Alfadda v. Fenn, 89 Civ. 6217 (LMM).
| Decision Date | 26 November 1990 |
| Docket Number | No. 89 Civ. 6217 (LMM).,89 Civ. 6217 (LMM). |
| Citation | 751 F. Supp. 1114 |
| Parties | Abdulaziz A. ALFADDA, Abdullah Abbar, Abdulla Kanoo, Abdulaziz Kanoo, Yusif Bin Ahmed Kanoo (a Partnership Company), and Ahmed A. Zainy, Plaintiffs, v. Richard A. FENN, Jamal Radwan, Saudi European Investment Corporation N.V., Saudi European Bank, S.A., Alef Investment Corporation N.V., and Alef Bank, S.A., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Beirne, Maynard & Parsons, Houston, Tex. (Jeffrey R. Parsons and Craig Glidden, of counsel), Leboeuf, Lamb, Leiby & Macrae, New York City (Geoffry D.C. Best and Elena Naughton, of counsel), for plaintiffs.
Hughes Hubbard & Reed, New York City (George A. Davidson and Daniel Weiner, of counsel), for defendants Jamal Radwan, Saudi European Inv. Corp. N.V., Alef Inv. Corp. N.V. and Alef Bank, S.A.
Cahill Gordon & Reindel, New York City (Thomas J. Kavaler and Patrick Rocco, of counsel), for defendant Richard A. Fenn.
Sherman & Sterling, New York City (Joseph F. Haggerty, of counsel), for defendant Saudi European Bank, S.A.
Plaintiffs, five individual foreign nationals and one foreign partnership company, brought this action for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-68 (Count I), for violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 (), and for common law fraud, breach of fiduciary duty and rescission of contract. Plaintiffs premise their amended complaint upon their purchase of shares of stock through private placements. Defendants have moved to dismiss the amended complaint for lack of subject matter jurisdiction or on the ground of forum non conveniens.1 Defendants have also moved to have the fraud claims dismissed for failure to plead fraud with particularity. For the reasons stated below, the amended complaint is dismissed for lack of subject matter jurisdiction.
Defendant Saudi European Investment Corporation N.V. ("SEIC") is a closely held Netherlands Antilles company which operated as a holding and/or controlling company of the other corporate defendants, Saudi European Bank S.A. ("SE Bank") (now known as Societe de Banque Privee), a French bank, Alef Investment Corporation N.V. ("AIC"), a Netherlands Antilles corporation, and Alef Bank S.A. ("Alef Bank"), a French bank (collectively, the "SE Group"). The individual defendants, Jamal Radwan ("Radwan") and Richard Fenn ("Fenn") are United States citizens who are sued based upon their activities in connection with the corporate defendants.
The amended complaint alleges that on or about February 4, 1979 defendant Radwan invited plaintiff Alfadda to become a shareholder in a proposed company, SEIC. SEIC was to have 40,000 authorized shares of stock and the original stock offering would consist of 20,000 shares at a price of $1,000 per share. In July 1979, Alfadda purchased 1000 shares of SEIC voting stock for $1,000,000. Pursuant to the terms of the offering, Alfadda and the other holders of the original 20,000 shares sold were to be given a preference in the offering of new shares, in proportion to the number of original shares held by them.
Around October 1983, the defendants planned a second offering of SEIC stock. The original shares sold were to be subject to a 30 for 1 split, creating 600,000 shares. The prospectus for the second offering stated that another 600,000 voting shares (which represented the 20,000 shares which were not issued in the original offering split 30 for 1) were to be sold at $100 per share. In the event of an oversubscription, up to 1,800,000 non-voting shares were to be issued.
Plaintiffs allege that, despite the representations made in the prospectus upon which they relied, 1,200,000 voting shares were sold, diluting their interests. Plaintiff Alfadda claims that, despite his reliance upon the representations made to him when he purchased shares in the original offering, defendants never informed him of the second offering, thus depriving him of his preferential right to purchase new shares.
In addition, plaintiffs' RICO, breach of fiduciary duty, and common law fraud claims allege that the defendants diverted proceeds from the oversubscription of stock for their personal benefit and the benefit of certain favored SEIC shareholders, and that the defendants used United States mail, telephone and wire services to further their scheme and conceal their activities.
Plaintiffs allege conduct by the defendants claimed to be relevant to subject matter jurisdiction. Plaintiffs specifically assert the following: defendants hired Ronald Reilly, a United States citizen, and his company, Capital International, Inc., to help prepare and market the second offering, and he performed some of his functions in the United States; SEIC's general counsel, Mario Diaz-Cruz, Esq., assisted in the preparation of the offering in New York; shares were sold in the United States to Lincoln American Investments N.V. ("Lincoln"), a Netherlands Antilles subsidiary of American Continental Corporation ("ACC"), and to a foreign businessman, Abdulrahaman Al-Turki;2 defendants repeatedly used United States mail, wire and telephone services; stock certificates were printed in New York and sent abroad; moneys used to purchase the shares were deposited in United States banks; meetings between representatives of ACC and the defendants were held in Washington, D.C. and Florida to assuage ACC and Al-Turki after they discovered and objected to the dilution of their interests; and the defendants purchased, with funds diverted from the proceeds of the oversubscription, one United States company and stock in another.
The availability of authority suggests that plaintiffs' securities law claims (Count II) be considered before their RICO claim (Count I). The Second Circuit has considered the application of the federal securities laws to transnational transactions in a line of detailed decisions: Schoenbaum v. Firstbrook, 405 F.2d 200, modified on other grounds (en banc), 405 F.2d 215 (1968), cert. denied, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969); Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326 (1972); Bersch v. Drexel Firestone, Inc., 519 F.2d 974, cert. denied, 423 U.S. 1018, 96 S.Ct. 453, 46 L.Ed.2d 389 (1975); IIT v. Vencap, Ltd., 519 F.2d 1001 (1975); Fidenas AG v. Compagnie Internationale, 606 F.2d 5 (1979); IIT v. Cornfeld, 619 F.2d 909 (1980); Psimenos v. E.F. Hutton & Co., 722 F.2d 1041 (1983); AVC Nederland B.V. v. Atrium Inv. Partnership, 740 F.2d 148 (1984); and Consolidated Goldfields PLC v. Minorco, 871 F.2d 252, cert. dismissed, ___ U.S. ___, 110 S.Ct. 29, 106 L.Ed.2d 639 (1989).3 In these cases, the Second Circuit developed two tests for determining when federal securities laws apply extraterritorially: the "conduct test," which looks to whether substantial conduct directly causing injuries to foreign plaintiffs takes place in this country; and the "effects test," which looks to whether conduct outside the country results in substantial and specific deleterious effects here. The conduct and effects tests are used to determine presumed Congressional intent as to extraterritorial application. In cases in which the securities laws are found not to have been intended to apply extraterritorially, subject matter jurisdiction does not exist.4
The Second Circuit considered both tests in Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2d Cir.1975), supra. There, purchasers of common stock in a Canadian corporation brought suit as a class for violations of the securities laws and for common law fraud. Plaintiffs alleged that they relied on misleading prospectuses. The class included some Americans, but consisted predominantly of foreign nationals. The court held that where the conduct in the United States is merely preparatory, takes the form of culpable non-feasance, or is relatively inextensive in comparison to the extent of conduct abroad, there is no subject matter jurisdiction over a suit brought by foreign plaintiffs. 519 F.2d at 987.
While the Bersch court dismissed the claims of the foreign plaintiffs because of the insufficiency of the relevant conduct within the United States, it sustained subject matter jurisdiction over the claims of American plaintiffs under the effects test. The court explained that, regardless of whether or not acts of material importance occurred in the United States, the exercise of jurisdiction was warranted as to those plaintiffs because of the detrimental effects in the United States felt by United States citizens. Id. at 991.
Under the Bersch analysis, plaintiffs' claims for securities fraud must be dismissed. In Bersch, the court characterized the following as merely preparatory:
... representatives of IOS, the major underwriters in the Drexel Group, their attorneys and accountants met in New York on numerous occasions to initiate, organize and structure the offering; that a New York law firm was retained to represent the underwriters and had numerous meetings with IOS; that Drexel officials and counsel met with the SEC; that the underwriters retained Price Waterhouse & Co. in New York as accountants to assist in reviewing the operations of IOS and received reports from that firm there; that on one occasion Andersen representatives met in New York with the underwriters to explain why Andersen could not perform a full audit for the period January 1-June 30, 1969, within the time allotted and to discuss the amount of work that Andersen might be able to complete during that period; that preliminary discussions on underwriting discounts and commissions possibly took place in New York in July and August, 1969; that parts of the prospectus were drafted in New York and...
To continue reading
Request your trial
-
Liberty Cable Co., Inc. v. City of New York, 94 Civ. 8886 (LAP).
...concerning the existence of jurisdiction"), cert. denied, 489 U.S. 1052, 109 S.Ct. 1312, 103 L.Ed.2d 581 (1989); Alfadda v. Fenn, 751 F.Supp. 1114, 1118 (S.D.N.Y.1990) (stating that a court may resolve factual disputes when a party moves to dismiss for lack of subject matter jurisdiction), ......