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ALFADDA v. FENN

June 11, 1997

ABDULAZIZ A. ALFADDA; ABDULLAH ABBAR; ABDULLA KANOO; ABDULAZIZ KANOO; YUSIF BIN AHMED KANOO (a Partnership Company); and AHMED A. ZAINY, Plaintiffs, against RICHARD A. FENN; JAMAL RADWAN; SAUDI EUROPEAN INVESTMENT CORPORATION N.V.; SAUDI EUROPEAN BANK, S.A.; ALEF INVESTMENT CORPORATION N.V.; ALEF BANK, S.A.; SOCIETE d'ANALYSES et d'ETUDES BRETONNEAU; and SOCIETE de BANQUE PRIVEE (S.B.P.), Defendants. ABDULRAHMAN A. AL-TURKI, ABDULRAHMAN H. SHARBATLY, ABDULLATIF A. ALISSA, AND SAAD A. ALISSA, Plaintiffs, --against-- RICHARD A. FENN; JAMAL RADWAN; SAUDI EUROPEAN INVESTMENT CORPORATION N.V.; SAUDI EUROPEAN BANK, S.A.; ALEF INVESTMENT CORPORATION N.V.; ALEF BANK, S.A.; SOCIETE d'ANALYSES et d'ETUDES BRETONNEAU; and SOCIETE de BANQUE PRIVEE (S.B.P.), Defendants.


The opinion of the court was delivered by: MCKENNA

 McKENNA, D.J.

 Plaintiffs in these consolidated actions (see Memorandum and Order, dated February 21, 1992, at 9.), all foreign nationals who reside in Saudi Arabia, commenced the instant actions because of injuries allegedly incurred as a result of their investment in defendant Saudi European Investment Corporation N.V. ("SEIC"), a Netherlands Antilles corporation. Plaintiffs allege violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968; Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); and state law.

 Defendants SEIC, Alef Investment Corporation N.V. ("AIC"), Alef Bank, S.A. ("Alef Bank"), and Jamal Radwan ("Radwan") (collectively these defendants will be referred to as the "SEIC defendants") move: (1) for summary judgment dismissing all the claims against them in Al-Turki v. Fenn (90 Civ. 4470) (the "Al-Turki action") on the ground that the doctrine of issue preclusion bars relitigation of facts resolved by a previous French judgment; and (2) for dismissal of both the Al-Turki action and Alfadda v. Fenn (89 Civ. 6217) (the "Alfadda action") on the ground of forum non conveniens. Defendant Societe de Banque Privee (S.B.P.) ("SBP") moves for dismissal of the claims against it in both the Al-Turki and Alfadda actions on the grounds that: (1) the Court lacks subject matter jurisdiction over plaintiffs' allegations against SBP; and (2) the doctrine of forum non conveniens.

 For the reasons set forth below, the Second Amended Complaint in the Al-Turki action and the Third Amended Complaint in the Alfadda action are dismissed. *fn1"

 FACTUAL BACKGROUND

 All the plaintiffs are foreign nationals residing in Saudi Arabia. (Alfadda Compl. PP 5-8; Al-Turki Compl. PP 5-8.) *fn2"

 Radwan, the only individual defendant, is a United States citizen who resides abroad, apparently in France. *fn3" (Alfadda Compl. P 11; Al-Turki Compl. P 11; Radwan Decl., 10-21-96, P 2; Jewell Aff., 10-30-96, Ex. H, at 2.) At all relevant times, Radwan was the chairman of SEIC and AIC, holding companies organized under the laws of the Netherlands Antilles. (Alfadda Compl. PP 16, 24; Al-Turki Compl. PP 16, 24; Jewell Aff., 10-30-96, Ex. D, at 2, 4, 7; Radwan Decl., 10-21-96, P 1.)

 Saudi European Bank, S.A. ("SE Bank"), a grandchild subsidiary of SEIC, and Alef Bank, a subsidiary of AIC, were French banks registered to do business in New York. (Alfadda Compl. PP 17, 25; Al-Turki Compl. PP 17, 25; Jewell Aff., 10-30-96, Ex. D, at 4,) Radwan was the chairman of SE Bank until 1989, when the bank was sold. (SE Bank 1983 Annual Report; Radwan Dep. 32.) SBP is also a French bank. (Alfadda Compl. P 19; Al-Turki Compl. P 19; Fonlupt Decl., 2-12-96, P 2.) The only known address of Societe d'Analyses et d'Etudes Bretonneau ("Bretonneau") is in France. (Alfadda Compl. P 18; Al-Turki Compl. P 18.)

 The nine-count complaints of the Alfadda and Al-Turki actions are substantially identical. In an earlier Memorandum and Order, the Court ordered separate trials for Counts I-VI and Counts VII-IX of the complaints. Alfadda v. Fenn, 1993 WL 526065 (S.D.N.Y. 1993). Counts I-VI include claims against all the defendants, and generally relate to alleged securities fraud violations perpetrated in 1984. Counts VII-IX include claims against Bretonneau and SBP only, and generally relate to the 1989 sale and reorganization of SE Bank.

 I. Counts I-VI

 The focus of plaintiffs' securities fraud and related claims concerns the 1984 offering of SEIC stock (the "1984 offering"). In conjunction with the 1984 offering, SEIC issued a prospectus entitled "Confidential Private Placement Memorandum" ("PPM"), dated January 5, 1984. Plaintiffs contend that the SEIC defendants, among others: (1) made material misrepresentations and omissions in the PPM regarding SEIC's financial condition and performance; (2) deliberately diluted plaintiffs' ownership interest in SEIC by issuing more than the 600,000 voting shares represented in the PPM; (3) charged plaintiffs an undisclosed premium for their shares, contrary to representations in the PPM; (4) diverted the proceeds from the 1984 offering to their own personal and fraudulent ends; and (5) concealed their fraudulent conduct.

 A. The Unitel Loan

 B. The Sale of SEIC Stock

 SEIC's original "Deed of Incorporation" authorized it to issue 40,000 voting shares of SEIC stock. In SEIC's original stock offering, it issued 20,000 of the authorized shares at $ 1,000 per share. In July 1979, Alfadda, an original shareholder of SEIC, paid $ 1 million for 1,000 voting shares of SEIC, which constituted 5% of the original voting shares issued, plus a $ 50,000 organization fee. (Alfadda Compl. PP 9, 33; Alfadda Decl., 6-12-90, P 2.) SEIC represented to Alfadda that, as an original shareholder, he would receive a preference to purchase SEIC stock in subsequent offerings.

 Around October 1983, SEIC planned the 1984 offering. SEIC engaged Ronald Reilly and his company, Capital International, Inc., a Texas corporation, to, among other things, help promote the 1984 offering to prospective investors. (Wohl Aff., 5-3-96, Ex. 27.) Reilly prepared the PPM on behalf of SEIC primarily in Paris. (Reilly Dep. 11.) Radwan agreed to have SE Bank act as both the paying agent and United States transfer agent for funds received from the 1984 offering. (Radwan Dep. 1404-05, 1484.) SE Bank used its account at European American Banking Corporation in New York City as the primary account for the deposit of subscription funds. (Alfadda Compl. P 53; Al-Turki Compl. P 52.) Alef Bank acted as the managing underwriter for the 1984 offering. (Jewell Aff., 10-30-96, Ex. D, at 1.)

 Around the time of the 1984 offering, the original shares sold were split 30 for 1, creating 1.2 million authorized and 600,000 issued shares. The prospectus for the 1984 offering stated that another 600,000 voting shares (equal to 20,000 original shares split 30 for 1) were to be sold at $ 100 per share. In the event of an oversubscription, up to 1.8 million non-voting shares were to be issued. Subscribers to the 1984 offering were offered a "pre-emptive right to new share issues in order to maintain or increase their percentage of ownership in the company." *fn4" (Jewell Aff., 10-30-96, Ex. D, at 11.)

 Plaintiffs contend that defendants did not disclose that the 20,000 originally authorized, but unissued, voting shares were allocated to certain callable convertible "capital notes." When the capital notes were called by Radwan, around the time of the 1984 offering, the capital note makers converted them to voting shares at the original share price ($ 1,000 per share before the 30 for 1 split; $ 33.00 per share after the split). *fn5" (See Radwan Dep. 88-89; Stanley Decl., 8-5-96, Ex. 6.)

 Because of the existence of the allegedly undisclosed capital notes, plaintiffs contend that the 600,000 voting shares represented in the PPM were not the originally authorized, but unissued, shares, as plaintiffs were induced to believe, but were newly authorized shares. Thus, after the 1984 offering, SEIC had issued a total of 1.8 million, not 1.2 million, voting shares of stock, which diluted plaintiffs' interest in SEIC and contravened their preemptive rights. Plaintiffs contend that the 600,000 shares were issued to cover oversubscriptions of the SEIC voting stock under the 1984 offering and distributed to the makers of the converted capital notes. (See Alfadda Compl. PP 59, 69, 97; Al-Turki Compl. PP 60, 91, 101; see also Radwan Dep. 83, 88-89, 956; Stanley Decl., 8-5-96, Ex. 6; Fenn Dep. 1273-74, 1278.) Alfadda claims that defendants failed to notify him of the 1984 offering, and thus deprived him of his preference.

 Two sales of SEIC stock in the United States, totaling 330,000 shares, allegedly contributed to the oversubscription of the 1984 offering: (1) the sale of 180,000 shares to Charles Keating, Chairman of American Continental Corporation ("ACC"); and (2) the sale of 150,000 shares to Al-Turki. (Alfadda Compl. P 76; Al-Turki Compl. P 68.) On May 8, 1984, SEIC telexed ACC in Phoenix to advise that it had accepted ACC's offer to purchase 15% of SEIC (180,000 shares) for $ 18 million and directed ACC to deposit the money in a New York bank account. (Alfadda Compl. P 81; Al-Turki Compl. 72.) On June 26, 1984, Reilly sent a telex to Al-Turki in Houston accepting his offer to purchase 12.5% of the voting shares of SEIC (150,000 shares) for $ 15 million and directed Al-Turki to deposit the money in a New York bank account. (Alfadda Compl. PP 86-87; Al-Turki Compl. PP 77-81.) Prior to the sale of these 330,000 shares, SEIC allegedly had sold 343,000 voting shares pursuant to the 1984 offering. Thus, SEIC allegedly oversubscribed the offering and diluted plaintiffs' interest.

 Plaintiffs also contend that defendants diverted some of the funds from the 1984 offering for the benefit of Fenn, Radwan, and certain favored shareholders of SEIC. These diversions included the purchase of United States Trading Division of Gulf Oil Corporation for $ 15 million and certain convertible preferred stock in Galveston-Houston Company, an energy services company located in Houston, Texas. (Alfadda Compl. PP 109-113; Al-Turki Compl. PP 111-115.)

 C. The French Proceedings

 Under French law, an injured party has two avenues for seeking relief. The party may initiate a civil lawsuit in the party's own name, or the party may file a criminal complaint and become a partie civile in the criminal proceeding. A partie civile, who may be represented by counsel, participates fully in the criminal proceeding. The judge in a criminal case conducts an investigation of the charges, and may order the production of documents and/or compel testimony. If warranted, after the investigation, the investigating judge may refer the matter to trial. If the criminal charges are sustained at trial, the partie civile can recover civil damages in the criminal proceeding. (Lefort Decl., 1-10-91, PP 3-7; Lefort Decl., 10-15-96, P 3; Bouloc Decl., 4-12-95, PP 4-6.) The burden of proof is the same in criminal and civil proceedings. (Lefort Supp. Decl. P 12.)

 In the instant case, as described below, Sharbatly, Al-Turki, and A. Alissa (referred to simply as the "parties") initiated criminal proceedings by filing complaints with the Chief Investigating Judge of the Tribunal de Grande Instance in Paris, France. The Chief Investigating Judge referred the matters to the Tribunal Correctionnel for trial, which, after trial, ruled against the parties. The parties appealed to the Cour d'Appel, the intermediate appellate court, which affirmed the trial court's decision in all respects. The parties appealed again, and the case is presently pending before the Cour de Cassation, France's highest court.

 1. The Investigation

 In July and September 1987, Sharbatly filed two complaints before the Chief Investigating Judge in the Tribunal de Grande Instance in Paris, based on the alleged fraudulent conduct relating to the 1984 offering, seeking both criminal and civil sanctions. (See Lefort Decl., 10-15-96, P 9; Lefort Decl., 10-15-96, Ex. B.) In the July complaint, Sharbatly alleged that the fraudulent activity was "made possible only by the positive actions performed by Mr. JAMAL RADWAN, General Manager of SAUDI EUROPEAN INVESTMENT CORPORATION." The September complaint added more detail to the July complaint and explained that "since the actual center of the interests of S.E.I.C. is in France, where its subsidiary, the SAUDI EUROPEAN BANK, is located, and since the personnel and the corporate bodies of S.E.I.C. are also located in France, the fact is that under French law the company's headquarters is in France and the company is subject to the laws of the French Republic." On June 16, 1988, and July 17, 1988, respectively, Al-Turki and A. Alissa filed similar complaints. (Lefort Decl., 10-15-96, Exs. D & F.)

 After investigation, the Chief Investigating Judge referred the matters to trial before the Tribunal Correctionnel against Radwan, whom he found to be a French national, because "the acts caracterizing [ sic ] the elements that constitute the offence of fraud were accomplished in PARIS." (Stanley Decl., 12-20-96, Ex. 3, at 15.) He also declared that "the French Criminal Jurisdiction is . . . not competent to hear the offences of an irregular increase of capital and the non respect of the preferential right of subscription of the old shareholders" against SEIC because Netherlands Antilles law, not French, applied to those claims. (Id.)

 2. The Decision of the Trial Court

 At trial, Sharbatly sought $ 4.8 million, Al-Turki sought $ 15 million, and A. Alissa sought $ 13 million ($ 12 million for stock purchased on his own behalf and $ 1 million for stock purchased on behalf of S. Alissa) in civil damages. The parties also sought interest and additional damages against Radwan. On October 3, 1994, the trial court issued its decision. It summarized the charges against Radwan in the following manner:

 
disseminating a confidential private-investment information memo, the financial data for which are false as regards the amount of the capital before the subscription, the number of stock shares before subscription, and the amount of equity; sending a series of telexes that gave false information (corroborating the false information contained in the confidential memo) about the amount of the capital, and which presented as a subscription an operation that was in reality a purchase; using only one of two notarial instruments confirming the two successive increases in capital; using fictitious instruments, "capital notes," to achieve a fictitious internal increase in capital designed to produce securities that were sold to the parties joining in the action, who thought they were subscribing.

 (Lefort Decl., 10-15-96, Ex. H, at 3.)

 The court also recounted the parties' claims that they were falsely persuaded that: (1) SEIC would be divided into 1.2 million shares after the 1984 offering, when in reality it was divided into 1.8 million shares; (2) the equity before subscription was $ 68 million, when in reality it was only $ 30.8 million; and (3) the well-known founding stockholders held one-half of the capital, when in reality most had left the company and held only one-fifth of the capital.

 Regarding the capital notes, the trial court found: (1) the existence of the capital notes "was in conformity with Article 4 of the articles of incorporation of SEIC"; and (2) the "capital notes had been carried in the SEIC corporate and consolidated accounts since 1980, the year of their subscription." (Id. at 6.) The court also found that the existence of the capital notes, made by AIC, Dalia Products Corporation ("Dalia"), and North South Finance Corporation ("NSFC"), was evident from correspondence to Sharbatly, dated September 21, 1982, and November 18, 1983. *fn6" (Id. at 7.) Moreover, the court found that "the parties . . . could not have made a mistake as regards the total number of SEIC shares following the two increases in capital, since they had at their disposal the SEIC financial statements and the aforementioned attestations and telexes." (Id.)

 The court did find that certain correspondence contained incorrect information, but concluded that the parties "inevitably made an in-depth study of the company before investing" and "cannot validly maintain" that their investment decisions were premised on that correspondence because: (1) they possessed the financial documents that contained the accurate information; and (2) they were wealthy businessman, in some cases chairmen or directors of banks, planning to invest large sums of money. (Id. at 8.) Considering the above factors the court concluded that the parties had failed to prove:

 
the fictitious nature of the capital notes or of the internal increase in capital, or of a lie concerning the true number of shares.

 (Id.)

 The court also rejected the parties' assertion that they were deceived into believing that they were purchasing newly issued shares, when in reality they purchased old shares in a secondary market. *fn7" The court found that the evidence established both the existence of the secondary market and the parties' knowledge of it. (Id. at 10.) The court noted that A. Alissa was specifically informed that his investment was made through the secondary market, and that in any event, each of the parties paid for their shares after the subscription closing date. ( Id.)

 II. Counts VII-IX

 Counts VII-IX concern the sale and reorganization of SE Bank (a French grandchild subsidiary of SEIC), into two French banks, Bretonneau and SBP (referred to jointly as the "bank defendants"). In 1989, SE Bank's name was changed to Societe de Banque Privee. (This was the original Societe de Banque Privee, which will be referred to as "OSBP"). Plaintiffs contend that Bretonneau and SBP, among others, conspired to "hinder, delay and defraud creditors of SE Bank, including plaintiffs" by transferring the business, operations, and assets of OSBP to a new entity, SBP, and reducing OSBP to an insolvent shell. OSBP was renamed Bretonneau, while the real business and assets of SE Bank were allegedly maintained by SBP. (Alfadda Compl. PP 3, 114; Al-Turki Compl. P 3, 116.) The individuals responsible for SBP's and Bretonneau's alleged conspiracy, Francis Bouygues, Olivier Bouygues, and Jean-Francis Fonlupt, are all non-defendant French nationals.

 As part of the bank defendants' alleged scheme to hinder, delay, and defraud creditors, plaintiffs' allege that the bank defendants (1) misled New York banking regulators into approving the closure of SE Bank's New York agency ("SE Bank-NY"); and (2) transferred "files, loans, notes and other papers evidencing assets worth millions of dollars from ...


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