The opinion of the court was delivered by: STEWART
This action was brought on by order to show cause on September 3, 1974 by the Securities and Exchange Commission ("SEC") for injunctive relief and for the appointment of a receiver. The complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Specifically, the complaint alleges that from September 1968 up to the present all of the defendants at various times have engaged in a course of conduct designed to convert the assets of the Capital Growth companies for their own benefit to the detriment of their shareholders.
On September 3, 1974, this court entered a temporary restraining order ("TRO") which enjoined defendants from taking any action with regard to the present and future assets of Capital Growth Company, S.A. (Costa Rica) and Capital Growth Company, S.A. (Panama) and the voting securities of Capital Growth Company, S.A. (Costa Rica) and New Providence Securities, Ltd., S.A. The TRO further enjoined defendants from engaging in any acts in violation of Section 10(b) or Rule 10b-5.
Since the defendants may be classified in three similarly situated groups, each group will be discussed separately.
Defendant Sheffield Advisory Company, S.A. is a Panamanian company with offices in New York City. It is the successor to defendant Sheffield Advisory Company, formerly a New York limited partnership with offices in New York City. Sheffield
served as investment advisor to defendant New Providence Securities, S.A. ("New Providence"), investment manager for the Capital Growth companies, with respect to the investment and reinvestment of the assets of the Capital Growth companies.
Defendant Sanford C. Shultes ("Shultes") is a United States citizen and a resident of New York City. Shultes managed and directed the affairs and was a substantial owner of Sheffield during the period covered by the complaint. From on or about October 15, 1971, to on or about July 25, 1972, Shultes was a director of New Providence and the Capital Growth companies.
The Sheffield group appeared in this action and requested an extension of time before the hearing on a preliminary injunction. Such an extension was given and during that time those defendants agreed with the SEC to settle the case against them. A permanent injunction was entered against Sheffield Advisory Company and Shultes on October 30, 1974. Following approval by its Board, defendant Sheffield Advisory Company, S.A. entered into a settlement agreement with the SEC on December 16, 1974.
2. The Capital Growth Group
Capital Growth Company, S.A. (Panama) ("CG Panama") is a wholly-owned subsidiary of the Costa Rica corporation Capital Growth Company, S.A. (Costa Rica) ("CG Costa Rica"). CG Panama was incorporated on August 4, 1972 and acquired substantially all the investments of CG Costa Rica on that date. The preferred shares of CG Costa Rica are held by approximately 16,000 public investors. On July 10, 1971, Capital Growth Fund, S.A. was converted into a close-ended investment company and changed its name on September 24, 1971 to Capital Growth Company, S.A. (Costa Rica).
Defendant New Providence and its predecessors have served as investment managers for the Capital Growth companies and own all of their common stock.
Defendant McAlpin owns or controls approximately sixty percent of the outstanding voting securities of New Providence. McAlpin, a resident of Costa Rica, has served as president and chairman of the boards of directors of the Capital Growth companies and of defendant New Providence.
The Capital Growth group defendants did not appear in this case and a preliminary injunction was entered against them on September 24, 1974.
At the same time, this court appointed a receiver inter alia, to take possession and control of certain assets of the Capital Growth companies wrongfully received by other of the named defendants and to seek disgorgement and an accounting from those defendants of all misappropriated assets of the Capital Growth companies. After the preliminary injunction was entered, this court received a request on behalf of CG Costa Rica to contest the preliminary injunction. A hearing was scheduled and held on September 24, 1974. The sole objection raised at that hearing and in subsequent papers filed with this court is one of subject matter jurisdiction. Defendant claims that under the laws of Costa Rica no foreign agency can have authority or competency over Costa Rican companies and no receiver may be appointed. Even ...