Opposition Brief — Berkley v. Itoba Ltd.

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Nos. 95-596, 95-606 Supreme Court,

IN THE Nov 23 1995s

Supreme Court of the nited{ States

OCTOBER TERM, 1995

>_>

LEP GROUP PLC, WILLIAM R. BERKLEY,

and PETER J. GRANT,

Petitioners,

ancl

ITOBA LIMITED,

Respondent.

ON PETITIONS FOR WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

RESPONDENT’S BRIEF IN OPPOSITION

MARK C. ZAUDERER

Counsel of Record

—and—

JAMES ROBERT PIGOTT, JR.

SOLOMON, ZAUDERER,

ELLENHORN, FRISCHER

& SHARP

45 Rockefeller Plaza

New York, New York 10111

(212) 956-3700

RICHARD F. LAWLER

JAMES C. RILEY

WHITMAN BREED ABBOTT

& MORGAN

100 Field Point Road

Greenwich, Connecticut 06830

(203) 869-3800

Attorneys for Respondent

ltoba Limited

TABLE OF CONTENTS

PAGE

TREE OF AUTOR Ee occisciccctcsscccanncsccsss lii

STATEMENT PURSUANT TO RULE 29.6 OF

THE RULES OF THE SUPREME COURT

OF THE UNGIED STATES 2... ccccccsscvecsccccens l

pi ES Fs SRR AA aR ge ee eer Oe Pee l

COUNTER-STATEMENT OF QUESTIONS

PRESENTED.........0. Nee ey Ese et TP ]

STATEREEIN © GE Fee CASE... ci cecccceccascesessss 2

Fi, PEE GFE ls 6 css conecvcasenaceessens 2

ADT’s Interest in Investing in LEP and Its

Analysis of the Company .................... 4

ADT’s Decision to Purchase LEP Stock..... 6

ADT’s Purchase of 7,300,000 LEP Shares

Held by Defendant William Berkley ........ 7

B. The Proceedings Below................s000:. 10

REASONS FOR DENYING THE WRIT............... 10

I. IN VIEW OF THE SECOND CIRCUIT’S REMAND

FOR FURTHER DEVELOPMENT OF JURIS-

DICTIONAL FACTS, THE SUPREME COURT

SHOULD NOT REVIEW THIS INTER-

SAE MON ol os ec ce ccecenscevcceescs 10

II.

III.

IV.

ll

PETITIONERS HAVE SKEWED THE RECORD

TO OBSCURE SUBSTANTIAL CONDUCT AND

EFFECTS WITHIN THE UNITED STATES......

THERE IS NO CONFLICT AMONG THE

CERAM ES oncousscicadesnaveguneneueeemebieesaraes

THE SECOND CIRCUIT’S DECISION WILL

NOT OPEN THE FLOODGATES TO FEDERAL

SECURITIES ACTIONS LACKING SUBSTAN-

TIAL CONDUCT OR EFFECTS WITHIN THE

UNITE) SEASGe oc cneucecivectecsxestalatawaciess

THIS COURT SHOULD NOT GRANT CERTIO-

RARI BASED ON LEP’S SUGGESTION THAT

THERE SHOULD BE NO EXTRATERRITORIAL

APPLICATION OF THE FEDERAL SECURITIES

PAGE

12

14

17

21

aa

ill

TABLE OF AUTHORITIES

Federal Cases

Cases PAGE

Alfadda v. Fenn, 935 F.2d 475 (2d Cir.), cert. denied,

cd lL sel ececeswes vee wands 15, 16, 22

American Construction Co. v. Jacksonville,

T. & K.W.R. Co., 148 U.S. 372 (1893)............ 11

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

(2d Cir.), cert. denied sub nom. Bersch v. Arthur

Andersen & Co., 423 U.S. 1018 (1975)........... 16

Commissioner v. Scottish Amer. Inv. Co., 323 U.S. 119

0 RS Oe a ee ree nee 14

Hamilton-Brown Shoe Co. v. Wolf Bros. & Co., 240

ee oe cSt senhbeeeeneea esis esans il

IIT v. Vencap., 519 F.2d 1001 (2d Cir. 1975) .......... 22

Ins. Corp. of Ireland v. Compagnie de Bauxites de

CE, OO Cie PD CEDES) ccc cciccccccccscccces 14

Leasco Data Processing Equip. Corp. v. Maxwell, 468

fe Ge Be le A oo) ee ee 13

SEC v. Kasser, 548 F.2d 109 (3d Cir.). cert. denied

sub nom., Churchill Forest Industries (Manitoba),

Ltd. v. Securities and Exchange Comm., 431 U.S.

| TRE Se en ee ee eee 15

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

1968), cert. denied sub nom. Manley v.

Schoenbaum, 395 U.S. 906 (1969) .............-. 14, 15

Tamari v. Bache & Co. (Lebanon) S.A.L., 730 F.2d

1103 (7th Cir.), cert. denied, 469 U.S. 871

re a dade shsahtabesseeetass 13, 21.22

iV

PAGE

United States v. Lorenzetti, 467 U.S. 167 (1984)...... 14

Virginia Military Academy Institute v. United States,

onesie ccs BAD Oe Gs ORE ERDOO) cevesinvsec il

Statutes and Regulations:

BR FRE Re ee ee ee ee eT eee epee 19

BD Tears SE OT is id ci baasciaceespretseedienunerels l

OF Ure Oe Pek ching a Sank cph cued eceuesaoatacésates 9

Re eas ee EE vis Canldea does untacuesneseseeae 4, 13,19

Be Ue a cad oa Nea Crew sce buvibncepeeeenuee en 19

eS 8 lf | SEM eran Cnr Smy ny tk er 20

Be Seas A cs edinianoceessdewesuusbanceaseornats l

EF Ree ee dig ounce cderkscacensavasnreumueiass 9

Other Authorities:

R. Stern et al., Supreme Court Practice, (1993)....... 14

SEC Act. Rel. No. 6493, [1983-1984 Transfer

Binder] Fed. Sec. L. Rep. (CCH) 9 83, 435

CDBG iy CID hs dp ccksdsscenvatavaeedsdleesdedicies 20

Piatecnsitte 0s ye Hew eo

STATEMENT PURSUANT TO RULE 29.6

OF THE RULES OF THE SUPREME COURT

OF THE UNITED STATES

Respondent Itoba Limited (“Itoba”) is the wholly-owned

subsidiary of A.D.T. Limited, a Bermudan corporation the

shares of which are listed on the New York Stock Exchange.

Itoba has no nonwholly owned subsidiaries.

JURISDICTION

Pursuant to Rule 24.2 of the Rules of this Court, respondent

states that it is dissatisfied with the statement in the Petition

filed by William A. Berkley and Peter J. Grant that “[t]he

jurisdiction of the district court was invoked under 15 U.S.C.

§ 78c(17).” The Complaint alleges jurisdiction of the District

Court under Section 27 of the Securities Exchange Act of

1934, 15 U.S.C. § 78aa.

COUNTER-STATEMENT OF

QUESTIONS PRESENTED

1. Should the Court grant certiorari to review an inter-

locutory decision remanding the case to the District Court for

further factual development of jurisdictional issues?

2. Should the Court grant certiorari when there is no con-

flict among the Circuits, which all apply a substantially sim-

ilar Conduct Test/Effects Test analysis to determine subject

matter jurisdiction over federal securities fraud claims?

3. Should the Court grant certiorari to review a decision

that will not expand the territorial scope of the federal secu-

rities laws?

4. Should the Court grant certiorari to disturb twenty-five

years of Circuit court decisions upholding the jurisdiction of

the U.S. courts to regulate securities fraud in instances in

which fraudulent conduct either occurred in the United States

or had substantial domestic effects?

STATEMENT OF THE CASE

A. Statement of Facts

The interlocutory order before the Court reinstated an

action between two of the major competitors in the United

States in the electronic security services business.' The action

was commenced under the anti-fraud provisions of the federal

securities laws to recover losses in excess of $100 million

suffered by a single investor, A.D.T. Limited (“ADT”), aris-

ing from its investment, through its wholly-owned subsidiary,

Itoba Limited (“Itoba”), in petitioner LEP Group pic (“LEP”).

(A7)?

ADT, Itoba’s parent, engages primarily in the businesses of

providing security services (i.e., residential and commercial

property alarm systems) and conducting motor vehicle auc-

tions in the United States and elsewhere. ADT’s net sales in

these two areas exceeded $1.2 billion for the year ended

December 31, 1992. (JA438) ADT has thousands of share-

holders, both record and beneficial owners, in the United

States; as of May 1992, approximately 50 percent of ADT’s

common shares were held of record in the United States by

The facts set forth were current as of the date of the perfection

of respondent’s appeal to the Second Circuit in July, 1994. The material

facts giving rise to the claims have not changed. We note that, within the

past two months, petitioner LEP Group plc’s security service subsidiary

in the United States, National Guardian Corporation, has been sold.

All references herein to “A__” are to pages of the Appendix to

the Petition for a Writ of Certiorari filed by petitioners William R.

Berkley and Peter J. Grant (hereinafter the “Berkley Pet.”). All references

herein to the “LEP Pet.” refer to the Petition for Writ of Certiorari with

Attached Appendix filed by petitioner LEP Group plc. All references to

“JA___” are to pages of the Joint Appendix filed on the appeal before the

Second Circuit.

over 2,000 record holders. (JA439) ADT’s stock trades on the

New York Stock Exchange. (JA439)

ADT has executive offices, which supervise its substantial

North American operations, in Boca Raton, Florida, where its

Chairman and its Chief Financial Officer maintain offices.

(JA439) ADT conducts its extensive security services busi-

ness in the United States through its wholly-owned sub-

sidiary, ADT Securities Systems, a Delaware corporation.

ADT is the largest single provider of central station moni-

toring security services in the United States, employing

approximately 7,000 employees throughout the country.

(JA438) Through its subsidiaries, ADT owns 55 offices in the

United States. (JA462)

ADT’s other principal business, conducting auctions for the

sale and purchase of motor vehicles, employs approximately

3,100 persons in the United States on a full-time basis.

(JA438) Thus, in total, ADT, through its wholly-owned sub-

sidiaries, employs over 10,000 persons in the United States.

(JA438, JA46))

LEP is a competitor of ADT in the United States, and, like

ADT, is engaged extensively in the security and alarm ser-

vices business, as well as the freight forwarding business.

(JA741) LEP’s security service business in the U.S. is con-

ducted through its wholly-owned subsidiary the National

Guardian Corporation (“National Guardian”), which is head-

quartered in Greenwich, Connecticut. National Guardian

employs approximately 2,000 persons throughout the United

States (JA690) and in 1989 had revenues of $200 million

from its operations in the United States. (JA691)

LEP’s securities trade in this country on the NASDAQ in

the form of American Depository Shares (“ADS’s”), repre-

senting American Depository Receipts (“ADR’s”) issued by

an American depository in exchange for LEP’s ordinary

shares on deposit (each LEP ADR represents the bundling of

five ordinary shares of LEP). (A7) As the Second Circuit

observed, there was a “direct linkage” between the trading

price for LEP ordinary shares and LEP ADR’s: “If the ordi-

nary share price fell on the London Exchange, the market

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

versa.” (A12) As a result of having registered its shares on the

NASDAQ, LEP has subjected itself under Section 12(b)(1) of

the Securities Exchange Act of 1934 [15 U.S.C. § 781(b)(1)]

to regular reporting requirements of the Securities and

Exchange Commission (the “SEC”).

LEP’s investments in United States businesses include its

substantial investment in real estate limited partnerships

developing property in California and Nevada (JA692-96),

and a trade finance company, Trading Alliance Corp.

(“T.A.C.”), headquartered in New York City. (JA697-99)

ADT’s Interest in Investing in

LEP and Its Analysis of the Company

ADT had acquired a relatively small amount of LEP secu-

rities as a result of the 1988 merger between LEP and

National Guardian, in which ADT already held stock. ADT

began to analyze potential further investments in LEP, with a

view toward possibly acquiring National Guardian through an

acquisition of LEP itself. (JA440-41)

In December, 1989, Michael Ashcroft, the Chairman of

ADT, requested that Nicholas Wells, an ADT executive,

undertake an evaluation of LEP in conjunction with Canadian

Pacific, another company contemplating an investment in

LEP. Wells had been hired by ADT to assist in managing its

program of securities investments, and, as a result of his prior

investment banking experience, was weil-acquainted with

techniques of valuation and investment analysis. (JA524-26)

Canadian Pacific had commissioned two companies to ana-

lyze and report on the business of LEP: S.G. Warburg, an

investment bank, and LEK, a management consulting group.

In December 1989 and January 1990, Nicholas Wells of ADT

met with representatives of Canadian Pacific, S.G. Warburg

and LEK in order to discuss the reports produced by them,

which had been provided to ADT. (JA526)

In performing his analysis of LEP, Wells, who was in

charge of ADT’s investigation of LEP, obtained and made

extensive use of a report produced by S.G. Warburg (the

“Report”). The Report was based heavily on LEP’s filings

with the SEC. As explicitly stated in the introduction to the

Report:

The analysis set out herein is based on publicly available

information on [LEP], including recent U.K. annual

reports and circular to shareholders, the U.S. annual

report on Form 20-F for the year ended 31st December,

1988 (the “Form 20-F”), the company’s shareholder reg-

ister and brokers’ reports. (JA534; emphasis added).

The Report given to Wells relied heavily on LEP’s U:S. fil-

ings with the SEC, because as noted in the Report:

In trying to analyze [LEP’s] financial performance, the

Form 20-F provides a more detailed description of the

company’s business activities than the U.K. accounts.

(JA539)

The Report was not all that Wells studied. The disclosure

documents themselves filed by LEP with the SEC in the

United States were central to ADT’s analysis of LEP. Wells

was provided by Canadian Pacific with a copy of the LEP

Form 20-F for the year ended 1988, which had been filed by

LEP with the SEC on June 30, 1989. (JA594-670) As Mr.

Wells stated in his affidavit before the District Court, “I

regarded the LEP 1988 Form 20-F as highly significant for

my analysis of LEP, as it was the most recent Form 20-F that

had been filed by LEP.” (JA527)

In March 1990, Canadian Pacific abandoned the idea of

acquiring LEP jointly with ADT. ADT, however, remained

interested in exploring a strategic investment in LEP, and

Mr. Wells continued his analysis of LEP. (JA527-28)

ADT’s Decision to Purchase LEP Stock

David Hammond, Deputy Chairman of ADT, and Michael

Ashcroft, the Chairman of ADT, conferred with ADT’s

Nicholas Wells regularly throughout the early part of 1990

regarding the progress of Mr. Wells’ analysis of LEP and the

conclusions he was formulating. (JA441-42, JA528)

In the Spring of 1990, Mr. Hammond discussed ADT’s pos-

sible investment in LEP with Michael Ashcroft, the Chairman

of ADT. Their discussion resulted in a decision that ADT

would undertake a program of acquiring LEP stock. This

decision was based largely on the analysis Mr. Wells had con-

ducted of LEP, relying on LEP’s U:S. filings with the SEC,

such as its Form 20-F for 1988, and the Report commissioned

by Canadian Pacific, which was also based on LEP’s SEC fil-

ings. The contemplated stock acquisition program involved

making purchases of LEP stock in the open market or through

negotiated transactions as LEP stock became available, in

such a way as to minimize the effect on the trading price of

LEP stock. (JA442-43, JA672-73)

ADT decided to implement its purchase program through

Itoba, one of its wholly-owned subsidiaries created to hold

the investments of ADT. Itoba is a Channel Islands ce*pora-

tion formed by ADT to acquire and hold securities invest-

ments for ADT with funds provided by ADT. (See

JA511-22.)°

, Itoba’s principal business, as disclosed in Schedules 13D filed

by ADT with the SEC, is “to hold investments for A.D.T.” (JA514) The

significant investments by Itoba and ADT’s other subsidiaries are iden-

tified in ADT’s Annual Report and in its filings with the SEC as invest-

ments held by ADT, as opposed to the particular ADT subsidiary used to

hold ADT’s investment. For example, in ADT’s Form 20-F for the year

ended December 31, 1991, Itoba’s investment in LEP is identified as an

investment of ADT. (JA453)

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In order to implement ADT’s decision to invest in LEP,

David Hammond contacted a member of the Itoba Board

(which is elected by its sole shareholder, ADT), advised him

of ADT’s decision and recommended that Itoba acquire LEP

stock on behalf of the ADT Group. Itoba adopted its parent

corporation’s recommendation (“[a]s expected,” as the Sec-

ond Circuit observed (A8)).

Itoba then implemented the ADT stock purchase program

by contacting, in turn, William Grant, an ADT employee, and

requesting that Mr. Grant commence making the purchases of

LEP stock on behalf of Itoba. (JA686-87, JA444, JA672-73)

Mr. Grant made the first purchase of LEP stock on June 4,

1990.

After the purchase program commenced, Mr. Wells con-

tinued his analysis of LEP. On or about June 29, 1990, LEP

filed its Form 20-F for the year ended December 31, 1989.

Mr. Wells obtained a copy of the 1989 Form 20-F in early

July 1990, and he analyzed the disclosure contained in that

Form 20-F to compare its information with that contained in

the Form 20-F for the prior year (i.e., 1988). Based upon this

comparison, Mr. Wells concluded that there was no reason for

ADT to abandon its ongoing program of acquiring LEP shares

through Itoba (JA529), and the purchases continued.

ADT’s Purchase of 7,300,000 LEP Shares

Held by Defendant William Berkley

On October 8, 1990, ADT, through Itoba, purchased

7,300,000 LEP shares from petitioner William R. Berkley

(“Berkley”), an American citizen and resident of Greenwich,

Connecticut. David Hammond, ADT’s Deputy Chairman, per-

sonally conducted the negotiation for this substantial purchase

with Lehman Brothers Securities (“Lehman”), brokers he

believed to be acting on behalf of Berkley. (JA445) As noted

above, Berkley was a director of LEP and the president of its

Connecticut subsidiary, National Guardian.

ae

The Berkley transaction was set in motion when Berkley

contacted his broker in Manhattan (New York & Foreign

Securities Corporation) to arrange for the sale, which was

cleared through Bear Stearns & Co. in New York. (JA705-06,

JA59) Berkley’s brokers, acting through Lehman’s London

branch, then contacted Mr. Hammond to inform ADT that

7,300,000 shares were being offered for sale by a United

States-based holder of LEP stock. Through information from

Lehman that the shareholder was based in the United States

and was not selling his entire holdings of LEP stock,

Mr. Hammond correctly concluded that the 7,300,000 shares

that were being offered for sale were held by Berkley.

(JA445) After negotiations with the broker over the price to

be paid, Itoba purchased Berkley’s 7,300,000 shares. Berkley,

after paying his broker’s commission, received $23,888,300

from the sale. (JA707-08, JAS9)

With the purchase of the 7,300,000 shares from Berkley and

several small purchases of LEP stock shortly thereafter, ADT

suspended its purchase program in November 1990. ADT con-

tinued to analyze LEP for the purpose of considering whether

to make a tender offer for LEP or otherwise to attempt to

acquire National Guardian. (JA445)

Beginning in September, 1991 and continuing into 1992,

LEP made a series of public disclosures that rocked the com-

pany and brought its stock value tumbling down. LEP dis-

closed for the first time that it had been making substantial,

high risk investments and had engaged in previously undis-

closed activities that were not central to its business. LEP

wrote off $522 million in losses on its 1991 financial state-

ments, a staggering result. (JA446, JA529-30) The most sub-

stantial part of the write-offs related to the previously

undisclosed and unauthorized operation of a knitwear com-

pany conducted through LEP’s New York-based trade finance

subsidiary, T.A.C., and write-offs of its investment through

the issuance of letters of credit in connection with real estate

in California and Nevada.

tie tone) a

LEP’s current management has blamed former management

for events that caused ADT’s losses and has questioned the

adequacy of prior public disclosures. At a meeting of LEP

shareholders on August 24, 1992, David James, the new LEP

Chairman, stated that it was “possible that the Board under

my direction may wish to initiate legal actions regarding var-

ious matters which have led to a loss of shareholders’ value

in their Company” and (JA772-73) that “[s]hareholders may

well feel it appropriate to enquire how such a series of

calamities may have befallen their company in a relatively

short period of time.” (JA779) In response to a shareholder

question at the meeting regarding non-disclosure in LEP’s

financial statements, Mr. James conceded that “the question

of whether on occasions full and proper disclosure has been

made is one which requires some subsequent and further

review.” (JA783)

The value of ADT’s $114 million investment in LEP had

plummeted to $2.26 million as of the commencement of this

action in September, 1992, representing a loss of approxi-

mately $111 million. (A9) This loss was borne by ADT’s

numerous U.S. shareholders (A15), as ADT has written off on

its own balance sheet the entire amount of its $114 million

investment in LEP. (JA903)

In the wake of these disclosures, ADT decided to com-

mence this action. The Complaint, filed on September 22,

1992 in the name of its subsidiary Itoba, asserts claims

against all defendants pursuant to Section 10(b) of the Secu-

rities Exchange Act of 1934 [15 U.S.C. § 78j(b)] and Rule

10b-5 thereunder [17 C.F.R. § 240.10b-5], to recover damages

arising from defendants’ fraudulent non-disclosure in filings

made by LEP with the SEC. (JA38, JA42-44) In addition to

the claims asserted against LEP and against its directors as

Section 20(a) “controlling persons” under Section 10(b) and

Rule 10b-5, Itoba asserts independent claims for federal secu-

rities violations against petitioner Berkley arising out of his

personal sale of LEP securities for over $23 million. (A9)

10

B. The Proceedings Below

Itoba commenced this action on September 22, 1992 in the

United States District Court for the District of Connecticut.

On February 4, 1994, a Magistrate Judge rendered a Recom-

mended Ruling, recommending that the District Judge grant

petitioners’ motions to dismiss for lack of subject matter

jurisdiction. (A22-35) On March 14, 1994, the District Judge,

in a one-sentence Endorsement Order, over Itoba’s objection

adopted the Recommended Ruling of the Magistrate Judge.

(A21)

On May 15, 1995, the Second Circuit, in a unanimous deci-

sion, reversed the District Court’s order of dismissal, remand-

ing the action to the District Court for further proceedings.

Petitioners filed a petition for rehearing with a suggestion for

rehearing en banc, which was denied by the Second Circuit on

July 14, 1995. (Al-2) LEP Group plc, William R. Berkley and

Peter J. Grant filed petitions for writ of certiorari on or about

October 12, 1995; defendants John L. Read and John R. East

have not sought certiorari. On October 12, 1995 and Novem-

ber 3, 1995, petitioners filed motions with the District Court

to dismiss the action on the grounds of forum non conveniens.

Those motions are pending.

REASONS FOR DENYING THE WRIT

I.

IN VIEW OF THE SECOND CIRCUIT’S REMAND

FOR FURTHER DEVELOPMENT OF JURIS-

DICTIONAL FACTS, THE SUPREME COURT SHOULD

NOT REVIEW THIS INTERLOCUTORY DECISION

The decision that petitioners urge this Court to review is

interlocutory. In reversing the District Court’s dismissal for

lack of subject matter jurisdiction, the Second Circuit

remanded for “a trial on the merits in which the facts relevant

to jurisdiction may be more fully developed.” (A18)

a ear Tey OF 1s Fees oe

POET PE Se

1]

The Second Circuit also took particular note of the Mag-

istrate Judge’s erroneous factual findings on which the Dis-

trict Court had based its decision, including the erroneous

finding that neither ADT nor Itoba had read and relied on

LEP’s SEC filings in making their purchase decision. (A11)

Among the additional facts related to jurisdiction that the Sec-

ond Circuit left for development on remand is whether the

sale by Berkley of 7,300,000 shares of LEP stock through a

New York broker and the purchase of such shares by Itoba on

the same day was “coincidental.”* (A16)

Thus, the Court is confronted with an interlocutory order

based on a disputed and, in some respects, undeveloped fac-

tual record. The well-settled jurisprudence of this Court

points clearly to the denial of certiorari to review such an

order. See Virginia Military Institute v. United States,

U.S. ___, 113 S.Ct. 2431, 2432 (1993) (Scalia, J., concurring)

(“We generally await final judgment in the lower courts

before exercising our certiorari jurisdiction”). Issuance of a

writ of certiorari in cases presented for review of interlocu-

tory orders is confined to instances in which review “is nec-

essary to prevent extraordinary inconvenience and

embarrassment in the conduct of the cause.” American Con-

struction Co. v. Jacksonville, T. & K.W.R. Co., 148 U.S. 372,

384 (1893). “[E]xcept in extraordinary cases, the writ is not

issued until final decree.” Hamilton-Brown Shoe Co. v. Wolf

Bros. & Co., 240 U.S. 251, 258 (1916).

There is yet another procedural reason why the Court

should decline to review the Second Circuit’s interlocutory

order—one which illustrates the wisdom of declining review

of interlocutory orders. On October 12 and November 3,

1995, petitioners moved in the District Court for dismissal of

this action on the ground of forum non conveniens. While

4

Itoba contended below that Berkley’s sale and Itoba’s purchase

constituted effectively a direct sale from Berkley to Itoba; Berkley con-

tended that he sold his shares on the market, to no purchaser in particular.

12

Itoba is opposing the motions, the District Court’s determi-

nation could dispose of this action prior to the opportunity for

review by this Court. Adherence in this case to the Court’s

general rule declining the review of interlocutory orders

would prevent potentially unnecessary review by this Court.

Petitioners, of course, will have the opportunity to seek a full

review of any jurisdictional issues should the forum non con-

veniens motions be denied and a judgment in Itoba’s favor be

rendered at trial.

II.

PETITIONERS HAVE SKEWED THE RECORD

TO OBSCURE SUBSTANTIAL CONDUCT AND

EFFECTS WITHIN THE UNITED STATES

Not surprisingly, petitioners seek to characterize this action

as entirely “foreign.” (See Berkley Pet. at 4 (“foreign pur-

chases of foreign securities on foreign exchanges. . .”); LEP

Pet. at 2 (same).) However, the Second Circuit appropriately

cut through petitioners’ attempts to obscure the substantial

conduct by defendants, and effects of defendants’ actions,

within the United States, which satisfy the well-settled “Con-

duct Test” and “Effects Test” for subject matter jurisdiction.

The significantly domestic nature of the conduct and effects

is apparent from the following facts recognized by the Second

Circuit:

1. The alleged fraud culminated with LEP’s filing with the

SEC in Washington, D.C. of documents containing material

misrepresentations and omissions. (A13) Thus, this is not the

kind of case appropriately screened by the Conduct Test, in

which defendants have engaged in a fraud abroad and, along

the way, have engaged in some “merely preparatory” activity

within the U.S. borders before the fraud is consummated

abroad.

13

2. As discussed within, because LEP has elected to take

advantage of U.S. markets by trading its securities on the

NASDAQ (A7), LEP is required to make regular disclosures

in filings with the SEC under Section 12(b)(1) of the Secu-

rities Exchange Act of 1934 [15 U.S.C. § 781(b)(1)].

3. ADT sought out and relied on LEP’s SEC filings in

making its decision to invest over $100 million in LEP. (A11)

4. Consistent with its precedents focusing on the economic

substance of a transaction for the determination of jurisdiction

(see Leasco Data Processing Equip. Corp. v. Maxwell, 468

F.2d 1326 (2d Cir. 1972)), the Second Circuit observed that

the investment in LEP securities at issue was made, and the

loss incurred, by Itoba’s parent company, ADT, a company

whose shares are listed on the New York Stock Exchange and

roughly 50 percent of whose shareholders of record reside in

the United States. (A7)

5. Perhaps the most glaring of petitioners’ omissions is the

absence of any discussion concerning the claim against peti-

tioner William R. Berkley, a United States citizen working

and residing in Greenwich, Connecticut, who was a director

of LEP and the President of its U.S. subsidiary, National

Guardian. His personal sale originating in Greenwich, Con-

necticut of over $23 million in LEP securities, which were

purchased by Itoba, forms the basis of a sizeable portion of

Itoba’s claim for damages on its federal securities fraud

claims. (A9, Al6-17)

Such substantial conduct and effects within the United

States, completely ignored by petitioners, satisfy the require-

ments for subject matter jurisdiction under the well-settled

“Conduct Test” and “Effects Tests,” as discussed in Point III.

os

III.

THERE IS NO CONFLICT AMONG THE CIRCUITS

In an attempt to create the appearance of a substantial con-

flict among the Circuits, petitioners, at great length, describe

past applications of the “Conduct Test” and the “Effects Test”

by different Circuits. (Berkley Pet. at 8-17.) However, more

than anything else, petitioners’ argument demonstrates not a

conflict among the Circuits, but only differences in emphasis

in their application of these tests.

All of the Circuits, without exception, apply a Conduct

Test/Effects Test analysis for the determination of subject

matter jurisdiction—an analysis originating in the Second Cir-

cuit’s decision in Schoenbaum v. Firstbrook, 405 F.2d 200 (2d

Cir. 1968), cert. denied sub nom. Manley v. Schoenbaum, 395

U.S. 906 (1969), and applied by the Second Circuit in this

case. And in most cases, the result of the analysis by the dif-

ferent Circuits to a given set of facts would yield the same

conclusion: either finding jurisdiction or finding it lacking.

Although various Circuit courts have developed somewhat

different formulations of the Conduct Test/Effects Test, no

“conflict” exists among the Circuits within the meaning

applied by this Court. As a commentator of this Court’s cer-

tiorari jurisprudence has observed, a conflict for the purposes

of a certiorari petition “means that there must be a real or

‘intolerable’ conflict on the same matter of law or fact, not

merely an inconsistency in dicta or in the general principles

utilized.” R. Stern et al., Supreme Court Practice, § 4.3 at 167

(1993).°

5

See, e.g., United States v. Lorenzetti, 467 U.S. 167, 173 (1984)

(interpretation of federal statute by the Sixth Circuit and the Third Cir-

cuit was “squarely inconsistent”); Ins. Corp. of Ireland v. Compagnie de

Bauxites de Guinee, 456 U.S. 694, 700 (1982) (Third Circuit’s decision

that a discovery sanction imposing finding of personal jurisdiction did

not violate due process “directly conflict{ed]” Fifth Circuit decision); see

also Commissioner v. Scottish Amer. Inv. Co., 323 U.S. 119, 121 (1944)

(“The irreconcilable conflict between the two courts below led us to grant

certiorari.”)

15

On repeated occasions, certiorari has been sought to review

Circuit court decisions finding subject matter jurisdiction

over federal securities fraud claims involving foreign aspects.

In each case, this Court has denied certiorari.® And in SEC v.

Kasser, 548 F.2d 109 (3d Cir.), cert. denied sub nom.

Churchill Forest Industries (Manitoba) Ltd. v. Securities and

Exchange Comm’n, 431 U.S. 938 (1977), the petitioners

sought certiorari, arguing, just as petitioners have in this

case, that certiorari should be granted to resolve an alleged

conflict between the Third, Second, Eighth and Ninth Circuits

as to the proper standard for subject matter jurisdiction over

feaeral securities fraud claims involving foreign elements.

Yet, this Court denied certiorari. Kasser, supra, 431 U.S. 938

(1978).

Much of petitioners’ argument relating to conflict is based

on their claim that the Second Circuit, in Jtoba, departed from

its own restrictive Conduct Tests/Effects Test formulation,

thereby expanding the continuum between those Circuits

adhering to the most restrictive formulation and those adopt-

ing the most expansive. This suggestion is simply not so.

As petitioners concede, the Second Circuit jurisdictional

test has always been among the most restrictive. In this case,

the Second Circuit’s discussion of the jurisdictional issue is

mostly a pointed analysis of how the District Court misread

critical facts before it on the jurisdictional motion. In dis-

cussing these facts in relation to the Conduct Test and Effects

Test, the Court did not create a new formulation; it simply

applied its tests to the facts before it.

© See Schcenbaum v. Firstbrook, 405 F.2d 200 (2d Cir. 1968),

cert. denied sub nom. Manley v. Schoenbaum, 395 U.S. 906 (1969). SEC

v. Kasser, 548 F.2d 109 (3d Cir.), cert. denied sub nom. Churchill For-

est Industries (Manitoba), Ltd. v. Securities and Exchange Comm., 431

U.S. 938 (1977); Alfadda v. Fenn, 935 F.2d 475 (2d Cir.), cert. denied,

502 U.S. 1005 (1991); Tamari v. Bache & Co. (Lebanon) S.A.L., 730 F.2d

1103 (7th Cir.), cert. denied, 469 U.S. 871 (1984) (claims under the anti-

fraud provisions of the Commodities Exchange Act).

16

In discussing the Conduct Test, the Court set forth its tra-

dit:onal formulation, citing Bersch v. Drexel Firestone, Inc.,

519 F.2d 974 (2d Cir.), cert. denied sub nom. Bersch v. Arthur

Andersen & Co., 423 U.S. 1018 (1975) and Alfadda v. Fenn,

935 F.2d 475 (2d Cir.), cert. denied, 502 U.S. 1005 (1991).

(A10) The Court then rejected the District Court’s finding that

LEP’s United States-based activities did not “directly cause”

Itoba’s financial losses. (All) Again applying its familiar

test, the Second Circuit also found that the filing of fraudu-

lent SEC filings in Washington, D.C. constitutes fraudulent

activity in this country that is not “merely preparatory” to a

fraud committed outside the United States. (A13-15) Nowhere

did the Second Circuit say, or suggest, that it was changing its

test or that Itoba failed to meet its traditional Conduct Test.

Similarly, in applying the Effects Test, the Second Circuit

broke no new ground. Rather, the Court emphasized that the

District Court erred in finding the Effects Test not met merely

because Itoba, and not ADT, was the plaintiff. (A15-A16)

Much of petitioners’ argument focuses on the Second Cir-

cuit’s observation that, with respect to the Conduct Test and

the Effects Test, “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 juris-

diction by an American court.” (A10) To suggest that this

observation represents either a fundamental shift in Second

Circuit jurisprudence, or a major change in subject matter

jurisdiction jurisprudence when taken in context of other Cir-

cuit court decisions—all of which differ slightly in their for-

mulation of the Conduct Test/Effects Test analysis—is to

grossly exaggerate the implication of that observation.’

7

Even assuming arguendo that /toba created a new formulation

of the Conduct Test/Effects Test analysis, it is by no means clear that the

formulation would expand jurisdiction. Just as elements which would not

independently satisfy the Conduct Test or Effects Test might, in com-

bination, produce a finding of jurisdiction, where a showing of either

conduct or effects is particularly weak, a court might decline jurisdiction

under /toba.

17

Petitioners’ conflict argument merely shows that in a par-

ticular case, subject matter jurisdiction theoretically could

exist under the formulation of one Circuit and not the other.

However, because of the substantial overlap of the Conduct

Test/Effects Test analysis as applied in every Circuit, the

nuances among the Circuits’ formulations do not create a con-

flict that justifies granting certiorari.

Finaliy, whatever the differences among the Circuits, this

case would serve as a poor vehicle for this Court to speak on

the issue of subject matter jurisdiction. This is not a “close”

case, in which one particular Circuit court’s formulation

would support jurisdiction while another’s would preclude it.

Because this case would pass muster under the most restric-

tive formulation (that applied by the Second Circuit and D.C.

Circuit), there is no question that jurisdiction would be found

in Circuits which, as petitioners recognize, have a more

expansive view of jurisdiction.*®

IV.

THE SECOND CIRCUIT’S DECISION WILL NOT

OPEN THE FLOODGATES TO FEDERAL

SECURITIES ACTIONS LACKING SUBSTANTIAL

CONDUCT OR EFFECTS WITHIN

THE UNITED STATES

Petitioners contend that:

The Second Circuit decision threatens to open the doors

of the United States courts to foreign purchasers of for-

eign securities on foreign exchanges that the United

States has little interest in regulating.

8

Petitioners misleadingly suggest that the Second Circuit's ref-

erence to “questionable law” is a criticism of its own subject matter juris-

diction jurisprudence. (Berkley Pet. at 16.) As apparent from the context

of the reference, the Second Circuit was merely referring to the Magis-

trate Judge's misapplication of Second Circuit precedent.

18

Berkley Pet. at 4. Indeed, petitioner LEP goes so far as to say:

[T]he Court of Appeals has created a new doctrine under

which any foreign corporation must anticipate that any

purchaser of its securities, anywhere in the world, who

received advice from anyone, American or not, which

was derived in any manner and at any level of indirect-

ness from information that appeared in an SEC filing,

can sue in an American court, provided some shareholder

of the purchaser (or as in this case a shareholder of the

purchaser’s corporate parent) is American.

(LEP Pet. at 10-11.)

Petitioners’ dire prediction that this decision wil! produce

a flood of Rule 10b-5 actions is sheer speculation, unsup-

ported by any empirical evidence, and, of course, any history.

Should this prediction prove true, there is time enough for

this Court to revisit the issue, and to evaluate both the num-

ber of those filings and the quality of those actions when mea-

sured against the purposes underlying the U.S. securities

laws. However, the reality is that the facts supporting juris-

diction in this case could not be alleged by the myriad, hypo-

thetical plaintiffs who petitioners claim will flood this

country’s courts in the wake of the /toba decision. Petitioners’

arguments completely overlook the substantial conduct and

effects within the United States in this case, which few puta-

tive Rule 10b-5 plaintiffs will be able to allege, let alone

prove.

In their briefs below, petitioners made many of the same

doomsday arguments they have made here. The Second

Circuit correctly contrasted ADT’s circumstances from those

of the many plaintiffs that petitioners speculate will over-

whelm our courts: “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.” (Al17; emphasis

added) Similarly, the Second Circuit correctly distinguished

19

this case from a fraud on the market case in which a plaintiff

would not allege actual reliance on SEC filings. (A14) Only

the plaintiff who can allege facts showing actual reliance will

find support in the holding in /toba as a basis for subject mat-

ter jurisdiction.

Petitioners also suggest that a defendant’s fraudulent filings

with the SEC are an insufficient or unpredictable basis for

subject matter jurisdiction. (See Berkley Pet. at 25 (“Any

investor claiming that a foreign market was somehow influ-

enced by an ADR filing would now be entitled to a United

States forum.”)) Petitioner LEP asserts that now “nearly every

foreign transaction of securities involving a company with

some connection to the United States will subject all parties

to the transaction to the prospect of litigation in the United

States.” (LEP Pet. at 22.)

However, LEP is hardly “a company with some connection

to the United States.” LEP, through its wholly-owned U.S.

subsidiary National Guardian, was one of the major providers

of electronic security services in the United States. Moreover,

LEP had taken the significant step of registering its securities

on the NASDAQ, which the SEC treats for reporting purposes

as a “national exchange.” As petitioner LEP itself points out,

the Securities Exchange Act of 1934 (the “Exchange Act”), in

its statement of legislative purpose, expresses Congress’ con-

cern with the “national market system,” citing 15 U.S.C.

§ 78b. (LEP Pet. at 12.) As a result of availing itself of the

benefits of trading on the NASDAQ, LEP was required to reg-

ister its ADR’s with the SEC pursuant to Section 12(b)(1) of

the Exchange Act [15 U.S.C. § 78(1)(b)(1)].°

9

By registering its securities on the NASDAQ, LEP lost the ben-

efit of an exemption for registration enjoyed by many foreign corpora-

tions whose securities trade in this country as ADR’s but do not trade on

a national exchange. Section 12(g) of the Exchange Act [15 U.S.C.

§ 781(g)Jand the regulations thereunder provide a lower tier “information-

supplying” exemption for companies whose securities do not trade on a

national exchange. This exemption establishes a system of supplying

20

There is nothing inappropriate, unbounded or unpredictable

about subjecting to the anti-fraud provisions of the federal

securities laws a company that has elected to register its secu-

rities on a U.S. national market system like the NASDAQ.

Companies with “merely some connection to the United

States,” for whom LEP purports to express concern, need not

fear being haled into the U.S. courts in the wake of the /toba

decision.

Petitioners also suggest that the holding in this case would

allow jurisdiction so long as “some shareholder of the pur-

chaser (or as in this case, of the purchaser’s corporate parent)

is American.” (LEP Pet. at 11.) Jurisdiction was not found

merely because “some shareholder . . . [was] American.”

The Second Circuit found that [h]ere, we have fraud occurring

on an American exchange that has impacted detrimentally

upon thousands of United States shareholders in the

defrauded company, i.e., over $100 million lost in the share-

holders’ corporate equity.” (emphasis supplied) (A15) Allow-

ing jurisdiction on these facts will not open the floodgates to

litigation.

If anything, the Second Circuit’s analysis in /toba ensures

that subject matter jurisdiction will not be found in cases

lacking significant conduct in, or effects within, the United

States. By considering an “admixture or combination” of the

information that is less rigorous than the periodic reporting requirements

of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] to which LEP

is subject. When a foreign issuer has its ADR’s listed for trading on

NASDAQ, as LEP has done, it becomes subject to the more rigorous

reporting requirements under Section 13(a) of the Exchange Act. The

“information-supplying” exemption was made unavailable to foreign

issuers whose securities trade on NASDAQ because:

[T}he [SEC] believes that foreign securities included in NASDAQ

should be regarded prospectively as voluntarily seeking U.S. trad-

ing markets and hence should be denied the information supplying

exemption.

Securities Act Release No. 6493, [1983-1984 Transfer Binder] Fed. Sec.

L. Rep. (CCH) 983,435 at 86,295 (Oct. 6, 1983).

ae Aang A SAB, fl iin cle MOA ts abe a ted

21

Conduct Test and the Effects Test (A10), the Court can

decline jurisdiction if there is a troubling gap in the level of

either U.S. conduct or U.S. effects.

V.

THIS COURT SHOULD NOT GRANT CERTIORARI

BASED ON LEP’S SUGGESTION THAT THERE

SHOULD BE NO EXTRATERRITORIAL APPLICA-

TION OF THE FEDERAL SECURITIES LAWS

Not content with suggesting a conflict among the Circuits,

LEP asserts that the federal securities laws should never be

given extraterritorial effect. (LEP Pet. at 11-12.) This argu-

ment would overturn not only the decision in this case, but

would reverse the law of all the Circuits, which, without

exception, determine the existence of subject matter juris-

diction under the Conduct Test/Effects Test analysis.

The characterization of the jurisdictional issue as the

“extraterritorial” application of the U.S. securities laws is

somewhat of a misnomer to the extent it implies that a federal

court would exercise jurisdiction over a purely foreign dis-

pute. Traditionally, the term has been applied to disputes in

which some—not all—of the relevant conduct or transactions

has occurred abroad; were the conduct or transactions at issue

to be entirely “extraterritorial,” the issue of purported U.S.

jurisdiction would never arise. Therefore, in any given case,

the issue is not whether the court should exercise jurisdiction

over a purely foreign dispute, but whether the conduct or

effects within the United States are sufficient to justify the

assertion of jurisdiction.

LEP bases its argument against any extraterritorial appli-

cation of the federal securities fraud laws on its assertion that

“It]he language of the Exchange Act does not directly dis-

close any intention to give it extraterritorial affect [sic]” (LEP

Pet at 11.) In Tamari v. Bache & Co. (Lebanon) S.A.L., the

22

petitioners for certiorari made the same argument LEP makes

in this case, and this Court denied certiorari. See Tamari v.

Bache & Co. (Lebanon) S.A.L., 469 U.S. 871 (1984) (certio-

rari petition argued that the Seventh Circuit had erred by

applying the Conduct Test and Effects Test).

Through the development of the Conduct Test/Effects Test

analysis, the Circuit courts, led by the Second Circuit, have

applied the federal securities laws to provide a remedy for

fraudulent conduct in this country injuring foreigners (so long

as that conduct is not “merely preparatory” to the fraud), and

fraudulent conduct causing a “substantial effect” within the

United States. See generally, Alfadda, supra, 935 F.2d at 478.

The Second Circuit, followed by every Circuit Court con-

sidering the question, has applied a Conduct Test/Effects Test

analysis so that American courts would not be powerless to

prevent “the United States [from] be[ing] used as a base for

manufacturing fraudulent security devices for export, even

when these are peddled only to foreigners.” //T v. Vencap.,

519 F.2d 1001, 1017 (2d Cir. 1975). Petitioners point to no

substantial source of dissatisfaction from the Congress, the

courts or any of the foreign governments for whom petition-

ers express concern. Twenty-five years of this settled and

workable jurisprudence should not be lightly cast aside.

23

CONCLUSION

For the foregoing reasons, the Petitions for Writ of

Certiorari filed by LEP Group plc, William R. Berkley and

Peter J. Grant should be denied.

Respectfully submitted,

MARK C. ZAUDERER

Counsel of Record

—and—

JAMES ROBERT PIGOTT, JR.

SOLOMON, ZAUDERER,

ELLENHORN, FRISCHER

& SHARP

45 Rockefeller Plaza

New York, New York 10111

(212) 956-3700

RICHARD F. LAWLER

JAMES C. RILEY

WHITMAN BREED ABBOTT

& MORGAN

100 Field Point Road

Greenwich, Connecticut 06830

(203) 869-3800

Attorneys for Respondent

Itoba Limited