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PSIMENOS v. E. F. HUTTON & CO.

February 3, 1983

JOHN PSIMENOS, Plaintiff,
v.
E. F. HUTTON & COMPANY, INC., Defendant



The opinion of the court was delivered by: MOTLEY

MOTLEY, C.J.

 Plaintiff John Psimenos, a Greek resident, seeks damages for claims allegedly arising under the Commodity Exchange Act, 7 U.S.C. ยงยง 1 et seq. (1982) as well as for pendent claims under common law contract and agency principles against the defendant E.F. Hutton & Company, Inc. (Hutton), a Delaware corporation maintaining its principal place of business in New York City. Defendant originally moved to dismiss plaintiff's complaint on various grounds. By stipulation dated January 6, 1983, the parties agreed to submit before the court on the instant motion the "fundamentally preliminary" *fn1" challenge to the court's subject matter jurisdiction because the federal commodities causes of action allege predominantly foreign transactions. Also before the court is Hutton's motion to dismiss on the ground that plaintiff's other alleged basis of federal jurisdiction, diversity of citizenship, is improperly pleaded. For the reasons set forth below, the claims allegedly arising under the Commodities Exchange Act are dismissed with prejudice. Plaintiff's other jurisdictional claim, diversity of citizenship, is also dismissed but without prejudice to file a motion for leave to replead this court's diversity jurisdiction.

 Plaintiff claims that in 1975 he opened a commodities trading account with defendant (Amended Complaint para. 16(c)). At that time Psimenos was informed by Mathieu Mavridoglou, Hutton's agent and employee in Athens, that his account would be managed in accordance with the defendant's standard procedures and with rules and regulations of the Commodities Futures Trading Commission. Mavridoglou, however, failed to inform Psimenos of the highly speculative, unresearched, and leveraged nature of the transactions placed in Psimenos' account (Amended Complaint paras. 16(d), 37(b)-(d)). In 1977, Hutton persuaded Psimenos to have his account handled in Paris (Amended Complaint para. 16(a)). At that time Psimenos was advised in conversations with Mavridoglou in Athens and in conversations with Mavridoglou and a Mr. Tome in Geneva that a Hutton representative in Paris would help Psimenos recoup his prior losses (Amended Complaint 16(a)). In 1981, the account was transferred to Athens; at that time Mavridoglou advised Psimenos that a new Hutton representative, Marios Michaelides, would handle his account (Amended Complaint para. 16(e)). Mavridoglou informed Psimenos that in managing his account, Michaelides would invest only in futures contracts in United States Treasury Bills which involve low risk and large profit potential (Amended Complaint para. 16(e)).

 The gravamen of the fraud is that each of the transactions in 1975, 1977, and 1981 involved misrepresentations by Hutton employees because Hutton did not have professional managers monitoring his account as promised and did not continually evaluate the performance of its managers as promised (Amended Complaint para. 17). The 1981 transaction involved the additional fraudulent statement by Mavridoglou that Michaelides was a Hutton employee when, in fact, Michaelides was neither an employee nor an agent of Hutton. In addition, although Hutton represented that its investments were sound and profitable, they were, in reality, highly speculative, unresearched, and risky (id.). As a result of these misrepresentations plaintiff claims that he suffered investment losses in excess of $200,000.

 Counts One through Three of plaintiff's complaint state claims allegedly arising under the Commodities Exchange Act. Counts Four through Seven allege claims sounding in common law contract and agency principles.

 Discussion

 A. Subject Matter Jurisdiction Over the Federal Claims

 The question of subject matter jurisdiction in cases involving the applicability of federal law to foreign transactions is governed by the following general principles:

 
When, as here, a court is confronted with transactions that on any view are predominantly foreign, it 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.

 Fidenas AG v. Compagnie Internationale Pour L'Informatique CII Honeywell Bull S.A., 606 F.2d 5, 9 (2d Cir. 1979) (quoting Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 985 (2d Cir.), cert. denied, 423 U.S. 1018, 96 S. Ct. 453, 46 L. Ed. 2d 389 (1975)). In IIT v. Vencap, Ltd., 519 F.2d 1001 (2d Cir. 1975), Judge Friendly stated:

 
Our ruling on this basis of jurisdiction is limited to the perpetration of fraudulent acts themselves and does not extend to mere preparatory activities or the failure to prevent fraudulent acts where the bulk of the activity was performed in foreign countries.

 Id. at 1018. Under these principles governing this court's subject matter jurisdiction, the relevant issue becomes "whether the fraud alleged has sufficient contacts with the United States to invoke the federal securities and commodities laws or whether it is 'predominantly foreign' in nature." Mormels v. Girofinance, S.A., 544 F. Supp. 815, 817 (S.D.N.Y. 1982) (Weinfeld, J.).

 In Mormels, the plaintiffs alleged that they opened a commodity trading account with defendant Girofinance S.A. ("Girofinance"), a Costa Rican corporation, in reliance upon misrepresentations made by Girofinance that, inter alia, it was the agent of defendant Hutton. Plaintiffs claimed that on or about November 1979, Girofinance converted their funds and fled Costa Rica with such funds. Plaintiffs alleged violations of various federal securities laws and violations of the Commodities Exchange Act. In deciding that the federal securities and commodities laws did not confer subject matter jurisdiction over these foreign acts, Judge Weinfeld reasoned:

 
The site of all basic activities which are at the core of plaintiffs' claims was Costa Rica. The alleged false representations were made there by Girofinance; the monies of which plaintiffs claim they were defrauded by reason of such representations were delivered by them to Girofinance in Costa Rica where the accounts were opened and maintained. Each plaintiff at the time of the complained of conduct was a resident of Costa Rica. Girofinance, the broker who allegedly converted plaintiffs' funds, did so there. ...

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