Adato v. Kagan
| Decision Date | 29 January 1979 |
| Docket Number | No. 772,D,772 |
| Citation | 599 F.2d 1111 |
| Parties | Fed. Sec. L. Rep. P 96,761 Mauricio ADATO and Ana and Samuel Cikrovich, Plaintiffs-Appellants, and All persons listed on Schedules A, B and C attached to Amended Complaint, Plaintiffs-Intervenors-Appellants, v. Saul KAGAN, Abraham Feinberg, Leslie Geiger, Stanley Kreitman, Jose Klein, Alexander Szasz, Arthur Vare, Martin Wolf, Francisco Klein, Thomas J. Klutznick, Torleaf H. Benestad, Jean L. Wolf, Fabio Bohorquez, Robert Migatz, Edmund A. Fleckenstein, Juan Graiver, Enrique Brodsky, Continental Trade Bank, American B & T Corporation and Lydia Graiver, as Administratrix of the Estate of David Graiver, Defendants-Appellants. ocket 77-7620. |
| Court | U.S. Court of Appeals — Second Circuit |
Stephen Lowey, New York City (Lipper, Lowey & Dannenberg and Burton L. Knapp, New York City, Richard B. Dannenberg, New York City, of counsel), for plaintiffs-appellants.
Peter H. Morrison, New York City (Morrison, Paul & Beiley, New York City, Benjamin Zelermyer, Gerald G. Paul and Bobbe A. Brown, New York City, of counsel), for appellee Kagan.
David C. Birdoff, New York City (Reavis & McGrath, New York City, Stephen R. Steinberg, Andrew C. Freedman and John A. Lowe, New York City, of counsel), for appellee Feinberg.
Geoffrey D. C. Best, New York City (LeBoeuf, Lamb, Leiby & MacRae, New York City), for appellee Continental Trade Bank.
Robert Cohen, New York City (Lans, Feinberg & Cohen, New York City), for appellee Migatz.
Paul, Weiss, Rifkind, Wharton & Garrison, New York City, filed a brief, for appellee Klutznick.
Lawrence M. Saiewitz, New York City, filed a brief, for appellee Fleckenstein.
Harvey L. Pitt, Gen. Counsel, James H. Schropp, Asst. Gen. Counsel, Washington, D. C., and Ralph A. Siciliano, Atty., Securities and Exchange Commission, New York City, filed a brief, for the SEC, amicus curiae.
Reford J. Wedel, Acting Gen. Counsel, Werner Goldman, Counsel, Arthur L. Beamon, Senior Atty. and Linda G. Davenport, Federal Deposit Ins. Corp., Washington, D. C., filed a brief, for the FDIC, amicus curiae.
Before WATERMAN, TIMBERS and VAN GRAAFEILAND, Circuit Judges.
Fifty-nine foreign nationals appeal from orders of the United States District Court for the Southern District of New York dismissing their complaint against appellees under Federal Rule of Civil Procedure 12(b)(6) for failure to state claims under either the federal securities laws or banking laws. 1 We reverse as to all claims except those predicated upon alleged violations of section 11(m) of the Federal Reserve Act, 12 U.S.C. § 248(m).
The issues confronting the district court were novel and require a somewhat detailed review of the allegations in the complaint, which, for purposes of this opinion, are assumed to be true. Jenkins v. McKeithen, 395 U.S. 411, 421-22, 89 S.Ct. 1843, 23 L.Ed.2d 404 (1969).
Until September 15, 1976, American Bank & Trust Co. (ABT) was a New York chartered On November 25, 1975, defendant Juan Graiver agreed to buy the stock owned by Continental and the nine individual defendants for $32,604,000, which was almost double the stock's book value. Only $9,100,000 of this amount was paid in cash; the balance was to be paid over a five-year period. Two months prior to the execution of this agreement, state and federal regulatory authorities had warned ABT that it was in hazardous financial condition due to its large proportion of high-risk loans and the lack of supervision by directors and senior management. The New York Superintendent of Banks had issued a cease and desist order directing ABT to remedy this condition and to discontinue certain unsafe and unauthorized practices. Appellants allege that Continental and the nine individual defendants, knowing of ABT's shaky financial condition and the exorbitant price paid by Graiver, were put on notice that improper financial machinations involving ABT were in the offing.
commercial bank and a member of the Federal Reserve System. Its deposits were insured by the Federal Deposit Insurance Corporation. All of ABT's outstanding capital stock was owned by the defendant American B & T Corp. (ABT Corp.) and constituted almost all of the assets of that corporation. Approximately seventy-six percent of ABT Corp.'s stock was held by defendant Continental Trade Bank, a Swiss banking corporation, and an additional nine percent was owned by nine of the individual defendants, each of whom was an officer of ABT.
Such machinations did take place. Pending approval by the New York Superintendent of Banks of Juan Graiver's acquisition of ABT Corp. (which was never given), Continental was authorized by the purchase agreement to nominate three representatives to the board of ABT Corp. Graiver was authorized to nominate the remaining members and given voting control of the stock. Juan's son, David, 2 was elected first to the board of ABT Corp. and then to the board of ABT, Juan succeeding him as director of ABT Corp. Both were provided with offices in the bank, and David was given authority to act as a bank executive officer.
In 1974, the Graivers had organized a bank in Brussels, Belgium, known as Banque Pour L'Amerique du Sud (BAS). In 1975, the Graivers had organized a Panamanian corporation known as New Loring, Inc., which was a corporate shell with no assets and no operations. Between September 30, 1975, and May 31, 1976, ABT extended credit in various forms to the Graivers and Graiver-controlled corporations, including the foregoing, in amounts ranging from $10 million to $22.4 million. This was between 43.1% And 88.5% Of ABT's book capital. The proceeds of the loans were funneled back to the Graivers and used to finance their purchase of ABT Corp. Because these extensions of credit resulted in substantial overdrafts and violated federal and state banking laws as well as the cease and desist order of the State Superintendent of Banks, defendants searched for ways to reduce the unfavorable balances in the Graiver-controlled accounts. The plan that evolved was supervised by David Graiver, who had been placed in charge of ABT's International Division, including its Mexican operations.
David induced ABT's Mexican representative to conduct a concerted drive for new deposits. Appellants were among those who responded, delivering new funds to ABT as time deposits and renewing existing time deposits; their total financial commitment exceeded $5 million. However, these funds were not entered in ABT's books as time deposits. Instead, they were credited to the accounts of BAS, New Loring, and ABT Corp., with bookkeeping entries showing that the money had been invested in "time deposits" of BAS, "certificates" of New Loring, and "commercial paper" of ABT Corp. ABT gave appellants receipts On September 15, 1976, ABT was put into receivership by the New York Superintendent of Banks. The FDIC was appointed receiver and arranged for the sale of ABT to Bank Leumi Trust Company of New York, which assumed certain liabilities of ABT, including its time deposits. Appellants were informed thereafter that, because their funds were not represented on ABT's books as deposits, they would not be repaid by Bank Leumi. Appellants could expect little or no payment from the corporations in which their funds had been "invested". New Loring never had any assets; BAS was closed by Belgian authorities on September 1, 1976, and subsequently placed in receivership; ABT Corp. was insolvent and filed in Chapter XI reorganization on December 2, 1976.
showing that they were depositors of ABT but followed this up by sending them confirmations of their "investments" in BAS, New Loring, and ABT Corp.
This unhappy situation led to the present suit for rescission and damages.
Appellants allege that, in recording their deposits in ABT as investments in BAS, New Loring, and ABT Corp., ABT was "in effect" selling them unregistered securities in violation of sections 5(a) and 12(1) of the Securities Act of 1933, 15 U.S.C. §§ 77e(a) and 77L (1) and that ABT also violated section 12(2), 15 U.S.C. § 77L (2), by making untrue statements of material facts and omitting to state material facts necessary in order to make its statements not misleading. Appellants assert that appellees were "controlling persons" of ABT within the meaning of section 15 of the 1933 Act, 15 U.S.C. § 77O, and had knowledge of or reasonable grounds to believe in the existence of the facts by which the liability of ABT to appellants is alleged to exist. Appellants allege further that ABT violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 by employing artifices and schemes to defraud and by making untrue statements and misleading omissions, and that appellees were controlling persons of ABT under section 20 of the 1934 Act, 15 U.S.C. § 78t.
In the same breath, appellants maintain that they were simply depositors of ABT and that ABT misappropriated, misapplied, and converted their deposits without their knowledge or authority by treating the deposits as investments in the securities of BAS, New Loring, and ABT Corp. It was this insistence by appellants that they intended only to make deposits in ABT and not to purchase the securities of other corporations that led to the dismissal of their securities claims. The district court held that the sections of the Securities Act and Securities Exchange Act relied upon by appellants were not intended for the protection of persons "who had no intent to be, or knowledge that they were, investors."
We believe that issues were presented which should not have been disposed of by a Rule 12(b)(6) motion. It may be that, had the action proceeded to trial and the evidence established that appellants did not intend to purchase securities of BAS, New Loring, and ABT Corp., did not...
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