The opinion of the court was delivered by: CARTER
Posture of the Litigation
The instant action involves yet another chapter in the fitful recent history of I.O.S., Ltd., the once high-flying mutual fund management corporation. Plaintiff sues on behalf of all who purchased I.O.S. stock from participating underwriters in a September, 1969, tripartite offering, and alleges, in substance, that the prospectuses pursuant to which the offering was made were false and misleading in that they failed to reveal material facts concerning I.O.S.'s finances, illegal activities, chaotic bookkeeping and mismanagement, and the actual looting and plundering of I.O.S.'s treasury, all in violation of Sections 12, 15, and 17 of the Securities Act of 1933 (15 U.S.C. §§ 77 l, 77 o, and 77 q); Sections 10(b), 15 (c)(1), and 20 of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78j(b), 78 o, and 78t), and SEC Rules 10b-5 and 15c1-2 (17 C.F.R. 240.10b-5, 240.15c1-2).
I.O.S. has been named a defendant, as has Bernard Cornfeld, who during the years with which this litigation is concerned was I.O.S.'s chief executive officer, board chairman, and largest shareholder. Other defendants include the eight principal underwriters and the international accounting firm which certified the financial statements that appeared in the prospectus.
In a memorandum opinion dated June 28, 1972, the court (Frankel, J.), ruled tentatively that this action might be maintained as a class action. In so doing, Judge Frankel expressly reserved for later determination by the Judge to whom the case was to be assigned for all purposes under the then-incipient individual assignment system, three issues: subject matter and personal jurisdiction; whether foreign purchasers should be included in the plaintiff class; whether and how the court's ultimate judgment may be made binding upon foreign class members. On December 27, 1972, the Drexel Group entered into a consent order (Ryan, J.) with the plaintiff, in which it was agreed that plaintiff would initially limit discovery to the issues left open by Judge Frankel, at the completion of which defendants would make jurisdictional and class determination motions within sixty days.
On April 2, 1973, Judge Ryan ordered that plaintiff's discovery be completed by September 1, 1973. On October 31 and November 1, 1973, defendants other than I.O.S. and Cornfeld filed motions designed to challenge the court's jurisdiction. On December 3, 1973, with the consent of the parties, Judge Ryan adjourned the motions to on or after April 15, 1974. Further adjournments followed.
During the same general period, defendants I.O.S. and Cornfeld were drawn into the fray. On December 7, 1972, a certificate of mailing was filed, indicating that a summons and complaint had been mailed to I.O.S. at an address in London, England. On May 21, 1973, a marshal's return was filed, indicating that Bernard Cornfeld had been served on May 15, 1973 at an address in California. Neither I.O.S. nor Cornfeld appeared, and on September 20, 1973, a default judgment was signed by Judge Ryan and entered against them. On December 5, 1973, defendant Cornfeld moved by order to show cause to vacate the default, and on December 26, 1973, Judge Ryan signed a consent order vacating the default and default judgment, and directing I.O.S. and Cornfeld to serve whatever jurisdictional motions they felt appropriate within forty days, said motions to be returnable at the same time as the aforementioned motions of the other defendants.
On February 1, 1974, a certificate of mailing was filed, indicating that a summons and complaint had been sent to I.O.S. offices in New Brunswick, Canada and Geneva, Switzerland, and to Cornfeld c/o St. Antoine Prison in Geneva, where he was then incarcerated. On February 21, Cornfeld filed a motion to dismiss the complaint and to amend Judge Frankel's class action determination, and on April 18, I.O.S. moved to dismiss the proceedings or, failing that, to stay them.
In mid-June, 1974, my chambers was informed that plaintiff and the Drexel Group were near agreement on a settlement, and that papers embodying the proposed settlement would be placed before the court by the end of June, at which time a conference would be requested. On June 28, 1974, a conference was indeed held. After a spirited exchange between the plaintiff and the "settling defendants" on the one hand and the "non-settling defendants" on the other, a second conference was set for July 15, at which time the relationship between the partial settlement and the pending motions was to be discussed. On the 15th, the parties were apprised of and apparently acquiesced in the court's proposal that it first determine whether subject matter jurisdiction was present, advise the parties orally of its decision so that a notice of settlement could be perfected and distributed, and thereafter the court would file a written opinion explaining its holding.
On July 29, the parties were notified by telephone that the court had concluded that it had subject matter jurisdiction and were given until July 31 to submit technical and procedural modifications to the proposed notice of settlement, and until August 2 to register responses to the suggested changes. On July 30, counsel for Crang requested another conference with the court and the parties. On July 31, that requested conference was held. The non-settling defendants urged the court to certify to the Court of Appeals, pursuant to 28 U.S.C. § 1292, the subject matter jurisdiction question. Further, they asked a stay of issuance of the notice of settlement until all appeals in respect of the jurisdictional questions had been exhausted. In addition, the non-settling defendants highlighted what they considered to be the most glaring defects in the proposed notice. I advised all present that inasmuch as similar facts and principles would be reviewed and applied in determining questions of subject matter and personal jurisdiction, I thought it appropriate to decide these issues together, and then assure appellate review of the package, either by directing the entry of a final judgment under Rule 54(b), Fed.R.Civ.P., or by certifying the jurisdictional questions to the Court of Appeals. I made it clear, however, that determination of the fairness of the settlement and approval or disapproval of same need not and ought not await the outcome of such appeals. I thereupon directed the parties to resolve among themselves as many of the suggested modifications to the proposed settlement as they could, and to submit for my determination the remainder. Moreover, approval of the settlement proposal was deliberately delayed to make certain that the time lag between that event and the filing of this opinion on the issues of subject matter and in personam jurisdiction would not be of long duration.
The Issues To Be Considered
Ripe for decision are defendants' motions to dismiss for lack of subject matter jurisdiction, for lack of personal jurisdiction, because of forum non conveniens, and (as to defendants I.O.S. and Cornfeld) because of defective service of process and because of plaintiff's failure to prosecute.
The Nature of the Offering
The 1969 I.O.S. public offering can be viewed as a single offering, two offerings, or three depending upon whether one focuses on the purposes of the offering and the interaction of its prime movers, upon the character of the offerings themselves, or upon the structure of the selling arrangement and the identity and locus of the purchasers. The Drexel Group served as chief underwriters for a primary offering of 5,600,000 new shares sold in Europe to Europeans. I.O.B., a wholly-owned subsidiary of I.O.S., managed a secondary offering in which 490 I.O.S. shareholders, most of them American, sold 3,950,000 shares to I.O.S. employees, long-time clients, and persons with long-standing business relationships with I.O.S., approximately 386 of whom were Americans. Crang managed a secondary offering of 1,450,000 shares, 150,000 of which it received from I.O.B. None of these shares were sold to Americans.
Based upon the evidence before me at the present time, I am convinced that the three offerings were sufficiently integrated and intertwined so as to appropriately be considered a unified transaction for purposes of subject matter jurisdiction considerations. Although the defendants appear to have gone to great pains to refer publicly to the offerings as separate and distinct -- and in fact each offering had unique characteristics and some non-identical parties -- nonetheless they were closely tied components of a functionally integrated process. Each of the offerings was of common shares of I.O.S. Deposition testimony of key figures involved in the offerings, a memoranda circulated among the various defendants, and the three final prospectuses all confirm that the Drexel Group, I.O.B., and Crang branches of the offering were commenced simultaneously and at the same price of $10 (U.S.) per share. The closings of all of the offerings occurred simultaneously as well. Although three different prospectuses were utilized, those of the Drexel Group and I.O.B. were substantially identical. The Crang prospectus, while "different" from the other two insofar as it sought compliance with Canadian securities regulations, utilized the same certified financial statement prepared by Arthur Andersen & Co., as did the other two prospectuses.
The "Plan of Distribution," at page 29 of the Crang prospectus, describes a patent connection between the I.O.B. and Crang offerings. I.O.B., acting as agent for selling shareholders, most of whom were American, was to offer 4,100,000 shares of I.O.S. common. Of that amount, it agreed to sell 150,000 shares to Crang, which Crang would sell for the American shareholders along with the other shares it was offering. In effect, Crang had assumed the obligations of and rights to a portion of the I.O.B. offering.
Contemporaneous documents also reflect that the underwriters considered the offerings to be closely intertwined, if not unitary. Murray J. Howe, of Crang, described the proposed Canadian offering in an inter-office memo dated August 29, 1969, stating:
"The offering of common shares of I.O.S., Ltd. to the public will total approximately $120,000,000 which will represent 20% of the total number of shares outstanding of the company. This new issue will be offered in Canada, the United Kingdom, Europe and other countries. The portion that will be offered in Canada (all Provinces) for Canadian distribution only, will approximate $15,000,000. . . . The Canadian, United Kingdom and European offerings will all be coordinated to be offered on or about September 24th. The issue price which will not be set until 3 or 4 days before the official offering date, will be between $10 and $11 per share which, incidentally, works out to be approximately 15 times current earnings." (See Appendix II, accompanying plaintiff's memorandum (hereinafter "Appendix II" ) Document 73 .) (Emphasis added)
In a letter from Howe of Crang to Edward Cowett of I.O.S., discussing the upcoming offering and Crang's role as managing underwriter for Canada, reference was made to the need for someone to coordinate the various underwritings and for one underwriting agreement between I.O.S. and the managing underwriters of each offering. (See Appendix II -- Document 73).
As the offering took shape, the managing underwriters appear to have been acutely aware of their ties to each other's segment of the transaction. Grayson Murphy of Shearman & Sterling, the firm representing Drexel Harriman, in a letter to the SEC , dated May 14, 1969, requested a meeting with the Commission regarding the offering, seemingly treating it as a unitary one. (Appendix II -- Document 75). At the meeting, as described by a member of Drexel Harriman, Murphy explained the principal features of all three of the offerings. (Appendix II -- Document 15a). In a letter to the SEC dated August 7, 1969, Murphy referred to the three offerings as separate, yet recognized the connections between the offerings in his attempt to obtain a favorable SEC opinion on registration of the shares. He was necessarily aware of the terms of the two other offerings and their effect upon his branch of the transaction. Moreover, in a reply letter to Murphy of September 8, 1969, the SEC saw fit to communicate information regarding "that part of the offering managed by Investors Overseas Bank."
The so-called "pertinent facts" stressed in Crang's reply memorandum in support of the motion to dismiss are inconclusive. The fact that the managing underwriters did not share in each other's fees might go to their particular roles and responsibilities in the offering, but has little bearing on the integrated nature of the transaction. Additionally, the alleged lack of activity by Crang in the United States and its failure to sell to United States citizens are potentially relevant to the issue of personal jurisdiction, but do little to elucidate the overall character of the offering and the relationship of its three branches.
While plaintiff is necessarily speculating, there appears to be substantial logic in his assertion that the primary and secondary features of the offering were necessary concomitants. The latter, which is an opportunity for management to realize on their investment, provides the incentive for the primary offering. The primary offering managed by Drexel creates the market for management to realize its profit in the secondary offering managed by Crang and I.O.B. While this relatedness of purpose is difficult to document, sufficient ties have been demonstrated to support plaintiff's contention that the three offerings were so integrated as to have their prime movers collectively considered for purposes of subject matter jurisdiction.
Subject Matter Jurisdiction
Defendants have moved, pursuant to Rule 12(b) (1), F.R.Civ.P., to dismiss for lack of subject matter jurisdiction.
The court's jurisdiction emanates primarily from § 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa.
To the extent that some of plaintiff's claims arise under the Securities Act of 1933, its jurisdictional provision -- Section 22, 15 U.S.C. § 77v -- should be viewed as being coextensive in reach with that of the 1934 Act. This conclusion is dictated by the language of each statute as well as by the statutes' shared function in policing securities transactions that are effected within the United States or that have a significant domestic impact. Cf. Leasco Data Processing Corp. v. Maxwell, 468 F.2d 1326, 1335-36 (2d Cir. 1972); SEC v. United Financial Group, Inc., 474 F.2d 354, 356 (9th Cir. 1973). At issue is whether the reach of those provisions extends to a securities transaction with substantial foreign components.
It is clear that the provisions of the American securities laws may cover transactions in the securities of foreign issuers. See Leasco Data Processing Corp. v. Maxwell, supra ; Madonick v. Denison Mines Ltd., 63 F.R.D. 657; CCH Sec.L.Rep. P 94,550 (S.D.N.Y. 1974); United States v. Clark, 359 F. Supp. 131 (S.D.N.Y. 1973). Ultimately, the concern is that domestic law be applied only to transactions with which the United States has a significant connection or interest. In assessing a particular transaction's connection with the United States, two basic principles are applied, concurrently or alternatively.
The first approach, sometimes referred to as the "subjective territorial principle," extends jurisdiction over acts or omissions which occur within a state's boundaries, even though the effect of such acts or omissions may be felt without. This Circuit, in its most recent pronouncement on application of the securities laws to foreign securities, relied upon this principle as set forth in § 17 of the Restatement (Second) of Foreign Relations Law of the United States (1965).
Leasco Data Processing Corp. v. Maxwell, supra.
In Leasco, an American company sought damages resulting from the fraudulent sale of a British company, the stock of which was listed on the London Stock Exchange, but not on any American exchange. The actual purchase of the securities occurred in England. The court focused on misrepresentations and meetings which occurred in the United States, although it acknowledged that the crucial misrepresentations may have occurred in England. It stated, at 468 F.2d 1334, that:
"Conduct within the territory alone would seem sufficient from the standpoint of jurisdiction to prescribe a rule. It follows that when, as here, there has been significant conduct within the territory, a statute cannot properly be held inapplicable simply on the ground that, absent the clearest language, Congress will not be assumed to have meant to go beyond the limits recognized by foreign relations law."
The second approach, which has been labeled the "objective territorial principle," was implicitly applied in Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir. 1968). The principle, as set forth and illustrated in § 18 of the Restatement (Second) of Foreign Relations Law of the United States (1965),
extends jurisdiction to conduct which occurs outside a territory, ...