Reply Brief — Lombardfin S. p. A. v. Securities & Exchange Commission

Supreme Caurt, U.S,

tr FILED

“ APR 19 1888

SHARE EH ROP ANIOL, UR,

&: CLARK

ee eee |

No. 87-1321

IN THE

Supreme Court of the United States

OcTOBER TERM, 1987

LOMBARDFIN S.p.A. and PAOLO MARIO LEATI.

| Petitioners,

v.

SECURITIES AND EXCHANGE COMMISSION,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

REPLY BRIEF OF PETITIONERS

LOMBARDFIN S.p.A. AND PAOLO MARIO LEATI

PauL JOSEPH BSCHORR

Counsel of Record

DoroTHEA W. REGAL

Loreto J. Ruzzo

Wuite & CasE

Attorneys for Petitioners

Lombardfin S.p.A. and

Paolo Mario Leati

1155 Avenue of the Americas

New York, New York 10036 :

(212) 819-8200 |

a

TABLE OF CONTENTS

Page

po SE i I Ce iii

I. PETITIONERS WERE NEVER SERVED

WITH PROCESS AND THE JUDGMENT

TAKEN AGAINST THEM IS A DENIAL OF

Sn Ie oS ka os en eee Vee eo ws ]

A. Assertion Of Jurisdiction Was Improper

Where Defendants Were Not Apprised Of

Their Status As Defendants.............. 2

B. The Trial Court’s Order Directing Service

Of A Summons By Publication Did Not

Create In Personam Jurisdiction.......... 3

C. This Ruling, If Not Vacated, Will Be

Precedent For Further Avoidance Of The

Constitutional Requirements Of Effective

Service Of Process...................05. 6

II. THE ARGUMENTS CONCERNING THE

HAGUE SERVICE CONVENTION, THE

“MISAPPROPRIATION” THEORY AND

LACK OF AUTHORIZATION BY STATUTE

OR RULE FOR SERVICE BY PUBLICATION

ARE PROPERLY BEFORE THIS COURT ... 7

oe ae ee ery eee eae 9

eee

TABLE OF AUTHORITIES

Cases Page

Carpenter v. United States, 108 S. Ct. 316 (1987) 9

a |

Dewey v. Des Moines, 173 U.S. 193 (1899) ......

Eddings v. Oklahoma, 455 U.S. 104 (1982) ......

~l

Mennonite Board of Missions v. Adams, 462 U.S.

ee a ak wep twa psn ase vea ess 3, 6

Mullane v. Central Hanover Bank & Trust Co..,

I cs ve ese cceesssacnnas 6

Raley v. Ohio, 360 U.S. 423 (1959)............. 7

Sieg v. Karnes, 693 F.2d 803 (8th Cir. 1982) .... 3

Volkswagenwerk Aktiengesellschaft v. Schlunk,

cert. granted, No. 86-1052 (Oct. 13, 1987) .... 8

Webb’s Fabulous Pharmacies, Inc. v. Beckwith,

a Sawa s even ou wR des ae ee 8

Wuchter v. Pizzutti, 276 U.S. 13 (1928)......... 3

Statutes and Rules

Section 27, Securities Exchange Act of 1934,

RE eer reer ere ee 5

ra ae 5, 6

UC a Ts MOREE oo ns vn cece esas canes 5

BE ee ee 2

ea do ashe kK csda dee keewss 2

iv

Treaty

Hague Convention on Service Abroad of Judicial

and Extrajudicial Documents in Civil or

Commercial Matters, done Nov. 15, 1965, 20

om ty i | ie RS | er ee eee

Other Authorities

Advisory Committee’s Note to Proposed

Amendment to Rules of Civil Procedure, Rule

4, Subdivision (e)(1963), reprinted at 31 F.R.D.

aad ean nad Nes a ak eo

1 Barron & Holtzoff, Federal Practice and

Procedure (Wright ed. 1960).................

Page

No. 87-1321

IN THE

Supreme Court of the United States

OcToBER TERM, 1987

LOMBARDFIN S.p.A. and PAOLO MARIO LEATI,

Petitioners,

Vv.

SECURITIES AND EXCHANGE COMMISSION,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

REPLY BRIEF OF PETITIONERS

LOMBARDFIN S.p.A. AND

PAOLO MARIO LEATI

I

PETITIONERS WERE NEVER SERVED WITH PRO.

CESS AND THE JUDGMENT TAKEN AGAINST

THEM IS A DENIAL OF DUE PROCESS

Petitioners were never served with any summons or complaint,

and the only notice they ever received that the SEC intended

to include them as defendants was seven days before trial, when

they received a copy of a motion requesting leave to amend the

complaint to name them as defendants. Thereafter, no summons

or complaint was ever served on them. Instead, the court granted

the SEC’s motion to amend and immediately thereafter, without

any further notification to petitioners, commenced the trial,

which lasted less than a day:

Petitioners were denied their constitutional rights of due pro-

cess, and the judgment, taking more than $2,000,000 from them

as well as subjecting them to serious administrative sanctions,

must be vacated. If this ruling is allowed to stand, it will pro-

vide precedent for other plaintiffs, both governmental and

private, to avoid the long-standing constitutional requirement

of personal service in in personam actions where the plaintiff

has the defendant’s name and address.

A. Assertion Of Jurisdiction Was Improper Where Defen-

dants Were Not Apprised Of Their Status As Defendants

The SEC and the courts below purport to justify this depriva-

tion of property without due process by claiming that the /n-

ternational Herald Tribune publication gave the petitioners

notice of the pendency of the action and they chose not to ap-

pear. (Pet. App. A20, A73; SEC Br. at 8)?. This claim, however,

confuses notice of pendency of an action with the requirement

to apprise an individual that he is called upon to defend himself

in the action. Leati and Lombardfin did have notice that the

action existed. They did not, however, have any knowledge that

they were intended defendants and, thus, had no notice of any

obligation to defend.

‘ Obviously, as a pleading amendment, the pleading was required to be serv-

ed on petitioners and the new defendants given time to appear and respond.

See Fed. R. Civ. P. 5 and 15. There was no court order to the contrary.

* References to “Pet. App.” are to the Petitioners’ Appendix; references to “Pet.”

are to Petitioners’ Petition For A Writ Of Certiorari; references to “SEC Br.”

are to the SEC’s Brief in Opposition To A Writ Of Certiorari; references to

“App. Br.” are to Petitioners’ Appellants’ Brief in the Second Circuit Court

of Appeals; references to “SEC App. Br.” are to the SEC’s Brief as Appellee

in the Second Circuit Court of Appeals.

Even if they had seen the publication in the /nternational

Herald Tribune, as the SEC now contends by reference to mat-

ter outside the record below,’ that publication did not give them

notice that they were defendants. (See Pet. App. Al06-A107).

On the contrary, since the SEC knew their names and addresses

and knew of their involvement in the subject trades, and indeed,

at that very time was in communication with petitioners’ counsel

on this matter, Leati and Lombardfin were entitled to conclude

that the SEC would have named them personally if they were

intended to be defendants in that action. Even in the absence

of their communication with the SEC, Leati and Lombardfin

were entitled to rely on the theretofore untarnished certainty

of the constitutionally mandated service of a summons, personal-

ly or by mail, to give them notice that they were defendants

and their property was at risk.

Moreover, even actual notice of one’s status as a defendant

is irrelevant to the jurisdiction issue if the individual sought to

be brought within the court’s power is not properly served. E.g.,

Sieg v. Karnes, 693 F.2d 803, 807 (8th Cir. 1982). There is no

obligation on the part of a person who has not been properly

served with process to answer the complaint or otherwise to ap-

pear in an action. Wuchter v. Pizzutti, 276 U.S. 13, 24 (1928).

B. The Trial Court’s Order Directing Service Of A Sum-

mons By Publication Did Not Create In Personam

Juriedicti

The SEC does not dispute the clear holding of Mennonite

Board of Missions v. Adams, 462 U.S. 791 (1983), that service

by publication is impermissible when the name and address of

the defendant are reasonably ascertainable. It concedes that it

knew their names and addresses. (SEC App. Br. at 50). Further,

it knew of Lombardfin’s involvement in the purchases of St. Joe

* The SEC referred to affidavit statements purporting to evidence that Leati

and Lombardfin received a copy of the newspaper publication (SEC Br. at

8-9 n.5, 15-16), which it had sought to introduce below in a motion to supple-

ment the record. The motion was denied by the Court of Appeals. (Pet. App.

Al8 n.6).

securities (see Pet. at 4, 12 n.8), including Tome’s telephone con-

tact with Lombardfin, at the time it sought the triai court’s order

permitting service by publication.* The SEC contends only that

it did not know that Leati and Lombardfin were “culpable” (SEC

Br. at 5), having been allegedly misled by Leati’s statement in

his affidavit that he and Lombardfin were innocent of trading

on the basis of nonpublic information. They still maintain their

innocence and maintain that the finding of liability below is

unsupported by the evidence and is clearly erroneous.‘ Men-

nonite makes no exception to its “per se rule against construc-

tive notice,” 462 U.S. at 805 (dissenting opinion), for a situation

where the plaintiff has not yet decided to sue a person whose

name, address and involvement are known to the plaintiff.

Even when the SEC changed its mind and decided to sue

Leati and Lombardfin in the Fall of 1985 (SEC Br. at 5; SEC

App. Br. at 14), it chose not to attempt to serve them with a

summons and complaint naming them as defendants. Instead,

the SEC chose to wait until the eve of trial and, through the

guise of a motion to amend the caption of the complaint, pro-

ceeded as if petitioners had been defendants all along, relying

on the publication to unnamed purchasers three and one-half

years earlier placed in the International Herald Tribune.

Not only was the publication order unconstitutional, but it

was improper under Rule 4 of the Federal Rules of Civil Pro-

cedure. The SEC has admitted that the publication did not in-

clude a complaint (SEC Br. at 10 n.6) and, thus, that Judge

* The publication itself refers to Lombardfin as one of the brokers through

which the intended defendants had purchased the securities. (Pet. App.

A106-A107).

* The SEC is mistaken when it says that petitioners do not claim the finding

of liability was clearly erroneous. (SEC Br. at 17 n.14). Petitioners so argued

to the Second Circuit. (App. Br. at 21 n.16). While the SEC further contends

that the Court of Appeals’ ruling should not be disturbed because liability

was conclusively established, due process requires more than an ex parte pro-

ceeding at which out-of-court statements taken without cross-examination are

offered as proof of liability.

Pollack’s order authorizing service by publication of a summons

without a complaint failed to meet the requirements of Fed.

R. Civ. P. 4(i)(1)(E).* The SEC mistakenly seeks to characterize

the order of publication as one authorized by Fed. R. Civ. P.

4(e).’ That rule, however, is limited in its applicability to orders

of service which are expressly authorized by statute.* Section 27

of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa (1982),

is not such a statute. It does not expressly authorize the issuance

of any order regarding service. Thus, the order of publication

* The SEC apparently claims that the requirement of service of a complaint

was effectively satisfied, notwithstanding the admitted absence of a complaint

because, it maintains, the publication notice sufficiently described the allega-

tions of the complaint. (SEC Br. at 10 n.6). Even if the complaint require-

ment of Rule 4(i) could ever be satisfied in such a manner, the publication

notice in this case can in no way be considered the equivalent of a complaint

It contains no allegations of any activity in violation of any law. All it says

about the nature of the case is that the action is one “alleging violations of

[securities law provisions]... , which provisions, inter alia, prohibit the use

of material, non-public information in connection with securities transactions”

(Pet. App. A107) (citations omitted).

’ Rule 4(e) provides that “[w Jhenever a statute of the United States or an order

of court thereunder provides for [extraterritorial service] .. . service may be

made under the circumstances and in the manner prescribed by the statute

or order, or, if there is no provision therein prescribing the manner of service.

in a manner stated in this rule... . ” Fed. R. Civ. P. 4(e).

* See Advisory Committee's Note to Proposed Amendment to Rules of Civil

Procedure, Rule 4, Subdivision (e) (1963), reprinted at 31 F.R.D. 628 (1963

As has long been recognized,

“(t]he words ‘order of court’ must be understood as limited to

orders authorized by a specific federal statute... . The court is

not given blanket authority to enter its rule or order for substituted

service or for personal service beyond the state. And the rule does

not sanction departure from standards of notice and publication

prescribed by statute... .”

1 Barron & Holtzoff, Federal Practice and Procedure 731-32 (Wright ed. 1960

(footnotes omitted). Thus, Rule 4(e) does not provide independent authoriza-

tion for service; it merely continues the effectiveness of certain federal statutes

which might otherwise be superseded by Rule 4, “rather in the nature of a

saving clause or exception.” Id. at 729.

_

i aaa ii aia ili

was not an order within the meaning of Rule 4(e) and was, ac-

cordingly, not authorized under that rule. Nor was the publica-

tion order authorized under any other provision of Rule 4 or

by statute. (See Pet. at 13-18).

C. This Ruling, If Not Vacated, Will Be Precedent For Fur-

ther Avoidance Of The Constitutional Requirements Of

Effective Service Of Process

One of the mandates of due process as it relates to civil litiga-

tion is that the defendant be given the most effective notice

reasonably possible that he has been named a defendant in order

that he has the opportunity to defend, including the right to

confront and cross-examine witnesses and to interpose affir-

mative defenses. There can be no constitutional taking of prop-

erty absent such notice. The ruling below makes a sham of those

constitutional protections. While the SEC argues that this case

does not warrant certiorari because there is no conflict in the

circuits, it must be recognized that, given the clear rulings by

this Court in Mullane v. Central Hanover Bank ¢ Trust Co.,

339 U.S. 306 (1950), and Mennonite, supra, it is not surprising

that no other court has chosen to disregard this mandate. The

SEC argues that this case is unique and is not likely to be

repeated by it because of the signing of various bilateral

memoranda. (SEC Br. at 9, 14-15). While petitioners do not agree

with this point, it must be recognized that these petitioners have

been denied their constitutional rights, reason enough to grant

certiorari, and that this case, if not vacated, will be precedent

for other litigants, both public and private, to find ways to con-

vince a court that they also should be excepted from the re-

quirements of Mullane and Mennonite.°

* The Second Circuit stated that the ,ublication was reasonable because peti-

tioners were “members of the securities industry” and could be “expected to

be aware of a publicly announced SEC investigation.” (Pet. App. A17).

However, as this Court stated in Mennonite Board of Missions, supra, “[p]er-

sonal service or mailed notice is required even though sophisticated creditors

have means at their disposal to discover whether property taxes have not been

paid and whether tax-sale proceedings are therefore likely to be initiated.”

462 U.S. at 799.

II

THE ARGUMENTS CONCERNING THE HAGUE

SERVICE CONVENTION, THE “MISAPPROPRIA-

TION” THEORY AND LACK OF AUTHORIZATION

BY STATUTE OR RULE FOR SERVICE BY PUBLICA-

TION ARE PROPERLY BEFORE THIS COURT

The SEC contends that petitioners improperly refer to the

Hague Convention on Service Abroad of Judicial and Extra-

judicial Documents in Civil or Commercial Matters (the “Hague

Service Convention”), done Nov. 15, 1965, 20 U.S.T. 361, T.I.A.S.

No. 6638 (SEC Br. at 11 n.7) and to the “misappropriation” theory

of liability under SEC Rule 10b-5 (SEC Br. at 17), arguing that

they were not presented to the Court of Appeals. Further, the

SEC contends in passing that petitioners’ arguments concerning

lack of authorization by statute or rule for service by publica-

tion were not raised below. (SEC Br. at 9). All these arguments

constitute enlargements of arguments made in the Second Cir-

cuit and may properly be considered by this Court. Dewey v.

Des Moines, 173 U.S. 193, 197-98 (1899); Raley v. Ohio, 360 U.S.

423, 437 n.12 (1959).”

Consideration of whether the Hague Service Convention should

have been used to effect service of process is fairly comprised

within petitioners’ due process challenge to the district court’s

order permitting service by publication. (App. Br. 12-17). This

Court is entitled to consider that a ratified treaty, to which the

United States and Italy were parties, was in effect setting forth

the appropriate method for international service of process.

Reference to the Hague Service Convention bolsters the asser-

tions made below that the SEC could have served Leati and Lom-

bardfin personally had they ever attempted to do so. Accordingly,

” The fact that these issues were not mentioned below by “book and verse” does

not preclude their review by this Court. Eddings v. Oklahoma, 455 U.S. 104,

113-14 n.9 (1982).

consideration of petitioners’ argument concerning the Hague Ser-

vice Convention adds greater specificity to the due process defect

raised and dealt with in the Court of Appeals, and it is properly

before this Court" Webb’s Fabulous Pharmacies, Inc. v. Beckwith,

449 U.S. 155, 159 n.5 (1980). Similarly, the argument concern-

ing the lack of authorization by statute or rule for service by

publication in this case also adds greater specificity to the due

process defect raised below.

The reference in the Petition For A Writ Of Certiorari to the

“misappropriation” theory is an enhancement of the argument

made below that mere possession of information does not give

rise to a duty to refrain from trading. (App. Br. at 19-31). Peti-

tioners argued to the Second Circuit that there was no scienter

proved against them because they were unaware that Giuseppe

Tome was conveying material nonpublic information obtained

improperly by him as a result of his relationship to Joseph E.

Seagram & Sons, Inc., the classic application of the “misap-

propriation” theory.

The fact that the “misappropriation” theory was not squarely

attacked in the context of petitioners’ argument on the lack of

scienter is understandable in light of both the fact that Tome

himself, the alleged “misappropriator”, was not even before the

Court of Appeals, his appeal previously having been dismissed,

and the fact that the Second Circuit had consistently approved

the “misappropriation” theory. However, particularly if the court

grants certiorari on the service of process issue, it would seem

proper in light of Carpenter v. United States, 108 S. Ct. 316 (1987),

that-the “misappropriation” theory be presented as well since

without it there could not have been any scienter.

® While the grant of certiorari in Volkswagenwerk Aktiengesellschaft v. Schlunk,

cert. granted, No. 86-1052 (Oct. 13, 1987) (argued Mar. 21, 1988), confirms the

importance of the issue of the exclusivity of the Hague Service Convention, that

case does not raise the issue presented here of whether, given the Hague Ser-

vice Convention, the SEC was free to seek an order directing publication abroad.

CONCLUSION

For the reasons set forth in this reply as well as those set forth

in the Petition For A Writ Of Certiorari, this Court should grant

certiorari to review the constitutionally defective judgment

entered against petitioners Leati and Lombardfin.

Respectfully submitted,

PAUL JOSEPH BSCHORR

Counsel of Record

é DOROTHEA W. REGAL

LORETO J. RUZZO

WHITE & CASE

Attorneys for Petitioners

Lombardfin S.p.A. and

Paolo Mario Leati

1155 Avenue of the Americas

New York, New York 10036

(212) 819-8200