Courts in this Circuit employ two tests to determine whether subject matter jurisdiction exists: the "conduct test" and the "effects test." E.g., Itoba Ltd. v. Lep Group PLC, 54 F.3d 118, 121-22 (2d Cir. 1995), cert. denied, 133 L. Ed. 2d 659, 116 S. Ct. 702; 116 S. Ct. 703 (1996). Because SEITA has not alleged that Defendants' alleged acts bore effects in the United States, only the conduct test need be considered.
Under the conduct test, subject matter jurisdiction over securities claims asserted by aliens exists only where there has been in the United States: (1) "conduct material to the completion of the fraud," Psimenos v. E.F. Hutton & Co., 722 F.2d 1041, 1046 (2d Cir. 1983); (2) "perpetration of the fraudulent acts themselves," IIT, 519 F.2d at 1017; or (3) the "final steps in the fraudulent scheme," Cresswell v. Prudential-Bache Secs. Inc., 580 F. Supp. 55, 58 (S.D.N.Y. 1984). Subject matter jurisdiction does not exist where activities in the United States are "merely preparatory"; "are relatively small in comparison to those abroad," Bersch, 519 F.2d at 987; are "far removed from the consummation of the fraud," Psimenos, 722 F.2d at 1046; or are "secondary," "ancillary," or "tertiary," Fidenas AG v. Compagnie Internationale Pour L'Informatique CII Honeywell Bull S.A., 606 F.2d 5, 8 (2d Cir. 1979) (upholding as "entirely correct" these descriptions by the district court). Put another way, "where defendants have undertaken significant steps in the United States in furtherance of a fraudulent scheme, United States courts have jurisdiction over suits arising from that conduct even if the final transaction occurs outside the United States and involves a foreign plaintiff." Carr v. Equistar Offshore, Ltd., No. 94 Civ. 5567 (DLC), 1995 U.S. Dist. LEXIS 13703, 1995 WL 562178 (S.D.N.Y. Sept. 21, 1995) (citing Alfadda, 935 F.2d at 478-79 (quoting Restatement (Second) of Foreign Relations Law of the United States § 416(d) (1987)); Bersch, 519 F.2d at 993) (emphasis added). The principles governing extraterritorial jurisdiction of the securities laws are applicable in deciding the same issue under the commodities laws. E.g., Psimenos, 722 F.2d at 1044; Mormels, 544 F. Supp. at 817 n.8 (S.D.N.Y. 1982). In sum, to satisfy the conduct test, SEITA must demonstrate that the defendants' United States-based activities "directly caused" its financial losses. E.g., Itoba, 54 F.3d at 122; Psimenos, 722 F.2d at 1047.
The allegations of the Complaint fail to satisfy the conduct test, and the affidavits, therefore, need not be addressed. The clear gravamen of the Complaint is that SEITA, a French corporation, was defrauded by SBIL, an English corporation, through acts that occurred in France or England and had their only effect in France. The alleged fraudulent conduct that "directly caused" SEITA's losses occurred outside the United States.
The Swaps themselves are not alleged to have been a fraudulent instrument. Instead, the Complaint alleges that SEITA entered into the Swaps in reliance upon fraudulent representations made by Albou, an SBIL employee located in London, and that, had such alleged misrepresentations not been made, SEITA would not have entered into the Swaps. (Compl. PP 32, 43, 45.) Thus, the alleged fraud occurred before or upon the execution of the Swaps. SBIL marketed the Swaps to SEITA from London (Compl. P 95), and Albou was responsible for "the bulk of the communications" with SEITA (Compl. P 29.) No other person is alleged to have induced SEITA to enter into the Swaps. As a French corporation headquartered in Paris (Compl. P 1), SEITA relied on the alleged misrepresentations, executed the Swaps, and realized its losses in Paris.
Although the Complaint refers to activity in the Tampa office, none of the allegations describes conduct within the United States that can be read to have "directly caused" SEITA's losses or to have been anything more than "preparatory," "ancillary," or "secondary" activities in the United States. Instead, the alleged fraudulent conduct that "directly caused" SEITA's losses consisted of inducing SEITA to enter into the Swaps through allegedly false or misleading information -- all of which occurred abroad. Although activity relating to the Swaps occurred in the United States, it was incidental to what was done in London, did not constitute fraud, and did not "directly cause" SEITA's losses.
SEITA counters that the Complaint alleges an involvement of the United States offices that goes to the "very heart of the fraud" (Def. Mem. at 16): structuring the terms, pricing and valuation of the Swap Transactions in such a way that they disproportionately favored Salomon over SEITA, and failing to disclose that fact to SEITA.
Yet these allegations are far from the heart of the Complaint. The gravamen of the purported federal claims asserted by SEITA can only be read as fraud in the inducement. The alleged fraud consists of allegations that: 1) Albou of SBIL "proposed" the Swaps, which he "described as being very good investments," to SEITA (P 30); 2) Albou (upon information and belief) had a personal financial motive for doing so (P 31); 3) Tardieu resisted at first, but agreed to the Swaps after "repeated calls from Albou aggressively promoting the transactions" (P 32); 4) Tardieu told Albou that SEITA "could not enter into any transaction in which any material portion of the principal it invested would be at risk," and Albou "stated that he understood this" (P 32); 5) Albou "represented to Tardieu that the risk of loss to SEITA was very small because of the range of the DEM interest rate and USD/JPY exchange rate that would be part of the terms of the Swap Transactions," and also "assured Tardieu that, if at any time it appeared that the principal SEITA invested was at risk, Salomon would get SEITA out of the Swaps at minimal cost to SEITA" (P 32); 6) had Albou "not made these representations, Tardieu would not have entered into the Swap Transactions." (P 32.)
No other communications are alleged to have induced SEITA to enter into the Swaps, and the Swaps themselves are not alleged to have been fraudulent. Complaint P 95 confirms that "Salomon's London office" was the one that "marketed the Swap Transactions to SEITA." Neither does the Complaint indicate that anyone other than Albou made any of the alleged statements that induced SEITA to enter into the Swaps. The Complaint does not allege statements made in the United States that induced SEITA to enter into the Swaps.
The alleged fraud described in the Complaint was, as a matter of law, consummated at the point in time when, having been induced by the alleged misrepresentations of SBIL's Albou, Tardieu executed the Swap agreements. As this Court held in Cresswell, 580 F. Supp. at 58, the "final step" in a securities fraud scheme occurs upon the execution of the fraudulently induced transaction.
SEITA notes that Paragraph 20 of the Complaint alleges that "Salomon's Tampa, Florida office, with possible assistance from Salomon's New York office, was responsible in whole or in part for the terms, pricing and valuation of the Swaps." Paragraph 38 of the Complaint alleges that Salomon had a financial incentive "to structure the Swap Transactions disproportionately in Salomon's favor and against the interests of its customer, SEITA," and that "Salomon did not disclose to SEITA that Salomon had such an incentive."
These allegations, however, do not provide jurisdiction. The gravamen of the alleged fraud is not in the structuring of the Swaps, but in the misrepresentation of them as low-risk. The Complaint does not allege that statements in the Swap agreements themselves are false or misleading. Rather, SEITA claims that Albou misrepresented the risk involved in the Swaps and thereby fraudulently induced SEITA to enter into them.
Even allegations that the Swap agreements themselves were false and misleading and that they had been structured in Tampa might present no basis for jurisdiction. Under those circumstances, this case would be analogous to Bersch, in which the defendants and others "met in New York on numerous occasions to initiate, organize and structure the offering" at issue, Bersch, 519 F.2d at 985 n.24, and in which Judge Friendly wrote for the Court of Appeals:
Assuming that there were no American purchasers and that the underwriting related, for example, to a large foreign industrial company clearly identified with a foreign country rather than with the United States, e.g., Rolls-Royce, Mercedes-Benz, or Fiat, we do not believe the activities in the United States . . . would justify an American court in taking jurisdiction in a suit for damages by foreign plaintiffs. The fraud, if there was one, was committed by placing the allegedly false and misleading prospectus in the purchasers' hands. . . . At most the acts in the United States helped to make the gun whence the bullet was fired from places abroad; alternatively proper action in the United States would have prevented the gun's ever being sent abroad. We are indeed holding in IIT v. Vencap Ltd., 519 F.2d 1001 (2d Cir. 1975), decided this day, that Congress did not mean the United States to be used as a base for fraudulent securities schemes even when the victims are foreigners, at least in the context of suits by the SEC or by named foreign plaintiffs. But as we there point out, that holding itself goes beyond any case yet decided, and we see no reason to extend it to cases where the United States activities are merely preparatory or take the form of culpable nonfeasance and are relatively small in comparison to those abroad.
Id at 986-87 (citations and footnotes omitted). Thus, even the most generous interpretation of SEITA's assertions concerning Tampa merely establishes that "acts in the United States helped to make the gun whence the bullet was fired from places abroad." As Bersch holds, that is not enough to establish jurisdiction.
Similarly, Judge Friendly's reasoning in Bersch suggests that jurisdiction cannot be founded on the failure of United States offices to make disclosures to SEITA regarding the alleged fraud perpetrated in London. An allegation that "proper action in the United States would have prevented the gun's ever being sent abroad" is not sufficient, nor are United States activities that "take the form of culpable nonfeasance and are relatively small in comparison to those abroad." Bersch, 519 F.2d at 987; see also IIT, 519 F.2d at 1018 ("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, such as in Bersch").
The Complaint cites a facsimile sent from Tampa directly to SEITA on January 19, 1995, which set forth the amount SEITA was to pay Salomon upon termination of the USD/JPY Swap, detailing how that amount was reached and providing payment instructions. (Compl. PP 20, 80) As Cresswell makes clear, the fraud in a case such as this is complete upon execution of the transaction. 580 F. Supp. at 58. The "final step" here was the execution of the Swaps in London and Paris. The faxed payment instructions were received at least nine months after SEITA had been induced to enter into the transactions, at least eight months after SEITA (according to its own allegations) had learned that it had a $ 29 million loss position in the Swap -- and, thus (necessarily), that the Swaps were not low risk (Compl. PP 51, 52, 57) -- and after SEITA had already paid over $ 5 million in partial termination of one of the Swaps without ever having received any payment instructions from the United States. (Compl. P 78.) Under these circumstances, the faxed payment instructions cannot be deemed to have been "critical." Applying the Court of Appeals' formulations, the faxed payment instructions did not constitute either "perpetration of the fraudulent acts themselves" or "conduct material to the completion of the fraud"; rather, viewing the allegations regarding the facsimile in the context of the allegations of the Complaint as a whole, they were "relatively small in comparison to those abroad," "far removed from consummation of the fraud," and "secondary," "ancillary," or "tertiary." The facsimile was, "'relatively minor' and of a 'secondary' nature and does not detract from the fact that the core of the primary fraud was centered and committed in [London] and not the United States." Mormels, 544 F. Supp. at 818. The facsimile does not alter the conclusion that the Swaps were transactions that were "'predominantly foreign.'" Id. at 817.
SEITA asserts that the involvement of Salomon's United States offices in the pricing and valuation of the Swaps can be seen by mark-to-market calculations received by SEITA from Salomon on a periodic basis from April through December 1994, which set forth SEITA's position on the Swaps. Certain of these statements bore disclaimer or disclosure statements of SBI (Compl. P 58), and SEITA argues that these strongly suggest that the calculations were prepared in the United States. Yet the "mark-to-market calculations" do not support jurisdiction, since as with the faxed payment instructions, they are not the kind of conduct -- central to perpetration of the alleged fraud -- that support jurisdiction in a United States federal court.
Further evidence of United States involvement in the Swaps, argues SEITA, can be seen by the letters sent and prepared by Salomon confirming or restructuring the Swap transactions. Each of those letters is alleged to have stated that any questions concerning the transactions could be directed to "the Swap Operations department" in Tampa. (Compl. P 49, 54.) Thus, contends SEITA, it is clear from this statement that the Tampa office was integrally involved in and had detailed knowledge of the Swaps and was authorized to disclose information concerning the Swaps to SEITA. The Swap Confirmations, argue SEITA, represent the Tampa office as a "department" of SBIL, which supports SEITA's allegation that SBIL conducts business in the United States through the Tampa office.
Yet the letters were sent after the Swap transactions had been executed; that is, after the alleged fraud in the inducement had been consummated in London. Under the circumstances the letters advising plaintiff to direct questions concerning operational matters to Tampa cannot be deemed to support the existence of federal jurisdiction. Defendants' back-office operations are not alleged to have been involved in the "perpetration of the fraudulent acts themselves"; were "far removed from consummation of the fraud"; were "relatively small in comparison to those abroad"; did not "directly cause" any of plaintiff's losses; and are properly characterized as "secondary," "ancillary," or "tertiary."
SEITA also cites as evidence of the likelihood of significant interaction between SBIL and Salomon's United States offices relating to the Swap Transactions the statements made by Salomon in a preliminary placement memorandum sent to SEITA concerning Salomon's EMS Strategies Fund, which described SBIL's function in Salomon's global network as "a London affiliate" of SBI. (Compl. P 17.)
Yet SEITA's investment in the EMS Strategies Fund was a 1990 transaction that was unrelated to the Swaps. (Compl. P 24.) Under the Second Circuit's conduct test, such interaction is insufficient to support subject matter jurisdiction.
Our Court of Appeals' decision in Bersch, discussed above, is instructive. In that case, the alleged fraud occurred upon the placing of a prospectus in the hands of the purchasers, which occurred abroad. Bersch, 519 F.2d at 987. The Court concluded that even where various physical meetings among the issuer, underwriters, accountants and SEC officials discussing the offering took place in the United States, they were at most "preparatory." Id. Similarly, the fraud here occurred upon SBIL's alleged inducement of SEITA to enter into the Swaps, which occurred in London and Paris.
In sum, it is not enough to assert that offices or entities in the United States had only some involvement in the transactions at issue. To support the assertion of federal jurisdiction, the plaintiff must put forward allegations of conduct in the United States of sufficient centrality to the claim of fraud to warrant an exercise of such jurisdiction. SEITA has failed to do this, demonstrating only that the Tampa office "helped to make the gun whence the bullet was fired from places abroad," Bersch, 519 F.2d at 987, or engaged in "mere preparatory activities or the failure to prevent fraudulent acts where the bulk of the activity was performed in foreign countries," IIT, 519 F.2d at 1018. This is not enough.
SEITA cites Venture Fund (Int'l) N.V. v. Willkie Farr & Gallagher, 418 F. Supp. 550, 555-56 (S.D.N.Y. 1976), for the proposition that when parties provide divergent accounts of facts relevant to jurisdiction, as they have in this case, the appropriate course is to allow discovery to proceed, rather than having the case decided on a motion to dismiss. Yet here, unlike in Venture Fund, the Complaint itself defeats a finding of subject matter jurisdiction, and the divergent accounts of facts presented by the parties need not, therefore, be considered or more fully developed by discovery.
For the reasons set forth above, the motion to dismiss for lack of subject matter jurisdiction will be granted and the case closed.
It is so ordered.
New York, N. Y.
June, 25, 1996
ROBERT W. SWEET
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