Friendly, Chief Judge, Feinberg, Circuit Judge, and Davis, Associate Judge.*fn*
This case, in which the plaintiffs (hereinafter collectively referred to as Leasco) seek large damages allegedly resulting from the purchase of shares of a British company on the London Stock Exchange, first came to our attention in October, 1971, on Leasco's appeal from a judgment entered by Judge Lasker in the District Court for the Southern District of New York, 319 F. Supp. 1256, dismissing the complaint as against defendant Isidore Kerman, a London solicitor, for lack of jurisdiction over the person. Consideration of the questions presented by that appeal led us to wonder whether, because of the foreign elements in the transaction in suit, the district court had jurisdiction over the subject matter. As that issue had not been briefed or argued, we gave the parties an opportunity to submit further briefs, and, since the issue was of obvious interest to other defendants, also invited them to furnish briefs. Plaintiffs' counsel advised that this question as well as claims of lack of personal jurisdiction as to other defendants were sub judice before Judge Ryan in the Southern District and suggested that the best course might be to withhold decision on Leasco's appeal from the judgment dismissing its complaint against Kerman until the entire matter could come before us. Following that suggestion, we awaited Judge Ryan's decision. He denied all the motions but certified the issues of in personam and subject matter jurisdiction pursuant to 28 U.S.C. § 1292(b). We granted leave to appeal.
The story of the circumstances underlying this action, a complicated one at best, is still harder to tell because there has thus far been no trial and the facts have not been determined. Yet the issue of subject matter jurisdiction and even, in some instances, that of personal jurisdiction depend on what the facts were. Conceding that, on the issue of subject matter jurisdiction, Leasco at this stage would be entitled to every favorable inference, Steele v. Bulova Watch Co., 344 U.S. 280, 284, 73 S. Ct. 252, 97 L. Ed. 319 (1952), defendant Maxwell suggests that we are likely to get somewhat closer to the truth if we disregard Leasco's affidavits subsequent to the motion to dismiss for lack of subject matter jurisdiction and look to its answers to defendants' interrogatories, which were made before that issue was raised. In the main we shall follow that course, without thereby implying that broader assertions in Leasco's later affidavits would have been disregarded if they were necessary to our decision. We add that if a trial should disclose that the allegedly fraudulent acts of any of the defendants within the United States were non-existent or so minimal as not to be material, the principles announced in this opinion should be applied to the proven facts; the issue of subject matter jurisdiction persists.
I. The Facts Claimed by Leasco
The gist of the complaint is that the defendants conspired to cause Leasco to buy stock of Pergamon Press Limited ("Pergamon"), a British corporation controlled by defendant Robert Maxwell, a British citizen, at prices in excess of its true value, in violation of § 10(b) of the Securities Exchange Act and the SEC's sufficiently known Rule 10b-5. According to Leasco, and -- as we shall not always repeat -- we here state only Leasco's version, the first contact occurred early in 1969 when Maxwell came to Great Neck, N. Y., where Leasco then had its principal office, and proposed to Saul Steinberg, Chairman of Leasco, that Pergamon and Leasco engage in a joint venture in Europe. Maxwell falsely told Steinberg that Pergamon had a computerized typesetting plant in Ireland and gave Steinberg the most recent Pergamon annual report, which contained untruthful and misleading statements of Pergamon's affairs. Steinberg telephoned Maxwell in London to decline the joint venture; Maxwell invited him to come there to discuss areas of possible cooperation.
Steinberg and Robert Hodes, a director of Leasco, met Maxwell at the latter's London office in late April, 1969; Maxwell made various false or exaggerated statements of Pergamon's performance and prospects. When he suggested that Pergamon could acquire Leasco's European operations, Steinberg responded that Leasco would be interested only in acquiring Pergamon and its related companies. Clark, a director of Pergamon, entered the room, Maxwell having left for a short time, and whetted Leasco's interest by falsely touting the profitability of International Learning Systems Company (ILSC). Pergamon was a 50% owner and had an option to acquire the other 50% of ILSC. When Maxwell rejoined the group, he told Steinberg and Hodes that Ladislaus Majhtenyi, an official of Pergamon Press, Inc., an American subsidiary whose stock was traded on the American Stock Exchange, would provide Leasco with all financial data necessary to evaluate the worth of Pergamon and the Maxwell-related companies.
In late April or early May, Michael Gibbs, Leasco's director of corporate planning, met in New York with Majhtenyi. The latter said that the Pergamon and Maxwell operations were very profitable. He added that Pergamon was in the process of acquiring MSI Publishers, Inc. (MSI) and falsely spoke in glowing terms of the profitability of that company's operations in selling Pergamon back issues in Canada, Mexico and South America. This was followed by telephone calls between Maxwell and Steinberg; in some (or perhaps all) of the calls, one (or perhaps both) of the participants were in the United States. Maxwell reported enthusiastically, and falsely, about sales of ILSC encyclopedias in Australia. Expressing surprise at the paucity of information Majhtenyi had given to Gibbs, he said he would meet Steinberg in New York City.
The meeting occurred at a hotel in early May; Maxwell, with Majhtenyi present, made various misrepresentations about the sales and earnings of Pergamon and ILSC. Around May 17 Maxwell mailed a letter from London to Leasco in New York enclosing a dozen documents. Among these were a false report of ILSC's profits; a draft of the 1968 Pergamon annual report, certified by defendant Chalmers, Impey & Co., containing false reports of profits; and a misleading report on Pergamon's affairs, prepared by Whinney, Murray & Co., accountants retained by defendant Robert Fleming & Co. Ltd. (Fleming Ltd.), a London banking firm whose clients were large holders of Pergamon stock and which also acted as financial adviser to Pergamon. Late in the month Maxwell, in London, called Steinberg, in New York; he said that any contract for the takeover would have to be signed before the Pergamon annual meeting on or about June 19. As a result, Gibbs and Schwartz went to London around May 30 and met for four days with Maxwell, Clark, Kerman (a director of Pergamon and Pergamon Press, Inc. and senior partner of a large London firm of solicitors which represented Pergamon and the Maxwell family interests), and others. Many further misrepresentations with respect to Pergamon and ILSC were allegedly made by Maxwell. The meetings were followed by telephone conversations between Maxwell in London and Steinberg in New York, in the course of which Maxwell is claimed to have made further false statements, especially with respect to Pergamon's profits from the sale of back issues. Around the same time Richard Fleming, chairman of Fleming Ltd., and Lawrence Banks, president of its American subsidiary, Robert Fleming, Incorporated (Fleming, Inc.), visited Leasco's offices in New York and told Schwartz and Hodes that Pergamon was far more valuable than the price Leasco was proposing to pay; in effect they also vouched for the correctness of the Whinney Murray & Co. report.
Later Maxwell telephoned from London that the contract would have to be signed on or before June 17. He and Paul DiBiase, a member of Kerman's firm, arrived in New York shortly thereafter. In the course of a series of meetings, he told Leasco that the condition of Pergamon and its related companies could accurately be determined by relying on the public financial statements certified by Chalmers, Impey & Co. Allegedly these statements misrepresented the profits of Pergamon and ILSC and included a false statement with respect to a large payment from MSI. Other oral misrepresentations were made. Banks, who was present during some of the meetings, repeated that the proposed price was too low and that Fleming Ltd. might oppose the offer if Leasco did not agree to terms satisfactory to Fleming. The upshot was an agreement between Leasco and Maxwell signed in New York on June 17, 1969. This provided that, subject to certain conditions, Leasco would offer to acquire each outstanding share of Pergamon for 37 shillings in cash or Leasco debentures plus, in respect of each 10 Pergamon shares tendered, a 5-year warrant to acquire from Leasco one Pergamon share for 42 shillings. Among the conditions were acceptance by not less than 51% of the Pergamon shares and the obtaining of all necessary United Kingdom exchange control permits. The tender offer was to comply with the Code on Take-Overs and Mergers of the City of London and the regulations of the London Stock Exchange. Maxwell agreed to accept the offer and procure the assent of "the Maxwell interests," to recommend acceptance by the Pergamon shareholders, and to use his best efforts to obtain a similar recommendation by the Pergamon board of directors. The closing was to be had at the office of Fleming Ltd. in London, unless otherwise agreed. Leasco was permitted to cause the offer to be made by a wholly-owned subsidiary (or a wholly-owned subsidiary of such subsidiary), providing Leasco remained responsible for the due performance of its obligations.
Apparently Steinberg and Hodes accompanied Maxwell back to England. There he told them, on June 18, that it would be in Leasco's interest to purchase Pergamon stock on the open market as soon as possible. At a press conference Maxwell stated that Pergamon's overdraft was less than $: 500,000, whereas in fact it was approximately $: 2,500,000. Later in June, Maxwell, from London, called Steinberg, in New York,*fn1 and said that there were rumors of a countertakeover bid and that it would be in Leasco's interests to purchase Pergamon stock to prevent this. Leasco claims that if there were any such rumor, the defendants instigated it. On June 20 Leasco, acting through the London banking firm of N. M. Rothschild & Sons ("Rothschild") began buying Pergamon shares on the London Stock Exchange. By July 24 it purchased 5,206,210 such shares, expending some $22,000,000; later it learned that some 600,000 of these shares had been secretly sold by one or more of the defendants. The stock was paid for with cash furnished by a wholly-owned subsidiary, Leasco International N.V. (Leasco N.V.), a Netherlands Antilles corporation, which had recently sold to a group headed by two United States underwriters $40,000,000 of 5% debentures and $20,000,000 of 7% notes for offering only outside the United States and to persons not nationals or citizens thereof or resident or normally resident therein. Both the debentures and the notes were unconditionally guaranteed by Leasco, and the debentures were convertible into its common stock.
Investigation of Pergamon's affairs by Leasco, authorized by the June 17 agreement, caused Leasco's representatives to make further inquiries of Maxwell in England; many of his responses are alleged to have been false and misleading. In early August, Leasco's representatives met with Maxwell, Majhtenyi and others in Elmsford, N. Y.; Leasco was provided with data indicating that previous representations on the subject of sales of back issues had been misleading. As a result of this and other information, Leasco declined to go forward with the tender offer. However, it was left with the $22,000,000 of Pergamon stock acquired on the London Stock Exchange. Leasco seeks damages in that amount, together with exemplary damages.
We shall reserve the statement of further facts relevant to the issue of personal jurisdiction over those defendants who raise that issue until we have disposed of the question of subject matter jurisdiction.
II. Subject Matter Jurisdiction
One of the few points on which all parties are in accord is that subject matter jurisdiction depends on the applicability of the Securities Exchange Act. Leasco's principal place of business is in New York. Defendants Isthmus Enterprises, Inc., Maxwell Scientific International, Inc., and MSI Publishers, Inc. appear to have their principal offices in New York, and this is stated to be true of defendant Robert Fleming, Inc. Plaintiff Leasco World Trade Company (U.K.) Limited, the reason for whose joinder is not apparent, is a British corporation, and most of the defendants are British citizens or corporations. There is thus no jurisdiction under 28 U.S.C. § 1332(a). However, § 27 of the Securities Exchange Act vests the district court with jurisdiction over an action "to enforce any liability created by this title or the rules and regulations thereunder . . . ." Section 10(b) makes it unlawful, inter alia, for any person
by the use of any means or instrumentality of interstate commerce or of the mails . . .
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 ...