S.E.C. v. Kasser

• Decision Date: 14 January 1977
• Docket Number: No. 76-1332,76-1332
• Citation: 548 F.2d 109
• Parties: Fed. Sec. L. Rep. P 95,845 SECURITIES AND EXCHANGE COMMISSION, Appellant, v. Alexander KASSER et al.
• Court: U.S. Court of Appeals — Third Circuit

Page 109

548 F.2d 109

Fed. Sec. L. Rep. P 95,845

SECURITIES AND EXCHANGE COMMISSION, Appellant, v. Alexander KASSER et al.

No. 76-1332.

United States Court of Appeals, Third Circuit.

Argued Nov. 8, 1976.

Decided Jan. 14, 1977.

David Ferber, Sol. to the Com'n, Jacob H. Stillman, Asst. Gen. Counsel, Thomas C. Devlin, Atty., Washington, D. C., for appellant.

Gerald Walpin, Marc Rowin, Rosenman, Colin, Freund, Lewis & Cohen, New York City, and Stephen E. Mochary, Montclair, N. J., for appellee Stephen E. Mochary.

Dickinson R. Debevoise, Alvin Weiss, Riker, Danzig, Scherer & Debevoise, Newark, N. J., for appellees Chester Chastek, James M. Brown, Jr., River Sawmills Co. and Blue Const. Corp.

Barry H. Garfinkel, Douglas M. Kraus, Skadden, Arps, Slate, Meagher & Flom, New York City, and Clyde A. Szuch, Pitney, Hardin & Kipp, Morristown, N. J., for appellees Churchill Forest Industries (Manitoba) Ltd., Technopulp Inc. and Churchill Pulp Mill Ltd.

Before ADAMS and WEIS, Circuit Judges, and FOGEL, District Judge. ^*

OPINION OF THE COURT

ADAMS, Circuit Judge.

The central issue in this case is whether the Securities and Exchange Commission (SEC) may invoke the jurisdiction of the federal courts over defendants who have allegedly engaged in fraudulent conduct within the United States, when the sole victim is a foreign corporation and when the purported fraud had little, if any, impact within this country.

I.

For the purpose of this appeal, the allegations of the amended complaint are deemed to be true and will serve as the factual matrix with which to resolve the jurisdictional issues raised here. ¹ Inasmuch as the district court aptly summarized the facts proffered by the pleadings, we need not narrate them at length. ² Rather, we shall outline only those facts that are necessary for our decision.

Basically, the SEC avers that the defendants engaged in a scheme to defraud and make misrepresentations to the Manitoba Development Fund ("Fund") with respect to the purchase and sale of various securities, including investment contracts, debentures and stock, both preferred and common. The Fund, the sole victim of the fraudulent conduct, is a corporation wholly owned by the Province of Manitoba, Canada. It was formed to interest private enterprise in the creation of a forestry development in that province.

According to the SEC, Kasser and his co-defendants induced the Fund to enter into investment contracts with and acquire debentures of two defendant corporations, Churchill Forest Industries ("CFI") and River Sawmills Company ("River"). These two corporations as well as several others involved in the allegedly fraudulent dealings were largely owned and dominated by Kasser. While CFI was a Canadian corporation with offices in Montclair, New Jersey, River was a Delaware corporation with offices at the same location. And, the Fund entered into the contracts and acquired the debentures based on false representations that Kasser and his associates, or corporations that they controlled, had invested and would invest capital in equity securities of CFI and River over and above the proceeds obtained from debenture sales to the Fund.

Under the investment contracts, the Fund was to make loans to CFI and River in exchange for the debentures. Each loan disbursement would be granted only upon certification that the defendants or their controlled corporations had effected the required equity investments. Both the loans and the equity proceeds were to be spent to establish the forestry development. However, the defendants never made, nor did they intend to make, the equity investments. Instead, they recirculated the proceeds of the loans and debenture transactions in a "ponzi"-like scheme: the defendants made the purported equity investment not with additional capital but with the very money previously made available by the Fund.

The fraud was implemented, in part, by "laundering" the Fund's loan disbursements through various corporations and bank accounts in the United States, Canada, and Switzerland. Over several years, the Fund invested roughly $45,000,000 in debt securities issued by CFI and River, and these payments were made, it is asserted, because of continuous misrepresentations to and concealment of material facts from the Fund. The defendants falsely represented that substantial equity capital had been invested in CFI and River and spent for development of the forestry complex. Moreover, they diverted much of the money invested in CFI and River to their own personal use. As a result, CFI and River have become bankrupt.

Transnational in character, the fraudulent transactions arranged by the defendants spanned at least two continents. But it is clear that a number of acts were committed within the United States. In its opinion, the district court expressly noted that the following conduct had occurred in this country: (1) various negotiations; (2) execution of one of the investment contracts in New York; (3) utilization of the instrumentalities of interstate commerce (e.g., telephones and mails) to further the scheme; (4) incorporation of defendant companies in the United States, or at least the establishment of corporate offices; and (5) use of the New York office of a Swiss bank as a conduit for moneys received from the Fund. ³ Other activities taking place within the United States, according to the complaint but not mentioned by the district court, included (1) maintenance of books and records in this country; ⁴ (2) drafting of agreements executed elsewhere; ⁵ and (3) transmittal of proceeds from the transactions to and from the United States. ⁶ In short, there was significant conduct which formed part of the defendants' scheme that did occur within this country.

By contrast, it is questionable whether any effect in the United States was wrought by the alleged fraudulent activities of the defendant. The SEC really does not claim that there was any such effect. Apparently, none of the securities was traded on any American exchange, nor did such sales have any measurable impact on domestic markets. In addition, no sale was made to any resident or citizen of this country, the sole victim of the defendants being the Fund, a Canadian corporation.

The SEC brought this action in the New Jersey district court, alleging that the defendants, individual and corporate, violated various antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. ⁷ It sought injunctions against any further violations as well as ancillary relief. However, the district court dismissed the complaint with prejudice, holding that it lacked subject-matter jurisdiction over the alleged fraud. The SEC then filed the present appeal in this Court.

Since we believe that a district court does have jurisdiction in an SEC suit for injunctive relief under the federal securities laws, given circumstances such as are presented here, we reverse and remand.

II.

In dismissing the SEC's complaint for injunctive relief, the district court concluded that it lacked subject-matter jurisdiction over the alleged fraudulent activities. That court bottomed dismissal on the ground that the claimed fraud entailed "essentially foreign transactions without impact in this country." ⁸ The district judge reasoned that conduct without such effect is insufficient for jurisdiction to attach. Even though this premise constituted the essence of its decision to dismiss, the court assumed that conduct without effect in the United States could give rise to jurisdiction. But the trial judge stated that the intranational conduct of the defendants here consisted merely of "miscellaneous acts," ⁹ not substantial enough to alter the foreign nature of the transaction. In their briefs and at oral argument, defendants in large part adopted the analysis of the district judge.

Although this case presents a relatively new legal problem, several opinions already have addressed similar matters. ¹⁰ They, and their underlying principles, suggest that the position of the district court was too restrictive and that jurisdiction should vest.

Just recently, this Court in Straub v. Vaisman & Co., ¹¹ considered the jurisdictional aspects of transnational securities fraud. There, an American broker-dealer engaged in fraudulent sales of securities to nonresident foreigners. A unanimous panel of this Court found jurisdiction under the 1933 and 1934 Acts. Speaking for the panel, Judge Weis posited that "(c)onduct within the United States is alone sufficient from a jurisdictional standpoint to apply the federal (securities) statutes . . . ." ¹²

It could be argued that Straub differs somewhat from the case at hand. The stock in the Straub fraud was traded on an American OTC exchange, unlike the securities here which were not so traded. Frequently, trading on an exchange has helped to undergird findings of jurisdiction in other transnational fraud cases. ¹³ Where a stock exchange is involved, courts have found sufficient impact in the United States to sustain jurisdiction. In addition, there may have been slightly more conduct in the United States in Straub than in the present case, for Judge Weis said that the panel was "not here faced with a predominantly foreign transaction." ¹⁴ Despite these possible variations, however, Straub indicates that jurisdiction does exist in this case. This is so because Judge Weis flatly proclaimed that conduct in this country, standing alone, is enough for jurisdiction to attach under the federal securities laws. ¹⁵

Perhaps the leading opinions which have delved into the problem of jurisdiction in transnational securities fraud cases are IIT v. Vencap, Ltd. ¹⁶ and Bersch v. Drexel Firestone, Inc. ¹⁷ Second Circuit decisions written by Judge Friendly. Of these two cases, IIT is more supportive of subject-matter jurisdiction here. In IIT, the alleged securities fraud arose out of negotiations outside the United States. These...