Appendix — Berkley v. Itoba Ltd.

Al

UNITED STATES COURT OF APPEALS

For the Second Circuit

United States Court House

40 Foley Square

New York 10007

George Lange II]

Clerk

At a stated term of the United States Court of Appeals

lor the Second Circuit, held at the United States ( ourthouse

Foley Square, in the City of New York. on the 14th day of Juls

one thousand nine hundred and ninety-five

Itoba Limited

Plaintiff-Appellant,

v Dkt No: 94-7562

LEP Group PLC

Defendants-Appellees

A petition for rehearing containing a suggestion that the action

be reheard in banc having been filed herein by the appellees,

LEP GROUP PLC, WILLIAM R. BERKLEY. PETER R

GRANT and JOHN R. EAST.

Upon consideration by the panel that decided

the appeal, it is Ordered that said petition for

rehearing is DENIED.

lt is further noted that the suggestion for rehearing in banc has

been transmitted to the judges for the court in regular active

service and to any other judge that heard the appeal and that no

such judge has requested that a vote be taken thereon

FOR THE COURT

GEORGE LANGE III, CLERK

By: __/s/

Beth J. Meador Date

Administrative Attorney

[Order entered on July 14, 1995. ]

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

At a Stated Term of the United States Court of Appeals

for the Second Circuit, held at the U nited States Courthouse in

the City of New York. on the [5th day of May, one thousand

nine hundred and ninety-five

PRESENT: HON. WILFRED FEINBERG

HON. ELLSWORTH A. VAN GRAAFEILAND

HON. ROGER J. MINER.

Circuit Judges.

Docket #94-7562 SSS F

[TOBA LIMITED,

Plaintiff-Appellant,

_

LEP GROUP PLC., WILLIAM R. BERKLEY,

JOHN L. READ, PETER J. GRANT &

JOHN R. EAST,

Defendants-Appellees

-X

Appeal from the United States District Court for the

District of Connecticut

This cause came on to be heard on the transcript of

record from the United States District Court for the District of

Connecticut and was argued by counsel.

ON CONSIDERATION WHEREOF. it is now hereby

ORDERED, ADJUDGED and DECREED that the judgment of

Said district court be and it hereby is reversed and the matter

A4

remanded to the said district court for further proceedings

consistent with the opinion of this Court.

GEORGE LANGE III, Clerk

By: __/s/

Arthur M. Heller

Administrative Attorney

[Judgment entered on May 15, 1995]

AS

UNITED STATES COURT OF APPEALS

For the Second Circuit

No. 582 - August Term 1994

(Argued December 1, 1994 Decided May 15, 1995)

Docket No. 94-7562

LEP GROUP PLC, WILLIAM R. BERKLEY,

JOHN L. READ, PETER J. GRANT, JOHN R. EAST,

Defendants-Appellees

Before: FEINBERG, VAN GRAAFEILAND and MINER,

Appeal from a judgment of the United States District

Court for the District of Connecticut (E ginton, J.) dismissing

appellant's securities fraud action for lack of subject matter

jurisdiction.

Reversed and remanded.

MARK C. ZAUDERER. New

York, NY (James Robert

Pigott, Jr., Stein, Zauderer,

Ellenhorn, Frischer &

Sharp, New York, NY,

Richard F. Lawler, James

C. Riley, Whitman Breed

Abbott & Morgan,

A6

Greenwich, CT, of counsel),

for Plaintiff-Appellant.

JEFFREY E. GLEN, New

York, NY (Berwin

Leighton, New York, NY,

Mark B. Seiger, Halloran &

Sage, Hartford, CT, of

counsel), for Defendant-

Appellee LEP Group Plc.

WILLIAM MCGUINNESS,

New York, NY (Fried,

Frank, Harris, Shriver &

Jacobson, New York, NY,

of counsel), for Defendants-

Appellees William R.

Berkley and Peter J, Grant.

Alan H. McLean, Stamford,

CT (Neville, Shaver, Kelly

& McLean, Stamford, CT,

of counsel), for Defendant-

Appellee John R. East.

John L. Read, pro se.

VAN GRAAFEILAND, Circuit Judge:

Itoba Limited appeals from a judgment of the United

States District Court for the District of Connecticut (Eginton,

J.) dismissing its securities fraud action against Lep Group

PLC, William Berkley, John Read, Peter Grant and John East

for lack of subject matter jurisdiction. For the reasons stated

below, we reverse and remand for further proceedings.

The corporate defendant in this case, Lep Group PLC,

is a London-based holding company with some fifty

subsidiaries operating in thirty countries. It is a true

conglomerate, owning businesses in freight forwarding, home

iieemmeemenencmnameiiias mene are simaeni tea ere eel

A7

security systems, biotechnology, travel services, and real estate

speculation. Lep's “ordinary shares", the British equivalent of

common stock, are registered in the United Kingdom,

obligating the company to compiy with United Kingdom

securities laws. The primary trading market for Lep's ordinary

shares is the International Stock Exchange of the United

Kingdom and the Republic of Ireland Ltd. (the "London

Exchange").

To create a United States market for its ordinary

shares, Lep deposited 12,842,850 of its approximately 136

million shares in an American depository in 1988. The

depository in turn issued an American Depository Receipt

(ADR) for each five ordinary shares of Lep on deposit.

Because these ADRs trade in the form of American Depository

Shares (ADSs) on the National Association of Securities

Dealers Automated Quotation System ("NASDAQ"), Lep is

subject to the reporting and disclosure requirements of United

States securities law.

A.D.T. Limited ("ADT") is a transnational holding

company based in Bermuda. Its shares are listed on the New

York Stock Exchange and approximately fifty percent of its

shareholders of record reside in the United States. Itoba, a

Channel Islands company, is a wholly-owned subsidiary of

ADT. ADT also is the corporate parent of A.D.T. Securities

Systems, Inc., a Delaware based firm and one of America's

largest suppliers of security and protection services.

In mulling over expansion plans for A.D.T. Securities

Systems, ADT considered the possible acquisition of one of

A.D.T. Securities Systems’ largest competitors in the American

security market, National Guardian. ADT already owned a

small interest in that corporation through shares it held of Lep,

the parent company of National Guardian. Because ownership

of Lep would lead to control of National Guardian. ADT

considered increasing its Lep holdings.

A8

At the same time, Canadian Pacific was interested in

expanding into the freight forwarding business and also was

pondering a sizable investment in Lep. Learning of their

mutual interest, the companies agreed to explore a joint

purchase of Lep. Canadian Pacific hired S.G. Warburg, a

London investment bank, to evaluate Lep's business operations.

Nicholas Wells, ADT's in-house financial analyst, was directed

by Michael Ashcroft, ADT's chairman, to perform a valuation

of Lep.

In December 1989, S.G. Warburg issued an extensive

report assessing Lep's prospects. The analysis in this report

was based on Lep’s U.K. annual reports, the Form 20-F that

Lep filed with the United States Securities and Exchange

Commission for the year ended December 31, 1988, Lep's

shareholder register, and broker reports. Shortly after the

Warburg report was issued, Canadian Pacific abandoned the

proposed joint venture.

ADT's interest, on the other hand, did not diminish.

Wells continued his examination of Lep, relying heavily on the

Warburg report. To supplement his research, he obtained from

Canadian Pacific a copy of Lep's Form 20-F for 1988. Wells

frequently discussed his analyses of these documents with

David Hammond, ADT's vice chairman and the person in

charge of acquisitions.

Based on Wells’ analyses and their own review of the

Warburg report, Hammond and Ashcroft decided to acquire

Lep. Soon thereafter, Hammond formulated a plan to increase

ADT's Lep holdings by making anonymous purchases on the

market through one of ADT's off-shore companies, in this case

Itoba. Hammond contacted the board members of Itoba and

recommended that they approve his purchase plan.

As expected, Itoba's board approved the plan. Itoba's

board then requested one of ADT's employees to commence

share purchases in Itoba's name; these purchases were made

according to Hammond's plan and paid for by ADT. During

Se

AY

the second half of 1990, Itoba executed a number of Significant

purchases on the London Exchange pursuant to the plan. By

November 1990, Itoba had acquired over 37 million Lep

ordinary shares for approximately $114 miliion

Before ADT could complete its planned acquisition

however, Lep disclosed a series of business reversals that

decimated its share value: Lep's stock price plummeted 97%

and the value of Itoba's Lep holdings declined by nearly $111

million. Lep wrote off approximately $522 million from its

books for the fiscal year ended December 31. 199]

Itoba sued Lep and its officers in the District of

Connecticut, asserting violations of sections 10(b) and 20 of the

Securities Exchange Act of 1934 (the "Act") and of Rule 10b-5

According to Itoba, the defendants were subject to liability

because they failed to disclose material matters in Statements

filed with the SEC Specifically, Itoba alleged that Lep made

high risk investments and engaged in speculative business

ventures without informing the investing public. Itoba claimed

that had these matters been properly disclosed, it would not

have purchased Lep's stock at artificially inflated prices

ltoba also asserted claims against Lep director William

Berkley for alleged violations of sections 10(b) and 12(2) of the

Act and of Rule 10b-5. Berkley, a United States citizen and a

resident of Connecticut, had sold a large block of Lep ordinary

Shares in the United States on the same day that Itoba

purchased a large block of shares in London. Itoba alleged that

had Berkley properly complied with his duty to disclose

material, nonpublic information before trading, it would not

have made that purchase

Defendants moved to dismiss Itoba's claims for lack of

subject matter jurisdiction, and Magistrate Judge Jean

Margolis, to whom the matter was referred for

recommendation and report, issued a report that recommended

dismissing Itoba's action on jurisdictional grounds. The district

court adopted the magistrate judge's recommendations in toto

Al0

It dismissed Itoba's action on Fed. R. Civ. P. 12(b)(1)

grounds in a short-form order. This, we conclude, was error.

It is well recognized that the Securities Exchange Act is

Silent as to its extraterritorial application. See, e.g., Alfadda v.

Fenn, 935 F.2d 475, 478 (2d Cir.) (citing 15 U.S.C. § 78aa),

cert. denied, 501 U.S. 1005 (1991). However, in determining

whether Congress intended that the "precious resources of

United States courts" be devoted to a specific transnational

securities fraud claim, we are not without guidance. Two

jurisdictional tests have emerged under this Court's decisions:

the "conduct test", as announced in Leasco Data Processing

Equip. Corp. y- Maxwell, 468 F.2d 1326, 1336-37 (2d Cir.

1972), and the “effects test", as announced in Schoenbaum v.

Firstbrook, 405 F.2d 200, 206-09 (2d Cir.), rev'd with respect

to holding on merits, 405 F.2d 215 (2d Cir. 1968) (in banc),

cert. denied sub nom. Manley v, Schoenbaum, 395 U.S. 906

(1969). There is no requirement that these two tests be applied

separately and distinctly from each other. Indeed, an

admixture or combination of the two often gives a better picture

of whether there is sufficient United States involvement to

justify the exercise of jurisdiction by an American court. It is

in this manner that we address the issue of jurisdiction in the

instant case. Because we believe that the allegations are

sufficient to support jurisdiction, we reverse.

Under the conduct test, a federal court has subject

matter jurisdiction if (1) the defendant's activities in the United

States were more than "merely preparatory" to a securities

fraud conducted elsewhere, Bersch v. Drexel Firestone, Inc.,

519 F.2d 974, 987 (2d Cir.), cert. denied, 423 U.S. 1018

(1975), and (2) these activities or culpable failures to act within

the United States "directly caused" the claimed losses, Alfadda,

supra, 935 F.2d at 478. Inherent in the conduct test is the

principle that Congress does not want "'the United States to be

used as a base for manufacturing fraudulent security devices for

export, even when these are peddled only to foreigners."

Psimenos v. E.F. Hutton & Co., 722 F.2d 1041, 1045 (2d Cir.

All

1983) (quoting [IT vy, Vencap, Lid., 519 F.2d lOO1, 1017 (2d

Cir. 1975))

rhe magistrate judge correctly stated the conduct test

when she said that Itoba must prove that Lep's United States

based activities directly caused Itoba's financial losses

However, whether she correctly applied the test is an entirely

different matter. [he magistrate Judge based her

recommendation to deny jurisdiction on the following findings

First, Itoba and ADT did not read the SEC

filing and rely on them: it was an investment

bank hired by ADT which had reviewed the

documents. And second, the SEC filings were

filed in connection with LEP's ADS's and

ADR's, not the ordinary shares purchased by

[toba, for which annual reports and press

releases were generated from England.

The magistrate judge's first finding -- that ADT and

[toba did not read and rely on the SEC filing in making their

purchase decision -- must be rejected in view of the

clearly-established fact that the executives of Itoba and ADT

based their investment decision on the Warburg report. The

analyses and conclusions in this report were predicated on

information found in the Form 20-F that Lep filed with the

SEC. Nicholas Wells, the ADT executive responsible for

assessing investment prospects, made the Warburg report the

centerpiece of his Lep valuation. Moreover. he not only relied

on the discussion of the SEC filing as contained in the Warburg

report, he also used his own copy of the 1988 Form 20-F to

formulate his purchase recommendations. According to the

affidavit of ADT's vice chairman. the decision to acquire Lep

was based upon these recommendations.

The fact that Itoba's board members did not read the

SEC filing is not of controlling significance. A party need not

personally have read a misleading financial report to establish

reliance; derivative reliance is a well-established basis for

liability in a Rule 10b-5 action. See, e.g., Austin v.

Loftsgaarden, 675 F.2d 168, 177-78 & n.19 (8th Cir. 1982),

appeal after remand, 768 F.2d 949 (8th Cir. 1985), rev'd on

other grounds sub nom. Randall v. Loftsgaarden, 478 U.S.

647 (1986); Garfinkel v. Memory Metals. Inc., 695 F. Supp.

1397, 1404 (D. Conn. 1988); Kronfeld v. Trans World

Airlines, Inc., 104 F.R.D. 50, 53-54 (S.D.N.Y. 1984); Walsh

v. Butcher & Sherrerd, 452 F. Supp. 80, 84 (E.D. Pa. 1978);

In re Ramada Inns Sec. Litig., 550 i*. Supp. 1127, 1131 (D.

Del. 1982). The acquisition plan that Itoba's directors

approved was formulated and funded by ADT, which in turn

relied on its financial officer's analysis of the Warburg report

and Lep's SEC filing. The contents of Lep's 1988 Form 20-F

were thus a "substantial" and "significant contributing cause” to

Itoba's purchase decision. There is no requirement, as

suggested by the magistrate judge's decision, that Itoba read

Lep's filing before it could rely on it.

The magistrate judge's second reason for denying the

jurisdiction, i.e., that the SEC filings were made in connection

with Lep's ADSs and ADRs, not its ordinary shares, is only

fifty percent correct and therefore is one hundred percent

wrong. The ADRs were simply a grouping into one security of

five ordinary shares. Inevitably, there was a direct linkage

between the prices of the ADRs representing five ordinary

shares and the prices of the single ordinary shares themselves.

If the ordinary share price fell on the London Exchange, the

market price of an ADR would decrease in similar manner, and

visa versa.

Finaliy, a Rule 10b-5 action is not barred because a

false and misleading statement in an SEC filing pertains to a

security that is not the security purchased. See In re Ames

Dep't Stores Inc. Stock Litig., 991 F.2d 953, 961-62 (2d Cir.

1993). So long as the fraudulent device employed is of the

type that would cause reasonable investors to rely thereon and,

so relying, cause them to purchase or sell the corporation's

securities, a Rule 10b-5 action may lie. See SEC v. Texas Gulf

Sulphur Co., 401 F.2d 833, 860 (2d Cir. 1968) (in banc), cert.

Al3

denied, 394 U.S. 976 ( 1969). SEC filings generally are the

type of "devices" that a reasonable investor would rely on in

purchasing securities of the filing corporation. When these

United States filings include substantial misrepresentations,

they may be a predicate for subject matter jurisdiction. See

Psimenos, supra, 722 F.2d at 1045 (citing Leasco, supra, 468

F.2d at 1337).

The fact that the Lep ordinary shares were issued and

purchased in England does not change our conclusion. "The

conduct test does not center its inquiry on whether domestic

investors or markets are affected, but on the nature of conduct

within the United States as it relates to carrying out the alleged

fraudulent scheme... ." Psimenos, supra, 722 F.2d at 1045;

see Leasco, supra, 468 F.2d at 1337.

Moreover, the making of the allegedly false and

misleading filings with the SEC was not “merely preparatory to

the fraud." Although the magistrate judge refrained from

forthrightly Stating as much, she tiptoed around that statement

as follows:

It is beyond dispute that SEC filings and press

releases are the type of information on which

an investor relies in making his or her

investment decisions. Securities & Exchange

-» 401 F.2d

833, 862 (2d Cir 1968), Cert. denied sub nom.

‘n, 394

U.S. 976 (1969). Even beyond the issue of

whether the SEC filings were "merely

preparatory to the fraud," plaintiff cannot

demonstrate that the alleged acts within the

United States "directly caused [its] losses" for

two reasons.

She then propounded the two reasons we have rejected in the

preceding paragraphs and cited two cases whose application

here is questionable at best, ustri

Al4

S.A., 808 F. Supp. 1143, 1153-55 (S.D.N.Y. 1992) and

Nathan Gordon Trust vy. Northgate Exploration, Lid., 148

F.R.D. 105, 107-08 (S.D.N.Y. 1993). In Koal Industries, a

Panamanian corporation acquired two Netherlands Antilles

corporations which owned interests in an Arkansas mining

company. The entire transaction took place in Switzerland and

the financing was obtained from outside the United States. The

only contact with the United States other than the location of

the mine was a telephone call seeking additional funds for the

acquisition. Northgate involved a motion for class

certification. The defendant was a Canadian corporation which

owned an interest in a gold mine located in northern Canada,

concerning which the defendant filed allegedly false SEC

statements. The proposed class was to consist of all persons

who purchased Northgate stock on the Toronto, Montreal,

London and New York Exchanges. The defendant requested

that the class be limited to those who purchased on the New

York Exchange, and the district court granted its request. In

contrast to the discretionary nature of the district court's class

certification ruling and the "fraud on the market" class issues of

Northgate, the instant case involves a single plaintiff asserting

direct individual fraud.

Appellees address the issue of "preparatory conduct”

more directly. They assert that the mere filing of a document

with the SEC should not trigger jurisdiction in United States

courts. In support of this contention, they point out that Lep's

financial statements were prepared in England and contend that

the act of filing alone should not confer subject matter

jurisdiction in the United States. They say further that the

filing was "incidental or preparatory conduct" in whatever

wrongdoing may have occurred. With respect to the first

contention, we hold that the situs of preparations for SEC

filings should not be determinative of jurisdictional questions.

Otherwise, the protection afforded by the Securities Exchange

Act could be circumvented simply by preparing SEC filings

outside the United States. We find no support in the Act for

such a result.

The second half of appellant's argument overlooks a

basic purpose of the securities law, which is fair disclosure of

material facts. A material fact that is undisclosed in an SEC

filing remains undisclosed absent public enlightenment. This

may bring into play a concomitant duty, i.e., the duty to

correct. See 2 Bromberg & Lowenfels, iti

investors.” Schoenbaum, Supra, 405 F.2d at 208. Here, we

have fraud occurring on an American exchange and persisting

The magistrate judge held that "if ADT were the

plaintiff, the ‘effects test' would be met, in that ADT's stock is

traded on the New York Stock Exchange and approximately

fifty percent (50%) of its shares are held in this country.” See

j , 871

F.2d 252, 262-63 (2d Cir.), , 890

F.2d 569 (2d Cir.), cert. dismissed, 492 U.S. 939 (1989):

» 107 F.2d 663, 666-67 (2d

Cir.), cert. denied, 463 U.S. 1215 (1983); Uni

» 148 F.2d 416, 443 (2d Cir. 1945);

§ 18(b),

cmt. d. We believe this reasoning applies with equal effect

where, although Itoba, ADT's wholly-owned subsidiary, was

the nominal purchaser and owner of the Lep stock, it was ADT

Al6

which financed the deal and which, with its shareholders,

ultimately must bear the loss. This is not a case in which Lep's

acts "simply [had] an adverse affect [sic] on the American

economy or American investors generally." See Bersch, supra,

519 F.2d at 989. In short, we hold that a sufficient

combination of ingredients of the conduct and effects tests is

present in the instant case to justify the exercise of jurisdiction

by the district court. See generally Leasco, supra, 468 F.2d at

1338.

For some reason that is not clear to us, the magistrate

judge did not consider it necessary to address specifically

Itoba's causes of action against any of the individual

defendants. She simply recommended a blanket dismissal of

the complaint as to all defendants, which recommendation was

adopted without discussion by the district court. We find this

particularly troublesome with respect to the defendant Berkley.

On October 8, 1990, Berkley, a United States resident

and a Lep director, sold 7,300,000 ordinary shares of Lep to

his United States-based broker, New York & Foreign Securities

Corporation, which in turn sold these shares for its own

account on the London Exchange. Berkley received almost $24

million for his shares. That same day, Itoba purchased

7,500,000 shares on the London Exchange through its London-

based broker. Whether the close temporal relationship of these

two transactions is or is not coincidental presents an interesting

question. After executing this purchase, Itoba and ADT

executives learned that the shares they had acquired were

owned previously by Berkley. When Itoba brought the instant

action, it asserted a separate claim against Berkley based on

this Court's “disclose or abstain" rule, which imposes on

insiders a duty to disclose material information before trading

in their company's securities. See SEC y. Texas Gulf Sulphur

Co., supra, 401 F.2d at 848. In Shapiro v. Merrill Lynch. :

Pierce. Fenner & Smith, Inc., 495 F.2d 228, 237 (2d Cir.

1974), we held that an insider who fails to comply with his duty

to disclose or abstain can be held liable “not only to the

purchasers of the actual shares sold by [the insider,] but to all

Al7

persons who during the same period purchased [the

corporation's] stock in the open market without knowledge of

the material inside information which was in the possession of

[the insider]."

Although we do not presently rule on the issue, it

would seem that Berkley's failure to disclose material,

nonpublic information prior to selling his Lep shares is the type

of behavior that falls under this Rule 10b-5 rubric. Because

antifraud provisions are designed to prevent corporate insiders

from taking unfair advantage of uninformed outsiders, Shapiro

y. Merrill Lynch, supra, 495 F.2d at 235 (citing Radiation

, 464 F.2d 876, 890 (2d Cir.

1972)), Berkley's alleged nondisclosure during a sales

transaction executed by two parties within the United States --

Berkley and his broker -- is the type of conduct that should

trigger jurisdiction. See Roth v. Fund of Funds, Ltd., 279 F.

Supp. 935, 936-37 (S.D.N.Y.), aff'd, 405 F.2d 421 (2d Cir.

1968), cert. denied, 394 U.S. 975 (1969).

Moreover, it is not clear that Itoba is disabled from

asserting its claim because it purchased its shares on a foreign

market -- the London Exchange. In :

Supra, we held that an inside trader is subject to liability to all

purchasers of his corporation's stock on the "open market."

495 F.2d at 237. Whether the "open market" encompasses

foreign exchanges is an issue we leave for remand.

We conclude that Itoba's claim against Berkley should

not have been incorporated without discussion into Itoba's

claim against the non-resident defendants and just as silently

dismissed.

CONCLUSION

Unlike some securities actions brought to recover

questionable damages on behalf of optimistically described

classes, we are met here with a single plaintiff which suffered

direct substantial losses. A plaintiff such as this should not be

Pe PS tn SD

Al8

deprived of its day in an American court by a Rule 12(b)(1)

order based on erroneous facts and questionable law. We

conclude that the issues now before us best can be resolved by

a trial on the merits in which the facts relevant to jurisdiction

may be more fully developed. See Bersch, supra, 519 F.2d

992-93 (quoting Leasco, supra, 468 F.2d at 1330). We reverse

the judgment below and remand for such a trial.

Al9

UNITED STATES DISTRICT COURT

DISTRICT OF CONNECTICUT

ITOBA LIMITED

v.

LEP GROUP pic, et al

CIVIL NO. 5:92cv556 (WWE)

CORRECTED

—IJUDGMENT _

This cause came on for consideration on plaintiff's

motion for order pursuant to Rule 60(a) or, in the alternative

pursuant to Rule 54(b) before the Honorable Warren W.

Eginton, Senior United States District Judge, and

The Court having considered the motion and all the

Papers submitted in connection therewith granted the motion

and further ordered judgment to enter in favor of defendant

John L. Read in addition to those defendants in whose favor

judgment has already entered, Fed. R. Civ. P. 60(a),

It is therefore ORDERED and ADJUDGED that the

judgment be and hereby is entered in favor of the defendants

Lep Group, John East, Peter Grant, William Berkley, and John

L. Read, in accordance with the court's order.

Dated at Bridgeport, Connecticut this 23rd day of May,

1994.

KEVIN F. ROWE, Clerk

By __/s/

Carol E. Cannady

Deputy in Charge

A20

UNITED STATES DISTRICT COURT

DISTRICT OF CONNECTICUT

ITOBA LIMITED

v.

LEP GROUP plc, et al

CIVIL NO. 5:92cv556 (WWE)

JUDGMENT

This cause came on for consideration of the defendants’

motions to dismiss before the Honorable Joan G. Margolis,

United States Magistrate Judge, having granted the motions to

dismiss, and

The Honorable Warren W. Eginton, Senior United

States District Judge, after de novo review, and over objection,

affirmed Magistrate Judge Margolis’ ruling,

It is ORDERED and ADJUDGED that judgment be

and is hereby entered in favor of the defendants Lep Group,

John East, Peter Grant, and William Berkley, in accordance

with the Court's ruling.

Dated at Bridgeport, Connecticut this 16th day of

March, 1994.

KEVIN F. ROWE, Clerk

By _/s/

Carol E. Cannady

Deputy in Charge

A21

[Memorandum Endorsement]

[Originally typed in margin of first page of U.S. Magistrate

Judge Joan Glazer Margolis's Recommended Ruling on

Motions to Dismiss]

3/14/94: After de novo review, and over objections,

the ruling of the Magistrate Judge is hereby AFFIRMED.

Ls/

Warren W. Eginton,

Senior U.S. District Judge

A22

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF CONNECTICUT

x

ITOBA LIMITED 5:92 CV 00556 (WWE)

V.

LEP GROUP pic, ET AL. : DATE: FEBRUARY 4, 1994

x

RECOMMENDED RULING ON MOTIONS TO DISMISS

On September 22, 1992, plaintiff Itoba Limited

["Itoba"] commenced this securities action with respect to

allegedly fraudulent non-disclosure of facts in press releases

and filings with the Securities and Exchange Commission

["SEC"] made by the defendant LEP Group plc ["LEP"]. As

set forth in its complaint, Itoba is a corporation organized

under the laws of the States of Jersey, Channel Islands, with its

principal place of business in St. Helier, Jersey, Channel

Islands (48). Itoba is a wholly-owned subsidiary of ADT

Limited ["ADT"], a corporation organized under the laws of

Bermuda, with its principal place of business in Hamilton,

Bermuda (id.). Defendant LEP is a corporation organized

under the laws of England, with its registered office in Epsom,

Surrey, England (id. 410). The four additional defendants are

present or former directors of LEP -- William, R. Berkley (who

resides in Greenwich, Connecticut), John L. Read, Peter J.

Grant and John R. East.'

lThe action has been stayed as against defendant Read, a citizen of

England who filed an Individual Voluntary Arrangement under

British law. See Ruling on Pending Discovery Motions, filed

Apr. 5, 1993 (Dkt. #81), at 3-6.

A23

After jurisdictional discovery was completed, on May

24, 1993, defendants LEP, Berkley, Grant and East filed

motions to dismiss plaintiff's complaint on the grounds that this

court lacks subject matter jurisdiction or, in the alternative, that

the complaint should be dismissed under the doctrine of forum

non conveniens (Dkt. ##83-88).2 On June 28, 1993, plaintiff

filed its brief in opposition and four affidavits (Dkt. ##90-94) 3

2Defendant Berkley also filed an affidavit from his counsel, William

G. McGuiness (Dkt. #85), to which the following four exhibits were

attached: excerpts from the deposition of defendant Berkley, taken

on March 10, 1993 ("Berkley Dep. Tr."] (Exh. 1): excerpts from the

deposition of David B. Hammond, taken in London on

November 24-25, 1992 {"Hammond Dep. Tr.”] (Exh. 2); excerpts

from the deposition of David L. Crespel, taken on February 10,

1993 ["Crespel Dep.Tr."] (Exh. 3); and excerpts from the telephone

deposition of Peter W.S. Percival, taken on April 23, 1993

("Percival Dep. Tr."] (Exh. 4).

Attached to the motion of defendants LEP and East was an affidavit

from their attorney, Jeffrey E. Glen (Dkt. #87), to which nine

exhibits were attached: copy of LEP’s Form 6-K. filed with the

SEC on July 6, 1989 (Exh. 1); copy of LEP's Form 6-K, dated

October 12, 1989 (Exh. 2); copy of LEP’s Form 6-K, dated April

20, 1990 (Exh. 3); copy of LEP’s Form 20-F, dated June 29, 1990

(Exh. 4); additional excerpts from the Hammond deposition (Exh.

5); additional excerpts from the Crespel deposition (Exh. 6); excerpts

from the deposition of defendant East, taken on February 25, 1993

(Exh. 7); excerpts from the deposition of defendant Read, taken on

April 8, 1993 in Naples, Florida (Exh. 8): and additional excerpts

from the Percival deposition (Exh. 9).

+The first affidavit was prepared by Hammond ["Hammond Aff't”]

(Dkt. #91), to which three exhibits were attached: copy of ADT's

Form 20-F, filed with the SEC on May 21, 1992 (Exh. 1): copy of

ADTs Form 10-K, dated March 31, 1993 (Exh. 2): and copy of

LEP’s Schedule 13D, filed with the SEC on October 18, 1990

(Exh. 3).

The second affidavit was prepared by Itoba’s counsel, Mark C.

Zauderer (Dkt. #92), to which the following twelve exhibits were

footnote continued on next page

A24

On July 27, 1993, defendants LEP, East, Berkley and Grant

filed a reply brief (Dkt. #97). On August 10, 1993, plaintiff

footnote continued from previous page

attached: copy of plaintiff's complaint (Exh. 1); additional excerpts

from the Hammond deposition (Exh. 2); additional excerpts from the

Crespel deposition (Exh. 3); additional excerpts from the East

deposition (Exh. 4); additional excerpts from the Berkley deposition

(Exh. 5); additional excerpts from the Read deposition (Exh. 6);

additional excerpts from the Percival deposition (Exh. 7); copy of

LEP’s Annual Report for 1991 (Exh. 8); copy of “Text of Address"

given by David N. James, LEP’s Chairman, at the "Extraordinary

General Meeting and Annual General Meeting" held on August 24,

1992 (Exh. 9); copy of an article appearing in the London Daily

Telegraph on November 21, 1992 (Exh. 10); letter from plaintiff's

counsel to defense counsel, dated December 29, 1992 (Exh. 11); and

Statement of Ruth Markland, a British solicitor (Exh. 12).

The third affidavit was prepared by defendant Grant (Dkt. #93), to

which two charts were attached (Exh. 1), indicating LEP's price on

NASDAQ and on the London Stock Daily Exchange, from

December 1988 to December 1991.

The last affidavit was prepared by Nicholas Wells ["Wells Aff't"]

(Dkt. #94), to which the following two exhibits were attached: a

copy of the "Project Bavaria" report, dated December 1989 (Exh. 1);

and copy of LEP's Form 20-F, dated June 29, 1989 (Exh. 2).

4Three exhibits were attached: additional excerpts from the

Hammond deposition (Exh. A); additional excerpts from the Crespel

deposition (Exh. B); and an affidavit from defense counsel, Jeffrey

E. Glen, with an Opinion by Nicholas Underhill, another English

barrister (Exh. C).

A25

filed a surreply brief (Dkt. #99).5 On June 30, 1993, these

motions were referred to this Magistrate Judge (Dkt. #95).

For the reasons stated below, defendants’ motions are

granted.

I,

FACTUAL BACKGROUND®

The jurisdictional facts are as follows:

As previously indicated, Itoba, a corporation organized

under the laws of the States of Jersey, Channel Islands, is a

wholly-owned subsidiary of ADT, a Bermudian corporation.

ADT's primary business is providing electronic security

services and alarm systems for residential and commercial

property, and conducts an extensive security services business

in the United States through its wholly-owned subsidiary, ADT

Security Systems, a Delaware corporation (Hammond Aff't

113-4). ADT maintains executive offices in the United States,

its stock is traded on the New York Stock Exchange, and

approximately fifty percent (50%) of its shares are held in the

United States (id. 46). Itoba is one of ADT's approximately

twenty subsidiaries whose principal business is to hold

investments for ADT (id. 447-9: Crespel Dep. Tr. at 59).

As previously indicated, LEP is a British corporation.

"Ordinary Shares" of LEP’s stock are traded on the London

>Four additional exhibits were attached: additional excerpts from the

East deposition (Exh. 1); additional excerpts from the Percival

deposition (Exh. 2); additional excerpts from the Read deposition

(Exh. 3); and an opinion letter from Samuel Stamler and Ian Glick,

two more British barristers (Exh. 4).

The filings associated with these motions are nearly six inches thick.

®See note 8 infra.

:

{

i

A26

Stock Exchange; however, since September 30, 1988, LEP's

American Depository Shares ["ADS"] are traded on the

National Association of Securities Dealers Automatic Quotation

System ["NASDAQ"]; each ADS is evidenced by an American

Depository Receipt ["ADR"], which represents five Ordinary

Shares (Crespel Dep. Tr. at 100; Percival Dep. Tr. at 29, 61-

62; Berkley Dep. Tr. at 54; Dkt. #87, Exh. 4, at 12-13; Dkt:

#94, Exh. 2, at 14-16). It is in connection with the ADS's and

ADR's that LEP has made its filings with the SEC (see, e¢.g.,

Dkt. #87, Exhs. 1-4; Dkt. #91, Exh. 3; Dkt. #94, Exh. 2). At

issue in this litigation are LEP's filings, commencing in July

1989, of Form 6-K's and 29-F, which allegedly failed to

disclose significant financial problems; various items were

attached to such forms, including LEP's 1988 and 1989 Annual

Reports, as well as a press release bearing the dateline,

"Greenwich, Connecticut."

In spring 1990, ADT "recommended" to Itoba that the

subsidiary purchase LEP stock (Hammond Aff't 414; Wells

Aff't 4412-14; Hammond Dep. Tr. at 59-60, 70-71, 106-07,

215; Crespel Dep. Tr. at 66-68, 85-86).’? In reaching this

"recommendation," ADT had relied upon a report prepared by

an investment bank; this bank, in turn, had reviewed LEP's

recent U.K. annual reports and circular to shareholders and its

Form 20-F filed with the SEC (Wells Aff't 445-11, 14; Exh.

1). Executives at ADT, however, did not themselves review

the SEC filings (Crespel Dep. Tr. at 74), nor did any

executives at Itoba (id. at 68). Between June 4, 1990 and

November 23, 1990, Itoba acquired 37,267,830 shares of LEP

7ADT contends that it is common practice for a parent corporation to

acquire securities through a wholly-owned subsidiary, which practice

avoids early identification of the parent and minimizes disturbances

in the market which might affect the stock's trading price (Hammond

Aff't 413). However, ADT also conceded, at depositions, that the

transaction would have been subject to U.K. taxation if the decision

to purchase the stock had been made in England (Hammond Dep. Tr.

at 215-16; Crespel Dep. Tr. at 25-26, 60, 66).

A27

stock as they became available on the London stock market, for

an aggregate price of approximately $114 million (Hammond

Aff't 421). These shares were purchased through Shearson

Lehman's London office, which in turn dealt with other stock

brokerage firms, including two located in New York City

(Hammond Aff't 449, 17-18: Hammond Dep. Tr. at 162-68,

218-20; Berkley Dep. Tr. at 54-68).

In September 1991, LEP first disclosed that it was

facing financial problems; LEP ultimately wrote off $522

million in losses for that year (Hammond Aff't 420; Wells Aff't

416). As a result, the value of Itoba's shares fell to

approximately $2.26 million, resulting in a loss of $111 million

(Hammond Aff't 421).

Il.

DISCUSSION

Defendants filed this motion to dismiss pursuant to Rule

12(b)(1) of the Federal Rules of Civil Procedure, challenging

this court's subject matter jurisdiction over this cause of

action.8

8A threshold matter to be resolved is the appropriate standard of

review. There is no dispute that once a party challenges the district

court's subject matter jurisdiction, the burden of establishing such

jurisdiction rests on the party asserting jurisdiction. Wills v.

Ferrandino, 830 F. Supp. 116, 122 (D. Conn. 1993); Washton v.

ULS., 2:91 CV 121 (AHN), 1993 U.S. Dist. LEXIS 2863, at *6 n.1

(D. Conn. Feb. 12, 1993);

International, Inc., 775 F. Supp. 518, 522 (D. Conn. 1991). Thus,

plaintiff here bears the burden of establishing the court's jurisdiction.

There is similarly no dispute that in deciding a Rule 12(b)(1) motion

challenging the district court's jurisdiction, the court may look

beyond the complaint and rely on extrapleading materials. Hicks v,

Brophy, 3:93 CV 1595(JAC), 1993 U.S. Dist. LEXIS 18495, at *5

(D. Conn. Dec. 14, 1993); Wills, Supra, F. 830 Supp. at 122;

footnote continued on next page

A28

A. SUBJECT MATTER JURISDICTION

Both the Securities Act of 1933 and the Securities and

Exchange Act of 1934 are silent as to their extraterritorial

application, so that the federal courts have had to determine

"whether Congress would have wished the precious resources

of the United States courts" to be used in resolving disputes

between foreign entities in the area of securities fraud. Bersch

vy. Drexel Firestone, Inc., 519 F.2d 974, 985 (2d Cir.), cert.

denied sub nom. Bersch v. Arthur Andersen & Co., 423 U.S.

1018 (1975). To determine whether the district courts have

subject matter jurisdiction over these foreign transactions, the

Second Circuit has fashioned two principal tests: the "effects

test" and the "conduct test." Alfadda v. Fenn, 935 F.2d 475,

478 (2d Cir.), cert, denied, 112 S. Ct. 638 (1991). Only one

of the two tests must be satisfied in order for subject matter

footnote continued from previous page

Ensign-Bickford Co, v, ICI Explosives USA Inc., 817 F. Supp.

1018, 1023 (D. Conn. 1993); Washton, supra, 1993 U.S. Dist.

LEXIS 2863, at *6 n.l. The parties disagree as to how a court

should respond to conflicting affidavits, depositions, and documents.

Under such circumstances, courts have looked to the decisions which

have developed the standards for summary judgment under Rule 56

to “assist in resolving the problem encountered if the affidavits

submitted on a 12(b)(1) motion should reveal the existence of factual

problems.” Exchange National Bank of Chicago v. Touche Ross &

Co., 544 F.2d 1126, 1130-31 (2d Cir. 1976); cf. Washton, supra,

1993 U.S. Dist. LEXIS, at *6 n.1.

Looking to Rule 56 summary judgment standards, the court will

resolve all factual “ambiguities and inferences” in the light most

favorable to the party opposing the motion, in this case, plaintiff

Itoba. Matsushita Electric Industrial Co.. Lid. v. Zenith Radio

Corp., 475 U.S. 574, 587 (1986); Delaware & Hudson RY. Co. v.

Consolidated Rail Corp., 902 F.2d 174, 177 (2d Cir. 1990), cert.

denied, 111 S. Ct. 2041 (1991). Thus, for the purposes of

considering defendants’ motions to dismiss, the facts will be viewed

in the light most favorable to plaintiff. Leasco Data Processing

Equipment Corp, v. Maxwell, 468 F.2d 1326, 1330 (2d Cir. 1972).

A29

jurisdiction to be conferred on the district court in a securities

fraud action. Psimenos v. E.F. Hutton & Co., Inc., 722 F.2d

1041, 1045 (2d Cir. 1983).

1. “CONDUCT TEST"

In Alfadda, supra, the Second Circuit's described the

"conduct test" as follows: "a federal court has subject matter

jurisdiction if the defendant's conduct in the United States was

more than merely preparatory to the fraud, and particular acts

or culpable failures to act within the United States directly

caused losses to foreign investors abroad." 935 F.2d at 478

(citations omitted).

This test has been applied with varying results. For

example, in one of the earliest cases, Leasco Data Processing

Equipment Corp, v. Maxwell, 468 F.2d 1326, 1336-37 (2d

Cir. 1972), the action was commenced by American citizens

against (the now late) Robert Maxwell, a British citizen, with

respect to a British company's stock, traded solely on the

London Stock Exchange; subject matter jurisdiction was found

because "substantial misrepresentations were made in the

United States." The same conclusion more recently was

reached in Alfadda, supra, 935 F.2d at 478-79, where the

plaintiffs were all residents of Saudi Arabia or Bahrain, and the

corporate defendants were either Netherlands Antilles or

French companies. However, jurisdiction in this country was

appropriate in that the allegedly fraudulent activity, Le.,

negotiations and communications which diluted plaintiffs’

shares, all took place in the United States. See also Psimenos,

Supra, 722 F.2d at 1045-48 (subject matter jurisdiction found in

action brought by Greek citizen regarding purchases made

through defendant's Athens and Paris offices, where plaintiff

was induced by pamphlets prepared in the U.S. and where

transactions were consummated in New York).

The plaintiff-class in Bersch, supra, were thousands of

Shareholders, who primarily were citizens of Canada,

Australia, England, France, Germany, Switzerland and of

A30

several other European, Asian, African, and South American

countries, with some Americans. The action involved the stock

of a Canadian company, which had its main business office in

Switzerland; the underwriters included two large American

banking houses -- Drexel Firestone, Inc. and Smith, Barney &

Co -- and four foreign underwriting houses. The prospectuses,

which were printed abroad in English, French, and German,

and which were delivered to purchasers outside the United

States, specifically provided that these shares of stock were not

being offered in the U.S. In applying the “conduct test,” the

Second Circuit differentiated between three sets of plaintiffs:

(1) American residents, who could commence securities actions

here, without regard to whether the alleged acts of material

importance occurred in this country; (2) American residents

abroad, who were permitted to commence securities actions

here "if, but only if, [alleged] acts . . . of material importance

in the United States have significantly contributed [to their

losses]"; and (3) foreigners, who could commence such actions

here only if the "[alleged] acts . . . within the United States

directly caused [their financial losses]." 519 F.2d at 993.

There is no doubt that the factual circumstances here

present a closer picture than those presented in the above-

referenced Second Circuit decisions. However, it would

appear that plaintiff cannot prevail under the "conduct test"

under the facts of this case. It is beyond dispute that SEC

filings and press releases are the type of information on which

an investor relies in making his or her investment decisions.

Securities & Exchange Comm'n vy. Texas Gulf Sulphur Co.,

401 F.2d 833, 862 (2d Cir. 1968), cert. denied sub nom.

Coates v. Securities & Exchange Comm'n, 394 U.S. 976

(1969). Even beyond the issue of whether the SEC filings were

"merely preparatory to the fraud," plaintiff cannot demonstrate

that the alleged acts within the United States "directly caused

[its] losses" for two reasons. First, Itoba and ADT did not read

the SEC filings or rely upon them; it was an investment bank

hired by ADT which had reviewed these documents. And

second, the SEC filings were filed in connection with LEP's

ADS's and ADR'S, not the Ordinary Shares purchased by

A31

Itoba, for which annual reports and press releases were

generated from England.

This conclusion is consistent with two recent district

court opinions, Koal Industries Corp. v. Asland, S.A., 808 F.

Supp. 1143, 1153-55 (S.D.N.Y. 1992) and Nathan Gordon

Trust v. Northgate Exploration, Lid., 148 F.R.D. 105, 107-08

(S.D.N.Y. 1993). In Koal Industries, the plaintiffs, a

Panamanian corporation and nationals, acquired from

companies organized in Netherlands Antilles an interest in a

mining company located in Arkansas. The negotiations, the

drafting of the purchase agreement, and its execution all took

place in Switzerland; the financing was obtained from outside

the United States. The only contact with the United States.

other than the location of the mine, was a single telephone call

seeking additional funding; the district court characterized that

single telephone call as “at best, a preparatory act,” so that

subject matter jurisdiction was lacking. The underlying facts in

Nathan Gordon Trust are even closer to this case. The

defendant was a Canadian corporation whose stock was traded

on the New York, Toronto, Montreal, and London Stock

Exchanges; the alleged misrepresentations were authored

entirely in Canada, although they were attached to

documentation filed with the SEC here and to some extent

circulated in this country. Relying upon Alfadda, Supra, the

district court limited the class action to transactions made on

the New York Stock Exchange only:

The court rules that the relevant

"conduct" in the present case occurred in

Canada where the alleged misleading

information was authored. The mere filing of

reports with the SEC and the dissemination of

some materials to shareholders in the United

States were merely incidental to the authorship,

preparation and dissemination of the allegedly

false information, all of which occurred in

Canada. Accordingly, the court does not have

A32

subject matter jurisdiction over the claims

arising from transactions on foreign exchanges.

148 F.R.D. at 108.

a " "

The second test to be applied is the "effects test,"

which applies "where illegal activity abroad causes a

‘substantial effect’ within the United States." Alfadda, supra,

935 F.2d at 478 (citation omitted). As the Second Circuit

observed in Bersch,_supra, this test is not met "simply because

in the long run there was an adverse effect on this country's

general economic interests or on American security prices,” or

when the alleged acts "simply have an adverse [e]ffect on the

American economy or American investors generally.” 519 F.2d

at 989 (footnotes omitted).

Subject matter jurisdiction was found under the "effects

test" in Consolidated Gold Fields PLC vy, Minorco, S.A., 871

F.2d 252, 262-63 (2d Cir. 1989). The plaintiff there was a

British corporation, with numerous American subsidiaries; half

of its $2.4 billion in assets were located in this country.

Defendant was a Luxembourg corporation, largely controlled

by South African companies and individuals. The Second

Circuit found that the "effects test" had been satisfied, because

2.5% of plaintiff's shareholders were American, holding

approximately 5.3 million shares with a market value of

approximately $120 million.

In contrast, no subject matter jurisdiction was found in

Koal Industries, supra, where the plaintiff was not an American

investor, the defendants’ stock was neither registered nor listed

on a national securities exchange, and the only financial

damage was the demise of the Arkansas mine.

If the court were to focus solely upon Itoba, the only

named plaintiff, it is clear that the "effects test" would not be

satisfied. It is equally clear that if ADT were the plaintiff, the

A33

"effects test" would be met, in that ADT's stock is traded on

the New York Stock Exchange and approximately fifty percent

(50%) of its shares are held in this country.

Itoba argues that ADT's attributes ought to be

considered here, under the rationale of Leasco, supra. In that

case, the named plaintiff was Leasco Data Processing

Equipment Corporation ["Leasco"}, an American corporation,

which had negotiated to purchase more than five million shares

in Maxwell's company, Pergamon Press Limited, a British

company; such stock had been purchased with cash provided

by its wholly-owned subsidiary, Leasco International N.V.

["Leasco N.V."], a Netherlands Antilles corporation, and

Leasco had unconditionally guaranteed Leasco N.V.'s financial

obligations. 468 F.2d at 1332-33. Leasco also sent a letter to

the British company indicating that Leasco “has an interest" in

the shares of stock, and that such shares “are held on behalf of

Leasco...N.V." Id, at 1338. Among defendants’ arguments

to defeat subject matter jurisdiction was that the “purchaser” of

the stock was not an American company but a Netherlands

Antilles corporation. The Second Circuit disagreed:

It seems quite arguable from all this

that Leasco N.V. is holding the shares merely

as trustee for Leasco, which has the beneficial

interest and is bound to reimburse Leasco N.V.

for the latter's expenditures. If that were so,

defendants’ contention that the true purchaser

was a foreigner would be drained of force. But

even if Leasco N.V. is the beneficial owner, it

would be elevating form over substance to hold

that this entails a conclusion that the purchases

did not have a sufficient effect in the United

States to make § 10(b) apply. Whether Leasco

N.V. is merely a financial conduit, as plaintiffs

assert, or was planned to conduct an active

business, as some of the SEC filings indicate, it

was wholly-owned and its debt securities were

guaranteed by Leasco and were convertible

A34

with Leasco common stock. We see no need to

enter into the debate whether, as defendants

contend and plaintiffs deny, Leasco obtained

substantial tax and other advantages through the

incorporation of Leasco N.V. and the use of

the latter to acquire the Pergamon shares.

Id. at 1338.

The Leasco case is distinguishable for at least three

reasons. First, and most obvious, is the simple fact that the

named plaintiff in Leasco was Leasco, an American

corporation, and not its foreign subsidiary. Second, despite the

copious filings made by both sides, no evidence was submitted

here that ADT made any unconditional guaranties of Itoba's

obligations. And third, the written contract between Leasco

and Pergamon expressly provided that “at [Leasco's] election,"

the offer to purchase could be made "by a wholly-owned

subsidiary of Leasco or a wholly-owned subsidiary of such

subsidiary," and that Leasco "shall remain responsible for the

due performance" of the obligation to acquire the shares. The

Second Circuit thus concluded: “In acceding to this provision

the defendants themselves recognized that Leasco, the United

States company, remained at all times intimately involved in the

transaction; the foreign entity was accepted by both sides as the

alter ego of the American.” Id, at 1338. In the present action,

there were no similar negotiations between Itoba/ADT and

LEP, so that LEP could be deemed to have viewed Itoba and

ADT as being interchangeable.

In light of these distinguishing factors, this court is not

willing to disregard corporate formalities and treat Itoba and

ADT as functional equivalents.

B. FORUM NON CONVENIENS

Given the conclusion reached in Section II.A. supra,

there is no need to address the issue of forum non conveniens.

A35

CONCLUSION

For the reasons stated above, defendants’ motions to

dismiss (Dkt. ##83, 86, & 87) are granted.

See 28 U.S.C. § 636(b) (written objections to ruling

must be filed within ten days after service of same); F. R.

Civ. P. 6(a), 6(e) & 72; Rule 2 of the Local Rules for United

States Magistrate Judges, United States District Court for the

District of Connecticut; Small v. Secretary, H&HS, 892 F.2d

15, 16 (2d Cir. 1989) (failure to file timely objection to

Magistrate Judge's recommended ruling may preclude

further appeal to Second Circuit).

Dated at New Haven, Connecticut, this 4th day of

February, 1994.

ls/

Joan Glazer Margolis

U.S. Magistrate Judge

A36

Section 27 of the Securities Exchange Act of 1934, 15

U.S.C. § 78aa, provides:

The district courts of the United States,

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 chapter 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 chapter 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

chapter or rules and regulations thereunder, or

to enjoin any violation of such chapter or rules

and regulations, may be brought in any such

district or in the district wherein the defendant

is found or is any 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 review

as provided in sections 1254, 1291, and 1292

of Title 28. No costs shall be assessed for or

against the Commission in any proceeding

under this chapter brought by or against it in

the Supreme Court or such other courts.

Section 10(b) of the Securities Exchange Act of 1934,

15 U.S.C. 78j(b) provides:

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--

= = =

A37

(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

manipulative or deceptive device or contrivance

in contravention of such rules and regulations

as the Commission may prescribe as necessary

Or appropriate in the public interest or for the

protection of investors.

SEC Rule 10b-5, 17 CFR 240.10b-5, adopted pursuant

to Section 10(b) of the Securities Exchange Act, provides:

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,

(1) to employ any device, scheme,

or artifice to defraud,

(2) 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 misleading, or

(3) to engage in any act, practice,

or course of business which operates or would

operate as a fraud or deceit upon any person, in

connection with the purchase or sale of any

security.

Section 3 of the Securities Act of 1934, 15 U.S.C.

§ 78c(a)(17) provides:

(a) When used in this chapter,

unless the context otherwise requires--

(17) The term “interstate commerce"

means trade, commerce, transportation, or

communication among the several States, or

between any foreign country and any State, or

between any State and any place or ship outside

thereof. The term also includes intrastate use

of (A) any facility of a national securities

exchange or of a telephone or other interstate

means of communication, or (B) other interstate

instrumentality.