American securities exchange, and

the only adverse impact shown there was upon investors’ con-

fidence in the securities market generally.

For other decisions upholding jurisdiction where there was

domestic impact, see Travis v. Anthes Imperial Ltd., 473 F.2d

515 (8th Cir. 1973) (jurisdiction found because of the “sub-

stantial” effect on the value of the stock held by the American

plaintiffs and the lesser dividends received by the shareholders

in the United States, /d. at 528); Leasco Data Processing

Equipment Corp. v. Maxwell, 468 F.2d 1326 (2d Cir.

1972) (jurisdiction upheld where activities in the United States

were combined with an impact on domestic investors); Garner

v. Pearson, 374 F. Supp. 591 (M.D. Fla. 1974) (jurisdiction

found because fraud had a significant impact on American in-

vestors) ; Selas of America (Nederland) N.V. v. Selas Corp. of

America, 365 F. Supp. 1382 (E.D. Pa. 1973) (jurisdiction up-

held because there was sufficient conduct within the United States

and the transaction had a significant impact on American secu-

rities markets); United States v. Clark, 359 F.Supp. 131, 134

(S.D.N.Y. 1973) (jurisdiction found because of “substantial

detrimental effects on the interests of American investors’).

16

Finally, decisions of the United States Supreme Court con-

cerning the extraterritorial application of othe~ federal statutes

support Appellant’s contention that no subject matter jurisdic-

tion exists herein. For example, see McCulloch v. Sociedad

Nacional de Marineros de Honduras, 372 U.S. 10 (1963)

(National Labor Relations Act not applicable to a foreign ship

owned by a foreign subsidiary of an American company which

carried foreign seamen and which traveled regularly between

the United States, Latin America and other ports. The Court

held that while Congress has the constitutional power to apply

the Act to foreign ships while in American waters, Congress

did not intend the Act to apply here); Foley Bros., Inc., v.

Filardo, 336 U.S. 281 (1949) (Federal Eight Hour Law not

applicable to the employment of an American citizen by an

American contractor on a foreign construction project even

though the project was being built on behalf of the United

States and the employment contract had been executed in the

United States); United States vs. Sisal Sales Corp., 274 US.

268 (1927) (jurisdiction upheld over a charge that Mexican

and American corporations had secured an unlawful monopoly

of interstate and foreign commerce in sisal, because by their

acts, the corporations “brought about forbidden results in the

United States”. /d. at 276).

It is significant to note that the securities involved herein

were not traded on any domestic securities exchange. No

domestic impact is, or even can be, alleged. At the hearing on

Defendant’s Motion to Dismiss, the Government made no allega-

tion of domestic impact, but only recited instances of conduct

within the United States. Indeed, the Government maintained

that no domestic impact is even required.

17

There is a total absence of factual allegations necessary to

support a finding that the securities acts were intended to cover

the essentially foreign transaction involved herein. The criminal

sanctions of the securities acts, therefore, cannot be applicable,

and the Court has no jurisdiction.

Appellant’s plea of guilty did not and could not operate as

a waiver of the lack of the Court’s jurisdiction. “(A) guilty

plea waives only nonjurisdictional defects,” Mercado v. Rocke-

feller, 502 F.2d 666, 672 (2d Cir. 1974), cert. denied 420

U.S. 923°(1975) and “(t)he parties may not by conduct waive

a lack of jurisdiction or consent to jurisdiction which does not

in fact exist.” McCusker v. Cupp, 506 F.2d 459 (9th Cir.

1974). “When a Court lacks jurisdiction, any judgment ordered

by it is void and unenforceable.” Hooker v. Boles, 346 F.2d

285, 286 (4th Cir. 1965).

CONCLUSION

In conclusion, it appears to counsel for Petitioner that the

holding of the Fifth Circuit with respect to the application of

the 1933 Securities Act to transactions occurring outside the

boundaries of the United States to protect foreign nationals is

an unwarranted expansion of the Securities Laws. This Court

should hear this issue to determine whether this expansion of

the jurisdiction of the Securities Acts should continue. There-

fore, Petitioner prays that a Writ of Certiorari issue to review

18

the judgment of the United States Court of Appeals for the

Fifth Circuit.

Respectfully submitted,

Gary D. Jackson

Ricuarp C. JENKINS

Kuent H. Rowron

Jackson, JENKINS AND RowTon

1600 Adolphus Tower

Dallas, Texas 75202,

Attorneys For Petitioner.

19

CERTIFICATE OF SERVICE

On the 23rd day of June, 1976, three copies of the Petition

for Writ of Certiorari were mailed, postage prepaid, to the.

Solicitor General of the United States, Department of Justice,

Washington, D. C. 20530.

*

APPENDIX A

Cit ae)

A-1

UNITED STATES of America,*

Plaintiff-Appellee,

v.

Larry N. COOK, Defendant-Appellant.*

No. 77-5497.

United States Court of Appeals,

Fifth Circuit.

May 19, 1978.

Appeal from the United States District Court for the Northern

District of Texas.

Before THORNBERRY, RONEY and HILL, Circuit Judges.

THORNBERRY, Circuit Judge:

After a plea of guilty, the appellant, Larry N. Cook, was

convicted of fraud in the offer of sale of securities in violation

of 15 U.S.C. §§ 77q(a), 77x, and 18 U.S.C. § 2, and of mail

fraud violation of 18 U.S.C. §§ 1341, 2. The trial judge sen-

tenced Cook to five years’ imprisonment for each offense.’ On

this appeal, Cook challenges only the jurisdiction of the trial

court to impose a sentence for the securities count. Cook argues

that the trial court lacked jurisdiction over the securities count

because the alleged fraud was committed solely upon foreign

investors and the fraud had no impact upon either the domestic

markets or domestic investors.”

'The sentences are consecutive.

*Specifically, Cook alleges that the indictment failed to charge that

(a) any fraudulent sale was made to a resident or citizen of the United

States; (b) any trading of fraudulent securities occurred in or over any

United States securities market; (c) the sale of the fraudulent securities

had any effect upon the domestic securities market, or (d) there was

any domestic injury from the sale of the fraudulent securities.

*The parties appear in reverse order, as shown, on the slip opinion.

J, J&R.

A-2

I.

The indictment charged that Cook and his codefendants, while

operating out of Dallas, Texas, defrauded European investors

by operating a Ponzi* scheme.* The heart of the scheme was the

offer and sale of fractional undivided working interests in oil

and gas wells located in the United States.

Cook and his codefendants would place false and misleading

advertisements in various Eurepean newspapers and periodicals.

The advertisement would extol the virtues of investments in

American oil and would falsely promise high monetary gain.

Specifically, in other sales material, Cook and his codefendants,

promised a 39.8% annual return on Ohio oil wells, 47%

return on Texas wells, 56% return on West Virginia wells, and

a 39% return on Kentucky wells. These returns were sup-

posedly based upon the production figures for operating

American oil wells, however, the production figures were grossly

misstated and the actual returns, if any, were far from the

promised figure.

Once an European investor decided to purchase an interest

in the American oil wells, a contract was signed in Europe by

the investor and a confederate of Cook. The contract would be

returned to Dallas and the agreement was recorded in the United

States.

As in a classic Ponzi scheme, payments based on the false

production figures were actually made to some initial investors.

These payments, which were financed from capital generated

*The indictment never uses the words “Ponzi Scheme” although the

U. S. Attorneys’ brief is full of erroneous and unwarranted references

to “Ponzi Scheme.” Jt doesn’t appear that the court read the indictment

at all. J, J & R.

In a Ponzi scheme, a swindler promises a large return for investments

made with him. The swindler actually pays the promised return on the

A-3

by subsequent investors, also served to attract new investors.

Cook and his confederates also developed investor interest by

having potential investors travel to the United States and inspect

various Texas oil wells.

In December 1976, the Ponzi scheme fell through and Cook’s

guilty plea and this appeal followed.

Il.

On this appeal, Cook contends that the district court lacked

jurisdiction over the subject matter under the securities acts

because the victims of his fraud were foreign investors and

Congress did not intend to protect foreign investors.

This court is aware of the legal developments involving

international fraud and the puzzling questions posed by some

transactions with only a marginal United States nexus. See Des

Brisay v. The Goldfield Corp., 549 F.2d 133( 9 Cir. 1977);

Securities and Exchange Commission v. Kasser, 548, F.2d 109

initial investments in order to attract additional investors. The payments

are not financed through the success of the underlying venture but are

taken from the corpus of the newly attracted investments. The swindler

then takes an appropriate time to abscond with the outstanding invest-

ments. As one author has described it, “he borrowed from Peter to pay

Paul. And it worked . . . until Peter got wise.”

The scheme is named after its most famous practitioner, Charles Ponzi.

Ponzi was an Italian immigrant who successfully bilked an unwitting

American public out of millions of dollars in a scheme involving inter-

national postal reply coupons. Ponzi ran his swindle from the heart of

Boston’s financial district and continued to run the scheme for about a

year before his empire collapsed — all despite the fact that Ponzi knew

little, if any, about international finance. Ponzi was eventually sentenced

to prison and upon his release he was deported to Italy where the dictator

Mussolini gave him a job in the finance ministry. Proving that swindle

knows no geographic bounds, Ponzi escaped Italy to South America just

before new charges could be brought against him. Ponzi died penniless

in South America. For a fascinating account of Charles Ponzi’s scheme

see J. NASH, BLOOD LETTERS AND BADMEN, 448-451 (1973).

A-4

(3 Cir. 1977), cert. denied sub nom. Churchill Forest Industries

(Manitoba) Lid. v. SEC, 431 U.S. 938, 97 S.Ct. 2649, 33

L.Ed.2d 255 (1977); Straub v. Vaisman & Co., 540 F.2d 591

(3 Cir. 1976); Bersch v. Drexel Firestone, Inc., 519 F.2d 974

(2 Cir. 1975), cert. denied, 423 U.S. 1018, 96 S.Ct. 453, 46

L.Ed.2d 389 (1975); IIT v. Vencapp, Litd., 519 F.2d 1001 (2

Cir. 1975) ; Travis v. Anthes Imperial Ltd., 473 F.2d 515 (8 Cir.

1973); Leasco Data Processing Equipment Corp. v. Maxwell,

468 F.2d 1326 (2 Cir. 1972); Schoenbaum v. Firstbrook, 405

F.2d 200 (2 Cir.), rev'd on rehearing on other grounds, 405

F.2d 215 (2 Cir. 1968, en banc), cert. denied, 395 U.S. 906,

89 S.Ct. 1747, 23 L.Ed.2d 219 (1969) ; Recaman v. Barish, 408

F.Supp. 1189 (E.D.Pa.1975); F.O.F. Proprietory Funds Ltd.

v. Arthur Young & Co., 400 F.Supp. 1219 (S.D.N.Y. 1975);

Garner v. Pearson, 374 F.Supp. 591 (M.D. Fla. 1974); Selas

of America (Nederland) N.V. v. Selas Corp. of America, 365

F.Supp. 1382 (E.D.Pa. 1973); United States v. Clark, 359

F.Supp. 131 (S.D.N.Y 1973); Finch v. Marathon Securities

Corp., 316 F.Supp. 1345 (S.D.N.Y. 1970) ; Kook v. Crang, 182

F.Supp. 388 (S.D.N.Y. 1960); Sinva, Inc. v. Merrill Lynch,

Pierce, Fenner & Smith, Inc., 48 F.R.D. 385 (S.D.N.Y. 1969) ;

Note, American Adjudication of Transnational Securities

Fraud, 89 Harv.L.Rev. 553 (1976). Fortunately, we may leave

for another day an attempt to formulate the outer perimeter of

American jurisdiction. The present scheme is so far within the

jurisdiction of the American courts as to give-us little pause.

Cook operated out of Dallas, Texas, his actions there were

hardly preparatory as some cases describe. See Bersch, supra

at 992; JIT, supra at 1018. The investors invested in American

securities — obviously Congress intended jurisdiction over

tie neha nacelle

ab wae

A-5

American securities regardless to whom the securities are sold.

The money from the scheme was repatriated. And some investors

were actually defrauded, in part, in the United States.“ Indeed,

it appears to us that if there are any unimportant factors in the

scheme it is the fact that the investors are European and the

contracts were physically executed in Europe.

” tt is an absurd notion that Congress intended activity in the

United States involving American securities to be exempt from

the fraud provisions of the securities acts simply because the

victims are not American citizens. Obviously, Cook and his

confederates were capitalizing on the well-known American

expertise in oil and gas production. Moreover, the European

investors undoubtedly thought they could expect honest treat-

ment from American entrepreneurs. That Congress would allow

America to be a haven for swindlers and confidence men when

the victims are European and while expecting the highest level

of business practice when the investors are American is “simply

unimaginable”. JIT, supra at 1016. As Judge Friendly said for

the Second Circuit in /TT, supra at 1017:

We do not think Congress intended to allow the United

States to be used as a base for manufacturing fraudulent

security devices for export, even when these are peddled only

to foreigners. This country would surely look askance if one

of our neighbors stood by silently and permitted misrepre-

sented securities to be poured into the United States.”

AFFIRMED.

‘Our holding today is there is more than an adequate basis for juris-

diction based on conduct occurring in the United States. We leave for

another day the possibility that jurisdiction could be found as a result of

effects in the United States.

5In Leasco, Bersch, and IIT, jurisdiction was found as a result of con-

A-6

duct in American territory. In JIT, Judge Friendly observed that “the

securities laws are not to apply in every instance where something has

happened in the United States.” Supra at 1018. In this instant case, we

need not be concerned with de minimus activity, the lion’s share of the

activity occurred in the United States and indeed actionable fraud

occurred within the territorial confines of the United States — the oldest

and surest basis for jurisdiction. In Bersch the court upheld jurisdiction

as to American plaintiffs who were residents abroad if the American

intiffs could show “acts . . . of material importance” occurred in the

nited States. Foreign plaintiffs had to show the occurrence of actual

fraudulent acts in the United States. 519 F.2d at 993.

In Kasser, supra at 114, the Third Circuit said: The federal securities

laws, in our view, do grant jurisdiction in transnational securties cases

where at least some activity designed to further a fraudulent scheme

occurs within this country.

Pe ee ee eee eee

—_ « eee ee

APPENDIX B

Ae la, ACN ep Plat Ate ete tw

B-1

Statutory Provisions Involved

Sections 17(a) and 24 of the Securities Act of 1933, 15

U.S.C. §§ 77q(a) and 77x, provide as follows:

Section 17. (a) It shall be unlawful tor any person in the

offer or sale of any securities by the use of any means or instru-

ments of transportation or communication in interstate com-

merce or by the use of the mails, directly or indirectly —

(1) to employe 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, not mis-

leading, 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 24. Any person who willfully violates any of the

provisions of this title, or the rules and regulations promul-

gated by the Commission under authority thereof, or any per-

son who willfully in a registration statement filed under this

title, makes any untrue statement of a material fact or omits

to state any material fact required to be stated therein or neces-

sary to make the statements therein not misleading, shall upon

conviction be fined not more than $10,000 or imprisoned not

more than five years, or both.