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CRESSWELL v. PRUDENTIAL-BACHE SECS.

February 22, 1984

EDWARD CRESSWELL, et al., Plaintiffs, against PRUDENTIAL-BACHE SECURITIES, INC., Defendant.


The opinion of the court was delivered by: SWEET

SWEET, D.J.

Defendant Prudential-Bache Securities, Inc. ("Prudential-Bache") has moved for summary judgment dismissing plaintiffs' claim for fraud under the Commodities Exchange Act ("CEA"), 7 U.S.C. ┬ž 6b, for lack of subject matter jurisdiction and the remaining claims under the doctrine of forum non conveniens. For the reasons given below, the motions are denied.

 Plaintiffs are 11 corporate investors, 10 of which are European corporations, and 74 individual investors of European and American citizenship residing abroad. They seek damages for fraud under the CEA as well as for state law fraud, negligence and breach of warranty. Plaintiffs commenced this action on March 17, 1983. This court's opinion of September 27, 1983 denied Prudential-Bache's motion to dismiss for lack of subject matter jurisdiction with leave to renew it after discovery. Discovery has taken place, although Prudential-Bache has requested time for additional discovery on matters other than the jurisdictional question posed by this motion.

 Plaintiffs' claims relate to losses they incurred as a result of their investment in spread positions ("Spreads") between futures contracts in Government National Mortgage Association certificates ("GNMA's") and United States Treasury bonds ("T-Bonds"). Beginning in late 1980, employees in Prudential-Bache's branch offices in London and West Germany recommended the Spreads to customers. In May 1981, an employee of Prudential-Bache's London office drafted a one-page document describing investment in Spreads.The document was sent to Prudential-Bache's New York office for review. George M. Caloger ("Caloger"), a second vice-president in the Prudential-Bache commodities division in New York, has testified by affidavit that he read this document but did not change it or show it to or discuss it with anyone else in the New York office. He stated that he reviewed the document to ensure that it was "generally tasteful, well-written and [made] no guarantees of success," then sent it to the Chicago Mercantile Exchange ("CME"), even though neither futures contracts in GNMA's nor those in T-Bonds are traded on the CME. The CME approved the letter, and Caloger notified the London office of this approval.

 In March 1982, another employee in the London office sent Caloger another prospecting letter concerning Spreads. Caloger has stated by affidavit that he reviewed this letter for the same purposes as he had the first letter, then phoned the London employee to tell him that he approved of the letter. Again Caloger did not change the document, show or discuss it with anyone else in the New York office. Finally, in April 1982, Prudential-Bache published a brochure describing the Spreads. The brochure was drafted, revised, printed and distributed only in Europe.

 All of the plaintiffs invested in Spreads and are alleged to have eventually lost money. Purchases and sales of the GNMA and T-Bond futures contracts for the accounts of plaintiffs were executed on the Chicago Board of Trade following communications from Prudential-Bache employees in the European offices to Prudential-Bache employees in New York and at the Chicago Board of Trade. Plaintiffs claim that Prudential-Bache fraudulently induced them to invest in Spreads by means of representations made orally and in the publications described above to the effect that the Spreads were safe, conservative investments, and that Prudential-Bache failed to disclose material facts about the Spreads and failed to supervise its employees who sold the Spreads to plaintiffs.

 Since this court's September 27 opinion, the Second Circuit has issued its decision in Psimenos v. E.F. Hutton & Co., Inc., 722 F.2d 1041 (2d Cir. 1983).That opinion is crucial to the disposition of the instant motion.

 Psimenos was a citizen and resident of Greece who became interested in investing through a commodities trading account with E.F. Hutton & Co., Inc. ("Hutton"). Hutton's Athens agent told Psimenos that his account would be managed in accordance with Hutton's standard procedures, and a Hutton flyer informed Pssimenos that Hutton's staff "continually monitors" each Hutton account manager. Relying on these statements, Psimenos opened a discretionary account with Hutton's Athens office. Psimenos directed that his money be spent only on conservative investments, but Hutton's agents used the money for highly speculative transactions, and Psimenos lost money. Dissatisfied, Psimenos talked in Geneva with the Athens agent and another Hutton employee and was induced to switch his account to Hutton's Paris office. Although Psimenos' losses were not recouped, he was later convinced to move his account back to Athens, where he lost still more money.

 Psimenos brought suit under the CEA for fraud. The district court dismissed the complaint for lack of subject matter jurisdiction, but the Court of Appeals reversed, holding as follows:

 Although most of the fraudulent misrepresentations alleged in the complaint occurred outside the United States, the trading contracts that consummated the transactions were often executed in New York. The issue on appeal is whether that trading in United States commodities markets is sufficient to confer subject matter jurisdiction on a federal district court to hear a claim for damages brought by an alien under the Commodities Exchange Act.

 We find that the district court has jurisdiction to hear Psimenos' claim. The trades Hutton executed on American markets constituted the final act in Hutton's alleged fraud on Psimenos, without which Hutton's employees could not have generated commissions for themselves.

 Id. at 354-55. In the final paragraph of the opinion, the Court stated:

 Trading activities on United States commodities markets were significant acts without which Psimenos' losses could not have occurred, and are ...


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