willingness to submit a dispute to judicial resolution and, if waived, is not automatically revived by the submission of an amended complaint." Id.).
These authorities apply to the case at bar, since on February 21, 1995, these defendants moved to dismiss plaintiffs' first amended complaint without raising the defense of improper venue, although the factual basis said to support that defense existed then, as it exists now. Accordingly defendants have waived the defense of improper venue.
Subject Matter Jurisdiction
The question of Federal subject matter jurisdiction vel non is not one that a defendant can waive. On the contrary: all parties may agree among themselves that the district court has subject matter jurisdiction, but the courts, trial and appellate, are obligated to consider the matter sua sponte. For that reason I will do so in this case, although defendants do not treat the subject in their reply brief and may have abandoned it.
A motion to dismiss an action for lack of subject matter jurisdiction falls under Rule 12(b)(1). On a Rule 12(b)(1) motion, the Court need not accept as true contested jurisdictional allegations, and may resolve disputed jurisdictional facts by reference to affidavits and other matters outside the pleadings. The burden of proving subject matter jurisdiction is on the party asserting it. See Societe Nationelle d' Exploitation Industrielle v. Salomon Brothers International Ltd., 928 F. Supp. 398, 402 (S.D.N.Y. 1996) (Sweet, J.).
In the case at bar, plaintiffs' third count charges defendants with violating section 4b of the CEA, 7 U.S.C. § 6b. The broad anti-fraud provisions of § 6b(a) are set out in part in the margin.
Plaintiffs also rely upon section 2(a)(1)(A)(iii) of the CEA, 7 U.S.C. § 4, which provides that for purposes of the statutory scheme, "the act, omission, or failure of any . . . agent, or other person acting for any individual, association, partnership, corporation, or trust within the scope of his employment . . . shall be deemed the act, omission, or failure of such individual, association, partnership, corporation, or trust, as well as of such . . . agent, or other person."
Defendants at bar argue that "when Germans solicit other Germans in Germany for an investment program by means of fraud in the inducement through an allegedly false Brochure which is delivered and causes losses in Germany," there is no subject matter jurisdiction under the CEA. Main Brief at 17. I do not think that is a complete characterization of plaintiffs' complaint. But it is useful first to review the governing law.
Federal commodities and securities laws, regarded as analogous on the point, are silent regarding the issue of extraterritorial jurisdiction over cases of alleged fraud. But Second Circuit cases delineate the boundaries. When faced with transactions that are "predominantly foreign," courts must ask "whether Congress would have wished the precious resources of the United States courts" to be devoted to such transactions. Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 985 (2d Cir.), (Friendly, J.).
Courts in this Circuit employ two tests to determine whether subject matter jurisdiction exists: the "conduct test" and the "effect test." See, e.g., Itoba Ltd. v. Lep Group PLC, 54 F.3d 118, 121-22 (2d Cir. 1995) (citing cases) (arising under Securities Exchange Act of 1934), cert. denied, 116 S. Ct. 703 (1996).
Under the conduct test, "a federal court has subject matter jurisdiction if the defendant's conduct in the United States was more than merely preparatory to the fraud, and particular acts or culpable failures to act within the United States directly caused losses to foreign investors." Under the effect test, a federal court has jurisdiction "where illegal activity abroad causes a substantial effect within the United States." Alfadda v. Fenn, 935 F.2d 475, 478 (2d Cir. 1991 (citations and internal quotation marks omitted).
Plaintiffs at bar contend that the defendants' alleged acts satisfy both jurisdictional tests. I think plaintiffs' invocation of the effect test is problematical; but the complaint's allegations, with which jurisdictional analysis begins, describe a pattern of behavior by defendants which clearly meets the conduct test.
It is of no moment that the solicitation and purchase of interests in the HOSSE Program took place in Germany. See Itoba Ltd., 54 F.3d at 123 ("The fact that the Lep ordinary shares were issued and purchased in England does not change our conclusion. The conduct test does not center its inquiry on whether domestic investors or markets are affected, but on the nature of conduct within the United States as it relates to carrying out the alleged fraudulent scheme.") (citations and internal quotation marks omitted). Activities in the United States are not sufficient to sustain Federal jurisdiction if they can fairly be characterized as "merely preparatory," "relatively small in comparison to those abroad," "far removed from the consummation of the fraud," or are "secondary," "ancillary," or "tertiary." Societe Nationale, 928 F. Supp. at 403 (citations omitted). But Federal subject matter jurisdiction exists "where conduct material to the completion of the fraud occurred in the United States." Psimenos v. E.F. Hutton & Co., Inc., 722 F.2d 1041, 1043 (2d Cir. 1983).
Application of the appropriate label depends upon the particular circumstances of the case. In the case at bar, plaintiffs allege inter alia that the cash, stuffed into suitcases in the United States for delivery in Germany to co-conspirators or beneficiaries of a fraudulent scheme, was generated by fraudulent trading in United States commodities markets, a fraud sought to be concealed by the mailing of misleading account statements from the United States to individual investors in Germany. It requires no analysis to demonstrate that this conduct in the United States was material to the completion of the alleged fraud.
The closest case on the facts is the Second Circuit's decision in Psimenos, where the plaintiff alleged violation of the anti-fraud provisions of the CEA. While the fraudulent inducement leading to the Greek plaintiff's losses occurred in Greece and Switzerland, see 722 F.2d at 1043-44, the court of appeals, sustaining Federal jurisdiction under the conduct test, observed that "the trades Hutton executed on American markets constituted the final act in Hutton's alleged fraud on Psimenos, without which Huton's employees could not have generated commissions for themselves." Id. at 1044. In the court's view, when evaluating jurisdiction under the conduct test, "far weightier is the fact that Hutton's agents completed the alleged fraud by trading domestic futures contracts on American commodities exchanges." Id. at 1046. The Second Circuit reasoned in Psimenos that Congress did not "want United States commodities markets to be used as a base to consummate schemes concocted abroad, particularly when the perpetrators are agents of American corporations."
There is no principled basis for distinguishing the plaintiff's allegations in Psimenos from those of the instant plaintiffs. That case, and the others referred to, mandate the conclusion that under the conduct test, this Court has subject matter jurisdiction over plaintiffs' claims.
Rule 12(b)(6) Motion
"In reviewing a complaint for dismissal under Rule 12(b)(6), the court must accept the material facts alleged in the complaint as true and construe all reasonable inferences in plaintiff's favor. The complaint may be dismissed only where it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. The issue is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims. Indeed it may appear on the face of the pleading that a recovery is unlikely but that is not the test." Gant v. Wallingford Board of Education, 69 F.3d 669, 673 (2d Cir. 1995) (citations and internal quotation marks omitted).
This Court's May 1, 1996 opinion, allowing the filing and service of the amended complaint at issue pursuant to Rule 15(a), rejected defendants' contentions that the complaint's fraud allegations were insufficient under Rule 9(b), and its agency allegations were futile. In Rule 15(a) practice, it is frequently held that "if a complaint as amended could not withstand a motion to dismiss, then the amendment should be denied as futile." 6 Wright-Miller-Kane, Federal Practice and Procedure (2d ed. 1990) at § 1487, p. 643 (footnote omitted). The opinion allowing the amendment held by necessary implication that the proposed complaint could withstand a motion to dismiss, and to that extent constitutes the law of the case.
On the present motion, defendants continue to challenge the sufficiency of plaintiffs' allegations, but the complaint easily satisfies the undemanding criteria of Rule 12(b)(6). No extended discussion is necessary. But the lack of substance of defendants' motion may be illustrated by their insistence that the HOSSE Program brochures referred at various places to the subject of risk.
This is said to negate the complaints' allegations that the brochures fraudulently minimized the risk. Even if the texts of the brochures had that effect, at least to some degree, they did not advise potential investors that the defendants and their associates planned to commingle all individual investments in a common pool and then trade in commodities markets for the purpose of generating large amounts of cash that would be distributed to the schemers, at the expense of investors.
The allegations of the complaint were reviewed at length at pp. 1-7, supra. It is quite impossible to conclude, as defendants ask me to do, that it appears beyond doubt that plaintiffs can prove no set of facts on any of their claims which would entitle them to any relief.
For the foregoing reasons, defendants' motion to dismiss the third amended complaint is denied in its entirety.
The Court lifts the stay on discovery. The parties are directed to attend a status conference in Room 17C, 500 Pearl Street, at 2:30 p.m. on November 21, 1997.
It is SO ORDERED.
DATED: New York, New York
October 20, 1997
CHARLES S. HAIGHT, JR.
UNITED STATES SENIOR DISTRICT JUDGE