Grunenthal GmbH v. Hotz, s. 81-5553

• Decision Date: 04 August 1983
• Docket Number: 81-5554,Nos. 81-5553,s. 81-5553
• Citation: 712 F.2d 421
• Parties: Fed. Sec. L. Rep. P 99,443 GRUNENTHAL GmbH, a corporation of the Federal Republic of Germany, Plaintiff-Appellant, v. Paul HOTZ, Bozena Hotz, Balfour Zepler, Joseph Lowe, Richter Corporation, Ltd., a Bahamian corporation, Cadence Corporation, Ltd., a Bahamian corporation, Productos Gedeon Richter (America) S.A., a Mexico corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 421

712 F.2d 421

Fed. Sec. L. Rep. P 99,443

GRUNENTHAL GmbH, a corporation of the Federal Republic of Germany, Plaintiff-Appellant, v. Paul HOTZ, Bozena Hotz, Balfour Zepler, Joseph Lowe, Richter Corporation, Ltd., a Bahamian corporation, Cadence Corporation, Ltd., a Bahamian corporation, Productos Gedeon Richter (America) S.A., a Mexico corporation, Defendants-Appellees.

Nos. 81-5553, 81-5554.

United States Court of Appeals Ninth Circuit.

Argued and Submitted May 4, 1982.

Decided Aug. 4, 1983.

Thomas G. Wood, Robert Lofts, Severson, Werson, Berke & Melchoir, San Francisco, Cal., for plaintiff-appellant.

Robert Mallory, Lawler, Felix & Hall, Gary L. Justice, Rex S. Heinke, Gibson, Dunn & Crutcher, Los Angeles, Cal., for defendants-appellees.

Appeal from the United States District Court for the Central District of California.

Before FLETCHER, PREGERSON and REINHARDT, Circuit Judges.

REINHARDT, Circuit Judge:

The question presented on this appeal is whether the district court has subject matter jurisdiction under the federal securities laws over a transaction in foreign securities between foreign corporations and citizens of foreign states where the only connection between the transaction and the United States is that some of the allegedly fraudulent conduct took place here and that instrumentalities of interstate commerce were used to effect the fraud. The district court held that it lacked jurisdiction. In its view, the securities laws do not apply to transactions that have "no effect on any American investors or securities market" and where "the only nexus with the United States is conduct in this country based on convenience and the only local act of fraud alleged is a mere repetition of misrepresentations first spoken abroad." Grunenthal GmbH v. Hotz, 511 F.Supp. 582, 588 (C.D.Cal.1981). We disagree with the district court's conclusion and find that the facts of this case are sufficient to establish subject matter jurisdiction. ¹

I. BACKGROUND

Plaintiff alleges that defendants violated sections 12(2) and 17(a) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. §§ 77l and 77q(a), and section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b), by making certain misrepresentations in connection with an agreement to sell all of the common stock of defendant Productos Gedeon Richter (American) S.A., ("Productos") to plaintiff Grunenthal GmbH ("Grunenthal").

All of the defendants and the plaintiff in this case are either foreign citizens or foreign corporations. Plaintiff Grunenthal is a West German corporation. Defendant Productos is a Mexican corporation controlled through a chain of Bahamian holding companies by a trust based in the Bahamas. The beneficiary of that trust, defendant Paul Hotz, is a citizen of Switzerland and a resident--during at least some of the year ²--of Italy. Defendant Joseph Lowe, the managing director of Productos, is a citizen and resident of Mexico.

For purposes of this appeal, we assume the facts to be as follows: ³

The Productos transaction was negotiated over the course of four meetings. The first three meetings were held outside the United States and the fourth meeting, at which the agreement was signed, was held in Los Angeles, California.

The first meeting took place in Germany in 1979. Lowe approached representatives of Grunenthal and told them that Hotz controlled Productos and was interested in selling the company. At a second meeting held in the Bahamas in January 1980, Grunenthal's general counsel, Alex F. Bernau, met with representatives of the Bahamian Trust to discuss the mechanics of the proposed transaction. Lowe, Bernau and other representatives of Grunenthal engaged in further negotiations at a third meeting in Mexico.

The fourth and final meeting took place in Los Angeles, California, at the law offices of Grunenthal's American counsel. This meeting was called for the purpose of executing an agreement. All of the principals were present--Lowe, Bernau, other representatives of Grunenthal, and, for the first time, Hotz and Grunenthal's United States counsel. During this meeting Lowe stated that Hotz controlled Productos. Hotz neither qualified nor denied Lowe's statement. At the meeting's conclusion, Hotz and the representatives of Grunenthal signed the agreement.

The closing of the transaction was to take place in the Bahamas. However, the Bahamian trustees refused to approve the sale. Plaintiff then brought this action, asserting two claims for relief. First, plaintiff alleges that Hotz falsely represented that he was the beneficial owner of Productos and that he would cause all of its shares to be transferred to Grunenthal pursuant to the agreement signed in Los Angeles. Second, plaintiff alleges that at the meeting in Los Angeles, Hotz and Lowe falsely represented that they had the present intention to perform the agreement.

Defendants moved to dismiss the complaint for lack of subject matter jurisdiction. The district court noted that there was no controlling precedent in this circuit and reviewed the cases that had arisen in the Second Circuit. ⁴ See 511 F.Supp. at 585-87. The court felt that the Second Circuit's approach to subject matter jurisdiction was "in keeping with expressions of the Ninth Circuit" in closely analogous cases. Id. at 588. The court concluded that subject matter jurisdiction did not exist under the Second Circuit's approach. The district court reasoned:

Plaintiff and all defendants are foreign nationals or corporations. The securities which are the subject matter of this transaction are foreign and are privately-held and not traded on any exchange. The course of conduct which culminated in execution of the agreement in Los Angeles involved conduct in three countries, other than the United States, and the importance of the conduct in each of those countries was at least equal to the conduct in this country. The only factual misrepresentation alleged to have been made in the United States was a repetition of representations first made abroad. Thus, it appears that the fact that the transaction was concluded here and, therefore, that the misrepresentation was repeated here, was only for convenience, i.e., that defendant Hotz happened to be here on a temporary visa.

We hold, on these facts, that no subject matter jurisdiction exists; that neither the Securities Act of 1933 nor the Securities Exchange Act of 1934 applies to a transaction in foreign securities between foreign nationals and corporations which has no effect on any American investors or securities market and in which the only nexus with the United States is conduct in this country based on convenience and the only local act of fraud alleged is a mere repetition of misrepresentations first spoken abroad and, thus, not essential to the consummation of the fraud.

Id. (footnote omitted).

II. DISCUSSION

Each of the three federal statutory provisions under which plaintiff has asserted a claim for damages against defendants extends its proscriptions to certain forms of fraudulent activity conducted by the use of "any means or instrumentality of transportation or communication" in commerce between the states or between any foreign country and a state. ⁵ There must also be some degree of connection between the fraud and conduct in, or effects on, the United States. Our circuit has spoken infrequently on the topic of subject matter jurisdiction over transnational securities transactions. While we exercised jurisdiction in both of the Ninth Circuit cases involving the extraterritorial application of the securities laws because the transactions produced "effects" within the United States, Des Brisay v. Goldfield Corp., 549 F.2d 133 (9th Cir.1977); Securities and Exchange Commission v. United Financial Group, Inc., 474 F.2d 354 (9th Cir.1973), we have never held that the absence of such effects precludes the exercise of jurisdiction or that conduct alone is not enough. Indeed, consistent with the established objectives of the federal securities laws, we have recognized that "the jurisdictional hook need not be large to fish for securities law violations." United Financial Group, Inc., 474 F.2d at 357 (quoting Lawrence v. SEC, 398 F.2d 276, 278 (1st Cir.1968)). In our view, the test for subject matter jurisdiction formulated by the Eighth Circuit in Continental Grain (Australia) Pty. Ltd. v. Pacific Oilseeds, Inc., 592 F.2d 409 (8th Cir.1979), best satisfies those objectives.

In Continental Grain, plaintiff, an Australian corporation, purchased all of the stock of another Australian corporation from defendants. Defendants were an Australian corporation, a California corporation and a California resident. Plaintiff alleged that defendants defrauded it by failing to disclose certain facts about the principal assets of the acquired corporation. The transaction produced no effect in the United States. The conduct that occurred in this country consisted largely of the use of instrumentalities of interstate commerce to transmit communications that furthered the alleged fraud. After reviewing relevant case law from the Second, Third and Eighth Circuits, the court formulated a test for subject matter jurisdiction that considered

whether defendant's conduct [that involved the use of instrumentalities of interstate commerce] in the United States was significant with respect to the alleged violation ... and whether it furthered the fraudulent scheme .... The conduct in the United States cannot be merely preparatory ... and must be material, that is, directly cause the losses.

Continental Grain, 592 F.2d at 420 (citations omitted). Applying this test to the facts before it, the Eighth Circuit held that the defendants' conduct supported subject matter jurisdiction. The Third Circuit has adopted a similar view. See SEC v. Kasser, 548 F.2d 109, 114 (3d Cir.) ("The federal securities laws, in our view, do grant jurisdiction in transnational...