SECURITIES & EX. COM'N v. Capital Growth Co., SA (CR)

• Decision Date: 31 December 1974
• Docket Number: No. 74 Civ. 3779.,74 Civ. 3779.
• Citation: 391 F. Supp. 593
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CAPITAL GROWTH COMPANY, S.A. (COSTA RICA), et al., Defendants.
• Court: U.S. District Court — Southern District of New York

391 F. Supp. 593

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CAPITAL GROWTH COMPANY, S.A. (COSTA RICA), et al., Defendants.

No. 74 Civ. 3779.

United States District Court, S. D. New York.

December 31, 1974.

COPYRIGHT MATERIAL OMITTED

Richard L. Jaeger, Chief Counsel, Division of Enforcement, Washington, D. C., for SEC.

Irving Rader, New York City, for defendant EHG Enterprises.

MEMORANDUM

STEWART, District Judge:

This action was brought on by order to show cause on September 3, 1974 by the Securities and Exchange Commission ("SEC") for injunctive relief and for the appointment of a receiver. The complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Specifically, the complaint alleges that from September 1968 up to the present all of the defendants at various times have engaged in a course of conduct designed to convert the assets of the Capital Growth companies for their own benefit to the detriment of their shareholders.

On September 3, 1974, this court entered a temporary restraining order ("TRO") which enjoined defendants from taking any action with regard to the present and future assets of Capital Growth Company, S.A. (Costa Rica) and Capital Growth Company, S.A. (Panama) and the voting securities of Capital Growth Company, S.A. (Costa Rica) and New Providence Securities, Ltd., S.A. The TRO further enjoined defendants from engaging in any acts in violation of Section 10(b) or Rule 10b-5.

Since the defendants may be classified in three similarly situated groups, each group will be discussed separately.¹

1. The Sheffield Group

Defendant Sheffield Advisory Company, S.A. is a Panamanian company with offices in New York City. It is the successor to defendant Sheffield Advisory Company, formerly a New York limited partnership with offices in New York City. Sheffield² served as investment advisor to defendant New Providence Securities, S.A. ("New Providence"), investment manager for the Capital Growth companies, with respect to the investment and reinvestment of the assets of the Capital Growth companies.

Defendant Sanford C. Shultes ("Shultes") is a United States citizen and a resident of New York City. Shultes managed and directed the affairs and was a substantial owner of Sheffield during the period covered by the complaint. From on or about October 15, 1971, to on or about July 25, 1972, Shultes was a director of New Providence and the Capital Growth companies.

The Sheffield group appeared in this action and requested an extension of time before the hearing on a preliminary injunction. Such an extension was given and during that time those defendants agreed with the SEC to settle the case against them. A permanent injunction was entered against Sheffield Advisory Company and Shultes on October 30, 1974. Following approval by its Board, defendant Sheffield Advisory Company, S.A. entered into a settlement agreement with the SEC on December 16, 1974.

2. The Capital Growth Group

Capital Growth Company, S.A. (Panama) ("CG Panama") is a wholly-owned subsidiary of the Costa Rica corporation Capital Growth Company, S.A. (Costa Rica) ("CG Costa Rica"). CG Panama was incorporated on August 4, 1972 and acquired substantially all the investments of CG Costa Rica on that date. The preferred shares of CG Costa Rica are held by approximately 16,000 public investors. On July 10, 1971, Capital Growth Fund, S.A. was converted into a close-ended investment company and changed its name on September 24, 1971 to Capital Growth Company, S.A. (Costa Rica).

Defendant New Providence and its predecessors have served as investment managers for the Capital Growth companies and own all of their common stock.

Defendant McAlpin owns or controls approximately sixty percent of the outstanding voting securities of New Providence. McAlpin, a resident of Costa Rica, has served as president and chairman of the boards of directors of the Capital Growth companies and of defendant New Providence.

The Capital Growth group defendants did not appear in this case and a preliminary injunction was entered against them on September 24, 1974.³ At the same time, this court appointed a receiver inter alia, to take possession and control of certain assets of the Capital Growth companies wrongfully received by other of the named defendants and to seek disgorgement and an accounting from those defendants of all misappropriated assets of the Capital Growth companies. After the preliminary injunction was entered, this court received a request on behalf of CG Costa Rica to contest the preliminary injunction. A hearing was scheduled and held on September 24, 1974. The sole objection raised at that hearing and in subsequent papers filed with this court is one of subject matter jurisdiction. Defendant claims that under the laws of Costa Rica no foreign agency can have authority or competency over Costa Rican companies and no receiver may be appointed. Even assuming the validity of these arguments, they are addressed not to the SEC's allegations that American securities laws have been violated, but only to whether this court's orders can be implemented in a foreign jurisdiction, a question not presently before us.

The issue presented by this challenge is whether this court had jurisdiction over the fraudulent scheme alleged in the complaint so that the injunction could be entered and the receiver appointed. We find that there was jurisdiction. First we note that since the Costa Rican defendants have not answered the complaint nor challenged the entry of a preliminary injunction on grounds other than jurisdiction, our inquiry is limited. We can take the allegations of the complaint as well as the affidavits in support of the preliminary injunction as true with respect to the Capital Growth defendants and do not need to set forth all the uncontested factual matters. See Carpenters' District Counsel v. Cicci, 261 F.2d 5 (6th Cir. 1958); cf. SEC v. Koenig, 469 F.2d 198, 202 (2d Cir. 1972); SEC v. Frank, 388 F.2d 486 (2d Cir. 1968).

Section 27 of the Securities Exchange Act of 1934 (15 U.S.C. § 78aa) gives United States district courts subject matter jurisdiction over suits brought to enforce any liability or duty created by the Act or rules and regulations promulgated thereunder. If the Securities Exchange Act is applicable, therefore, this court has jurisdiction.

The leading cases in this circuit make it clear that subject matter jurisdiction will attach to the transactions here in issue if it can be established either that there was significant conduct within the territorial limits of the United States or that there was extraterritorial conduct which was harmful to and which had an impact upon United States investors. Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326 (2d Cir. 1972); Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir. 1968) rev'd in part on other grounds, 405 F.2d 215 (2d Cir. en banc, 1968), cert. denied sub nom. Manley v. Schoenbaum, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969). See also Travis v. Anthes Imperial Limited, 473 F.2d 515 (8th Cir. 1973). The Leasco court found that the issue of subject matter jurisdiction turns on a factual determination of whether acts which formed an essential part of the fraudulent activities occurred within the United States. The additional fact that the conduct complained of had an impact upon a United States company, its shareholders, or upon United States investors tips the scales in favor of applying the United States securities laws. The facts before this Court bring the present action well within the guidelines set forth in Leasco.

The SEC has submitted affidavits of a number of United States shareholders of the Capital Growth companies who state that they purchased their shares through the United States mails and, in one instance, after a sales pitch regarding Capital Growth's "status and ambitions" by defendant McAlpin at a group meeting in New York.⁴ In addition, the Capital Growth companies are alleged to have sent both stock certificates and sporadic literature regarding the companies through the United States mails to United States investors. As the Leasco court noted: "We see no reason why, for purposes of jurisdiction to impose a rule, making telephone calls and sending mail to the United States should not be deemed to constitute conduct within it." Leasco v. Kerman, supra 468 F.2d at 1335.

The SEC alleges that the above securities were offered and sold to public investors under representations which stressed the companies' ties with the United States and the advantages of its securities markets. For example, the prospectuses stated: "Capital Growth Fund is one of the few mutual funds operating outside of the United States whose underlying investments are primarily in United States securities, whose management company has a Board of Directors primarily composed of executives within the United States . . . . The Fund's assets are invested with the assistance of investment advisors who are registered with the Securities and Exchange Commission of the United States." Thus, the companies' own statements lead us to conclude that there is sufficient contact here with the United States to assert jurisdiction. See SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 353, 64 S.Ct. 120, 124, 88 L.Ed. 88 (1943) ("promoters' offerings should be judged as being what they are represented to be.")

The illiquid investments, non armslength transactions and other activities alleged in the complaint with which the Capita Growth companies were involved were contrary to the representations and restrictions contained in the above prospectuses of the companies. In addition, while prospective purchasers were told in the prospectuses that "the Sponsor a subsidiary of the Management Company will liquidate the shares in the planholder's account at 100% of the net asset value at the time instructions are received",...