Armstrong v. McAlpin
| Decision Date | 24 January 1983 |
| Docket Number | Nos. 605,898,D,s. 605 |
| Citation | 699 F.2d 79 |
| Court | U.S. Court of Appeals — Second Circuit |
| Parties | Fed. Sec. L. Rep. P 99,073 Michael F. ARMSTRONG, as Receiver of Capital Growth Company, S.A. (Costa Rica) and Capital Growth Company, S.A. (Panama), Robert Moore, suing on his own behalf and derivatively on behalf of Capital Growth Fund, and Francesco Galofaro, suing on his own behalf and derivatively on behalf of Capital Growth Real Estate Fund, Inc., Plaintiffs-Appellants-Cross-Appellees, v. Clovis McALPIN, Capital Growth Real Estate Fund, Inc., Defendants-Appellees-Cross-Appellants, New Providence Securities, Ltd., S.A., New Providence Securities, Ltd., Arawak Trust Company, Ltd., Brown Brothers Harriman & Co., Goldman, Sachs & Co., EHG Enterprises Inc., Sheffield Advisory Company, Sheffield Advisory Company, S.A., Fiduciary Trust Company, Bradford Trust Company, Sion Plaza, S.A., Sanford C. Shultes, Ariel E. Gutierrez, Enrique Gutierrez, Joseph D. Schwerin, Koitcho Beltchev, Capital Growth Management Company, Ltd., Hayden Stone & Co., Alberto Alvarez, Antonio Pena Chavarria, Hacienda Cafetalera Santa Elena, Ltd., Jose Figueres Ferrer, Moore & Schley, Cameron & Co., William Hutchinson & Co., R.H. Pringle, P.J. Rafferty, Sociedad Agricola Industrial San Cristobal, S.A., and Capital Growth Fund, Defendants-Appellees. ockets 81-7634, 81-7654. |
Kent T. Stauffer, New York City (Gordon, Hurwitz, Butowsky, Baker, Weitzen & Shalov and Mathew E. Hoffman, New York City, on brief), for plaintiffs-appellants-cross-appellees Armstrong, Moore and Galofaro.
J. Robert Lunney, New York City (Lunney & Crocco, Michael J. McAllister and James J. DeLuca, New York City on brief), for defendants-appellees-cross-appellants Clovis McAlpin and Capital Growth Real Estate Fund, Inc.
Matthew Gluck, New York City (Fried, Frank, Harris, Shriver & Jacobson, New York City, on brief), for defendants-appellees Arawak Trust Co., Ltd., R.H. Pringle, P.J. Rafferty.
William E. Wurtz, New York City (Davis, Polk & Wardwell, James W.B. Benkard and Paul W. Bartel, New York City, on brief), for defendant-appellee Brown Brothers Harriman & Co.
James E. Tyrell, New York City (Sullivan & Cromwell and Marvin Schwartz, New York City, on brief), for defendants-appellees Goldman, Sachs & Co.
Mary L.B. Betts, New York City (LeBoeuf, Lamb, Leiby & MacRae and Taylor R. Briggs, New York City, on brief), for defendant-appellee Bradford Trust Co.
Edward C. McLean, Jr., New York City (Chadbourne, Parke, Whiteside & Wolff and Edwin D. Scott, New York City, on brief), for defendant-appellee HS Equities, Inc.
James J. Maloney, New York City (Rogers & Wells and Barbara J. Green, New York City, on brief), for defendant-appellee Moore & Schley, Cameron & Co.
James J. Terry, New York City (Cole & Deitz and Robert E. Kushner, New York City, on brief), for defendant-appellee William Hutchinson & Co.
Before WATERMAN and VAN GRAAFEILAND, Circuit Judges, and POLLACK, District Judge. *
Plaintiffs-appellants appeal from a judgment of the United States District Court for the Southern District of New York (Werker, J.) dismissing their securities fraud complaint on motion of the defendants. Cross-appellants appeal from the order of Judge Werker denying their motion to disqualify plaintiffs' attorneys. We affirm the judgment in part and reverse and remand it in part. Because we are reversing the judgment in favor of cross-appellant McAlpin and remanding for further proceedings as to him, we dismiss the cross-appeal from the disqualification order on the ground that the order no longer is final in character.
In 1962, a Texas resident named Clovis W. McAlpin moved to Nassau, Bahamas, where he organized New Providence Securities, Ltd. and became active in the field of investment management. McAlpin retained ownership of approximately sixty percent of New Providence's stock and became its chief executive officer.
On July 24, 1962, New Providence and Chase Manhattan Trust Corporation, Ltd., another Bahamian company, entered into a trust agreement pursuant to which Chase became the trustee of an investment trust to be known as First Bahamas Investment Trust. Under the terms of the trust agreement, the purchases and sales of trust assets were to be the sole prerogatives of New Providence, the trustee's obligations in substance being the administration and custodianship of the trust property. The trustee was authorized to take such action as it believed in good faith was for the benefit of the trust property, and, in any litigation regarding the trust property in which the trustee was a party, it would be deemed to represent the shareholders of the trust. The certificates to be issued to shareholders were to contain provisions that the shareholders would be bound by the provisions of the trust agreement.
First Bahamas was an open-end mutual fund, whose projected rate of growth was based in large measure upon the leverage authorization given it to borrow amounts equal to seventy percent of the gross value of the trust property. However, First Bahamas was limited in its investments to the shares of SEC-approved open-end mutual funds or trusts and United States Treasury Bills.
On September 10, 1963, appellee Arawak Trust Company, Ltd. succeeded Chase Manhattan as trustee. Arawak had been organized by Kleinwort, Benson, Ltd., a leading London merchant banking house, and appellees Goldman, Sachs & Co. and Brown Brothers Harriman & Co. became shareholders of Arawak at Kleinwort, Benson's request, each of them owning approximately a ten percent interest in the company. Although Kleinwort, Benson and the Canadian Imperial Bank of Commerce each owned approximately a twenty percent interest in Arawak, neither was named as a defendant herein. In 1965, the name of First Bahamas Investment Trust was changed to Capital Growth Fund.
The trust agreement provided that it could be amended for any reason, provided the interests of the shareholders were not adversely affected thereby. If an amendment was made, the trustee was required to give each shareholder twenty days written notice setting forth the details of the amendment and the reasons therefor. On August 8, 1967, Arawak and New Providence sent letters to shareholders notifying them of proposed changes in the trust deed. Arawak's letter contained the precise language of the change, which was in substance that trust property would thereafter be invested in open-end investment companies or trusts, "the Investment Advisor of which" was registered with the SEC. New Providence's letter informed shareholders:
Instead of investing in U.S. mutual funds, we will invest in our own--five or more--open end investment trusts supervised by some of the best Investment Advisors in the United States. These Investment Advisors are all registered with the Securities and Exchange Commission in the United States.
Since the subsidiary trusts, unlike the parent trust, were not restricted in their choice of investments, the change proved to be an unhappy one for the shareholders. Extensive purchases and sales of common stock led to a substantial increase in handling and brokerage fees. Moreover, several of the subsidiary trusts' major investments were, at best, questionable in character.
In 1970, McAlpin formed the Capital Growth Real Estate Fund, a Panamanian investment company; and Capital Growth Management, a subsidiary of New Providence, became the Real Estate Fund's investment manager. The Real Estate Fund received $10,000,000 in assets from Capital Growth Fund in exchange for stock. Shortly after its formation, the Real Estate Fund also engaged in a series of questionable financial transactions.
On October 16, 1970, Arawak notified McAlpin that it wanted to resign as trustee, and asked that a new trustee be appointed. When McAlpin failed to comply with Arawak's request, Arawak petitioned the Bahamas Supreme Court to make the appointment. Although the record is somewhat obscure on this point, it appears that on April 7, 1971, the Court appointed Banco Anglo Costarricence of San Jose, Costa Rica, as trustee in place of Arawak, and, on May 4, 1971, Banco Anglo Costarricence was succeeded by appellee Sion Plaza, S.A., a Costa Rican corporation.
McAlpin then formed appellee Capital Growth Fund, S.A. under the laws of Costa Rica and merged the old Capital Growth Fund into the new one. To prevent shareholders from redeeming their shares, as they could under the existing open-end trust provisions, McAlpin, in July, 1971, took advantage of liberal Costa Rican laws to convert unilaterally the Costa Rican Fund from open-end to close-end. In August, 1971, the Fund's name was changed to Capital Growth Company, S.A., and the Real Estate Fund was merged into it. McAlpin then formed New Providence Securities, Ltd. (Panama), and the new firm became the investment manager for Capital Growth Company, S.A. In a complicated series of transactions, New Providence Securities, Ltd. became the owner of Capital Growth Company's common stock, and the fundholders' shares were converted to preferred stock.
In 1973, the Securities and Exchange Commission launched an investigation into McAlpin's activities, which culminated in an enforcement action brought in the United States District Court for the Southern District of New York on September 3, 1974. See SEC v. Capital Growth Company, S.A. (Costa Rica), et al., 391 F.Supp. 593 (S.D.N.Y.1974). On September 24, 1974, the court appointed Michael F. Armstrong receiver for the Capital Growth Companies. Id. at 596. On September 17, 1976, Armstrong filed the instant action. Joining him as plaintiffs were Robert Moore, a shareholder of the original Capital Growth Fund, and Francesco Galofaro, the owner of a Capital Growth Real Estate Fund debenture, each of them suing derivatively on behalf of his Fund.
At a pretrial conference held on February 4, 1977, discussions...
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