519 F.2d 974 (2nd Cir. 1975), 75-7057, Bersch v. Drexel Firestone, Inc.
|Docket Nº:||75-7057 and 75-7031.|
|Citation:||519 F.2d 974|
|Party Name:||Howard BERSCH, Plaintiff-Appellee-Appellant, v. DREXEL FIRESTONE, INCORPORATED, et al., Defendants, Arthur Andersen & Co., I.O.S., Ltd., and Bernard Cornfeld, Defendants-Appellants, J. H. Crang & Co., Defendant-Appellee. Nos. 783, 784, 795 and 822, Dockets 75-7038, 75-7055,|
|Case Date:||April 28, 1975|
|Court:||United States Courts of Appeals, Court of Appeals for the Second Circuit|
Argued March 6, 1975.
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Sidney B. Silverman, New York City (Silverman & Harnes, New York City, of counsel), for Howard Bersch, plaintiff-appellee-appellant.
Edward J. Ross, New York City (James D. Zirin and Breed, Abbott & Morgan, New York City, and Charles W. Boand and Wilson & McIlvaine, Chicago, Ill., of counsel), for defendant-appellant Arthur Andersen & Co.
Bernard Mindich, New York City (Michael W. Schwartz, and Wachtell, Lipton, Rosen & Katz, New York City, of counsel), for defendant-appellant I.O.S., Ltd.
Leonard M. Marks, New York City (Martin R. Gold, Charles B. Ortner and Gold, Farrell & Marks, New York City, of counsel), for defendant-appellant Bernard Cornfeld.
Howard C. Buschman, III, New York City (Anthony F. Phillips, Paula J. Mueller and Willkie Farr & Gallagher, New York City, of counsel), for defendant-appellee J. H. Crang & Co.
Before FRIENDLY, MULLIGAN and TIMBERS, Circuit Judges.
FRIENDLY, Circuit Judge:
These appeals from orders of Judge Carter in an action in the District Court for the Southern District of New York again bring before us the question of the territorial reach of the federal securities laws with which we have previously dealt in Schoenbaum v. Firstbrook, 405 F.2d 200 (2 Cir.), rev'd on the merits, 405 F.2d 215 (2 Cir. 1968) (en banc), cert. denied sub nom., Manley v. Schoenbaum, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969), and Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326 (2 Cir. 1972). Apart from differences in the facts, there is the added complexity that whereas Schoenbaum was a derivative action by stockholders of a Canadian corporation and Leasco an action by two corporate plaintiffs, 1 the suit here is a class action on behalf of thousands of plaintiffs 2 preponderantly
citizens and residents of Canada, Australia, England, France, Germany, Switzerland, and many other countries in Europe, Asia, Africa, and South America.
I. The Basic Facts.
The securities transactions giving rise to this litigation go back to 1969. The securities were the common stock of defendant I.O.S., Ltd. (IOS), an international sales and financial service organization principally engaged in the sale and management of mutual funds and complementary financial activities organized under the laws of Canada, 3 having had its main business office in Geneva, Switzerland. It is now in the hands of liquidators appointed in November, 1973, by the Supreme Court of New Brunswick pursuant to the Canadian Winding-Up Act, Revised Statutes of Canada, 1970, ch. W-10. 4
Prior to 1968 the stock of IOS and its subsidiaries had been held by its organizer, defendant Bernard Cornfeld, his associates, and their employees. Although Cornfeld had always been free to sell his IOS shares, and in fact had disposed of significant amounts of these over the prior nine year period, his employees had been denied the right to sell their holdings and no organized market for IOS shares existed. Within the company the price of the stock was set by a theoretical formula value; the stock was used as a means of partial compensation and was granted to employees as a performance incentive, it being commonly understood
by the employees that the company would eventually be taken public and they might then "cash in". 5 A plan was developed wherein each of IOS's principal subsidiaries would first separately be taken public; finally common shares of IOS itself would be sold. In 1968 IOS floated 600,000 shares of one of its principal subsidiaries, IOS Management Ltd., a Canadian registered concern. The shares were offered at $12.50; trading opened at $75; and by March 1969 they had reached a peak of around $180. Subsequent to this sale, no doubt in part due to the success of this offering and more importantly to growing salesman dissatisfaction in light of a successful offering by a recently created competitor, 6 the decision was made to abandon the original plan and to take IOS public as soon as appeared feasible. The planning of this offering was constrained by the framework set out in an Order Accepting Offer of Settlement entered by the SEC on May 23, 1967. Paragraph 4 of this order provided in pertinent part: 7
Upon entry of the Order based on this Stipulation, IOS and all its affiliates shall cease all sales of securities to United States citizens or nationals wherever located, except for (i) offers and sales outside of the United States (and its territories, possessions or commonwealth subject to the jurisdiction of the United States) to officers, directors and full-time personnel of IOS and its subsidiaries. . . .
Three separate distributions of IOS common stock were proposed. The largest was to be a primary offering of 5,600,000 newly issued shares underwritten by six of the defendants (hereafter the Drexel group) two American banking houses, Drexel Firestone, Inc. 8 and Smith, Barney & Co., having their principal offices in the United States but also having offices in Europe, and four foreign underwriting houses, Banque Rothschild; Hill Samuel & Co. Limited; Guinness Mahon & Co. Limited; and Pierson Heldring & Pierson, having their principal offices abroad. 9 The 5,600,000 shares
were to be and were in fact sold under a prospectus outside the United States to foreign nationals residing in Europe, Asia and Australia. Prospectuses were printed abroad in English, French, and German and delivered to the purchasers outside the United States. A secondary offering of 1,450,000 shares, underwritten by defendant J. H. Crang & Co., a Toronto investment house (Crang), 10 was made in Canada by a prospectus conforming to the laws of Canada and its provinces; all of these shares were sold in Canada and none was sold to Americans resident there. 11 The third distribution, whence this action springs, was a secondary offering of 3,950,000 shares by defendant Investors Overseas Bank Limited of Nassau, the Bahamas, an IOS subsidiary (IOB). The prospectus stated, as had that of the Drexel Group, that the shares "are not being offered in the United States of America or any of its territories or possessions or any area subject to its jurisdiction" and was "being made to approximately 25,000 persons who are either (1) employees or sales associates of the Company, (2) certain clients presently holding investments in managed funds or other products of the Company, or (3) persons who have had a long-standing professional or business relationship with the Company."
The offerings were made at the same price, $10 per share, and at approximately the same time. Each prospectus referred to the two other offerings. Reference was made to plans to list the IOS stock on various stock exchanges, none of these being in the United States. The Drexel Group and IOB prospectuses were substantially identical. Although the Crang prospectus was somewhat different insofar as compliance with particular Canadian securities regulations was sought, all three contained balance sheets of IOS and various subsidiaries as of December 31, 1968, and income statements for the five years then ended, and a report of defendant Arthur Andersen & Co. (Andersen), an international accounting firm with its principal office in the United States, that, subject to usual qualifications, the statements fairly presented the financial condition of the company as of December 31, 1968, and for the five years then ended. The
Drexel and IOB prospectuses stated that the offerings had not been registered under United States securities laws. 12 The offerings were successful in the limited sense of being fully subscribed, but after stabilizing briefly at $14 the price of the shares drifted downward until April 1970 when it collapsed through the $10 level and three weeks later the shares apparently were virtually unsaleable. The plight of the purchasers was further aggravated when control of IOS passed into the hands of Robert L. Vesco, currently a resident of Costa Rica, and a defendant in a substantial number of actions for fraud pending in this circuit.
II. The Proceedings in the District Court and this Court.
The complaint in this action alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, and also containing allegations which can be read as charging common law fraud, was filed in December 1971 by Howard Bersch, a United States citizen living in New York, who had purchased 600 shares of IOS common distributed as part of the IOB underwriting. 13 Characterizing the three underwritings as the "IOS Public Offering", Bersch alleged he was bringing the action individually and on behalf of all persons who purchased stock in each of the offerings, estimated to approximate 100,000. 14 The complaint contained the allegations usual when a plaintiff desires designation of his action as a class action under Fed.R.Civ.P. 23(b)(3). It alleged that the underwriters "impliedly represented to the public that IOS was a suitable company for public ownership" when, in part as a result of the refusal of other investment houses to participate, they should have known that it was not. It also contained more particularized charges, e. g., that the prospectuses failed to reveal illegal activities by IOS and its officers which had seriously damaged the company...
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