Kauthar SDN BHD v. Sternberg

• Decision Date: 12 August 1998
• Docket Number: No. 97-2795,97-2795
• Citation: 149 F.3d 659
• Parties: Fed. Sec. L. Rep. P 90,240 KAUTHAR SDN BHD, a Malaysian Corporation, Plaintiff-Appellant, v. Michael A. STERNBERG, an individual and citizen of the State of Illinois, James A. Simon, an individual and citizen of the State of Indiana, Carl B. Hilliard, Jr., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 659

149 F.3d 659

Fed. Sec. L. Rep. P 90,240

KAUTHAR SDN BHD, a Malaysian Corporation, Plaintiff-Appellant, v. Michael A. STERNBERG, an individual and citizen of the State

of Illinois, James A. Simon, an individual and

citizen of the State of Indiana, Carl B.

Hilliard, Jr., et al.,

Defendants-Appellees.

No. 97-2795.

United States Court of Appeals,

Seventh Circuit.

Argued Jan. 13, 1998.

Decided July 14, 1998.

Rehearing Denied Aug. 12, 1998.

Daniel J. Voelker (argued), Seyfarth, Shaw, Fairweather & Geraldson, Chicago, IL, for Kauthar SDN BHD.

Martin T. Fletcher, Rothberg & Logan, Fort Wayne, IN, for Michael A. Sternberg and James A. Simon.

Leonard E. Eilbacher, Eilbacher Scott, Fort Wayne, IN, for Carl B. Hillard, Jr.

C. Erik Chickendantz (argued), Hawk, Haynie, Gallmayer & Chickedantz, Fort Wayne, IN, for Matt C.

Warren A. Fitch (argued), Swidler & Berlin, Washington, DC; Solomon L. Lowenstein, Jr., Fort Wayne, IN, for Friendly Islands Satellite Communications, Limited.

Wesley N. Steury, Burt, Blee, Dixon & Sutton, Fort Wayne, IN, for Larry L. Risser.

Before CUMMINGS, RIPPLE and ROVNER, Circuit Judges.

RIPPLE, Circuit Judge.

Kauthar SDN BHD, a Malaysian corporation, filed suit on March 10, 1995, in the United States District Court for the Northern District of Illinois, Eastern Division, against numerous defendants. It alleged federal securities law violations, violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(a)-(d), and various state law claims. The case was transferred, over Kauthar's objection, to the United States District Court for the Northern District of Indiana, Fort Wayne Division. Kauthar then filed its First Amended Complaint (the "complaint"). The defendants subsequently moved to dismiss the complaint and for summary judgment. On April 14, 1997, the district court rendered its decision in three related orders dismissing the complaint and all of its claims on multiple grounds and also granting the defendants' motion for summary judgment. Kauthar now appeals. For the reasons stated in the following opinion, we affirm the judgment of the district court.

I BACKGROUND

A. Facts ¹

This case centers on a $38 million investment made by Kauthar in a company called Rimsat, Ltd. Kauthar is a Malaysian corporation with its principal place of business in Kuala Lumpur, Malaysia. Rimsat, whose principal place of business is in Fort Wayne, Indiana, was incorporated in the Caribbean island nation of Nevis for the purpose of providing satellite communications services to customers within the Pacific Rim region. These satellite communications were to be provided using satellites that Rimsat had contracted to purchase from a Russian satellite company. The satellites were to be placed in geosynchronous (or geostationary) orbit positions ("GSOs") that were leased to Rimsat by a company called Friendly Islands Satellite Communications, Ltd., doing business as "Tongasat." Tongasat is incorporated in the Pacific Rim Kingdom of Tonga.

Apparently, there is a limited number of GSOs available in the world because satellites may not be put in too close proximity to one another or else communications interference occurs. Satellites in geosynchronous orbit, by definition, stay essentially in the Not surprisingly, such a venture is highly capital-intensive. Rimsat and various of the individual defendants involved in forming Rimsat and Tongasat sought investors for this project. Kauthar allegedly was convinced, on the basis of various communications and meetings, that Rimsat was a worthy investment, and it sank $38 million into the venture through a purchase of Rimsat stock. Kauthar effected this purchase by wiring funds to Rimsat's bank in Fort Wayne, Indiana.

same spot over the earth and on the same equatorial plane. Consequently, the number of these spots in space is finite and, as with all scarce resources for which there is demand, they are valuable. The International Telecommunications Union ("ITU") and the International Frequency Registration Board, agencies of the United Nations, coordinate the registration and regulation of GSO positions. Only sovereign nations may apply to the ITU for rights to a GSO position for operation of a satellite. In this case, the Kingdom of Tonga obtained seven GSOs which it leased out to others through its company Tongasat. Rimsat's apparent plan was to make its fortune by buying relatively inexpensive Russian communications satellites, leasing GSOs from Tongasat and selling satellite communications services.

In January 1995, several of Rimsat's creditors forced Rimsat into bankruptcy by filing a petition for involuntary bankruptcy in the United States Bankruptcy Court for the Northern District of Indiana. Six weeks later, when Kauthar realized that its equity stake in Rimsat was worthless, it brought this suit. Essentially, Kauthar alleged in its complaint that all of the parties involved in soliciting its investment in Rimsat intentionally misled Kauthar about the investment. Kauthar specifically points to a document that it terms a "prospectus" that was disseminated by Rimsat to outline the company's investment and business plans. In its 113-page amended complaint, Kauthar identifies alleged misrepresentations contained in the prospectus in addition to other misrepresentations and omissions it alleges were made in the course of dealings.

B. Holding of the District Court

Rendering its decision in three related orders, the district court determined that Kauthar's complaint failed to state any tenable federal claim.

In its first two orders, the district court addressed, and dismissed, the federal causes of action. In its first order, the court addressed Kauthar's alleged federal securities fraud claims. The court held that: (1) it lacked subject matter jurisdiction to adjudicate Kauthar's federal securities claims, (2) certain of the securities claims were barred by the one-year statute of limitations, and (3) the securities claims were not pleaded with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure.

In its second order, the district court revisited certain of the securities claims alleged in the complaint. The court held that Kauthar's claim brought under § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q, failed because there is no private right of action recognized in this circuit under that section. The court dismissed the claims under § 12(2) of the 1933 Act, 15 U.S.C. § 77l, because that section does not apply to private sales of stock and Kauthar had failed to allege sufficient facts to indicate that the transaction involved was not a private placement. The court also held that, to the extent the complaint could be construed to allege control person liability for certain of the defendants, see 15 U.S.C. § 78t(a), those claims failed because Kauthar failed to allege essential components of the claims and because the claims were not alleged with sufficient particularity.

The other set of claims addressed in the court's second order was Kauthar's allegations concerning civil RICO violations. The court dismissed all of the RICO claims on the grounds that Kauthar failed to allege satisfactorily the requisite predicate acts, failed to allege a pattern of racketeering activity and failed to allege other essential elements of individual RICO claims under 18 U.S.C. § 1962(a)-(d).

In its third order, the court granted the defendants' motion for summary judgment on the ground that Kauthar lacked standing

                to sue in this case because the actual purchaser of the securities was a Mr. Tajudin Bin Ramli--not Kauthar.  Following the issuance of these orders, Kauthar requested a Rule 54(b) certification in order to bring this appeal. 2  The certification was provided by the district court;  this appeal followed
                

II DISCUSSION

We first shall address the issues with respect to the federal securities fraud claims and then shall turn to the civil RICO claims.

A. Securities Fraud Claims

Kauthar alleged in Counts I and II of its complaint violations of § 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, which relate to fraud in the purchase or sale of a security. ³ In Counts III and IV of its complaint, Kauthar alleged additional securities fraud claims predicated on violations of § 17(a) of the 1933 Act, 15 U.S.C. § 77q, and of § 12(2) of the 1933 Act, 15 U.S.C. § 77l. Before we address the specifics of each claim, we first consider a problem common to all of them. ⁴

1. Extraterritorial Application of the Antifraud Securities Statutes

The district court determined that the securities violations alleged by Kauthar in Counts I-IV of its complaint were beyond the ambit of statutory protection because they involved transnational securities transactions without a sufficient connection to the United States. Specifically, the district court held that Kauthar's allegations satisfied neither the "effects" nor the "conduct" analyses employed by federal courts to decide whether the securities acts cover a particular transnational securities transaction. We review this question of law de novo.

Courts have struggled for many years to define with meaningful precision the extent to which the antifraud provisions of the securities laws apply to securities transactions that are predominantly extraterritorial in nature but have some connection to the United States. The courts that have addressed the issue have noted that the question is a difficult one because Congress has given little meaningful guidance on the issue. ⁵ In addition, resort to the legislative history of the securities acts does little to illuminate Congress' intent in this area. See, e.g., Zoelsch v. Arthur Andersen & Co., 824 F.2d 27, 30 (D.C.Cir.1987) ("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...