The opinion of the court was delivered by: POLLACK
Defendant has moved for dismissal of the amended complaint in this action, and certain specific allegations thereof, on several grounds. The original complaint was dismissed for lack of diversity jurisdiction, since at that time one of the co-plaintiffs was an alien in this suit against an alien bank. The amended complaint was thus an attempt to plead federal claims in relation to the transactions in question. Prior to the hearing on defendant's motion to dismiss the amended complaint, plaintiffs moved for leave to drop the alien co-plaintiff from the suit. That motion is granted, and diversity jurisdiction now exists.
For purposes of clarity in this opinion, therefore, the alien co-plaintiff's interest will not be discussed. Plaintiff has moved to amend his amended complaint ("the complaint," hereafter) to assert non-federal claims now proper under diversity jurisdiction.
The complaint has attempted to state federal claims under the Securities Exchange Act of 1934, (the "Act") Sections 7, 10(b), 27 and 29 (15 U.S.C. §§ 78g, 78j(b), 78aa and 78cc), together with Federal Reserve Board Regulations B and T (12 C.F.R. §§ 207 et seq. and 220 et seq.) and S.E.C. Rule 10b-5 (17 C.F.R. § 240.10b-5); and claims under The Investment Advisers Act of 1940, Sections 206, 214 and 215 (15 U.S.C. §§ 80b-6, 80b-14, and 80b-15).
Defendant contends that: (1) None of the claims is a valid federal claim thus foreclosing jurisdiction in this Court, citing Rule 12(b)(1) and (6), Fed. R. Civ. P.; (2) the fraud allegations in the complaint are not stated with the particularity required by Rule 9(b), Fed. R. Civ. P.; (3) the claims based upon §§ 7 and 29 of the Act are barred by New York's three year statute of limitations; and (4) the amended complaint is not in the plain, concise language required by Rule 8, Fed. R. Civ. P.
In support of that segment of its motion that suggests that this Court lacks subject matter jurisdiction over plaintiff's claims, defendant has strongly urged that the Act does not apply to the transactions here involved, which it asserts are essentially overseas claims.
As detailed infra, the Court finds that the Act does in fact apply and that plaintiff has stated claims entitling relief under certain of the cited sections of the Act.
Plaintiff Selzer engaged in a series of financial transactions with the defendant Bank of Bermuda, from which the present suit arises.
Selzer, a New York citizen, arranged with Bank, a Bermuda corporation, to have one Courtois, a Canadian citizen, create a personal trust, of which Bank was named the trustee and Selzer was named the beneficiary, with Selzer's family as contingent beneficiaries. This trust was settled in 1967 with $1,000 capital supplemented with loan capital thereafter. Its purpose was to trade in American securities, which it did, losing large amounts of money. The securities purchased for the trust were financed by collateralized loans made by the Bank at up to 100% margin. In 1970, Selzer personally guaranteed the trust's debts to the Bank, a guarantee which he allegedly revoked in 1973. Selzer charges various violations of the securities laws in connection with the Bank's trading for the trust and sues for damages as beneficiary and guarantor.
Between May 1967 and January 1968 Selzer made substantial deposits in an account with the Bank. In 1968 Selzer arranged for a loan of $390,000 from the Bank, allegedly for the purchase of American securities pursuant to options he then held. He placed $136,500 on deposit with the Bank at the time of the loan as collateral to guarantee interest payments on the loan. Selzer never drew down the loan from the Bank, allegedly because the price of the stock he contemplated acquiring never rose above the option price. He alleges securities law violations by the Bank in connection with alleged misuse by the Bank of the proceeds of the loan, which he had arranged. The Bank is now holding $203,750 of Selzer's funds as security for the payment of the trust's debts.
The transactions here involved have the following connection with this country: Selzer is an American citizen. Bank allegedly solicited the trust and loan arrangements in New York. Plaintiff alleges that the trust was set up to invest in, and did invest in, American securities, listed and unlisted.
The Securities Exchange Act is applicable to securities transactions where (1) there is some significant connection in the violations with the United States, and (2) the effects of the violations are detrimental to American investors. The significant connection may be involvement of stock listed on American Exchanges, Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir. 1968), cert. denied, 395 U.S. 906, 89 S. Ct. 1747, 23 L. Ed. 2d 219 (1969); Roth v. Fund of Funds, 405 F.2d 421 (2d Cir. 1968), cert. denied, 394 U.S. 975, 22 L. Ed. 2d 754, 89 S. Ct. 1469 (1969), fraudulent misrepresentations in the United States, Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326 (2d Cir. 1972); Travis v. Anthes Imperial Ltd., 473 F.2d 515 (8th Cir. 1973), or other involvement of American investors to their detriment, S.E.C. v. United Financial Group, Inc., 474 F.2d 354 (9th Cir. 1973).
The disputed transactions, at least those alleged in connection with the 10b-5 claim, involved trading in securities listed on American exchanges, as in Schoenbaum and Roth. The required significant connection is thus present here.
The question of whether sufficiently detrimental effects in this country can be found is more difficult. The trust appears to be a Bermuda citizen; its nominal founder is a Canadian; yet Selzer, who stands to lose under his guarantee of the trust's debts, is an American. He alleges that trusts similar to his were arranged for other Americans. While it would be possible to view this dispute as one between a Bermuda trust and a Bermuda bank, the proper course is to look through the forms to discover the effect upon the Bank's ultimate American customer. Selzer's claims as to the loan account are less troublesome, since as to them the detrimental effect of the alleged misuse is clearly ...