Opinion ID: 328889
Heading Depth: 1
Heading Rank: 1

Heading: facts

Text: 4 The leading player in the drama here unfolded is the defendant Richard C. Pistell, whom the court found to be a United States citizen who resides in the Bahamas. 2 Early in 1972, Pistell, who at that time had over 24 years of experience in the investment and finance business, first as a financial analyst and then as an investment banker with his own firm, met with Stanley Graze, a United States citizen resident in London, president of International Capital Investments (Sterling) Ltd., also known as Incap, an English corporation, which had overall responsibility for managing various IOS mutual funds, including IIT, in Nassau, Bahamas, in connection with the sale of a resort named Paradise Island by Resorts International, Ltd. to the IOS Group. Over a period of several weeks, in a number of meetings, all but one of which apparently were conducted outside the United States, 3 they discussed financial subjects in which they each had a strong interest, including the philosophy of money markets, the perils of the stock market and particularly whether monetary parity could be maintained. During one of Pistell's visits to London in the early part of 1972, Graze told Pistell that he intended to put the funds managed by Incap in a more liquid position if the Dow Jones Industrial Average fell below 1040 and solicited Pistell's views. Pistell presciently took a bearish attitude and advised that if he were in Graze's position, he would invest in Japanese yen, Deutschmarks, and gold. From April through October 1972 IIT had net sales of $121,708,019 in United States securities. 5 During that same period Pistell, who had extensive experience in locating and financing new ventures, finalized his plans to form a venture capital firm, an idea which he claims to have had at the end of 1971. One of the individuals with whom he discussed his plan and certain of the ventures in which the proposed firm likely would invest, was Graze, who, according to Pistell, indicated that IIT would be interested in holding an interest in such a firm. 6 In June 1972, Pistell, with the help of his lawyer, Charles E. Murphy, Jr., a member of the New York law firm of Havens, Wandless, Stitt and Tighe (Havens Wandless) and a Bahamian law firm, Carson, Lawson & Co. (Carson Lawson), set about to organize a venture capital firm. On July 4 Vencap Limited (Vencap) was incorporated under the laws of the Bahamas. Five thousand common shares were initially authorized, with 2,000 being issued to Pistell, and one share each to the four other incorporators, apparently at $1 per share. Pistell became chairman of the board, president, and treasurer. On July 31, 2,000 common shares were issued to Count Armoury de Reincourt, a French citizen, publisher, financial consultant, and private investor, residing in either Paris or Geneva; 4 again, the issue price was $1 per share, or $2,000. 7 During August 1972 Graze and Pistell, apparently in London, 5 came to an understanding in principle that IIT would invest in Vencap. Shortly thereafter, a three-page undated memorandum was prepared at Pistell's instructions. Because of the central importance of the memorandum, we shall follow Judge Stewart's example and annex a copy of that document, as well as the shareholders resolution which it incorporates by reference, as an appendix to this opinion; understanding will be facilitated if the memorandum is read at this point. It is reasonably clear that the memorandum which ultimately found its way into the hands of IIT or its attorneys Willkie, Farr, & Gallagher of New York (Willkie Farr) and Higgs & Johnson of Nassau was prepared in the Bahamas mainly by Vencap and/or its lawyers. However, if it was prepared by Vencap's lawyers, as seemingly it must have been at least in part, there is conflicting evidence as to which lawyer. Also the evidence is unclear as to just what was done with it. Moreover, there is testimony, which is in part contradicted, that this memorandum itself was based on a prior memorandum outlining the purposes of Vencap, which had been prepared by Murphy at the request of Pistell. Assuming this to be true, it is unclear when and where this earlier document was prepared, whether it was prepared with the expectation that portions of it would later be transmitted to potential investors, what was done with it, and to what extent, if any, the final memorandum varied in substance from this earlier document. 6 The district court did not resolve these conflicts or uncertainties. 8 Willkie Farr in New York proceeded to draft an agreement for IIT's subscription to the 30,000 redeemable preference shares at $100 per share described in the memorandum, these to be accompanied by warrants to purchase an additional 30,000 such shares exercisable at the same price within three years of the closing. Defendants contend, relying on the uncontradicted testimony of a number of witnesses, that the essential terms and conditions of the preference shares had been prepared jointly in Nassau, Bahamas, by Bahamian counsel and Willkie, Farr . . . . Although plaintiffs state that (t)he terms and conditions of the preference stock were formulated, drafted and negotiated by Taylor in New York after Pistell and Graze agreed on broad outlines, the portions of the record which they cite in support of that conclusion indicate only that the Havens, Wandless firm reviewed the agreement, particularly the provisions relating to the preferred shares, and did exchange drafts with Willkie Farr in New York. David Taylor, a member of the Havens, Wandless firm, who admitted to having authored in New York a draft of the redemption provision of the preference shares, see App. A, Shareholders' Resolution of August 31, 1974, P (5), testified that the entire contract was negotiated and the essential terms all determined and arranged in the Bahamas before I even saw the document. Despite this testimony it is not entirely clear whether the substance of the drafts exchanged in New York related only to certain technical aspects of the preference share terms or to broader matters. Some light could surely have been furnished by a lawyer from Willkie Farr but none was called to testify. Again, the district court's findings do not greatly clarify things, its only statement with regard to these events being that (d)uring September 1972, Willkie Farr & Gallagher, a law firm doing business in New York City, prepared an agreement with respect to the IIT investment in Vencap which was presented to Pistell's lawyers for review. 9 The final agreement, a document of two single-spaced typewritten pages, is simplicity itself. Beyond incorporating by reference the August 31, 1972 resolution of the Vencap shareholders, see App. A, defining the terms of the preference shares which apparently had been annexed to the three-page memorandum, 7 and setting forth the form of warrant, the provisions were usual boiler plate. 10 The agreement was dated September 29, 1972, and the closing was set for October 6, the place being unnamed. It was signed in the Bahamas by I.I.T. Management Company, S.A., on behalf of IIT, an International Investment Trust by Milton Meissner, who was president of the Management Company and also of IOS, Ltd., the daddy or granddaddy of them all. It was accepted by Vencap; the signature is illegible but we are told it is Pistell's. The closing occurred in the Bahamas on October 9. Although the district court found that the funds were transferred by American National Bank and Trust Company of New Jersey (ANBT), where IIT had a large balance as a result of the security sales it had been making since April, to the Bahamas Commonwealth Bank (BCB), defendants say this is clearly erroneous. We believe it is, and on a basis that shows the relative unimportance of this bitterly contested point. Apparently IIT had initially intended to have ANBT transmit the funds but then changed its mind and had the funds transferred directly to BCB by the Overseas Development Bank of Luxembourg (ODB). 8 11 The district court also recited several rather peculiar transactions that took place in 1973, without indicating just what their legal significance was considered to be. 12 As to the first of these, the court appears to have been plainly wrong on the facts. In January, 1973 de Reincourt, having become alarmed by adverse publicity about Vencap's connections with Robert L. Vesco, transferred his shares to Pistell. 9 These shares were reissued to defendant Walter Blackman, an American citizen resident in the Bahamas, in May, 1973. He became a director, executive vice president, and secretary of Vencap. In its findings the court stated that at some unnamed date Pistell and Blackman each agreed to sell their interest in Vencap to the other for $5,000 in the event of death or termination of employment. In fact the agreement, signed May 22, 1973, the day after Blackman became a shareholder, is between Vencap and any holder (as therein defined) who subscribed to the agreement; provided for sale to Vencap's designee; and was signed only by Blackman. The court also found that in March, 1973 Pistell (as well as Blackman) agreed to sell his interest in Vencap at cost to Norman Le Blanc, executive vice president of IOS, Ltd., if the latter requested. In fact this was a proposal made by Pistell by letter dated March 27 and was not joined by Blackman which, of course, he could not have done since he apparently was not yet a Vencap shareholder 10 , was made in connection with a proposed general settlement relating to various IOS funds and claimants against them, and was later withdrawn. 13 More important, at a time unspecified by the court, which turns out to be January, 1973, Pistell caused Vencap to initiate a series of transactions that resulted in funneling substantial amounts of Vencap's funds into his own hands. Although we can be relatively certain of the net effect of these transactions, we are again confronted with conflicting evidence as to precisely how they were completed. The plaintiffs allege, and the district court found, that Pistell caused Vencap to deposit $600,000 in the Handelskredit-Bank A.G., a private Swiss bank; and that Pistell then caused Intercapital N.V., a Netherlands Antilles corporation, which apparently had no assets and had its office at 99 Park Avenue, New York City, the office of Havens, Wandless, and whose only shareholders were Pistell and Blackman, each holding 50% of its common shares, to borrow $590,000 from the bank. To secure the loan Vencap pledged what the court characterized as its $600,000 certificate of deposit as collateral; as further collateral for the loan Pistell pledged to the bank his interest in Pamaikai Oil Company which was later merged into Flag-Redfern Oil Company. These findings do find some support in the record. One of the plaintiffs' exhibits is a telex to Taylor dated January 9, 1973, which they allege is from the Handelskredit-Bank, acknowledging the receipt of a $600,000 deposit by Vencap. Moreover, in deposition testimony rendered by Pistell in another proceeding he stated that Vencap had made time deposits at the bank which he characterized as certificates of deposit and that the bank held these, as well as certain stock which he owned, as security for certain loans, one of which was (f)ive ninety ($590,000) and ten thousand cash. 11 Finally, on January 19, 1973 the directors of Vencap authorized certain of its officers, including Pistell and Taylor, who was then Assistant Secretary, to execute any promissory notes or other documents which might be required by Handelskredit-Bank, or any party designated by it in connection with a loan to be made by the bank to Intercapital N.V. in an amount which does not exceed the amount of funds of the Company currently on deposit with the Bank. 14 There is, however, substantial evidence in the record which supports a slightly different view of how this phase of the funneling of funds to Pistell was accomplished. While this difference likely would not prove decisive to a resolution of plaintiffs' claims, we emphasize the importance of ascertaining as precisely as possible the exact means by which an alleged fraud has been accomplished, since, as will be discussed more fully below, both the question of jurisdiction and the availability of a remedy may turn upon this. Contained in the record is a copy of a document with the heading Trust-Agreement that was entered into by Vencap, being signed by Pistell, and Handelskredit-Bank A.G., dated February 1, 1973. The agreement provided that the depositor Vencap would place $590,000 in a trust-account . . . in its name . . . with instructions to grant a loan in the Bank's name, but for the account and at the exclusive risk and peril of the depositor to Intercapital N.V. The loan had a two year maturity and carried an interest rate of 8.5%; interest was payable annually. The trust agreement provided that the interest received would be credited to Vencap's account, after deduction of an annual trusteeship-commission to the bank of 1.5% of the original principal of the loan. This commission was payable whether or not interest was in fact paid by Intercapital. 15 Ignoring, at least for present purposes, these and other more minor differences in the apparent structure of the loan agreement with the Handelskredit-Bank, 12 the $590,000 was then borrowed by Pistell from Intercapital; the loan carried an interest rate of 9.5%. He used these funds to pay personal federal and state income taxes (the former of which was secured by a lien against all his property) and loans from Chemical Bank, Bowery Savings Bank, and Franklin National Bank, and to satisfy a judgment against him. The only benefit to Vencap from all this, apart from the 7% net interest payable by Intercapital, likely no more than the return which it might have obtained by investing this amount directly in certificates of deposit offered by any number of foreign banks, was the grant by Pistell to it of an option to purchase 10% of his interest in Flag-Redfern. 13 16 This loan transaction was followed in March, 1973 by an employment agreement whereby Pistell was to receive a salary of $60,000 per annum, 15% off the top of any Vencap profits, and a home in the Bahamas costing no more than $150,000, including renovation. 14 17 The court further stated that Vencap has been used to aid in the financing of other companies in which defendants have or had an interest. The principal instance given in the opinion was a transaction wherein Vencap loaned Chibex, a Canadian gold mine corporation, $155,000 and received options on 75,000 shares at $1.00 per share and another 75,000 shares at $1.50 per share, but submitted to a put by Fund of Funds, an IOS dollar fund, whereby upon three days' notice Vencap could be required to purchase 500,000 additional shares at $1.00 per share. Chibex was said to have been controlled by a company bearing the rather misleading name of Conservative Capital Limited, which in turn was controlled by Pistell and Blackman, see note 2 supra. In addition to claiming that only $75,000 had been loaned, for which Vencap received an option to purchase 75,000 shares at $1.00 per share (an additional $75,000 loan and the $1.50 option being at Vencap's election), 15 Pistell contends that the transaction was advantageous, as evidenced by the fact that Chibex shares were selling at $1.78 per share until, as claimed, due to the publicity incident to the bringing of this action, the price fell to $1.18. The district court made no findings with respect to these contentions. 16 18 This court has no desire to and does not assume the role of a defender of Mr. Pistell. On the other hand, we cannot look with favor on a series of findings which simply adopt plaintiffs' accusations and leave Pistell's explanations unmentioned and undecided. 17 Nor are we able to decide these disputed factual issues for the first time on appeal. 19 The district court concluded, on grounds hereafter discussed, that it had subject matter jurisdiction, that plaintiffs had demonstrated a probability of succeeding on the merits, that plaintiffs would be irreparably harmed if interlocutory relief were not granted, and that the balance of hardship was in their favor. Accordingly, it enjoined Vencap, Intervent, 18 Intercapital and Pistell from dealing with the property of the three corporations or of IIT and appointed a receiver pending final hearing. 20