Zoelsch v. Arthur Andersen & Co., 86-5351

Citation824 F.2d 27
Decision Date17 July 1987
Docket NumberNo. 86-5351,86-5351
Parties, Fed. Sec. L. Rep. P 93,317 Klaus ZOELSCH, Appellant, v. ARTHUR ANDERSEN & CO.
CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)

Appeal from the United States District Court for the District of Columbia (Civil Action No. 85-02453).

David N. Yellen, with whom James K. Stewart, Washington, D.C., was on the brief for appellant.

Milton Eisenberg, with whom Lydia H. Suffling, Washington, D.C., was on the brief for appellee.

Before WALD, Chief Judge, and BORK and SILBERMAN, Circuit Judges.

Opinion for the Court filed by Circuit Judge BORK.

Opinion concurring in the judgment filed by Chief Judge WALD.

BORK, Circuit Judge:

Klaus Zoelsch brought this action against Arthur Andersen & Co. in federal court in the District of Columbia on behalf of himself and at least thirty-one others, all citizens of the Federal Republic of Germany. In the complaint, he stated two claims under the United States securities laws and four common law claims. He alleged federal court jurisdiction on the basis of the federal claims and diversity of citizenship. The district court dismissed the action for want of subject matter jurisdiction. Zoelsch appeals only the district court's refusal of jurisdiction over the federal claims. We affirm.

I.

The transactions that led to this lawsuit involved four principal participants. Dr. Loescher und Co. KG ("Loescher") is a West German limited partnership. First American International Real Estate Limited Partnership ("FAIR") is an American limited partnership based in Miami, Florida. Arthur Andersen & Co. GmbH ("GmbH") is a West German limited liability corporation. Arthur Andersen & Co. ("AA-USA"), the sole defendant in this case, is an American general partnership organized under the laws of Illinois.

Zoelsch and the other West Germans invested in an intricate investment and tax shelter plan. Under the plan, their funds were placed either directly with Loescher, or indirectly with another West German entity that is a limited partner of Loescher. In either case, the investors understood that their funds would be channeled through these entities to FAIR. FAIR, in turn, would invest the funds in property and condominium conversions in Memphis, Tennessee, and Atlanta, Georgia.

In April of 1981, Loescher and FAIR entered into an investment agreement. In September of 1981, Loescher commissioned GmbH to prepare an audit report on the entire plan, including an analysis of FAIR's written description of the American investments. Within the month, GmbH issued its report. Loescher then solicited investors by distributing a package of materials to them, which included GmbH's audit report and FAIR's materials. It is undisputed that FAIR's materials were prepared in the United States, that the audit report was prepared in West Germany, and that the package of materials was distributed only in West Germany to West German investors. The investments were not successful, and Zoelsch's complaint alleges that he and the other investors detrimentally relied on a number of false representations and material omissions in the audit report. 1

Zoelsch has brought a separate suit against GmbH in Munich, West Germany. He brings this suit, however, only against AA-USA, which was not directly involved in the solicitation of these investors or in the preparation of any of the documents that induced these purchases of securities. The sole link between AA-USA and the package of materials distributed by Loescher is one reference to AA-USA in the audit report prepared by GmbH. The reference is in German, and plaintiff's translation reads: "With respect to a number of data and particulars in the prospectus in conjunction with the economic fundamentals we have made inquiries thereabout by way of our branch-establishment Arthur Andersen & Co., Memphis." Joint Appendix ("J.A.") at 70. Defendant's translation is somewhat different: "With respect to some general prospect data relating to the overall environment we have made inquiries through the office of Arthur Andersen & Co. Memphis." Brief for Appellee at 7 n. 2. We do not have the original German version but the difference between the two translations does not affect our jurisdictional determination.

Zoelsch's complaint alleged that AA-USA provided false and misleading information to GmbH with ample reason to know that this information would be incorporated in GmbH's audit report and would be relied on by investors such as Zoelsch. See Complaint paragraphs 16-18, J.A. at 28-29. Zoelsch alleged fraud in connection with the sale of securities and the aiding and abetting of securities fraud in violation of section 10(b) of the Securities Exchange Act of 1934 and its attendant Rule 10b-5. See 15 U.S.C. Sec. 78j(b) (1982); 17 C.F.R. Sec. 240.10b-5 (1985). The district court granted defendant's motion to dismiss for lack of subject matter jurisdiction.

II.
A.

The issue, not previously addressed in this circuit, is American court jurisdiction over securities law claims against a defendant who acted in the United States when the securities transaction occurred abroad and there was no effect felt in this country.

Congress can, of course, prescribe the extent of federal jurisdiction over actions to enforce the federal securities laws, so long as it does not overstep the broad limits set by the due process clause. See, e.g., Leasco Data Processing Equip. Corp. v. Maxwell, 468 F.2d 1326, 1334 (2d Cir.1972). But in the Securities Exchange Act of 1934, Congress said little that bears on this issue. The explicit purposes of the Act are:

to remove impediments to and perfect the mechanisms of a national market system for securities and a national system for the clearance and settlement of securities transactions and the safeguarding of securities and funds related thereto, and to impose requirements necessary to make such regulation and control reasonably complete and effective, in order to protect interstate commerce, the national credit, the Federal taxing power, to protect and make more effective the national banking system and Federal Reserve System, and to insure the maintenance of fair and honest markets in such transactions.

15 U.S.C. Sec. 78b (1982). The relevant language of section 10(b) prohibits "any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails" from using "in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance" proscribed by the SEC. Id. Sec. 78j(b). "Interstate commerce" is broadly defined to include "trade, commerce, transportation, or communication ... between any foreign country and any State." Id. Sec. 78c(a)(17). And the federal district courts are given exclusive jurisdiction of suits brought to enforce the securities laws. See id. Sec. 78aa. These provisions frame a fairly broad grant of jurisdiction but they furnish no specific indications of when American federal courts have jurisdiction over securities law claims arising from extraterritorial transactions.

A single passage in the statute addresses this issue explicitly. Section 30(b) states that the 1934 Act "shall not apply to any person insofar as he transacts a business in securities without the jurisdiction of the United States, unless he transacts such business in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate to prevent the evasion of this chapter." 15 U.S.C. Sec. 78dd(b) (1982). But AA-USA is not alleged to have transacted a business in securities anywhere. Nevertheless, as will be seen, infra 32-31, section 30(b) gives some reinforcement to the conclusion that there is no jurisdiction to entertain Zoelsch's claims.

If the text of the 1934 Act is relatively barren, even more so is the legislative history. Fifty years ago, Congress did not consider how far American courts should have jurisdiction to decide cases involving predominantly foreign securities transactions with some link to the United States. The web of international connections in the securities market was then not nearly as extensive or complex as it has become. In this state of affairs, our inquiry becomes the dubious but apparently unavoidable task of discerning a purely hypothetical legislative intent. As Judge Friendly candidly put it in a very similar case:

We freely acknowledge that if we were asked to point to language in the statutes, or even in the legislative history, that compelled these conclusions, we would be unable to respond. The Congress that passed these extraordinary pieces of legislation in the midst of the depression could hardly have been expected to foresee the development of offshore funds thirty years later.... Our conclusions rest on ... our best judgment as to what Congress would have wished if these problems had occurred to it.

Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 993 (2d Cir.), cert. denied, 423 U.S. 1018, 96 S.Ct. 453, 46 L.Ed.2d 389 (1975).

B.

The courts have not confined federal jurisdiction to securities transactions consummated in the United States. They have deviated from this position in two respects. First, they have asserted jurisdiction over extraterritorial conduct that produces substantial effects within the United States, such as effects on domestic markets or domestic investors. See, e.g., Schoenbaum v. Firstbrook, 405 F.2d 200, 206-08 (2d Cir.), partially rev'd on other grounds, 405 F.2d 215 (1968), cert. denied, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969). Second, they have asserted jurisdiction in some cases over acts done in the United States that "directly caused" the losses suffered by investors outside this country. See, e.g., Bersch, 519 F.2d at 991-93.

Zoelsch concedes that jurisdiction in this case cannot be premised on domestic "effects" of predominantly foreign conduct, see ...

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