Alfadda v. Fenn

• Decision Date: 28 September 1998
• Docket Number: No. 97-7867,97-7867
• Citation: 159 F.3d 41,1998 WL 741836
• Parties: Abdulaziz A. ALFADDA, Yusif Bin Ahmed Kanoo, a Partnership Company, Abddullah Abbar, Abdulaziz Kanoo, Ahmed A. Zainy, Abdulla Kanoo, Abdulrahman A. Al-Turki, Abdulrahman H. Sharbatly, Saad A. Alissa, and Abdullatif A. Alissa, Plaintiffs-Appellants, v. Richard A. FENN, Alef Bank, S.A., Alef Investment Corporation N.V., Saudi European Bank, S.A., Jamal Radwan, Saudi European Investment Corporation, N.V., Saudi Arabian & European Finanz Corp. B.V., Societe D'Analyses et D'Etudes Bretonneau, and Societe de Banque Privee (SBP), Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 41

159 F.3d 41

Abdulaziz A. ALFADDA, Yusif Bin Ahmed Kanoo, a Partnership Company, Abddullah Abbar, Abdulaziz Kanoo, Ahmed A. Zainy Abdulla Kanoo, Abdulrahman A. Al-Turki, Abdulrahman H Sharbatly, Saad A. Alissa, and Abdullatif A. Alissa Plaintiffs-Appellants, v. Richard A. FENN, Alef Bank, S.A., Alef Investment Corporation N.V., Saudi European Bank, S.A., Jamal Radwan Saudi European Investment Corporation, N.V., Saudi Arabian & European Finanz Corp. B.V., Societe D'Analyses et D'Etudes Bretonneau, and Societe de Banque Privee (SBP), Defendants-Appellees.

No. 97-7867.

United States Court of Appeals, Second Circuit.

Argued May 11, 1998.

Decided Sept. 28, 1998.

Andrew L. Frey, Mayer, Brown & Platt, New York City (John M. Aerni, Leboeuf, Lamb, Greene & MacRae, New York City, Craig B. Glidden, Timothy J. Hill, Keith A. Rowley, Glidden Partners, LLP, Houston, Texas, Dan M. Kahan, Chicago, Illinois, Christopher Armeniades, Paris, France, of counsel), for plaintiffs-appellants.

David R. Jewell, Donovan, Leisure, Newton & Irvine LLP, New York City, (Alison S. Berger, Luigi D. Vissicchio, of counsel), for defendants-appellees Jamal Radwan, Saudi European Investment Corporation, N.V., Alef Investment Corporation N.V., and Alef Bank, S.A.

Robert Ted Parker, Berg, Ziegler, Anderson & Parker LLP, San Francisco, California, (Jeffrey B. Kirschenbaum, Joel Freid, of counsel), for defendants-appellees Saudi European Bank, S.A. and Societe d'Analyses et d'Etudes Bretonneau.

Frank H. Wohl, Lankler, Siffert & Wohl, New York City, (Curtis B. Miner, of counsel), for defendant-appellee Societe de Banque Privee (SBP).

BEFORE: WALKER, MCLAUGHLIN, Circuit Judges, and SHADUR, Senior District Judge. ^*

BACKGROUND

MCLAUGHLIN, Circuit J.

Saudi European Investment Corporation ("SEIC") is incorporated in the Netherlands Antilles to invest Saudi Arabian capital in "Western markets." SEIC's stock is not publicly traded. Until 1989, its principal asset was Saudi European Bank ("SE Bank"), a French-licensed bank, headquartered in Paris. Although SEIC maintained an office in New York, and SE Bank had a branch there, SEIC's operations were indisputably based in France; and it dealt almost exclusively with money from Saudi Arabia. Both SEIC and SE Bank were run by the Chairman of SEIC, Jamal Radwan.

Under its Deed of Incorporation, SEIC was authorized at its founding to issue 40,000 voting shares. It initially issued only 20,000 shares, which were sold in its first offering in 1979. Following a 30:1 split in 1983, there were 600,000 issued shares outstanding and 600,000 more authorized, but unissued, shares.

In 1984, SEIC sought to raise $60 million in capital through a private stock offering of its remaining 600,000 authorized shares. These shares were offered pursuant to a Subscription Agreement and Private Placement Memorandum ("PPM"), which made certain representations about SEIC's financial condition and business plan. The PPM represented that the 1984 offering would consist of 600,000 voting shares to be sold for $100 each and that if the offering was oversubscribed, nonvoting shares would then be issued. Finally, the PPM provided that none of the shares would be sold in the United States. The PPM was prepared for SEIC in the United States by Ronald Reilly, the president of a Texas corporation retained by SEIC to help it raise money.

A number of wealthy Saudi businessmen purchased 600,000 shares in SEIC's 1984 private offering. However, after the 1984 offering closed, Radwan converted certain SEIC "capital notes" (which were essentially stock options) into shares of SEIC voting stock. The existence of the capital notes was not disclosed in the PPM.

Radwan owned 600,000 of the capital notes, which he converted into 600,000 shares of SEIC stock by paying SEIC $33 per share. Radwan then sold the shares to Charles Keating's now infamous Lincoln Savings and Loan for $100 per share. The effect, of course, was that SEIC had now sold 1.2 Around 1988, SE Bank began to stumble. A number of French banks with ties to the Middle East had failed in the late 1980's; and the French government began to fear that SE Bank would also fail. In 1988 and 1989, the Governor of the Bank of France requested that SEIC shareholders deposit funds into SE Bank to solve its liquidity problems. However, no shareholders responded. In November 1989, the French government ordered Radwan either to sell the bank to new investors or face the involuntary liquidation of SE Bank. Radwan chose to sell the bank.

million voting shares, rather than the 600,000 shares originally contemplated. SEIC, however, did not disclose the sale of the extra shares in the PPM. Moreover, Radwan's sale to Keating contradicted the PPM's representation that shares would not be sold in the United States.

The Commission Bancaire, France's banking regulatory authority, became an active player in the sale of SE Bank. Prospective purchasers were required to obtain the Commission Bancaire's approval of a plan to stabilize the bank to avoid future liquidity crises. After an audit of the bank's condition, it was sold for approximately $3.4 million. The new owners injected $9.8 million into SE Bank and rechristened it Societe de Banque Privee, S.A. ("SBP"). As a result of the sale, SEIC shareholders lost all equity in SE Bank.

Soon after the sale of SE Bank, the new entity, SBP, became embroiled in several American lawsuits arising out of SEIC's and Radwan's dealings with Charles Keating. SBP was sued in several investor class actions. The United States' Resolution Trust Company also sued SBP as the successor to SE Bank. To insulate SBP from these claims, French banking authorities reorganized SBP and placed SE Bank's former American holdings in an entity called Societe d'Analyses et d'Etudes Bretonneau ("Bretonneau"). Soon after the spin-off, Bretonneau's banking license was revoked by French authorities and its only business then became the liquidation of SE Bank's former American business.

In July 1987, Abdulrahman Sharbatly, a Saudi investor, filed a criminal complaint in the French Tribunal de Grande Instance against Radwan and SEIC, alleging that the misrepresentations contained in the PPM constituted fraud under French penal law. He also filed a civil complaint against Radwan and SEIC involving the same transactions. Under the French criminal code, a private party may bring a civil action for damages (action civile ) based on a criminal offense, and may initiate a criminal prosecution if the state fails to do so.

One year later, Abdulrahman Al-Turki and Abdullatif Alissa, who also invested in SEIC, filed separate criminal complaints against SEIC with the Tribunal de Grande Instance. The Saudi investors charged that "unknown persons" associated with SEIC concealed the existence of Radwan's convertible capital notes and misrepresented in the PPM both the number of shares to be sold in the 1984 offering and the financial condition of SEIC in 1984.

The French examining magistrate indicted Radwan for the crime of "swindling" under Article 405 of the French Penal Code. In October 1994, the Tribunal Correctionnel in Paris acquitted Radwan of the criminal charges, and the Court of Appeals for Paris later affirmed the acquittal.

In April 1989, while the French actions were proceeding, Al-Turki, Saad Alissa, Abdullatif Alissa, Abdulaziz Alfadda, Abdullah Abbar, Yusif Bin Ahmed Kanoo (a Saudi Arabian partnership), and Ahmed Zainy filed a civil complaint against Radwan and SEIC in the Court of First Instance in Curacao, Netherlands Antilles. The plaintiff-shareholders alleged that they purchased SEIC shares in 1984 on the basis of the defendants' misrepresentations regarding SEIC's capital structure.

In September 1989, part of the litigation now before us started. Alfadda, Abbar, Abdulla Kanoo, Abdulaziz Kanoo, Yusif Bin Ahmed Kanoo, and Zainy sued Radwan, SEIC, SE Bank, SBP, Bretonneau, Richard Fenn (Vice-Chairman of SEIC), Alef Bank, S.A., and Alef Investment Corporation N.V. in the United States District Court for the Southern District of New York (McKenna, J.) (the "Alfadda action"). The investors In 1990, Judge McKenna dismissed the Alfadda action for lack of subject matter jurisdiction because the claims had no connection to the United States. This Court reversed Judge McKenna, finding that the action had a sufficient connection to this country because of the sales to Keating's Lincoln Savings and Loan. Alfadda v. Fenn, 935 F.2d 475, 478 (2d Cir.1991).

alleged that the defendants violated Section 10b of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., by: (1) misrepresenting SEIC's value at the time of the 1984 offering; (2) diluting SEIC's stock by selling too many shares in 1984; (3) failing to disclose the existence of the capital notes held by Radwan; and (4) misappropriating SEIC funds (the "SEIC claims"). Plaintiffs also alleged New York state common law claims for fraud and breach of fiduciary duty.

On July 5, 1990, Al-Turki, Sharbatly, and the Alissas filed yet another complaint against the Alfadda defendants in the United States District Court for the Southern District of New York (the "Al-Turki action"). The Al-Turki plaintiffs alleged that Fenn, Radwan, SEIC, SE Bank, Alef Investment Corporation N.V., and Alef Bank, S.A. violated RICO by manipulating SBP's assets during SBP's restructuring to prevent plaintiffs from obtaining damages on the SEIC claims (the "SBP claims"). The Al-Turki and Alfadda actions were consolidated before Judge McKenna.

In 1992, after the Alfadda action was remanded to Judge McKenna, the defendants moved for dismissal of the consolidated actions on the ground of forum non conveniens. Judge McKenna denied the motion, concluding that although France might be a more convenient forum, the balance of interests did not tilt particularly in...