Psimenos v. E.F. Hutton & Co., Inc.

• Decision Date: 28 November 1983
• Docket Number: No. 43,D,43
• Citation: 722 F.2d 1041
• Parties: John PSIMENOS, Plaintiff-Appellant, v. E.F. HUTTON & COMPANY, INC., Defendant-Appellee. ocket 83-7178.
• Court: U.S. Court of Appeals — Second Circuit

Page 1041

722 F.2d 1041

John PSIMENOS, Plaintiff-Appellant, v. E.F. HUTTON & COMPANY, INC., Defendant-Appellee.

No. 43, Docket 83-7178.

United States Court of Appeals Second Circuit.

Argued Sept. 14, 1983.

Finally Submitted Oct. 26, 1983.

Decided Nov. 28, 1983.

Michael C. Devine, New York City (Kieffer & Hahn, New York City, of counsel), for plaintiff-appellant.

Thomas J. Kavaler, New York City (Cahill Gordon & Reindel, New York City, Thomas F. Curnin, Joel E. Davidson, Julie A. Petruzzelli, New York City, of counsel), for defendant-appellee.

Kenneth M. Raisler, Gen. Counsel, Commodity Futures Trading Com'n, Washington, D.C. (Pat G. Nicholette, Deputy Gen. Counsel, Jeri E. Ruscoll, Washington, D.C., of counsel), for Commodity Futures Trading Com'n, as amicus curiae.

Daniel L. Goelzer, Gen. Counsel, S.E.C., Washington, D.C. (Jacob H. Stillman, Associate Gen. Counsel, Elisse B. Walter, Asst. Gen. Counsel, Elizabeth E. Ashcraft and Paul Gonson, Sol., Washington, D.C., of counsel), for S.E.C., as amicus curiae.

Before FEINBERG, Chief Judge, and LUMBARD and NEWMAN, Circuit Judges.

LUMBARD, Circuit Judge:

Plaintiff John Psimenos, a citizen and resident of Greece, brought this action under the anti-fraud provisions of the Commodities Exchange Act, 7 U.S.C. Sec. 1 et seq. (1982) ("CEA"), ¹ as well as under common law contract and agency principles against E.F. Hutton & Company, a Delaware corporation having its principal place of business in New York, for damages resulting from Hutton's allegedly fraudulent procurement and management of his commodities trading account.

Hutton moved pursuant to Fed.R.Civ.P. 12(b)(1) to dismiss the federal claims for lack of subject matter jurisdiction, and to dismiss the diversity claims for improper pleading, Fed.R.Civ.P. 9(b). Chief Judge Motley, holding that the alleged fraud was "predominantly foreign" and therefore outside the scope of the Commodities Exchange Act, dismissed the federal claim for lack of subject matter jurisdiction. ² 560 F.Supp. 1111 (S.D.N.Y.1983). We disagree with Judge Motley's reading of the jurisdictional limitations of the Act and, accordingly, reverse and remand for further proceedings. ³

Since we are reviewing a motion to dismiss, we take the facts to be as stated in the plaintiff's amended complaint. IIT v. Cornfeld, 619 F.2d 909, 914 (2d Cir.1980).

In 1975, plaintiff became interested in investing in a commodities trading account with E.F. Hutton. Mathieu Mavridoglou, Hutton's agent and employee in Athens, told Psimenos "that his account would be managed in accordance with Hutton's standard procedures and with rules and regulations of the Commodities Futures Trading Commission." Psimenos was also informed by a flyer, printed by Hutton, of the quality and experience of Hutton's money managers. The flyer touted that Hutton's "experienced and qualified staff continually monitors the performance of each current Hutton approved manager ..." and that "Hutton's professionals thoroughly analyze and evaluate these managers in a manner beyond the resources of the ordinary investor." This flyer contained a tear-off post card to send to Hutton's New York office for more information.

Relying on these statements, Psimenos opened an account with Hutton's Athens office, executing blank forms that granted Hutton discretionary authority to trade in his account. Although Psimenos directed Mavridoglou to seek conservative investments, Hutton's agents often used money in Psimenos' account to participate in unresearched and highly speculative and leveraged transactions.

By 1977, after having incurred heavy losses, Psimenos talked in Athens with Mavridoglou, and in Geneva with Mavridoglou and a Mr. Tome, another Hutton employee. Through these conversations, he was induced to have his account moved to Hutton's Paris office. Mavridoglou and Tome told Psimenos that Hutton's Paris representative would place only completed, profitable trades in his account until he had recouped his losses. These representations were false, since Hutton did not place only such "good" trades in his account, and did not make up Psimenos' losses. At some point, the exact date being unstated in the amended complaint, Psimenos ordered trading halted in his account.

In 1981, Mavridoglou convinced Psimenos to move the account back to Athens and to allow trading in his account to resume. Mavridoglou told Psimenos that Hutton would recoup all his losses by assigning a new manager, Marios Michaelides, to the account. Michaelides was represented as a Hutton employee and qualified broker, though in fact he was not a Hutton employee, and was not nor had he ever been registered with the Commodities Futures Trading Commission as a broker.

Psimenos again told Mavridoglou that he wanted only low risk investments. He was told that Michaelides would trade on Psimenos' behalf only in United States Treasury Bill futures, which were represented as being risk-free. As a show of good faith, Michaelides said he would join Psimenos as a partner in his first trade, which turned out to be profitable. Later trades, however, resulted in large losses and Hutton began "churning" the account simply to generate commissions. Eventually, Psimenos lost in excess of $200,000.

In short, Psimenos alleges that, contrary to Hutton's representations, his account was not handled by qualified managers. In 1981, the manager assigned to Psimenos was neither a Hutton employee nor a registered broker. Several times, managers failed to close commodity purchase contracts by sale, with the result that Psimenos was forced to take possession of the commodity at an additional expense for which he was unprepared. Moreover, Hutton did not evaluate the performance of its managers, and did not monitor Psimenos' account as it had represented it would. Contrary to Psimenos' instructions, high risk trades were conducted in his account, resulting in significant losses.

Although most of the fraudulent misrepresentations alleged in the complaint occurred outside the United States, the trading contracts that consummated the transactions were often executed in New York. ⁴ The issue on appeal is whether that trading in United States commodities markets is sufficient to confer subject matter jurisdiction on a federal district court to hear a claim for damages brought by an alien under the Commodities Exchange Act. ⁵

We find that the district court has jurisdiction to hear Psimenos' claim. The trades Hutton executed on American markets constituted the final act in Hutton's alleged fraud on Psimenos, without which Hutton's employees could not have generated commissions for themselves. Coming as they did as the culminating acts of the fraudulent scheme, such trading could hardly be called "preparatory activity" not subject to review under the anti-fraud provisions of the CEA. ITT v. Vencap, Ltd., 519 F.2d 1001, 1018 (2d Cir.1975). On the contrary, Hutton's trades in the United States, involving domestic futures contracts, were material acts that directly caused Psimenos' claimed losses.

In construing the reaches of jurisdiction under the CEA, courts have analogized to similar problems under the securities laws which have been more extensively litigated. See, e.g., Mormels v. Girofinance, S.A., 544 F.Supp. 815, 817 n. 8 (S.D.N.Y.1982) ("[s]ecurities cases and principles are used as persuasive aids to interpretation of the CEA"); Miller v. New York Produce Exchange, 550 F.2d 762, 769 n. 2 (2d Cir.), cert. denied, 434 U.S. 823, 98 S.Ct. 68, 54 L.Ed.2d 80 (1977); CFTC v. J.S. Love & Assoc. Options, 422 F.Supp. 652, 660 (S.D.N.Y.1976).

Several of our decisions have explored the limits of subject matter jurisdiction under the federal securities statutes. Our major consideration concerning transnational transactions is "whether Congress would have wished the precious resources of United States courts and law enforcement agencies to be devoted to them rather than leave the problem to foreign countries." Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 985 (2d Cir.), cert. denied sub nom. Bersch v. Arthur Andersen & Co., 423 U.S. 1018, 96 S.Ct. 453, 46 L.Ed.2d 389 (1975).

Two tests have emerged, the "effects" test, as announced in Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir.), rev'd with respect to holding on merits, 405 F.2d 215 (2d Cir.1968) (en banc), cert. denied sub nom. Manley v. Schoenbaum, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969), and the "conduct" test. Since we find that there is jurisdiction under the latter, we do not need to reach the question whether the effects test provides an independent basis for jurisdiction.

The conduct test does not center its inquiry on whether domestic investors or markets are affected, but on the nature of conduct within the United States as it relates to carrying out the alleged fraudulent scheme, on the theory that Congress did not want "to allow the United States to be used as a base for manufacturing fraudulent security devices for export, even when these are peddled only to foreigners." Vencap, supra, 519 F.2d at 1017.

This test was originally applied by us in Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326 (2d Cir.1972). Plaintiffs, United States citizens, alleged fraud surrounding their purchase through British brokers on the London Stock Exchange of a British corporation whose stock was not registered or traded on United States exchanges. While we stated that "the adverse effect of the fraudulently induced purchases in England of securities of an English corporation, not traded in an organized American securities market, upon an American corporation," (468 F.2d at 1336) was insufficient to create jurisdiction under Schoenbaum, we nevertheless upheld jurisdiction because "substantial misrepresentations were made in the United States." 468 F.2d at 1337. Thus, domestic conduct alone was sufficient to trigger the applicability of the securities laws to a transaction...