United States District Court, S.D. New York
February 11, 2004.
NIKKO ASSET MANAGEMENT CO., LTD., on behalf of itself, and as Trustee of NIKKO MONEY MANAGEMENT FUND ("MMF") and PF HMMF, NIKKO ASSET MANAGEMENT CO., LTD. MONEY MANAGEMENT FUND ("MMF"), and PF HMMF, Plaintiffs -against- UBS AG, UBS WARBURG (JAPAN), LTD., UBS WARBURG, UBS WARBURG LLC, UBS AG LONDON BRANCH, and UBS AG JERSEY BRANCH, Defendants
The opinion of the court was delivered by: ROBERT SWEET, Senior District Judge
Defendants UBS AG, UBS Warburg (Japan), Ltd. ("UBS Japan"), UBS
Warburg, UBS Warburg LLC ("UBS Warburg"), UBS AG London Branch, and UBS
AG Jersey Branch ("UBS AG") (collectively "UBS") have moved pursuant to
Rule 9(b), 12(b)(1), and 12(b)6, Fed.R. Civ. P., and the doctrine of
forum non conveniens to dismiss the corrected first amended complaint
("CFAC") of plaintiffs Nikko Asset Management Co., Ltd. ("Nikko"), Nikko
Money Management Fund ("MMF"), and PF HMMF ("HMMF"), Nikko Asset
Management Co., Ltd., Money Management Fund ("MMF") and PF HMMF
(collectively "Nikko"). For the reasons set forth below, the motion is
In June and July 2001, defendant UBS Japan arranged for the sale of two
series of credit-linked notes to Nikko in the total amount of JPY
(Japanese Yen) 20,000,000,000, which is alleged to have bought these
notes on behalf of two Japanese investment funds. The notes were issued
by defendant UBS AG with its subsidiaries, and linked UBS's obligations
to pay principal and interest to certain events occurring at Enron
Corporation ("Enron"). Such notes were developed and are employed to
transfer credit risk.
Whether the purchase and sale of the credit-linked notes ("CLNs") is
covered by the federal securities laws in light of the demise of Enron
and the alleged knowledge of the defendants of the
probability of that demise is the central issue presented by this
Nikko is a corporation organized and existing under the laws of the
country of Japan, and maintains its principal executive office at 1-1-3,
Yurakucho, Chiyoda-ku, Tokyo, Japan. Nikko is an investment trust
management company and provides investment management services, managing
Japanese equity and fixed income assets for institutional clients and
Japanese mutual funds for retail clients.
MMF is a contractual investment trust existing under the investment
trust law of Japan and trust clauses with beneficiaries. MMF was operated
by Nikko in the custody and safe keeping of Mitsubishi Trust and Banking
Corporation based on an agreement between Nikko and Mitsubishi Trust and
HMMF is a contractual investment trust existing under the investment
trust law of Japan and trust clauses with beneficiaries, operated by
Nikko in the custody and safe keeping of Mitsubishi Trust and Banking
Corporation based on an agreement between Nikko and Mitsubishi Trust and
UBS AG is a corporation organized under the laws of Switzerland with
its principal executive offices located at Bahnhofstrasse 45, CH-8098,
Zurich, Switzerland. UBS AG is a global, integrated investment services
firm involved in all major banking activities, including international
investment banking and corporate finance, private banking, institutional
asset management and, in Switzerland, retail and corporate banking.
UBS Warburg (Japan) Ltd. ("UBS Warburg Japan") with its principal place
of business at East Tower, Otemachi First Square 5-1, Otemachi 1-chome,
Chiyoda-ku, Tokyo 100-0004, is a division of UBS Warburg and a wholly
owned subsidiary of UBS AG.
USB Warburg is the investment banking arm of UBS AG with its principal
place of business at 1/2 Finsbury Avenue, London, EC2M 2PP, United
Kingdom. UBS Warburg employs over 17,000 people worldwide and has
substantial operations in the United States, Switzerland, Japan,
Australia, Hong Kong and Singapore. UBS Warburg's operations include debt
and equity finance, advisory services, research, risk management, and
securities and foreign exchange. UBS Warburg also offers investors access
to private equity and hedge funds. The company works with corporate,
institutional, government, and private clients worldwide.
UBS Warburg, LLC is a Delaware Limited Liability Company, authorized to
do business in New York. UBS Warburg, LLC is a
division of UBS Warburg and a wholly owned subsidiary of UBS AG with its
principal place of business at 299 Park Avenue, New York, New York
UBS AG London Branch ("UBS London") is a wholly owned subsidiary of UBS
AG with its principal place of business at 1/2 Finsbury Avenue, London,
EC2M 2PP, United Kingdom.
UBS AG Jersey Branch ("UBS Jersey") is a wholly owned subsidiary of UBS
AG and serves as UBS AG's branch in the Channel Islands (U.K.) with its
offices located at 24, Union Street, St. Helier, JE 2 3RF. (The
defendants referred to herein are collectively referred to as "UBS" or
On June 18, 2001, MMF purchased JPY 10,000,000,000 of UBS AG .89% Fixed
Rate Notes, Series No. 696, Tranche 1, which had an issue date of June
21, 2001 and a maturity date of June 17, 2002 (the "June Notes") from UBS
Warburg Japan constituting a purchase of 100% of the outstanding issue of
the June Notes. (CFAC ¶ 11).
On July 26, 2001, MMF purchased JPY 9,000,000,000 of UBS AGJ .89% Fixed
Rate Notes, Series No. 726, Tranche 1, which had an issue date of August
7, 2001 and a maturity date of July 25, 2002 (the "July Notes") from UBS
Warburg Japan. (CFAC ¶ 12).
On July 26, 2001, HMMF purchased JPY 1,000,000,000 of UBS AG .89% Fixed
Rate Notes, Series No. 726, Tranche 1, which had an issue date of August
7, 2001 and a maturity date of July 25, 2002 (the "July Notes") from UBS
Warburg Japan. By this transaction and the purchase described in the
preceding paragraph, Nikko MMF and HMMF purchased 100% of the July Notes
issue. (CFAC ¶ 14). The June Notes and the July Notes are
collectively referred to as "the Notes, "Credit Linked Notes" or the
The CLNs listed Enron as the "Reference Entity" and provided that if
Enron suffered a Credit Event, the Notes may diminish in value according
to a formula in the Pricing Supplements that essentially tracked the
value of certain specified Enron credit obligations. (CFAC Exs. 3, 5
(Pricing Supps.) at 1, 3, 10). The Pricing Supplements stated that the
value of the Notes might "be zero" if a Credit Event occurred. (CFAC
Exs. 3, 5 (Pricing Supps.) at 1). The Supplements further state that "the
issuer makes no representations as to the future performance of the Notes
either in absolute terms or relative to competing investments," and that
"[t]here is no guarantee, protection or assurance for purchasers of the
Notes in respect of the credit or performance of the Reference Entity or
Reference Obligation." Id. at 13. The Notes were one of several types of
notes issuable under a UBS Warburg programme, and Nikko bought all of the
CLNs issued under the Pricing Supplements for these particular CLNs with
Enron as the Reference Entity. (CFAC ¶¶ 11, 13, Ex. 1 (Info. Mem.) at
The solicitation of the purchases of, and the sales of, the June Notes
and July Notes to MMF and HMMF were made pursuant to the (i) Information
Memorandum; (ii) June Notes Term Sheet; (iii) June Notes Pricing
Supplement; (iv) July Notes Term Sheet; (v) July Notes Pricing Supplement
(Exhibits 1-5 to the CFAC). The Information Memorandum, June Notes Term
Sheet, June Notes Pricing Supplement, July Notes Term Sheet, and July
Notes Pricing Supplement are hereinafter sometimes collectively referred
to as the "CLN Offering Memoranda." (CFAC ¶ 15).
UBS Warburg Japan dealt directly with Nikko and MMF and HMMF, and sold
them the UBS June and July Notes in Japan in June and July, 2001. (CFAC
According to the Information Memorandum and the purchase transaction
confirmations, UBS Warburg acted as the seller of the June Notes and July
Notes in connection with Nikko MMF's and HMMF's purchase of those notes.
UBS AG, through UBS Warburg, acted as (1) arranger and dealer for the
June Notes; (2) arranger and dealer for the July Notes; and (3) London
listing agent for the UBS AG US $25,000,000,000 Euro Note Programme (the
"Programme"). (CFAC ¶ 19).
The Programme and the Offering Materials
UBS AG, acting through its Jersey Branch, issued and, through UBS
Warburg and UBS Warburg Japan, sold tens of millions of dollars of UBS
CLNs through UBS AG's U.S. $25,000,000,000 Euro Note Programme (the "Note
Programme"). (CFAC ¶ 88). In accordance with this Note Programme,
various tranches and series of notes were issued and sold in the United
States and Japan and on a worldwide basis. Sales were permitted as part
of a worldwide integrated public offering. (CFAC Exh. 1 at 79).
UBS AG, acting through its Jersey Branch, was the "issuer" of the CLNs.
(CFAC ¶ 17, Exh. 3, 4). UBS AG, through UBS Warburg, acted as
arranger and dealer for the CLNs and London Listing Agent for the Note
Programme. (CFAC ¶ 20). UBS Warburg, LLC served as a dealer for the
Note Programme. (CFAC ¶ 21). Defendant UBS London served as an
Issuer for the Note Programme and Calculation Agent for the CLNs. (CFAC
¶ 22). UBS Jersey served as an Issuer of the Note Programme. (CFAC
According to Nikko, UBS's Information Memorandum, Pricing Supplements,
Term Sheets and oral communications, in connection with the solicitation
and sale of the CLNs (collectively, the "Offering Memoranda"), did not
disclose material facts known to UBS AG and the UBS related entities
concerning the true financial condition at Enron. (CFAC ¶¶ 102-109).
UBS Warburg served as a dealer for the UBS AG US $25,000,000;000 Euro
Note Programme established in June 2001 by UBS AG (the "Issuers") as a
framework for "issuing notes and other debt instruments." (CFAC ¶¶ 20,
21, 22, Ex. 1).
Under the Programme, the Issuers could issue many types of notes,
including various derivative instruments (i.e., instruments whose value
is linked to some outside factor specified in the notes' documentation).
(CFAC Ex. 1' (Info Mem. at 70-71). Notes issued under the Programme were
issued in different series. (CFAC Ex. 1 (Info Mem.) at 8).
The Information Memorandum provided only "General Terms arid
Conditions," and each series of notes was issued pursuant to a Pricing
Supplement, "which will contain the information which specifically
relates to that issue of Notes." (CFAC Ex. 1 (Info. Mem.) at 12). The
Information Memorandum provided that "[i]n relation to any issue of
Notes, the Pricing Supplement may contain provisions which supplement,
modify or replace all or any General Terms and Conditions for the purpose
of that issue alone." (CFAC Ex. 1 (Info Mem.) at 12).
The Information Memorandum also established mandatory provisions
governing all notes issued under the Programme, including that neither
the Information Memorandum nor "any other information supplied in
connection with the Programme or any Notes
. . . should be considered as a recommendation or constituting an
"invitation or offer" to purchase securities. (CFAC Ex. 1 (Info Mem.) at
The Information Memorandum issued in connection with the Programme,
including the solicitation and sale of the June Notes and July Notes,
Each of the Issuers and the Guarantor have jointly and
severally confirmed to the dealers (the "Dealers")
named under "Selling Restrictions" that (i) this
Information Memorandum is true and accurate in all
material respects and not misleading; (ii) there are
no other facts in relation to the information
contained or incorporated by reference in this
Information Memorandum the omission of which would, in
the context of the issue of the Notes, make any
statement in the Information Memorandum misleading in
any material respect; and (iii) all reasonable
inquiries have been made to verify the foregoing. Each
of the Issuers and the Guarantor have jointly and
severally further confirmed to the Dealers that, in
relation to any Notes issued under the Programme, this
Information Memorandum (together with the relevant
Pricing Supplement) contains all such information as
investors and their professional advisers would
reasonably require, and reasonably expect to find, for
the purpose of making an informed assessment of the
assets and liabilities, profits and losses and the
financial position of each of the Issuers, the
Guarantor and their respective subsidiaries and of the
rights attaching to the relevant Notes.
* * *
[T]o the best of the knowledge and belief of the
Issuers and the Guarantor (who have taken all
reasonable care to ensure that such is the case)
the information contained in this Information
Memorandum is in accordance with the facts and
does not omit anything likely to affect the import
of such information.
(CFAC Ex. 1 at 2).
The Information Memorandum also states in relevant part:
each Issuer is obliged to prepare listing
particulars that contain all information which
investors and their professional advisers would
reasonably require and reasonably expect to find
there, in order to make an informed assessment of the
assets and liabilities, financial position, profits
and losses and prospects of such Issuer and the rights
attaching to the Notes. In determining what
information is so required or is so expected, regard
may be had to (1) the nature of the Notes, (2) the
nature of the persons likely to consider their
acquisition, and (3) certain information available to
investors and their professional advisers.
(CFAC Ex. 1 at 5).
Under the heading "Use of Proceeds," the Information Memorandum states
in relevant part:
[t]he net proceeds of the issue of each Series or
Tranche of Notes will be used by the relevant Issuer
towards meeting the general financing requirements of
the UBS Group outside Switzerland.
(CFAC, Ex. 1 at 33).
The UBS United States Activities Alleged
On June 9, 1999, UBS AG subsidiaries PaineWebber and UBS PaineWebber
International (U.K.) Ltd. performed underwriting services for the Initial
Public Offering of Azurix, a company created by Enron and incorporated in
the United States and is
charged with knowing, or negligence in not knowing, that Enron used
Azurix and its U.S. Enron Special Purpose Entities ("SPEs"), `the Marlin
Water, Atlantic Water, and Bristol Water Trusts (which were Delaware
business trusts), to keep billions of dollars in debt off Enron's balance
sheet. UBS also learned that Enron owed a massive repayment obligation in
connection with Marlin's funding based upon equity "triggers" that were
not disclosed to the public.
UBS was directly involved with LJM Cayman ("LJM"), an Enron SPE run by
Enron insiders from Houston, Texas. UBS was part of several LJM
transactions that furthered Enron's fraud. UBS, Enron, and LJM hedged
Enron's equity position in Rhythms Net Connections, Inc., a transaction
conceived, planned, and executed in the United States.
UBS facilitated equity swap transactions and performed key underwriting
services for transactions known as the "Raptors" which concealed from
Enron's balance sheet almost $1 billion in investment losses, and Enron,
with the direct participation of UBS, terminated the Raptor SPEs in the
third quarter of 2001.
UBS was involved in stock purchase agreements referencing and involving
a UBS account in New York City, equity forward confirmations concerning
over 1 million shares of Enron stock, and payments were made to UBS
concerning the Raptors. Correspondence from UBS Warburg, LLC's confirmed
UBS's role in a Raptor transaction
to sell 706, 274 Enron shares and receive over $50 million from
Enron, and wire transfers amounting to tens of millions of dollars were
made from Enron to UBS accounts in the U.S., including New York.
According to Nikko, because of its close working
relationship with Enron, UBS knew that Enron's reported
financial results were fraudulent and that during late
2001 Enron was in an ever-worsening financial condition
`and obtained knowledge about Enron's true financial
affairs by, among other things: (i) financing,
supporting, and servicing Enron's Special Purpose
Entities ("SPEs"); (ii) engaging in transactions
enabling Enron to hedge its equity positions in
violation of accepted accounting principles; (iii)
serving as underwriter of Enron securities, or
securities issued by Enron SPEs; (iv) providing numerous
investment banking services for Enron; and (v) serving
as Enron's exclusive brokerage firm authorized to act as
the administrator of Enron's employee stock option plan
and deferred benefit plan. (CFAC ¶ 25).
According to Nikko, to protect itself, UBS devised and
implemented a scheme to fraudulently transfer JPY 20
billion of its Enron credit risk from itself to MMF and
HMMF by soliciting of the purchase of, and sale of, the
June Notes and July Notes. UBS perpetrated its scheme to
sell these notes by means of a prospectus and oral
communications which misrepresented and omitted to
disclose material facts. UBS's activities in the United
directly caused the Nikko Management losses and UBS's
activities were more than merely preparatory to the
marketing, sale, and issuance of the CLNs to MMF and
HMMF. If not for UBS's activities in the United States
involving Enron, UBS would not have been able to
perpetrate the CLNs scheme, and would not have
fraudulently, recklessly and/or negligently transferred
the Enron credit risk from itself to MMF and HMMF,
thereby directly causing the damages suffered by the
Plaintiffs. (CFAC ¶ 27).
In addition, UBS AG, and its U.S. based subsidiaries,
UBS PaineWebber and defendant UBS Warburg LLC, earned
substantial fees in the U.S. from Enron, (CFAC ¶¶
67-71), and attempted to offload such debt through the
sale of hundreds of millions of dollars worth of Enron
Zero Coupon Notes in the United States. (CFAC ¶¶
On October 16, 2001, Enron reported that it would
reduce shareholder equity by $1.2 billion. (CFAC ¶
65). Moody's downgraded Enron's debt rating to junk
status on November 28, 2001. One week later, Enron filed
for bankruptcy. According to the CFAC, MMF and HMMF
incurred JPY 18.6 billion in direct and consequential
damages as a result of the fraudulent, reckless and/or
negligent conduct engaged in by UBS AG and related UBS
entities. (CFAC ¶ 24).
The Causes of Action
After detailing the allegations supporting the theory
of the CFAC, the Plaintiffs allege six causes of
(1) Violations of Section 10(b) of the Exchange
Act and Rules 10b-5(a) and (c) arising out of the
scheme to defraud. (CFAC ¶¶ 130-139).
(2) Violations of Section 10(b) of the Exchange
Act and Rule 10b-5(b) arising out of the creation
of a fraudulent market, untrue' statements of
material facts and omissions to state material
facts. (CFAC ¶¶ 140-150).
(3) Violation of Section 20(a) by UBS AG of the
Exchange Act arising out of its control of its
subsidiaries. (CFAC ¶¶ 151-155).
(4) Violation of Section 12(a) 2 and 15 of the
Securities Act of 1933 arising out of fraud in
connection with a public offering. (CFAC ¶¶
(5) Fraud and deceit. (CFAC ¶¶ 166-184).
(6) Negligent misrepresentation. (CFAC ¶¶
Nikko Has Acquired Standing
Initially UBS sought dismissal under Fed.R.Civ.P. 17(a) on the
grounds that neither Nikko nor the MMFs have standing to bring this
action on the grounds that each MMF is a contractual investment trust
existing under the Investment Trust Law of Japan and under the Investment
Trust Law and Trust Law of Japan, a contractual investment trust is not a
distinct juridical entity and is not the trustee of an express trust
(i.e., of the MMFs) or "a
party in whose name a contract had been made for the benefit of another"
(i.e., for the benefit of an MMF).
Upon learning of the position taken by UBS, counsel for Nikko
determined that their initial information that Nikko was the trustee of
the MMFs was incorrect and that the Mitsubishi Trust and Banking
Corporation ("Mitsubishi") was the trustee. Mitsubishi has ratified
Nikko's action and agreed to be bound by any final judgment entered.
UBS no longer contests the standing issue but notes that the Plaintiffs
do not dispute that the two Japanese money managements funds ("MMFs") are
not juridical entities with the capacity to bring suit. As such they are
not proper parties to these suits and will be therefore dismissed. See
Robv v. Corp. of Lloyd's, 796 F. Supp. 103, 106-07 (S.D.N.Y. 1992),
aff'd, 996 F.2d 1353 (2d Cir. 1993).
This Court Lacks Jurisdiction
UBS has moved to dismiss under Fed.R.Civ.P. 12(b)(1), arguing that the
Court lacks subject matter jurisdiction over the foreign transactions
involved in this litigation. Nikko bears the burden of "showing by a
preponderance of the evidence that subject matter jurisdiction exists."
APWU v. Potter, 343 F.3d 619, 623 (2d Cir. 2003) (quoting Lunnev v.
United States, 319 F.3d 550, 554 (2d
Cir. 2003)). Further, "jurisdiction must be shown affirmatively, and that
showing is not made by drawing from the pleadings inferences favorable to
the party asserting it." Id. (quoting Shipping Fin. Servs. Corp. v.
Drakos, 140 F.3d 129, 131 (2d Cir. 1998)). "On a Rule 12(b)(1) motion,
the Court need not accept as true contested jurisdictional allegations
and may resolved disputed jurisdictional facts by reference to affidavits
and other material outside the pleadings." Societe Nationale
d'Exploitation Industri-elle v. Salomon Bros.Int'l Ltd. 928 F. Supp. 398,
402 (S.D.N.Y. 1996) (citing Antares Aircraft.L.P. v. Federal Republic of
Nigeria, 948 F.2d 90, 96 (2d Cir. 1991), vacated on other grounds,
5 U.S. 1215, 112 S.Ct. 3020, 120 L.Ed.2d 892 (1992)); see also Scherer
v. Equitable Life Assurance Society of U.S., 347 F.3d 394, 401-02 (2d
Cir. 2003) ("when a question of the District Court's jurisdiction is
raised, either by a party or by the court on its own motion,
Fed.R.Civ.P. 12(b), the court may inquire, by affidavits or otherwise,
into the facts as they exist." (erupting Land v. Dollar, 330 U.S. 731,
735 n. 4, 67 S.Ct. 1009, 1011, 91 L.Ed. 1209 (1947) (citations
omitted), overruled on other grounds. Larson v. Domestic and Foreign
Commerce Corp., 337 U.S. 682, 69 S.Ct. 1457, 93 L.Ed. 1628 (1949)).
As this Court held in Societe Nationale.
The securities and commodities laws are silent
regarding the issue of extraterritorial jurisdiction.
See, e.g., Alfadda v. Fenn, 935 F.2d 475 (2d Cir.),
cert. denied, 502 U.S. 1005, 112 S.Ct. 638,
116 L.Ed.2d 656 (1991).
Therefore, when faced with transactions that are
"predominantly foreign," the Court "must seek to
determine whether Congress would have wished the
precious resources of United States courts . . . to be
devoted to them rather than leave the problem to
foreign countries." Bersch v. Drexel Firestone, Inc.,
519 F.2d 974, 985 (2d Cir.)(Friendly, J.), cert.
denied, 423 U.S. 1018, 96 S.Ct. 453, 46 L.Ed.2d 389
(1975). Thus, in meeting Congress's intent not "to
allow the United States to be used as a base for
manufacturing fraudulent security devices for export,"
IIT v. Vencap, Ltd., 519 F.2d 1001, 1017 (2d Cir.
1975), "[t]he issue then is whether the fraud alleged
has sufficient contacts with the United States to
invoke the federal securities and commodity 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.).
928 F. Supp. at 402. To determine whether a district court has subject
matter jurisdiction over securities fraud actions involving predominantly
foreign transactions, the Second Circuit has "consistently looked at two
factors: (1) whether the wrongful conduct occurred in the United States;
and (2) whether the wrongful conduct had a substantial effect in the
United States or upon United States citizens." S.E.C. v. Berger,
322 F.3d 187, 192 (2d Cir. 2003). In evaluating these two factors, this
Circuit applies "what are known respectively as the `conduct test' and
the `effects test.'" Id. at 193. Courts, however, "need not reach the
question whether the effects test provides an independent basis for
jurisdiction when there is jurisdiction under the conduct test." Id. at
195 (quoting Psimenos v. E.F. Hutton & Co., Inc. 722 F.2d 1041, 1045
(2d Cir. 1983)).
Here, Nikko does not identify any domestic effects of the alleged fraud
other than the assertion, unsupported by factual allegations, that
"[d]efendants' illegal conduct had a substantial impact upon interstate
commerce." (CFAC ¶ 6). There is no allegation that any U.S. person
was harmed by the MMFs' collapse, or that the Notes were ever sold to a
U.S. person or traded on a U.S. exchange. Nikko has therefore failed to
establish jurisdiction under the effects test. See Europe & Overseas
Commodity Traders, S.A. v. Banoue Paribas London, 147 F.3d 118, 128 (2d
Cir. 1998) (jurisdiction is lacking where "the plaintiff is a Panamanian
corporation; the individual . . . who ultimately suffered any losses, is
a Canadian citizen; the securities are not traded on a U.S. exchange; and
no effect on a U.S. affiliated company is alleged").
As a consequence, "[t]o 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." Societe Nationale, 928 F. Supp. at 406.
In Berger, the Second Circuit stated its standard for exercising
subject matter jurisdiction over claims of securities fraud based on
purported domestic conduct:
jurisdiction exists only when substantial acts in
furtherance of the fraud were committed within the
States. . . . [T]he test is met whenever (1) the
defendant's activities in the United States were more
than "merely preparatory" to a securities fraud
conducted elsewhere and (2) the activities or culpable
failures to act within the United States "directly
caused" the claimed losses.
Berger, 322 F.3d at 193 (internal quotation marks and citations
omitted; emphasis added); see also Bersch v. Drexel Firestone, Inc.,
519 F.2d 974, 985 n.24, 987, 993 (2d Cir. 1975) (Friendly, J.) ("the
anti-fraud provisions of the federal securities laws . . . [d]o not apply
to losses from sales of securities to foreigners outside the United
States unless acts (or culpable failures to act) within the United States
directly caused such losses." (emphasis added).
The U.S. conduct that Nikko alleges in this action is UBS's alleged
transactions with Enron, which it is claimed provided UBS with advance
knowledge of Enron's impending bankruptcy. UBS Warburg LLC, a dealer for
the Euro Note Programme, is the only U.S. entity among the Defendants.
It is not alleged that UBS Warburg LLC was involved with the issuance of
these Notes. The fact that "one defendant . . . is a U.S. citizen"
does not suffice to provide this Court jurisdiction. IIT v. Vencap,
Ltd., 519 F.2d 1001, 1016 (2d Cir. 1975). However, Nikko asserts
that "[t]he UBS CLNs were part of UBS's fraudulent dealings with Enron in
the United States, were devised and executed in the United States and
were intertwined with Enron in the United States." (CFAC ¶ 85).
According to the CFAC, the Plaintiffs, all Japanese entities, were
defrauded by a transaction in Japan by UBS Japan, another Japanese
entity, to the detriment of Japanese investors. (CFAC ¶¶ 97-101, 112).
The fraud is alleged because UBS Japan did not warn Nikko of Enron's
financial crisis. (CFAC ¶ 107). The U.S. conduct alleged is that UBS
purportedly learned in the U.S. in the course of its Enron-related
transactions, that Enron's financials were false, which UBS Japan then
allegedly failed to disclose to Nikko during the Japanese transaction
between Nikko and UBS Japan. (CFAC ¶ 106).
In circumstances involving allegations of U.S. ties more substantial
than those alleged here, the Second Circuit has ruled that subject matter
jurisdiction was lacking. In Europe & Overseas Commodity Traders, a
§ 10(b) action, the Second Circuit ruled that the district court
lacked jurisdiction, even though the defendants solicited the plaintiff's
representative to buy the allegedly fraudulent securities, and accepted
his order for them, while the representative was in the United States.
See 147 F.3d at 127-31. The representative's presence in the United
States "did not bring this otherwise entirely foreign transaction within
the antifraud provisions of U.S. securities law." Id. at 131. Here, by
contrast, there is no specific allegation that the transactions at issue
as opposed to the general Programme involved any U.S.
Under the standard established by the Second Circuit and applied by
this Court in Societe Nationale, the federal courts have no jurisdiction
over the two entirely foreign transactions alleged in the CFAC. See also
e.g., Fidenas AG v. Compagnie Internationale pour L'Informatioue CII
Honeywell Bull S.A., 606 F.2d 5, 8-10 (2d Cir. 1979) (holding that
jurisdiction was lacking where defendants' Minneapolis office was aware
of the fraud and some of the fraudulent securities eventually were sold
to U.S. residents); Bersch, 519 F.2d at 985, 987 & n.24 (holding that
jurisdiction was lacking despite substantial New York-based activities in
preparation of the alleged fraudulent securities transaction); Interbrew
S.A. v. Edperbrascan Corp., 23 F. Supp.2d 425, 432 (S.D.N.Y. 1998)
(holding that jurisdiction was lacking even though the transaction at
issue was the purchase of a company with substantial U.S. operations);
cf. Robinson v. TCI/US West Communications Inc., 117 F.3d 900, 905-07
(5th Cir. 1997) ("adopt[ing] the Second Circuit's test," and applying
that "restrictive" test to dismiss a securities fraud claim even though
"one of the key events if not the key event is the
alleged scheme" occurred in the United States).
Nikko has alleged that Enron was a large UBS client from which UBS
earned millions of dollars in fees, in return for which Enron pressured
UBS to lend it approximately $300 million to fund its operations and
perpetuate its fraud. (CFAC ¶¶ 67-70). In support of its theory of the
complaint Nikko has further alleged that during May 2001, prior to the
issuance of the UBS CLNs, UBS
Warburg LLC served as Joint Lead Manager and as Initial Purchaser
for three Citigroup credit linked notes tranches that closely resembled
the UBS CLNs. (CFAC ¶¶ 80-83). As a result of working on the Citigroup
credit linked notes transaction, UBS knew that the CLN structure enabled
Citigroup to transfer hundreds of million of dollars of Enron risk from
Citigroup to third party purchasers. UBS applied what it had learned from
Citigroup, to transfer its Enron risk of loss through the sale of its own
credit linked notes.
In addition to the loans that UBS advanced to Enron (that were the
subject of the Credit Linked Notes), UBS AG purchased $250,000,000 face
amount and UBS Warburg LLC purchased $800,000 face amount, of Enron Zero
Coupon Notes in or about February 2001. (CFAC ¶ 79). During 2001,
when UBS suspected that Enron would default on its outstanding debt, the
Defendants attempted to sell all of their Enron Zero Coupon Notes into
the United States Public market, notwithstanding that the Enron Zero
Coupon Notes were purchased only months earlier. (CFAC ¶ 79).
Nikko agrees that under the Second Circuit's "conduct test," a district
court properly exercises subject matter jurisdiction over foreign
purchasers of securities where a defendant's activities in the U.S. were
more than "merely preparatory," and its culpable conduct (or omissions)
in the U.S. "directly caused" the claimed losses. Berger, 322 F.3d at
193; Leasco Data Processing
Equipment Corp. v. Maxwell, 468 F.2d 1326, 1336-37 (2d Cir. 1972).
(Pltf. Memo. Opp. at 10-11).
In support of its allegations Nikko points to the economic activity in
the United States which it maintains is material to the alleged
securities fraud involving the CLNs that UBS loaned to Enron and served
as a joint lead manager and initial purchaser of the hundreds of millions
of dollars credit linked notes issued by Citigroup. (CFAC ¶¶ 81-82).
According to Nikko, the totality and materiality of UBS's conduct
distinguishes its action from cases cited by Defendants.
Here, as in Societe Nationale, there is no dispute that the two
Japanese transactions in Yen-denominated CLNs occurred in Japan. Id. at
403-04. Here, unlike in Societe Nationale, there is no allegation that
there was any U.S. structuring, marketing, or transactional activity in
connection with the Notes Nikko bought from UBS Japan, Id. at 404, or
indeed any U.S. activity at all, leaving aside the fact that the U.S.D.
Bank Trust Association is alleged to have been the Registrar for the
Programme (CFAC ¶ 95).
In searching for a jurisdictional hook, Nikko asserts that (i) the Note
transactions were part of the Programme, (ii) "a substantial amount of
conduct . . . material to the Note Programme" occurred in the United
States, and (iii) the Programme's U.S. contacts therefore suffice to
provide jurisdiction. (Pltf. Memo
Opp. at 11). However, the Programme itself had no connection to Enron. As
described in the Information Memorandum, the UBS Programme allowed
various UBS entities to issue many types of debt securities with a wide
variety of terms and conditions in myriad geographic locations, including
the United States, but this action alleges fraudulent conduct with regard
to only two specific Notes issued under the Programme. (CFAC ¶¶ 2,
102-09). Taking Nikko's allegations as true, the Programme is an example
of non-fraudulent preparatory activity, and does not suffice to create
jurisdiction. See Europe & Overseas, 147 F.3d at 129; Bersch v.
Drexel Firestone, Inc., 519 F.2d 974, 985-88 (2d Cir. 1975).
Nikko also asserts that UBS Warburg LLC, the lone U.S. defendant in
this action, was involved in the issuance of these Notes because UBS
Warburg LLC was listed in the Information Memorandum as a potential
dealer of securities under the Programme. (Pltf. Memo. Opp. at 11).
However, as disclosed in the Pricing Supplements, UBS Warburg LLC was not
a dealer, and did not play any other role, in issuing the Notes Nikko
bought in Japan. (CFAC Exs. 3, 5 (Pricing Supps.) at 1, 5). The
allegation that UBS Warburg LLC was authorized to deal securities under
the Programme does not constitute UBS Warburg as the dealer for the Notes
sold to Nikko in Japan.
Domestic conduct that is "merely preparatory to a securities fraud
elsewhere will not implicate our antifraud laws."
Europe & Overseas Commodity Traders. 147 F.3d at 129; accord Societe
Nationale, 928 F. Supp. at 405. The alleged fraud happened in Japan; at
most, the knowledge that made the transaction fraudulent was gained in
the United States. Because the UBS activity in the United States, even if
fraudulent, was merely preparatory, there is no conduct in the United
States that directly caused the damage of which Nikko complains.
Taking all of Nikko's allegations as true, its losses were also not
"directly caused" by any fraudulent conduct in the United States. Nikko
neither had contact with Enron nor held any Enron-issued securities, and
Enron was not involved in these Note transactions. Enron's financial
fraud was at most an indirect cause of Nikko's losses, whereas the Note
transactions, conducted in Japan between Japanese financial institutions
for the benefit of Japanese investors was the direct cause of Nikko's
losses. (CFAC ¶¶ 97-101, 112). Just as in Societe Nationale, "even the
most generous interpretation of [Plaintiffs'] assertions concerning
[U.S. contacts] merely establishes that acts in the United States helped
make the gun whence the bullet was fired from places abroad." Societe
Nationale, 928 F. Supp. at 405 (quoting Bersch, 519 F.2d at 987).
Nikko has therefore failed to "put forward allegations of conduct in
the United States of sufficient centrality to the claim of fraud to
warrant an exercise of jurisdiction." Id. at 406.
"Because no federal question is presented under the federal laws under
which jurisdiction is asserted, and because no diversity jurisdiction is
asserted, the Court lacks subject matter jurisdiction, and the federal
law claims will be dismissed." Id. at 402. Further, Nikko's tort claims
for fraud and negligent misrepresentation are also dismissed pursuant to
28 U.S.C. § 1367(c)(3) and United Mine Workers v. Gibbs, 383 U.S. 715,
86 S.Ct. 1130, 16 L.Ed.2d 218 (1966).
For the reasons set forth above, the motion to dismiss for lack of
subject matter jurisdiction is granted. Submit judgment on notice.
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