Bersch v. Drexel Firestone, Inc.

• Decision Date: 27 November 1974
• Docket Number: No. 71 Civ. 5373.,71 Civ. 5373.
• Citation: 389 F. Supp. 446
• Parties: Howard BERSCH, Plaintiff, v. DREXEL FIRESTONE, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

389 F. Supp. 446

Howard BERSCH, Plaintiff, v. DREXEL FIRESTONE, INC., et al., Defendants.

No. 71 Civ. 5373.

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

November 27, 1974.

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Silverman & Harnes, New York City, for plaintiff.

Sullivan & Cromwell, New York City, for defendants Drexel Firestone, Inc., Drexel Harriman Ripley, Pierson, Heldring & Pierson, Hill Samuel & Co., Ltd., Guinness Mahon & Co., Ltd.

Breed, Abbott & Morgan, New York City, for defendant Arthur Andersen & Co.

Davis, Polk & Wardwell, New York City, for defendant Smith Barney & Co., Inc., Banque Rothschild.

Willkie, Farr & Gallagher, New York City, for defendant J. H. Crang & Co.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendant Investors Overseas Bank Limited.

Gold, Farrell & Marks, New York City, for defendant Bernard Cornfeld.

Wachtell, Lipton, Rosen & Katz, New York City, for defendant I.O.S., Ltd.

OPINION

ROBERT L. CARTER, District Judge.

Posture of the Litigation

The instant action involves yet another chapter in the fitful recent history of I.O.S., Ltd., the once high-flying mutual fund management corporation. Plaintiff sues on behalf of all who purchased I.O.S. stock from participating underwriters in a September, 1969, tripartite offering, and alleges, in substance, that the prospectuses pursuant to which the offering was made were false and misleading in that they failed to reveal material facts concerning I.O.S.'s finances, illegal activities, chaotic bookkeeping and mismanagement, and the actual looting and plundering of I.O.S.'s treasury, all in violation of Sections 12, 15, and 17 of the Securities Act of 1933 (15 U.S.C. §§ 77l, 77o, and 77q); Sections 10(b), 15(c)(1), and 20 of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78j(b), 78o, and 78t), and SEC Rules 10b-5 and 15cl-2 (17 C.F.R. 240.10b-5, 240.15cl-2).

I.O.S. has been named a defendant, as has Bernard Cornfeld, who during the years with which this litigation is concerned was I.O.S.'s chief executive officer, board chairman, and largest shareholder. Other defendants include the eight principal underwriters and the international accounting firm which certified the financial statements that appeared in the prospectus.¹

In a memorandum opinion dated June 28, 1972, the court (Frankel, J.) ruled tentatively that this action might be maintained as a class action. In so doing, Judge Frankel expressly reserved for later determination by the Judge to whom the case was to be assigned for all purposes under the then-incipient individual assignment system, three issues: subject matter and personal jurisdiction; whether foreign purchasers should be included in the plaintiff class; whether and how the court's ultimate judgment may be made binding upon foreign class members. On December 27, 1972, the Drexel Group entered into a consent order (Ryan, J.) with the plaintiff, in which it was agreed that plaintiff would initially limit discovery to the issues left open by Judge Frankel, at the completion of which defendants would make jurisdictional and class determination motions within sixty days.

On April 2, 1973, Judge Ryan ordered that plaintiff's discovery be completed by September 1, 1973. On October 31 and November 1, 1973, defendants other than I.O.S. and Cornfeld filed motions designed to challenge the court's jurisdiction. On December 3, 1973, with the consent of the parties, Judge Ryan adjourned the motions to on or after April 15, 1974. Further adjournments followed.

During the same general period, defendants I.O.S. and Cornfeld were drawn into the fray. On December 7, 1972, a certificate of mailing was filed, indicating that a summons and complaint had been mailed to I.O.S. at an address in London, England. On May 21, 1973, a marshal's return was filed, indicating that Bernard Cornfeld had been served on May 15, 1973, at an address in California. Neither I.O.S. nor Cornfeld appeared, and on September 20, 1973, a default judgment was signed by Judge Ryan and entered against them. On December 5, 1973, defendant Cornfeld moved by order to show cause to vacate the default, and on December 26, 1973, Judge Ryan signed a consent order vacating the default and default judgment, and directing I.O.S. and Cornfeld to serve whatever jurisdictional motions they felt appropriate within forty days, said motions to be returnable at the same time as the aforementioned motions of the other defendants.

On February 1, 1974, a certificate of mailing was filed, indicating that a summons and complaint had been sent to I. O.S. offices in New Brunswick, Canada and Geneva, Switzerland, and to Cornfeld c/o St. Antoine Prison in Geneva, where he was then incarcerated. On February 21, Cornfeld filed a motion to dismiss the complaint and to amend Judge Frankel's class action determination, and on April 18, I.O.S. moved to dismiss the proceedings or, failing that, to stay them.

In mid-June, 1974, my chambers was informed that plaintiff and the Drexel Group were near agreement on a settlement, and that papers embodying the proposed settlement would be placed before the court by the end of June, at which time a conference would be requested. On June 28, 1974, a conference was indeed held. After a spirited exchange between the plaintiff and the "settling defendants" on the one hand and the "non-settling defendants" on the other, a second conference was set for July 15, at which time the relationship between the partial settlement and the pending motions was to be discussed. On the 15th, the parties were apprised of and apparently acquiesced in the court's proposal that it first determine whether subject matter jurisdiction was present, advise the parties orally of its decision so that a notice of settlement could be perfected and distributed, and thereafter the court would file a written opinion explaining its holding.

On July 29, the parties were notified by telephone that the court had concluded that it had subject matter jurisdiction and were given until July 31 to submit technical and procedural modifications to the proposed notice of settlement, and until August 2 to register responses to the suggested changes. On July 30, counsel for Crang requested another conference with the court and the parties. On July 31, that requested conference was held. The non-settling defendants urged the court to certify to the Court of Appeals, pursuant to 28 U. S.C. § 1292, the subject matter jurisdiction question. Further, they asked a stay of issuance of the notice of settlement until all appeals in respect of the jurisdictional questions had been exhausted. In addition, the non-settling defendants highlighted what they considered to be the most glaring defects in the proposed notice. I advised all present that inasmuch as similar facts and principles would be reviewed and applied in determining questions of subject matter and personal jurisdiction, I thought it appropriate to decide these issues together, and then assure appellate review of the package, either by directing the entry of a final judgment under Rule 54(b), Fed.R.Civ.P., or by certifying the jurisdictional questions to the Court of Appeals. I made it clear, however, that determination of the fairness of the settlement and approval or disapproval of same need not and ought not await the outcome of such appeals. I thereupon directed the parties to resolve among themselves as many of the suggested modifications to the proposed settlement as they could, and to submit for my determination the remainder. Moreover, approval of the settlement proposal was deliberately delayed to make certain that the time lag between that event and the filing of this opinion on the issues of subject matter and in personam jurisdiction would not be of long duration.

The Issues To Be Considered

Ripe for decision are defendants' motions to dismiss for lack of subject matter jurisdiction, for lack of personal jurisdiction, because of forum non conveniens, and (as to defendants I.O.S. and Cornfeld) because of defective service of process and because of plaintiff's failure to prosecute.

The Nature of the Offering

The 1969 I.O.S. public offering can be viewed as a single offering, two offerings, or three depending upon whether one focuses on the purposes of the offering and the interaction of its prime movers, upon the character of the offerings themselves, or upon the structure of the selling arrangement and the identity and locus of the purchasers. The Drexel Group served as chief underwriters for a primary offering of 5,600,000 new shares sold in Europe to Europeans. I.O.B., a wholly-owned subsidiary of I. O.S., managed a secondary offering in which 490 I.O.S. shareholders, most of them American, sold 3,950,000 shares to I.O.S. employees, long-time clients, and persons with long-standing business relationships with I.O.S., approximately 386 of whom were Americans. Crang managed a secondary offering of 1,450,000 shares, 150,000 of which it received from I.O.B. None of these shares were sold to Americans.

Based upon the evidence before me at the present time, I am convinced that the three offerings were sufficiently integrated and intertwined so as to appropriately be considered a unified transaction for purposes of subject matter jurisdiction considerations. Although the defendants appear to have gone to great pains to refer publicly to the offerings as separate and distinct — and in fact each offering had unique characteristics and some non-identical parties — nonetheless they were closely tied components of a functionally integrated process. Each of the offerings was of common shares of I.O.S. Deposition testimony of key figures involved in the offerings, a memorandum circulated among the various defendants, and the three final prospectuses all confirm that the Drexel Group, I.O.B., and Crang branches of the offering were commenced simultaneously and at the same price of $10 (U.S.)...