The opinion of the court was delivered by: BONSAL
Pursuant to the Court's directions on May 5, 1975, the parties have briefed their positions on the issue of the Court's subject-matter jurisdiction over this case, which has been brought under the Securities Act of 1933, 15 U.S.C. § 77v, and the Securities Exchange Act of 1934, 15 U.S.C. § 78aa.
Plaintiffs, originally F.O.F. Proprietary Funds, Ltd. ("FOF Prop.") and John W. Davidge, Jr., as Trustee in Reorganization of Farrington Overseas Corporation ("Trustee"), filed this class action claiming violations by defendants of the Federal securities laws. The Trustee withdrew from the action on February 18, 1975, in compliance with an order of Judge Oren R. Lewis of the United States District Court for the Eastern District of Virginia, leaving FOF Prop. as the sole named plaintiff.
FOF Prop. is a Canadian mutual fund and is a subsidiary of Investors Overseas Services, Ltd. ("IOS"), an international sales and financial service organization principally engaged in the management of mutual funds.
In 1968, FOF Prop. purchased, allegedly in reliance on a "Preliminary Offering Circular" dated October 10, 1968 and on an "Offering Circular" dated October 17, 1968, $1,000,000 of the Farrington Overseas Corporation ("FOC") 5 1/2% Convertible Guaranteed (Subordinated) Debentures (the "FOC Debentures"), which were guaranteed by FOC's parent, Farrington Manufacturing Company ("FMC").
FOC was incorporated in Delaware and was "formed for the principal purpose of making loans to and investments in companies operating outside the United States." FOC Debenture Offering Circular, Oct. 17, 1968, at 3. FOC was a wholly-owned subsidiary of FMC.
FMC was incorporated in Massachusetts and had its executive offices in New York City. FMC specialized in "computer input systems" and manufactured "optical character reader systems" and "credit identification systems." FOC was part of what FMC referred to as its "International Group" which marketed FMC products in foreign countries.
In order to comply with the Federal securities laws and with regulations of the United States Office of Foreign Direct Investment,
the following proviso appeared in bold typeface on the cover page of the FOC Debenture Offering Circular:
"The Debentures have not been registered under the United States Securities Act of 1933 and are not being offered in the United States . . ., to nationals or residents thereof or to residents of Canada or Canadian corporations."
The purpose of the 1968 distribution of the FOC Debentures was explained in the FOC Debenture Offering Circular, dated October 17, 1968, at page 3, as follows:
"The net proceeds to be received from the sale of the Debentures will be invested in or loaned to certain subsidiaries or affiliates of [FMC] and [FOC] outside the United States to assist in financing their working capital requirements and their expansion programs and to retire existing indebtedness incurred for those purposes. They may also be used for direct or indirect investment in, or for acquisition of, other companies operating outside the United States . . . .
"[FOC] intends to conduct its business so that more than 80% of its gross income will be derived from sources outside the United States."
Based upon FOC's representation that its Debenture offering was to constitute long-term foreign borrowing for its overseas operation, and based on the condition that each underwriter which offered the FOC Debentures sign a covenant expressly agreeing that
"it [would] not offer or sell the Debentures in the United States . . ., to nationals or residents thereof or to residents of Canada or Canadian Corporations. . . . Each Underwriter severally represents further to [FOC] and [FMC] that it will cause each purchaser from it who is a dealer to agree not to offer or sell Debentures [in these places or to these persons],"
the Securities and Exchange Commission issued a no-action letter and agreed that the FOC Debentures need not be registered. See note 2 supra. The underwriters each agreed to this covenant and, in seeking to comply with its restrictions, ...