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WAGMAN v. ASTLE

August 30, 1974

Wagman
v.
Astle, et al.


Ward, District Judge.


The opinion of the court was delivered by: WARD

WARD, District Judge.

This case, before the Court on cross-motions for summary judgment with stipulated facts, presents hitherto undecided questions concerning the extraterritorial application of the Securities Exchange Act of 1934, 15 U.S.C. § 78a (the "Exchange Act"), and in particular, of § 16(b) of that Act, 15 U.S.C. § 78p(b). The facts can be very briefly stated.

 Plaintiff, a holder of ten shares of Dome Petroleum, Ltd. ("Dome"), sues derivatively on behalf of the corporation to recover profits made by the three individual defendants, officers of the corporation, upon purchases and sales of the common stock of Dome within a six month period as prohibited by § 16(b). *fn1" Dome is a Canadian corporation listed and traded on the American Stock Exchange ("Amex") continuously since 1951, and registered with the Securities and Exchange Commission (the "Commission") in accordance with § 12 of the Exchange Act, 15 U.S.C. § 78l. The individual defendants are all citizens and residents of Canada; none is present in or does business in this district, nor even, so far as the papers reflect, anywhere in the United States. Each of the transactions in question took place in Canada, either on Canadian exchanges or in private sales. The individual defendants complied with the reporting requirements of § 16(a) of the Exchange Act, 15 U.S.C. § 78p(a) *fn2" by filing Form 4 reports with the Commission, but had no other contact with the United States in connection with these transactions. Personal service was made upon the individual defendants in Canada, by order of Judge Cooper of this Court.

 The parties, and the Commission as amicus curiae, argued three questions before the Court: whether the Court has subject matter jurisdiction over the controversy; whether it has personal jurisdiction over the individual defendants; and whether venue is properly laid in this Court. All three were thoroughly briefed and argued, and are of great interst; however, the Court's determination of the question of personal jurisdiction disposes of the case, and precludes discussion of the other questions.

 It is axiomatic that a court must have personal jurisdiction over at least one defendant before it has jurisdiction to adjudicate the substantive controversy. *fn3" 1 Moore's Federal Practice P0.60, n. 7 (1972); Japan Gas Lighter Ass'n. v. Ronson Corp., 257 F. Supp. 219, 224 (D.N.J. 1966). Absent waiver or consent, personal jurisdiction is conferred upon the Court by valid service of process. 1 Moore's Federal Practice P0.60, n. 7. In the instant case there is no such waiver or consent.

 Section 27 of the Exchange Act, 15 U.S.C. § 78aa, authorizes this Court to assert personal jurisdiction to enforce any liability under the Act by service of process "wherever the defendant may be found." Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326 (2d Cir. 1972) held that by this clause Congress authorized extraterritorial service to the fullest extent compatible with due process. 468 F.2d at 1340. Defendants claim that for the Court to assert jurisdiction over them in this case would violate due process, and that therefore the personal service upon them in Canada was invalid. This Court agrees.

 The general boundaries of due process in connection with jurisdiction are outlined most extensively by the Supreme Court in Hanson v. Denckla, 357 U.S. 235, 2 L. Ed. 2d 1283, 78 S. Ct. 1228 (1958); McGee v. International Life Ins. Co., 355 U.S. 220, 2 L. Ed. 2d 223, 78 S. Ct. 199 (1957); and International Shoe v. Washington, 326 U.S. 310, 90 L. Ed. 95, 66 S. Ct. 154 (1945). The fundamental principle which emerges from these cases is a requirement of some minimal connection between the defendant and the state enforcing liability, in addition to notice and an opportunity to be heard, such that the exercise of jurisdiction does not offend traditional notions of justice and fair play.

 In Leasco, supra, Judge Friendly discussed this principle specifically in the context of the extraterritorial application of the Exchange Act. Although he was there confronted with an alleged violation of § 10(b) of that Act, 15 U.S.C. § 78j(b), the reasoning is equally applicable here. *fn4"

 Judge Friendly cited Hanson v. Denckla, supra, stating: ". . . It is 'essential in each case that there be some act by which the defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws. '" 468 F.2d at 1340. He went on to explore just what such acts might be, noting that personal jurisdiction could be based upon either acts within the state, doing business within the state, or acts outside the state having effects within the state. Since in this case the defendants did not come within or do business in the United States, the basis for personal jurisdiction must be the effects within the United States of their acts in Canada. A general statement of this basis of jurisdiction appears in the Restatement (Second) of Conflict of Laws, § 37.

 
A state has the power to exercise judicial jurisdiction over an individual who causes effects in the state by an act done elsewhere with respect to any cause of action arising from these effects unless the nature of the effects and of the individual's relationship to the state makes the exercise of such jurisdiction unreasonable.

 But, after quoting this statement, Judge Friendly went on to observe:

 
But this is a principle that must be applied with caution, particuarly in an international context. See Duple Motor Bodies, Ltd. v. Hollingsworth, 417 F.2d 231, 239 (9 Cir. 1969) (dissenting opinion); Von Mehren & Trautman, Jurisdiction to Adjudicate: A Suggested Analysis, 79 Harv. L. Rev. 1121, 1127 (1966). At minimum the conduct must meet the test laid down in § 18 of the Restatement (Second) of Foreign Relations Law, including the important requirement that the effect "occurs as a direct and foreseeable result of the conduct outside the territory." We believe, moreover, that attaining the rather low floor of foreseeability necessary to support a finding of tort liability is not enough to support in personam jurisdiction. The person sought to be charged must know, or have good reason to know, that his conduct will have effects in the state seeking to assert jurisdiction over him.

 468 F.2d at 1341. *fn5"

 At this point the unique characteristics of § 16(b) become significant. That section imposes upon officers, directors, and owners of more than ten percent of the shares, of corporations registered with the Commission in accordance with § 12 of the Exchange Act, 15 U.S.C. § 78l, automatic liability for profits made upon purchases and sales of securities of those corporations, within a period of six months. The penalty is forfeiture of those profits to the corporation. The section is designed to protect "outside" stockholders against short-swing speculation by "insiders" with advance information, II Loss, Securities Regulation 1041 (1961); its purpose as set forth in the section itself is to prevent "the unfair use of information which may have been obtained by such beneficial owner, officer or director by reason of his relationship with the issuer." Congress' goal was to restore eroded investor confidence in the integrity of the market, and the technique it chose was a sweeping removal of any profit motive for such "sure-thing" speculation. This is different from the anti-manipulation provisions of §§ 9, 10(b), and 15(c) (1) of the Exchange Act, 15 U.S.C. §§ 78i, 78j(b) and 78o(c)(1); the rationale is primarily that it is unfair for some to profit ...


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