IIT v. Cornfeld
| Decision Date | 07 December 1978 |
| Docket Number | 75 Civ. 3514 (GLG). |
| Citation | 462 F. Supp. 209 |
| Parties | IIT, an International Investment Trust, and Georges Baden, Jacques Delvaux and Ernest Lecuit, as Liquidators for IIT, an International Investment Trust, Plaintiffs, v. Bernard CORNFELD, Carl Johan Bernadotte, Martin Brooke, C. Henry Buhl, III, Joop Melse, Erich Mende, Bert Notz, Pierre Rinfret, James Roosevelt, Melvin Rosen, Barry Sterling, Moritz von Hessen, Henry von Maur, Arthur Lipper Corporation, Arthur Lipper, III, Arthur Andersen & Co., James E. Bye, Stanley B. Hallman, James B. Kuhn, Lawrence Ocrant, E. Keene Wolcott, Adams & Peck, Bear, Stearns & Co., Burnham and Company, Emanuel Deetjen & Co., Irving Lundborg & Co., Burnham & Company, Incorporated, Drexel Burnham & Co., Inc. and Does 1 through 10, Defendants. |
| Court | U.S. District Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
Anderson, Russell, Kill & Olick, P. C., New York City, for plaintiffs by Eugene R. Anderson, Neal J. Morse, New York City, of counsel.
Breed, Abbott & Morgan, New York City by Edward J. Ross, James R. Peterson, New York City, of counsel, Wilson & McIlvaine, Chicago, Ill. by Charles W. Boand, Chicago, Ill., of counsel for defendant, Arthur Andersen & Co.
Winthrop, Stimson, Putnam & Roberts, New York City, for defendants, Bear, Stearns & Co., Adams & Peck, Burnham & Co., Burnham & Co., Inc., and Drexel Burnham & Co., Inc. by Stephen A. Weiner, Robert J. Sussman, Stanley D. Davis, New York City, of counsel.
DiFalco, Field & Lomenzo, New York City, for defendants, Arthur Lipper Corp. and Arthur Lipper, III by Howard S. Klotz, New York City, of counsel.
This securities case raises novel questions about derivative actions under section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 15 C.F.R. § 240.10b-5, and subject matter jurisdiction under the federal securities laws. The case presents the general issue whether, or to what extent, foreign shareholders in foreign corporations may assert, in a United States court, 10b-5 fraud claims in a derivative action against their own management and alleged American co-conspirators.
The plaintiff, IIT, was an "international investment trust" organized under the law of the Grand Duchy of Luxembourg. It is now in liquidation there. The individual plaintiffs are IIT's liquidators, appointed by a Luxembourg court. The action is not the first involving IIT in this circuit and is yet one more "product of the troubled existence of Investors Overseas Services ("IOS")." IIT v. Vencap, Ltd., 519 F.2d 1001, 1003 (2d Cir. 1975).
The complaint originally named sixty-eight individual and corporate defendants, all alleged to be members of one or more conspiracies to defraud IIT. Several defendants have moved to dismiss for lack of subject matter jurisdiction under Fed.R. Civ.P. 12(b)(1).1 Defendant Arthur Andersen & Co. has also moved to dismiss, under Fed.R.Civ.P. 17, on the ground that the plaintiffs lack capacity to prosecute this action. All the moving defendants also assert that the statute of limitations bars the plaintiffs' claims.
The complaint alleges that IIT was operated under Luxembourg law much like the open-ended mutual funds common in this country.2 Investors, virtually all of whom were foreigners residing in countries other than the United States, bought units of participation in the IIT "fund." The fund was managed by IIT Management Co., a corporation organized under Luxembourg law and not registered in this country under the Investors Advisors Act, 15 U.S.C. §§ 80b-1 to 80b-21. IIT Management was in turn controlled by its parent, IOS, Ltd., first a Panamanian and then a Canadian corporation, made somewhat infamous by Bernard Cornfeld and later by Robert Vesco.3
IIT Management, although incorporated in Luxembourg, was based primarily in Geneva, Switzerland.4 As a result of a 1967 consent order of the Securities and Exchange Commission ("SEC"), IOS agreed not to sell shares in IIT to Americans. It appears that currently there remain about 144,496 fundholders of IIT, who reside in 154 different countries. Apparently 218 of the fundholders now reside in the United States.5 In its heyday, during the late 1960's and early 1970's, IIT's assets totalled in the hundreds of millions of dollars, and IIT Management invested IIT funds in securities from all over the world, including substantial amounts in American securities.6
The complaint is a general attack on the relations between IIT and an American entrepreneur named John King. King allegedly controlled a group of American corporations operating principally from Denver, Colorado. This King group included King Resources, Inc., a publicly traded Maine corporation headquartered in Denver, the Colorado Corp., a private company incorporated under the law of Colorado, and various subsidiaries of both. In addition, King Resources also allegedly controlled a Netherlands Antilles subsidiary called King Resources Capital Corp. ("KRCC").
The complaint alleges generally a massive conspiracy among the "King complex," IOS and IIT Management to defraud the fundholders of IIT. The allegations, although flagrantly verbose,7 center on three series of acquisitions by IIT of King-related securities.
The first was a series of purchases of "eurodollar" convertible debentures issued by KRCC, the Netherlands Antilles subsidiary of King Resources. The debentures were issued in November, 1968, by KRCC, in a foreign offering outside of the United States, and they were guaranteed by King Resources, the American parent. Because they were issued by the foreign subsidiary of King Resources and offered only outside the United States, "no action" treatment was requested and received from the SEC, and the offering was not registered under the Securities Act of 1933 (the "1933 Act"). The eurodollar debenture offering, however, was made at the same time as a domestic offering of King Resources common stock which was registered under the 1933 Act. The complaint alleges that IIT bought approximately $8 million worth of the eurodollar debentures in the "aftermarket," i. e., not directly on the offering but during a six-month period following the offering. These purchases were made in Europe through European brokers.
Next, the complaint states that, during the same approximate time period, IIT was caused to invest in the common stock of King Resources, ultimately in an amount in excess of $14 million. King Resources common was traded on the over-the-counter market in the United States, and these purchases were executed in this country. Plaintiffs allege that IIT's losses on the eurodollar debentures and King Resources common stock eventually amounted to over $22 million.
The third challenged transaction is a $12 million loan from IIT to the Colorado Corp., a privately owned American corporation allegedly controlled by King. The complaint alleges that in July of 1969, the IIT Management defendants caused IIT to purchase a convertible note in that sum from the Colorado Corp., which was never intended to be, and was not in fact, repaid to IIT.
As alleged more substantially in one of the plaintiffs' memoranda, the quid pro quo for the IIT Management principals in these King-related acquisitions included personal kickbacks, special opportunities for tax avoidance schemes involving various King Resources properties, and the ability to overvalue some of the King assets in the IIT portfolio so as to increase the management fee paid by the fund to IIT Management. The complaint alleges that all of the principals in IIT Management were involved in these fraudulent transactions by which they effectively stole money from the fund. The directors of IIT Management Co. included both Americans and foreign citizens. Of the six IIT Management principals who allegedly had direct responsibility for IIT's investments, two are alleged to be citizens of foreign countries.
The roles of the non-IIT Management defendants were allegedly those of aiders and abettors and co-conspirators. In connection with both the purchases of the eurodollar debentures and of King Resources common, the complaint alleges that virtually all the major documents involved were false and misleading. Plaintiffs focus especially on the prospectus used in the KRCC foreign offering, and allege that it misstated drastically the financial picture of King Resources (the American guarantor). Because IIT Management was allegedly involved completely in the fraud and hence cannot be described as being deceived, the complaint states that IIT either "relied upon the misleading prospectus . . . or, . . . the defendants are estopped from denying such reliance." Defendant Arthur Andersen, the accountants for King Resources and IIT, allegedly certified false financial statements of King Resources and provided misleading "comfort letters" to the underwriters involved in the European offering at the closing of the agreement among underwriters in London.
Defendants Bear, Stearns & Co., Adams & Peck and Burnham & Co. and its successors (the "underwriter defendants") were lower-bracket underwriters in the eurodollar debenture offering.8 Although it is unclear how these defendants allegedly participated in the purchases of King Resources common and the loan to the Colorado Corp., plaintiffs do allege that they knew of the misleading character of the eurodollar prospectus and aided in the scheme to have IIT buy large amounts after the offering. The lead and co-managing underwriter for the foreign offering, however, was Investors Bank Luxembourg, S. A., itself a Luxembourg investment bank alleged to have been a subsidiary of IOS and directly controlled by Cornfeld and the other IOS principals.
Defendants Arthur Lipper and Arthur Lipper Corp. (referred to collectively as "Lipper") are described as the securities brokers for IIT during the period embraced by the...
To continue reading
Request your trial
-
Samuel M. Feinberg Testamentary Trust v. Carter
...against Icahn and Crane Associates. Reingold v. Deloitte Haskins & Sells, 599 F.Supp. 1241, 1270 (S.D.N.Y. 1984); IIT v. Cornfeld, 462 F.Supp. 209, 224 (S.D.N.Y.1978); aff'd in part, rev'd in part on other grounds, 619 F.2d 909 (2d Cir.1980) ("without primary liability, there can be no aidi......
-
Daniels v. Powell
...and Netherlands Antilles courts allowing foreign creditors' claims for purpose of voting for bankruptcy trustee); IIT v. Cornfeld, 462 F.Supp. 209 (S.D.N.Y.1978), aff'd in part and rev'd in part, 619 F.2d 909 (2d Cir.1980) (court recognized capacity of liquidators to represent the fund as e......
-
Klamberg v. Roth
...cert. denied, 434 U.S. 1066, 98 S.Ct. 1243, 55 L.Ed.2d 767 (1978) (expressed in terms of duty to disclose). But cf. IIT v. Cornfeld, 462 F.Supp. 209, 223-26 (S.D.N.Y.1978) (finding no justifiable basis for extending jurisdiction over a foreign investment trust on a theory of constructive de......
-
Continental Grain (Australia) Pty. Ltd. v. Pacific Oilseeds, Inc.
...appellees directed the court's attention to a recent decision relating to the question of subject matter jurisdiction, IIT v. Cornfeld, 462 F.Supp. 209 (S.D.N.Y.1978). We have carefully reviewed Judge Goettel's excellent opinion and do believe the analysis presented in IIT v. Cornfeld is co......