Securities Investor Protection Corp. v. Vigman

• Decision Date: 02 July 1985
• Docket Number: Nos. 84-6074,84-6311,s. 84-6074
• Parties: , Fed. Sec. L. Rep. P 92,222 SECURITIES INVESTOR PROTECTION CORPORATION, Eugene W. Bell, Trustee For the Liquidation of Joseph Sebag Incorporated, and John L. Britton, Trustee for the Liquidation of First State Securities Corporation, Plaintiffs-Appellants, v. Seymour VIGMAN, et al., Defendants, and Eugene C. Ferri, Jr., and Mobile International Corporation, Defendants- Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1309

764 F.2d 1309

54 USLW 2052, Fed. Sec. L. Rep. P 92,222

SECURITIES INVESTOR PROTECTION CORPORATION, Eugene W. Bell Trustee For the Liquidation of Joseph Sebag Incorporated and John L. Britton, Trustee for the Liquidation of First State Securities Corporation, Plaintiffs-Appellants, v. Seymour VIGMAN, et al., Defendants and Eugene C. Ferri, Jr., and Mobile International Corporation Defendants- Appellees.

Nos. 84-6074, 84-6311.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 8, 1985.

Decided July 2, 1985.

Stephen C. Taylor, Sheppard, Mullin, Richter & Hampton, Los Angeles, Cal., for plaintiffs-appellants.

Daniel L. Goelzer, Gen. Counsel, Paul Gonson, Sol., Jacob H. Stillman, Asso. Gen. Counsel, Robert Mills, Sp. Counsel, SEC, Washington, D.C., amicus curiae.

Bill E. Schroeder, Patrick J. Steele, McCutchen, Black, Verleger & Shea, Los Angeles, Cal., for defendants-appellees.

Appeal from the United States District Court for the Central District of California.

Before BARNES, Senior Circuit Judge, REINHARDT, Circuit Judge, and GILLIAM, District Judge. ^*

BARNES, Senior Circuit Judge:

Appellants, Securities Investor Protection Corporation ("SIPC"), Eugene W. Bell and John L. Britton appeal the dismissal of four of seventy-five defendants from the securities fraud action brought in the United States District Court for the Central District of California. The district court dismissed these defendants, finding that it lacked personal jurisdiction over them, and that venue was improper in the Central District. This appeal presents questions of first impression in this Circuit, and we reverse the district court's dismissal of the defendants.

I. BACKGROUND

Appellant SIPC was established pursuant to the Securities Investors Protection Act of 1970, as amended, 15 U.S.C. Sec. 78aaa, et seq., in response to the collapse of numerous brokerage houses, in order to provide greater protection for customers of registered brokers and dealers and members of national securities exchanges. H.R.Rep. No. 1613, 91st Cong.2d Sess., reprinted in 1970 U.S.Code Cong. & Ad.News, 5254, 5254-55. Congress created the SIPC as a private, nonprofit corporation, whose members would consist of most of the broker-dealers registered under the Act. 1970 U.S.Code Cong. & Ad.News at 5258.

The SIPC has the power to sue and be sued, and to complain and defend in its corporate name and through its own counsel, in any State, Federal or other court. 15 U.S.C. Sec. 78ccc(b)(1). In addition, the statute empowers the SIPC to seek a protective decree from a court of competent jurisdiction when one of the broker-dealer members has failed or is in danger of failing to meet its obligations to customers, and to appoint a trustee for the liquidation of the business of the broker-dealer member. See 15 U.S.C. Sec. 78eee.

Upon application of the SIPC, on July 24, 1981, John L. Britton ("Britton") was appointed trustee for the liquidation of First State Securities Corporation ("FSSC"), a Delaware corporation with its principal place of business in North Miami, Florida. On July 27, 1981, Eugene W. Bell ("Bell") was appointed trustee for the liquidation of Joseph Sebag Incorporated ("Sebag"), a Delaware securities broker-dealer corporation, registered and licensed by the National Association of Securities Dealers, with its principal place of business in Los Angeles, California. These appointments were made pursuant to the provisions of 15 U.S.C. Sec. 78eee.

This action was filed in the United States District Court for the Central District of California on July 22, 1983 by Appellants SIPC, Bell and Britton under the powers granted by 15 U.S.C. Sec. 78ccc(b)(1). The complaint alleged securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Act") and Rule 10b-5 thereunder; a conspiracy under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sec. 1961, et seq. ("RICO"); common law fraud; and breach of fiduciary duty. Appellants alleged in their complaint that the seventy-five defendants engaged in acts which appellants contend to be predatory manipulative schemes practiced upon member broker-dealers of the SIPC and the investing public concerning the stock of seven companies traded in the over-the-counter market, and that defendants engaged Sebag and FSSC as vehicles in furtherance of their scheme.

All seventy-five defendants in this action have moved the district court to dismiss and/or strike the complaint, basing their motions on various grounds. The district court entered an order dismissing certain of the seventy-five defendants on May 30, 1984, finding that it lacked personal jurisdiction over those defendants and that venue was improper in the Central District of California. On August 20, 1984, the district court amended the order, and dismissed without leave to amend but not on the merits, the complaint as to four of the defendants who are the appellees in this appeal. The claims against appellees were limited to alleged violations of the Act and common law fraud, and did not include any alleged violations under RICO or for breach of fiduciary duty.

Only two of the appellees remain in this appeal: Eugene C. Ferri, Jr. ("Ferri"), a United States citizen, and Mobile International Corporation ("Mobile"), a foreign corporation. The other two appellees, Leo Vela and Harry Drooker were dismissed by orders of this Court, pursuant to stipulations of the parties.

In dismissing the appellees, the district court rejected appellants' argument that Section 27 of the Act (15 U.S.C. Sec. 78aa) allows nationwide service of process and confers personal jurisdiction over the defendants. It also refused to apply a co-conspirator theory of venue. The co-conspirator theory of venue provides that where venue is established in a district for any defendant in a securities action which is brought against multiple defendants alleging a common scheme, then venue is proper as to all defendants even though certain defendants did not commit an act within the district. See generally, Securities and Exchange Commission v. Diversified Industries, 465 F.Supp. 104, 111 (D.D.C.1979) The court certified the May 30, 1984 order and the August 20, 1984 amended order for immediate appeal pursuant to Federal Rules of Civil Procedure 54(b), and appellants filed a timely notice of appeal.

II. ANALYSIS

There are two issues to be resolved by this court:

(1) Whether the district court erred in finding that it lacked personal jurisdiction over certain defendants in an action brought under the Securities Exchange Act of 1934; and

(2) Whether the district court erred when it failed to apply a co-conspirator venue theory to an action under the Securities Exchange Act of 1934.

A. Standard of Review

This Court reviews de novo the dismissal of a complaint without leave to amend. Whittington v. Whittington, 733 F.2d 620, 621 (9th Cir.1984). We must determine whether the district court erred as a matter of law. See e.g., Des Brisay v. Goldenfield Corp., 549 F.2d 133, 134 (9th Cir.1977); Fitzsimmons v. Barton, 589 F.2d 330, 331 (7th Cir.1979); Mariash v. Morrill, 496 F.2d 1138, 1140 (2d Cir.1974).

B. The Act

Section 27 of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78aa), grants jurisdiction to the federal courts and provides for venue and service of process. Touche Ross & Co. v. Redington, 442 U.S. 560, 577, 99 S.Ct. 2479, 2489, 61 L.Ed.2d 82 (1979). The jurisdiction to consider claims brought under the Act is vested exclusively in the federal courts. Clark v. Watchie, 513 F.2d 994, 997 (9th Cir.), cert. denied, 423 U.S. 841, 96 S.Ct. 72, 46 L.Ed.2d 60 (1975).

Appellants argue that (1) Section 27 of the Act (15 U.S.C. Sec. 78aa) provides for nationwide service of process, thereby conferring personal jurisdiction over defendants Ferri and Mobile, and (2) the district court applied a narrower standard for determining venue than that allowed under the Act, and it should have adopted a co-conspirator theory of venue. We agree.

When considering a Section 10(b) and Rule 10b-5 claim for relief, the court should liberally construe that claim in order to effectuate the policies underlying the federal securities laws. See, e.g., Affiliated Ute Citizens v. United States, 406 U.S. 128, 150-54, 92 S.Ct. 1456, 1470-72, 31 L.Ed.2d 741 (1972); Superintendent of Insurance v. Bankers Life and Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971); Mansbach v. Prescott, Ball and Turben, 598 F.2d 1017, 1924-25 (6th Cir.1979).

In distinguishing between the principles of jurisdiction and venue, we note that "[j]urisdiction is the power to adjudicate, while venue, which relates to the place where judicial authority may be exercised, is intended for the convenience of the litigants." Still v. Rossville Crushed Stone Co., 370 F.2d 324, 325 (6th Cir.1966) (per curiam) (emphasis added) (citing Neirbo Co. v. Bethlehem Shipbuilding Corp., 308 U.S. 165, 60 S.Ct. 153, 84 L.Ed. 167 (1939); 1 Barron & Holtzoff, Federal Practice and Procedure (Wright Ed.), Sec. 71), cert. denied, 387 U.S. 918, 87 S.Ct. 2030, 18 L.Ed.2d 970 (1967). In order for the district court to hear a case, the court must have not only personal jurisdiction over the parties, but also venue.

C. Personal Jurisdiction

In order to find personal jurisdiction over Appellees Ferri and Mobile in the Central District of California, there must be an applicable rule or statute which potentially confers jurisdiction over the defendants. See, Amba Marketing Systems, Inc. v. Jobar International, Inc., 551 F.2d 784, 787 (9th Cir.1977). In addition, assertion of such jurisdiction must accord with constitutional principles of due process. Id. at 787.

The general jurisdictional statute which confers the power of the district court to hear a cause arising from a violation of a federal law or statute is 28 U.S.C. Sec. 1331 (federal question). "A claim based on a violation of a...