IIT, an Intern. Inv. Trust v. Cornfeld

• Decision Date: 17 March 1980
• Docket Number: No. 8,D,8
• Citation: 619 F.2d 909
• Parties: Fed. Sec. L. Rep. P 97,320 IIT, AN INTERNATIONAL INVESTMENT TRUST, and Georges Baden, Jacques Delvaux and Ernest Lecuit, as Liquidators for IIT, an International Investment Trust, Plaintiffs-Appellants, v. Bernard CORNFELD, Carl Johan Bernadotte, Martin Brooke, C. Henry Buhl, III, Joop Melse, Erich Mende, Beat Notz, Pierre Rinfret, James Roosevelt, Melvin Rosen, Barry Sterling, Moritz Von Hessen, Henry Von Maur, Arthur Lipper Corporation, Arthur Lipper, III, Arthur Andersen & Co., James E. Bye, Stanley B. Hallman, James B. Kuhn, Lawrence Ocrant, E. Keene Wolcott, Adams & Peck, Bear, Stearns & Co., Burnham and Company, Emanual Deetjen & Co., Irving Lundborg & Co., Burnham & Company, Incorporated, Drexel Burnham & Co., Inc. and Does 1 through 10, Defendants- Appellees. ocket 79-7084.
• Court: U.S. Court of Appeals — Second Circuit

Page 909

619 F.2d 909

Fed. Sec. L. Rep. P 97,320

IIT, AN INTERNATIONAL INVESTMENT TRUST, and Georges Baden,

Jacques Delvaux and Ernest Lecuit, as Liquidators

for IIT, an International Investment

Trust, Plaintiffs-Appellants, v. Bernard CORNFELD, Carl Johan Bernadotte, Martin Brooke, C.

Henry Buhl, III, Joop Melse, Erich Mende, Beat Notz, Pierre

Rinfret, James Roosevelt, Melvin Rosen, Barry Sterling,

Moritz Von Hessen, Henry Von Maur, Arthur Lipper

Corporation, Arthur Lipper, III, Arthur Andersen & Co.,

James E. Bye, Stanley B. Hallman, James B. Kuhn, Lawrence

Ocrant, E. Keene Wolcott, Adams & Peck, Bear, Stearns & Co.,

Burnham and Company, Emanual Deetjen & Co., Irving Lundborg

& Co., Burnham & Company, Incorporated, Drexel Burnham &

Co., Inc. and Does 1 through 10, Defendants- Appellees.

No. 8, Docket 79-7084.

United States Court of Appeals, Second Circuit.

Argued Oct. 24, 1979.

Decided March 17, 1980.

Eugene R. Anderson, New York City (Anderson, Russel, Kill & Olick, P.C., Neal J. Morse, New York City, of counsel), and Detlev F. Vagts, Cambridge, Mass., for plaintiffs-appellants.

Stephen A. Weiner, New York City (Winthrop, Stimson, Putnam & Roberts, Robert J. Sussman, New York City, of counsel), for defendants-appellees, Adams & Peck, Bear, Stearns & Co., Burnham and Co. Inc. and Drexel Burnham & Co. Inc.

Edward J. Ross, New York City (Breed, Abbott & Morgan, James R. Peterson, New York City, of counsel), and Wilson & McIlvaine, Charles W. Boand, Chicago, Ill., of counsel for defendant-appellee, Arthur Andersen & Co.

Di Falco Amhurst Smithson Tannenbaum & Duval, New York City (Howard Sanford Klotz, New York City, of counsel), for defendants-appellees, Arthur Lipper Corp. and Arthur Lipper III.

Ralph C. Ferrara, Gen. Counsel, Jacob H. Stillman, Associate Gen. Counsel, Elisse B. Walter, Sp. Counsel, Robert Lipsher, Atty., Washington, D.C., for amicus curiae, Securities and Exchange Commission.

Before FRIENDLY, OAKES and NEWMAN, Circuit Judges.

FRIENDLY, Circuit Judge:

This is an appeal from an order of the District Court for the Southern District of New York dismissing, for want of subject-matter jurisdiction, a Rule 10b-5 action by a Luxembourg investment trust and its liquidators, 462 F.Supp. 209 (1978). It again raises vexing questions with respect to the reach of the anti-fraud provisions of our securities laws with respect to transactions having substantial foreign elements. Here, as in other cases on this subject, ¹ we are obliged to pick out boundaries as best we can although the statutory language gives little aid. ² The appeal illustrates the infinite variety of situations that may arise; the ground rules we have endeavored to lay down, notably in Bersch, supra, 519 F.2d at 993, although alleged by both sides to be dispositive in their favor, do not lead ineluctably to one result or the other, at least as to one of the transactions here at issue. Decision is further complicated by the fact that, as in Schoenbaum, supra, the issue of subject-matter jurisdiction arises in the context of a situation in which the managers of the defrauded corporation are allegedly implicated in the fraud. Finally, if subject-matter jurisdiction is found to exist, our task is far from ended, since we are then faced with serious issues whether the complaint is sufficient with respect to the defendants who are before us and whether the action is time-barred.

I. IIT's Transactions in King-related Securities

Many members of the cast of characters in this case are not new to our courtroom. Plaintiff-appellant IIT, an International Investment Trust, was organized under the laws of the Grand Duchy of Luxembourg in 1961. Before it and its liquidators were forced to spend most of their time in court, ³ IIT provided an investment vehicle by which fundholders could participate in a portfolio of securities chosen and managed by allegedly "(q)ualified professional investment counsel." ⁴ IIT was controlled and managed by IIT Management Company, S.A. (Management), a Luxembourg corporation, which was in turn controlled by its parent Investors Overseas Services, Ltd. (IOS), first a Panamanian and then a Canadian corporation whose "troubled existence", see 519 F.2d at 1003, has spawned many actions besides the present one. Both Management and IOS were operated out of Geneva, Switzerland, although plaintiffs allege that "all the top persons" controlling the once vast financial empire were Americans, notably Bernard Cornfeld and Edward M. Cowett. The transactions which form the basis of IIT's complaint occurred before Cornfeld lost control of IOS to Robert Vesco.

IIT currently has 144,496 fundholders residing in 154 countries. Some 218 reside in the United States, although it is unclear how many of these are American citizens. ⁵ At the height of its prosperity in the late 1960's and early 1970's, IIT held assets worth $375 million, about forty percent of which were in American securities. This prosperity, however, was short-lived. Late in 1972 the Securities and Exchange Commission charged that Vesco was looting the assets of the IOS funds and, in the wake of the resulting scandal, the Grand Duchy of Luxembourg placed all Luxembourg investment funds under supervision of the Bank Control Commissioner. One year later, upon petition of that Commissioner, the Luxembourg district court declared IIT an involuntary bankrupt. Georges Baden, Jacques Delvaux, and Ernest Lecuit, were appointed liquidators of the fund and are co-plaintiffs in this action.

The transactions giving rise to the present case, which occurred between January 16 and October 26, 1969, involved three series of acquisitions by IIT of securities related to a complex of companies controlled by one John M. King, an American oil and gas entrepreneur based in Denver. King allegedly controlled King Resources Company (KRC), a publicly traded Maine corporation, and The Colorado Corporation (TCC), a private company largely owned by him. Both the public side of the King complex (KRC) and the private side (TCC) bought and sold natural resource properties and offered a variety of investments in the nature of tax shelters. The two companies had numerous subsidiaries. One of these, King Resources Capital Corporation, N.V. (KRCC), a wholly-owned Netherlands Antilles subsidiary of KRC, figures prominently in this case. Like IIT, King and his companies have fallen on hard times, but were not named as defendants in this action because stays were issued by courts in bankruptcy proceedings involving them.

IIT's first acquisition of King-related securities occurred between January 16 and October 26, 1969, during which period IIT bought about $8 million face value of KRCC subordinated convertible debentures. The debentures had been issued in Europe on November 27, 1968, to raise $15 million in the eurodollar market. This offering was closely coordinated with a domestic offering of an additional $25 million in debentures of KRC which occurred on November 26. The KRCC debentures were guaranteed by KRC and convertible into KRC common stock. The bulk of IIT's purchases were made abroad, although IIT alleges it purchased $50,000 face value of the debentures through defendant Arthur Lipper Corporation (Lipper) in the United States. IIT sold its KRCC debentures between July 28, 1970 and February 5, 1971 at a loss of $8,765,698.

IIT's second acquisition of King-related securities was the purchase between January 16 and March 20, 1969, of 200,000 shares of KRC common stock. IIT purchased its shares in the United States over-the-counter market for $16.8 million, availing itself of the brokerage services Lipper performed for IIT and the other members of the IOS complex. These shares were sold between October 6 and November 4, 1970, at a loss of approximately $14 million.

IIT's final acquisition of King-related securities was a July, 1969 purchase of a $12 million 15 year convertible note from TCC. IIT alleges that the purpose of this loan was to make TCC a seemingly attractive merger partner for KRC, although no such merger took place. TCC defaulted on the note and has never paid any principal or interest to IIT. As noted, TCC is now in bankruptcy.

II. The Complaint

IIT commenced the instant action by filing a complaint in the District Court for the Southern District of New York on July 17, 1975. The complaint, correctly characterized by Judge Goettel as "flagrantly verbose," 462 F.Supp. at 212 & n.7, alleged violations of sections 5, 11, 12, 15, and 17 of the Securities Act of 1933; section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 adopted thereunder; section 206 of the Investment Advisers Act; section 352-c of the General Business Law of New York; breach of fiduciary duty and contract; misappropriation; and failure to disclose these numerous violations of the law. As the briefs and arguments indicate, however, the focus of the complaint is Rule 10b-5. See 462 F.Supp. at 217, 221 & n.25.

According to the complaint and various affidavits and memoranda submitted by plaintiffs in the district court, ⁶ the three transactions outlined above were the result of a conspiracy to defraud IIT between those in control of IOS and Management, together with Lipper and those in control of the King complex. The King empire allegedly required "continuous injections of vast sums of cash to survive," some of which it obtained from IIT's purchases. For their part, the IOS and Management defendants received personal kickbacks, opportunities to join in KRC tax avoidance schemes, and the ability to over-value King-related assets so as to increase their management fees and performance bonuses. ⁷ Lipper, the United States broker for the IOS complex, was allegedly involved in all three transactions. Its recompense included not only the sizable commissions it gained from the IOS brokerage business but also a special right, allegedly given in connection with the TCC note transaction, to purchase...