The opinion of the court was delivered by: FRANKEL
FRANKEL, District Judge: Asserting claims under the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, the complaint invokes § 22(a) of the former, 15 U.S.C. § 77v, § 27 of the latter, 15 U.S.C.§ 78aa, and 28 U.S.C. § 1337 as grounds for this court's jurisdiction.
The plaintiffs are the trustees of Venture Fund (International) N.V. ("Venture Fund"), a foreign corporation in liquidation.
The defendants are the law firm of Willkie Farr & Gallagher ("Willkie Farr"), Allan F. Conwill, Raymond W. Merritt, and John S. D'Alimonte, members of that firm, Robert Vesco, and several of Vesco's former business associates.
This is another in a long series of cases emanating from the alleged manipulation and looting of IOS and its corporate family by Robert Vesco and his associates. The essence of the particular scheme alleged here is that the defendants conspired to defraud Venture Fund by (1) liquidating some $20 million of its portfolio invested in marketable U.S. securities and (2) reinvesting the proceeds in the illiquid securities of Global Holdings Limited and Global Financial Limited ("the Global companies"), two Bahamian corporations created by defendant Vesco, for the ultimate purpose of misappropriating Venture Fund's $20 million. The Willkie Farr defendants are charged, inter alia, with having knowledge of the scheme, having been instrumental in its creation, and with malpractice in the exercise of their duties as counsel to Venture Fund during the period of the transactions complained of.
There are two motions to dismiss. One, by individual defendants Conwill, Merritt, and D'Alimonte, may be disposed of fairly briefly. They assert that the complainant fails to plead a claim upon which relief may be granted.
Recognizing the liberality with which complaints are read upon such occasions, the movants nevertheless find plaintiffs' effort fatally inadequate. It will suffice to say the court disagrees.
The other motion, by the defendant law firm, is substantially more imposing. It tenders an array of grounds for dismissal, all interesting and interestingly briefed. The court concludes, however, that while one or more of these grounds may defeat the plaintiffs after a trial, none can accomplish that end now.
Since most of the allegedly injured parties are foreign citizens, and since a considerable portion of the events giving rise to this action took place abroad, we have the difficult and recurring question of the proper international reach of the federal securities laws. The court has been led to revisit the learning most recently canvassed and extended in two of Judge Friendly's comprehensive opinions, Bersch v. Drexel Firestone, Incorporated, 519 F.2d 974 (2d Cir.), cert. denied, 423 U.S. 1018, 96 S. Ct. 453, 46 L. Ed. 2d 389 (1975); IIT v. Vencap, Ltd., 519 F.2d 1001 (2d Cir. 1975). In the end, that learning defeats this branch of defendants' motion to dismiss for lack of subject-matter jurisdiction.
Venture Fund and its bankruptcy trustees are all citizens of Netherlands Antilles. Venture Fund has 22,000 shareholders, only two of whom are American citizens.
None of the shares of Venture Fund or the Global companies, both Bahamian corporations, are traded on any domestic exchange or counter. The agreements consummating the investments in the Global companies were seemingly drafted, approved, and executed in the Bahamas. The American "contacts" allegedly included (1) a disputed number of meetings held in New Jersey concerning how to "close-end" the dollar funds,
(2) selling $20 million of Venture Fund's U.S. portfolio on domestic exchanges, (3) using domestic banks as custodians for Venture Fund's U.S. securities and funds, and (4) a number of telephone calls between the Bahamas and New York, including one from Bruno Lederer, compliance officer of the dollar funds, to defendant Merritt, for an opinion as to the legality of the Global transactions. The call to Merritt is alleged to have been a "but for" cause of the consummation of the Global transactions.
There were other activities that took place in the United States after the Global transactions were closed, but the significance of these to plaintiffs' allegations of securities fraud, and thus to subject-matter jurisdiction, is not apparent at this juncture.
Since there is no explicit Congressional learning on the subject, see Bersch v. Drexel Firestone, Incorporated, supra, 519 F.2d at 993, a court "confronted with transactions that on any view are predominantly foreign * * * must seek to determine whether Congress would have wished the precious resources of United States courts and law enforcement agencies to be devoted to them rather than leave the problem to foreign countries." Id. at 985. In making this determination, the approach has been to assess what is permitted by the principles of international relations law,
and then to decide whether Congress would want to go that far (or farther) in light of the dual purposes of the securities laws to protect American investors and the domestic securities markets.
Under that reasoning, the Second Circuit has recently decided that the federal antifraud provisions:
"(1) Apply to losses from sales of securities to Americans resident in the United States whether or not acts (or culpable failures to act) of material importance occurred in this country; and
"(2) Apply to losses from sales of securities to Americans resident abroad if, but only if, acts (or culpable failures to act) of material importance in the United States have significantly contributed thereto; but
"(3) Do not apply to losses from sales of securities to foreigners outside the United States unless acts (or culpable failures to act) within the United States directly caused such losses."
In the instant setting, plaintiffs must seemingly come within the exception to the third test in order to state a viable federal claim. It is apparently not enough that defendants, or some of them, are United States nationals and performed various "preparatory" acts here. See IIT v. Vencap, Ltd., supra, 519 F.2d at 1016, 1018; Bersch v. Drexel Firestone, Incorporated, supra, 519 F.2d at 985-88. In essence, what plaintiffs must show is that the United States was "used as a base for manufacturing fraudulent security devices for export," or at least that the acts performed here were themselves fraudulent and not merely preparatory. IIT v. Vencap, Ltd., supra, at 1018. "Admittedly the distinction is a fine one." Id. It cannot be made, at least in this case, without a full airing of the relevant facts. See Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326, 1330 (2d Cir. 1972).
The clearest lesson in the precedents is that the kind of jurisdictional problem we confront here must be decided with close and particular attention to concrete facts. We have been taught "the importance of ascertaining as precisely as possible the exact means by which the alleged fraud has been accomplished, since * * * both the question of jurisdiction and the availability of a remedy may turn upon this." IIT v. Vencap, Ltd., supra, at 1009. It is necessary "to ascertain exactly what was done -- by whom, when, and where * * *." Id. at 1006 n. 7. We have also been specially instructed in cases of this kind that plaintiffs are "entitled to every favorable inference." Leasco Data Processing Equipment Corp. v. Maxwell, supra, 468 F.2d at 1330, citing Steele v. Bulova Watch Co., 344 U.S. 280, 284, 97 L. Ed. 319, 73 S. Ct. 252 (1952). In a still developing area, where there may be a need for fine distinctions, live testimony and detailed ...