Source: https://law.justia.com/cases/federal/appellate-courts/F2/712/421/415071/
Timestamp: 2020-08-03 09:25:16
Document Index: 269983684

Matched Legal Cases: ['§ 1332', '§ 12', '§ 77', '§ 10', '§ 78', '§ 77', '§ 78']

Fed. Sec. L. Rep. P 99,443grunenthal Gmbh, a Corporation of the Federal Republic Ofgermany, Plaintiff-appellant, v. Paul Hotz, Bozena Hotz, Balfour Zepler, Joseph Lowe, Richtercorporation, Ltd., a Bahamian Corporation, Cadencecorporation, Ltd., a Bahamian Corporation, Productos Gedeonrichter (america) S.a., a Mexico Corporation, Defendants-appellees, 712 F.2d 421 (9th Cir. 1983) :: Justia
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Fed. Sec. L. Rep. P 99,443grunenthal Gmbh, a Corporation of the Federal Republic Ofgermany, Plaintiff-appellant, v. Paul Hotz, Bozena Hotz, Balfour Zepler, Joseph Lowe, Richtercorporation, Ltd., a Bahamian Corporation, Cadencecorporation, Ltd., a Bahamian Corporation, Productos Gedeonrichter (america) S.a., a Mexico Corporation, Defendants-appellees, 712 F.2d 421 (9th Cir. 1983)
U.S. Court of Appeals for the Ninth Circuit - 712 F.2d 421 (9th Cir. 1983) Argued and Submitted May 4, 1982. Decided Aug. 4, 1983
The question presented on this appeal is whether the district court has subject matter jurisdiction under the federal securities laws over a transaction in foreign securities between foreign corporations and citizens of foreign states where the only connection between the transaction and the United States is that some of the allegedly fraudulent conduct took place here and that instrumentalities of interstate commerce were used to effect the fraud. The district court held that it lacked jurisdiction. In its view, the securities laws do not apply to transactions that have "no effect on any American investors or securities market" and where "the only nexus with the United States is conduct in this country based on convenience and the only local act of fraud alleged is a mere repetition of misrepresentations first spoken abroad." Grunenthal GmbH v. Hotz, 511 F. Supp. 582, 588 (C.D. Cal. 1981). We disagree with the district court's conclusion and find that the facts of this case are sufficient to establish subject matter jurisdiction.1
All of the defendants and the plaintiff in this case are either foreign citizens or foreign corporations. Plaintiff Grunenthal is a West German corporation. Defendant Productos is a Mexican corporation controlled through a chain of Bahamian holding companies by a trust based in the Bahamas. The beneficiary of that trust, defendant Paul Hotz, is a citizen of Switzerland and a resident--during at least some of the year2 --of Italy. Defendant Joseph Lowe, the managing director of Productos, is a citizen and resident of Mexico.
Defendants moved to dismiss the complaint for lack of subject matter jurisdiction. The district court noted that there was no controlling precedent in this circuit and reviewed the cases that had arisen in the Second Circuit.4 See 511 F. Supp. at 585-87. The court felt that the Second Circuit's approach to subject matter jurisdiction was "in keeping with expressions of the Ninth Circuit" in closely analogous cases. Id. at 588. The court concluded that subject matter jurisdiction did not exist under the Second Circuit's approach. The district court reasoned:
Each of the three federal statutory provisions under which plaintiff has asserted a claim for damages against defendants extends its proscriptions to certain forms of fraudulent activity conducted by the use of "any means or instrumentality of transportation or communication" in commerce between the states or between any foreign country and a state.5 There must also be some degree of connection between the fraud and conduct in, or effects on, the United States. Our circuit has spoken infrequently on the topic of subject matter jurisdiction over transnational securities transactions. While we exercised jurisdiction in both of the Ninth Circuit cases involving the extraterritorial application of the securities laws because the transactions produced "effects" within the United States, Des Brisay v. Goldfield Corp., 549 F.2d 133 (9th Cir. 1977); Securities and Exchange Commission v. United Financial Group, Inc., 474 F.2d 354 (9th Cir. 1973), we have never held that the absence of such effects precludes the exercise of jurisdiction or that conduct alone is not enough. Indeed, consistent with the established objectives of the federal securities laws, we have recognized that "the jurisdictional hook need not be large to fish for securities law violations." United Financial Group, Inc., 474 F.2d at 357 (quoting Lawrence v. SEC, 398 F.2d 276, 278 (1st Cir. 1968)). In our view, the test for subject matter jurisdiction formulated by the Eighth Circuit in Continental Grain (Australia) Pty. Ltd. v. Pacific Oilseeds, Inc., 592 F.2d 409 (8th Cir. 1979), best satisfies those objectives.
Continental Grain, 592 F.2d at 420 (citations omitted). Applying this test to the facts before it, the Eighth Circuit held that the defendants' conduct supported subject matter jurisdiction. The Third Circuit has adopted a similar view. See SEC v. Kasser, 548 F.2d 109, 114 (3d Cir.) ("The federal securities laws, in our view, do grant jurisdiction in transnational securities cases where at least some activity designed to further the fraudulent scheme occurs within this country."), cert. denied, 431 U.S. 938, 97 S. Ct. 2649, 53 L. Ed. 2d 255 (1977).
We believe that the test used by the Third and Eighth Circuits advances the policies underlying federal securities laws. First, to deny jurisdiction in cases like Continental Grain might encourage "those who wish to defraud foreign securities purchasers or sellers to use the United States as a base of operations ... [and,] in effect, create a haven for such defrauders and manipulators." Kasser, 548 F.2d at 116; see also Continental Grain, 592 F.2d at 421-22. In addition, a "fundamental purpose, common to [the federal securities] statutes, was ... to achieve a high standard of business ethics in the securities industry." SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186, 84 S. Ct. 275, 279, 11 L. Ed. 2d 237 (1963) (footnote omitted). Thus, the view adopted by the Third and Eighth Circuits is "consistent with the intent of Congress, as expressed in the antifraud provisions of the federal securities laws, to elevate the standard of conduct in securities transactions" within this country. Continental Grain, 592 F.2d at 421; IIT v. Cornfeld, 619 F.2d at 919; Kasser, 548 F.2d at 116. Assertion of jurisdiction may encourage Americans--such as lawyers, accountants and underwriters--involved in transnational securities sales to behave responsibly and thus may prevent the development of relaxed standards that could "spill over into work on American securities transactions." Note, American Adjudication of Transnational Securities Fraud, 89 Harv. L. Rev. 553, 570-71 (1976).
We adopt the Continental Grain test and hold that defendants' conduct was sufficient to establish subject matter jurisdiction.6 The misrepresentations that took place in this country were "significant with respect to the alleged violation [s]," Continental Grain, 592 F.2d at 420; Travis v. Anthes Imperial Ltd., 473 F.2d 515, 524 (8th Cir. 1973), and "furthered the fraudulent scheme," Continental Grain, 592 F.2d at 420; Kasser, 548 F.2d at 114. Although Grunenthal had previously been told by Lowe that Hotz controlled Productos, the Los Angeles meeting furthered the fraudulent scheme because Hotz for the first time, through his silence, confirmed the claim that he owned Productos. Hotz' conduct in this country was not "merely preparatory"; rather, the conduct was "material" because immediately thereafter defendants signed and plaintiff was induced to execute the agreement. Continental Grain, 592 F.2d at 420; IIT v. Vencap, 519 F.2d at 1018; Bersch, 519 F.2d at 993. Moreover, the execution of the agreement in Los Angeles itself constituted an act that strongly supports our assertion of jurisdiction. The signing of this agreement by Hotz can be regarded as a definitive statement by him that he was in a position to complete the transaction. In short, we do not regard defendants' allegedly fraudulent conduct in Los Angeles as a "mere repetition" of previous misstatements.7 On the contrary, the misrepresentation arising from Hotz' presence for the first time, and the actual signing of the agreement, were significant, material and in furtherance of the fraudulent scheme.8
We disagree with the district court's view that the result in this case should be different because the allegedly fraudulent conduct occurred in this country by happenstance. We think it of little significance that the conduct in this country was "based on convenience." 511 F. Supp. at 588. Indeed, to hold otherwise could make it convenient for foreign citizens and corporations to use this country and its lawyers, accountants and underwriters to further fraudulent securities schemes. See Continental Grain, 592 F.2d at 421; Kasser, 548 F.2d at 116.
Because all parties to this case are foreign in citizenship, there is no diversity jurisdiction over the claims of fraud. See Montalet v. Murray, 8 U.S. (4 Cranch) 46, 47, 2 L. Ed. 545 (1807); see also 28 U.S.C. § 1332(a) (1976)
The district court accepted plaintiff's allegations as true "to the extent not controverted by other evidence." The court was careful to explain that its "recitation" of the "facts" was "not intended as a finding on the merits." 511 F. Supp. at 584 n. 2. Accordingly, we take plaintiff's allegations as true only for purposes of this review. Des Brisay v. Goldfield Corp., 549 F.2d 133, 135 n. 3 (9th Cir. 1977). However, "the issue of subject matter jurisdiction persists," id. at 136 (quoting Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326, 1330 (2d Cir. 1972)); if the facts upon which jurisdiction rests are to the contrary, the district court should dismiss the cause of action
The court reviewed the Second Circuit's decisions in Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir.), rev'd on other grounds, 405 F.2d 215 (2d Cir. 1968) (en banc), cert. denied, 395 U.S. 906, 89 S. Ct. 1747, 23 L. Ed. 2d 219 (1969); Leasco, 468 F.2d 1326; Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2d Cir.), cert. denied, 423 U.S. 1018, 96 S. Ct. 453, 46 L. Ed. 2d 389 (1975); IIT v. Vencap, Ltd., 519 F.2d 1001 (2d Cir. 1975); IIT v. Cornfeld, 619 F.2d 909 (2d Cir. 1980). We find the court's review of these cases sufficiently complete and we need not repeat or summarize it here
The provisions of the 1933 Act and the 1934 Act under which liability is asserted in this case each proscribe fraudulent activity only if accomplished through the "use of any means or instruments of transportation or communication in interstate commerce," 1933 Act, §§ 12(2), 17(a), 15 U.S.C. §§ 77l, 77q(a), or "the use of any means or instrumentality of interstate commerce," 1934 Act, § 10(b), 15 U.S.C. § 78j(b). The term "interstate commerce" is similarly defined under both the 1933 Act and the 1934 Act to include, respectively, "trade or commerce in securities or any transportation or communication relating thereto ... between any foreign country and any State," 15 U.S.C. § 77b(7), and "trade, commerce, transportation, or communication ... between any foreign country and any State," 15 U.S.C. § 78c(a) (17).
We note that the Second Circuit's apparent application of different tests depending on the nationality of the plaintiff may raise constitutional questions. See, e.g., Continental Grain, 592 F.2d at 418 n. 14; Note, The Extraterritorial Application of the Antifraud Provisions of the Securities Acts, 11 Cornell Int'l L.J. 137, 146 n. 67; Note, American Adjudication of Transnational Securities Fraud, supra, 89 Harv. L. Rev. at 569; Comment, Transnational Reach of Rule 10b-5, 121 U. Pa. L. Rev. 1363, 1376-77 (1973)