Bertozzi v. King Louie Intern., Inc., Civ. A. No. 76-0158.

• Court: U.S. District Court — District of Rhode Island
• Writing for the Court: Max Wistow, Providence, R. I., Marvin Rich, Kansas City, Mo., for defendants
• Citation: 420 F. Supp. 1166
• Decision Date: 13 September 1976
• Docket Number: Civ. A. No. 76-0158.
• Parties: Albert N. BERTOZZI et al. v. KING LOUIE INTERNATIONAL, INC., et al.

420 F. Supp. 1166

Albert N. BERTOZZI et al.
v.
KING LOUIE INTERNATIONAL, INC., et al.

Civ. A. No. 76-0158.

United States District Court, D. Rhode Island.

September 13, 1976.

420 F. Supp. 1167

COPYRIGHT MATERIAL OMITTED

420 F. Supp. 1168

Paul F. Greene, Edward J. Bertozzi, Jr., of Edwards & Angell, Providence, R. I., for plaintiffs

Max Wistow, Providence, R. I., Marvin Rich, Kansas City, Mo., for defendants.

OPINION

PETTINE, Chief Judge.

Plaintiffs have filed this class action on behalf of themselves and certain other stockholders of King Louie International, Inc., one of the defendants herein. The other individual defendants allegedly constitute

420 F. Supp. 1169

the management of King Louie and have, through their working control of the corporation, caused it to issue a tender offer to plaintiffs' designated class to purchase 139,246 shares of common stock with corporate funds. According to the amended complaint, the "defendants have caused copies of the Tender Offer herein to be sent to plaintiffs in this district". Plaintiffs further contend that the tender offer, and its distribution to plaintiffs in Rhode Island, is an integral part of a scheme perpetrated by and on behalf of the individual defendants, inter alia, to perpetuate their control of King Louie and cause it to "go private" to the detriment of public shareholders

Relying on these facts, other asserted material omissions from the tender offer, and two recent decisions of the Second Circuit Court of Appeals, plaintiffs claim that the defendants have devised a plan which violates § 10(b), of the Securities Exchange Act of 1934 (the Act), 15 U.S.C. § 78j(b), Rule 10b-5 of the Securities and Exchange Commission (SEC), 17 C.F.R. § 240.10b-5, promulgated thereunder, and § 14(e) of the Act, 15 U.S.C. § 78n(e). See Green v. Santa Fe Industries, Inc., 533 F.2d 1309 (2d Cir. 1976); Marshel v. AFW Fabric Corp., 533 F.2d 1277 (2d Cir. 1976). In its ruling on plaintiffs' motion for a temporary restraining order, the Court examined the cited decisions and adopted their reasoning to find that the allegations of the verified complaint stated a violation of §§ 10(b) and 14(e) of the Act, as well as Rule 10b-5. A temporary restraining order was issued against King Louie to halt further action related to the tender offer. That order has been extended by consent of the parties. Since that ruling an amended complaint has been filed, as well as several motions, to which we now turn.

I. Jurisdiction and Venue

A. Federal Securities Law Claims

In Counts I (§ 14(e) of the Act) and II (§ 10(b) of the Act and Rule 10b-5) of their amended complaint, plaintiffs assert violations of provisions of the Securities Exchange Act of 1934. Jurisdiction and venue are asserted under § 27 of the Act. 15 U.S.C. § 78aa, which provides:

"§ 78aa. Jurisdiction of offenses and suits

The district courts of the United States, and the United States courts of any Territory or other place subject to the jurisdiction of the United States shall have exclusive jurisdiction of violations of this chapter of the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder. Any criminal proceeding may be brought in the district wherein any act or transaction constituting the violation occurred. Any suit or action to enforce any liability or duty created by this chapter or rules and regulations thereunder, or to enjoin any violation of such chapter or rules and regulations, may be brought in any such district or in the district wherein the defendant is found or is an inhabitant or transacts business, and process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found. Judgments and decrees so rendered shall be subject to review as provided in sections 225 and 347 of Title 28. No costs shall be assessed for or against the Commission in any proceeding under this chapter brought by or against it in the Supreme Court or such other courts."

Plaintiffs claim that venue is properly premised in the District of Rhode Island upon two grounds recognized in § 27: 1) that this is "the district wherein any act or transaction constituting the violation occurred"; and 2) that this is "the district wherein the defendant . . . transacts business." If either ground for venue is met, it is clear that the defendants are properly before the Court, since § 27 permits service of process "in any other district of which the defendant is an inhabitant or wherever the defendant may be found".

In support of the first ground, plaintiffs point to the allegation that the defendants caused copies of the tender offer to be sent,

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presumably by interstate mail, to plaintiffs, almost all of whom reside in Rhode Island. Both plaintiffs and defendants agree upon the standard to be applied to test the adequacy of this action to support venue and cite many of the same cases

"In considering the extent and nature of the contact with a jurisdiction necessary to establish venue under section 27, this Court concluded in Puma v. Marriott, 294 F.Supp. 1116, 1120 (D.Del.1969) that section 27 `does not require that the violative act or acts form the core of the claim. All that is required is but one act within the forum district which represents more than an immaterial part of the allegedly illegal events.' In Dauphin Corp. v. Redwall Corp., 201 F.Supp. 466, 469-470 (D.Del.1962) this Court ruled that acts committed in the jurisdiction which were `integral parts of' or of `material importance to' the commission of the violation of the '34 Act were sufficient to establish venue in this jurisdiction." Jacobs v. Tenney, 316 F.Supp. 151, 158 (D.Del. 1970).

Defendants acknowledge that as a general rule the use of interstate mail to distribute a proxy solicitation or, as here, a tender offer can constitute adequate ground for venue under § 27. Authority for this proposition was analyzed in Sarratt v. Walker, 405 F.Supp. 132, 134 (D.S.C.1975):

"The Fifth Circuit concluded in 1961 that `any use of instrumentalities of the mails or other interstate facilities made within the forum district constituting an important step in the execution of the fraudulent, deceitful scheme or in its consummation is sufficient' for venue to lie in that district. Hooper v. Mountain States Securities Corp., 282 F.2d 195, 204-05 (5th Cir. 1960), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1961); cf. Mariash v. Morrill, 496 F.2d 1138 (2nd Cir. 1974). Other district courts considering this question have also reached the same conclusion and held that venue is proper in a district although the defendant committed only a single act there and was never in fact physically present. See, e. g., Oxford First Corp. v. PNC Liquidating Corp., 372 F.Supp. 191 (E.D.Pa.1974); Prettner v. Aston, 339 F.Supp. 273 (D.Del.1972); Stern v. Gobeloff, 332 F.Supp. 909 (D.C.Md.1971); Livingston v. Weis, 294 F.Supp. 676 (D.C.N.J.1968); Schneider v. Sears, 265 F.Supp. 257 (D.C. N.Y.1967)."

See also Travis v. Anthes Imperial, Ltd., 473 F.2d 515 (8th Cir. 1973). Cf. Goldberg v. Touche Ross & Co., 390 F.Supp. 290 (S.D. N.Y.1975).

Despite the broad language of the cited decisions and the wide accessibility that § 27 is designed to provide, cf. Kane v. Central American Mining & Oil, Inc., 235 F.Supp. 559, 565 (S.D.N.Y.1964), defendants urge the Court to consider the distribution of the tender offer to plaintiffs in Rhode Island immaterial because only a small number of the shareholders live here. In support of this position, defendants cite dicta in Puma v. Marriott, 294 F.Supp. 1116, 1120 (D.Del.1969); and Blanning v. Tisch, 378 F.Supp. 1058, 1063 (E.D.Pa.1974).

With all due respect, the Court is not convinced that an act which "constitutes an important step in the execution of the fraudulent, deceitful scheme or in its consummation", Hooper v. Mountain States Securities Corp., 282 F.2d 195, 204-205 (5th Cir. 1960), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693, loses its materiality because its multistate consequences are diffuse and not concentrated in the forum state. Plaintiffs' federal claims are based upon an allegedly fraudulent and manipulative tender offer: without the mailing of that tender offer to the public shareholders of King Louie, the scheme could never be realized. Thus, the use of interstate mails to distribute the tender offer in Rhode Island must be considered an integral and material part of the allegedly fraudulent scheme. In addition, according to the July 8, 1976, affidavit of Paul F. Greene, plaintiffs owned 12.1%, not 2.5% as asserted by defendants, of the publicly held shares of King Louie stock at the time the tender offer was commenced. As a result, the Court concludes that defendants' reliance on dicta in Puma, supra, and Blanning, supra,

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is factually as well as legally misplaced

Defendants do not take issue with the applicability of the "co-conspirator" theory of venue to make all the defendants amenable to suit in the forum if venue is proper under § 27 as to any one of them. Plaintiffs have alleged that the individual defendants herein joined together with King Louie in the assertedly fraudulent tender offer. The Court has ruled that King Louie's distribution of the tender offer by interstate mail to plaintiffs in Rhode Island satisfies the venue provisions of § 27. It is further alleged that, as directors of King Louie, the individual defendants directly caused the tender offer to be mailed into the state. This need not be established, however, in order to hold the individual defendants amenable to suit in the forum under § 27, since the "co-conspirator" theory of venue is clearly applicable:

"It is well recognized that in multi-defendant and multi-forum securities fraud actions any act committed

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