Sloane Overseas Fund v. Sapiens Intern. Corp.

• Decision Date: 23 September 1996
• Docket Number: No. 95 Civ. 9165 (RPP).,95 Civ. 9165 (RPP).
• Citation: 941 F.Supp. 1369
• Parties: SLOANE OVERSEAS FUND, LTD., Brompton Partners L.P., and Susan Roeder, Plaintiffs, v. SAPIENS INTERNATIONAL CORPORATION, N.V., Swiss Bank Corporation, and Deloitte & Touche, L.L.P., Defendants.
• Court: U.S. District Court — Southern District of New York

941 F.Supp. 1369

SLOANE OVERSEAS FUND, LTD., Brompton Partners L.P., and Susan Roeder, Plaintiffs, v. SAPIENS INTERNATIONAL CORPORATION, N.V., Swiss Bank Corporation, and Deloitte & Touche, L.L.P., Defendants.

No. 95 Civ. 9165 (RPP).

United States District Court, S.D. New York.

September 23, 1996.

COPYRIGHT MATERIAL OMITTED

Herzfeld & Rubin, P.C. by John M. Schwartz, New York City, for Plaintiffs.

Skadden, Arps, Slate, Meagher & Flom by Seth M. Schwartz, Michael P. Lowman, New York City, for Defendant Sapiens International Corporation, N.V.

Cleary, Gottlieb, Steen & Hamilton by William M. Hohengarten, Richard F. Ziegler, New York City, for Defendant Swiss Bank Corporation.

Deloitte & Touche, L.L.P. by David Wagner, New York City, for Defendant Deloitte & Touche, L.L.P.

ROBERT P. PATTERSON, Jr., District Judge.

Plaintiffs Sloane Overseas Fund, Ltd. ("Sloane"), Brompton Partners L.P. ("Brompton"), and Susan Roeder ("Roeder") filed a complaint alleging that (1) defendants Sapiens International Corporation, N.V. ("Sapiens"), Swiss Bank Corporation ("SB"), and Deloitte and Touche L.L.P. ("D & T") violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. ("the 1934 Act") along with Rule 10b-5 of the Securities and Exchange Commission ("SEC"); (2) defendants Sapiens and SB violated § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77a et seq. ("the 1933 Act"); (3) defendant SB violated § 20(a) of the 1934 Act and § 15 of the 1933 Act; and (4) all three defendants engaged in common law fraud, deceit, or negligent misrepresentation.

Defendant Sapiens moves pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure ("Fed.R.Civ.P.") to dismiss the entire complaint for lack of subject matter jurisdiction; to dismiss all plaintiffs' federal claims as barred by the statute of limitations¹; and to dismiss the § 12(2) claim pursuant to Fed. R.Civ.P. 12(b)(6) for failure to state a claim in light of the Supreme Court's recent decision in Gustafson v. Alloyd Co., ___ U.S. ___, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995). Defendant SB joins Sapiens' motion in its entirety; moves to dismiss the § 10(b) claim pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b) for failure to plead facts constituting fraud; and moves to dismiss the § 15 and § 20(a) claims pursuant to Fed.R.Civ.P. 12(b)(6) for failure to plead facts necessary to infer control person status. Defendant D & T joins those portions of Sapiens' motions pertaining to subject matter jurisdiction and statute of limitations and also moves pursuant to Fed. R.Civ.P. 12(b)(6) and 9(b) to dismiss the § 10(b) claim for failure to plead facts constituting fraud.

BACKGROUND

Defendant Sapiens is a Netherlands Antilles corporation with its principal office located in Curacao, Netherlands Antilles. (Complaint dated Oct. 25, 1995 ("Complaint") ¶ 8.) Sapiens common stock has been publicly traded since June 1992. (Id. ¶ 11.) In September 1993, Sapiens sold $50 million worth of debt securities due in 2003 convertible into Sapiens common stock ("the Notes"). (Id. ¶ 12.) The offering was made pursuant to an Offering Circular which stated that the Notes could be sold either (1) outside the United States pursuant to an exemption from registration under Regulation S or (2) to qualified institutional buyers in the United States pursuant to an exemption under Rule 144A. (Declaration of Michael Hammond sworn to on Feb. 21, 1996 ("Hammond Decl."), Ex. A at 63.) SB was the lead manager of the offering. (Complaint ¶ 13.) D & T audited the financial statements for the fiscal year ending December 31, 1992 in the Offering Circular. (Id. ¶ 19.) The Offering Circular also contained unaudited figures for the six months ending June 30, 1993. (Id.)

Plaintiff Sloane is a corporation organized under the laws of the British Virgin Islands, where it maintains its principal place of business. (Id. ¶ 5.) Plaintiff Brompton is a Delaware Limited Partnership. (Id. ¶ 6.) Plaintiff Roeder is a United States citizen who resides in England. (Id. ¶ 7.) Plaintiffs allege that in September 1993 they purchased from defendant SB a total of $750,000 face amount of the Notes in reliance on the Offering Circular. (Id. ¶ 29.)

On October 25, 1995, plaintiffs commenced this action. They allege that numerous misrepresentations and omissions in the Offering Circular and elsewhere caused them to "suffer[] damages in the amounts of their respective investments in connection with their purchases of the Notes." (Id. ¶ 53.)

DISCUSSION

I. The Motion to Dismiss the Complaint for Lack of Subject Matter Jurisdiction.

All defendants move pursuant to Fed. R.Civ.P. 12(b)(1) to dismiss the complaint for lack of subject matter jurisdiction. They contend that Sapiens' debt offering was an extraterritorial offering which occurred outside the United States and was offered only to citizens of countries other than the United States, (Memorandum of Law of Defendant Sapiens International Corporation, N.V. in Support of its Motion to Dismiss the Complaint ("Sapiens Mem.") at 2), and is therefore not subject to the 1933 Act or the 1934 Act.

As a preliminary matter, the parties dispute whether the plaintiffs had notice that they were required to provide a participation certificate in order to purchase the Notes. Defendant SB offers affidavits and documentary evidence tending to show that participation certificates were required of all purchasers of the Notes pursuant to a Fiscal Agency Agreement, and that these certificates required a representation that the purchaser was in compliance with the exemption from registration requirements under either Rule 144A or Regulation S. (See, e.g., Hammond Decl.Ex. A at 63; Declaration of Janet Robinson sworn to on June 19, 1996 ("Robinson Decl.") ¶ 2.) The Declarations tend to show that plaintiffs must have had notice from the transfer agents and clearing agents that they were required to submit a participation certificate because the transfer agent had certified that the purchasers had delivered certificates confirming compliance with Regulation S. (Robinson Decl. ¶ 3.)

Plaintiffs maintain that their purchases were made without notice of any such restrictions. With the Declaration of Thomas Roeder sworn to on June 5, 1996 ("Roeder Decl."), plaintiffs have established, solely for purposes of this motion, that plaintiffs evidently purchased the Notes without notice that a participation certificate was required.²

Defendants contend that, pursuant to the Supreme Court's decision in E.E.O.C. v. Arabian American Oil Co., 499 U.S. 244, 111 S.Ct. 1227, 113 L.Ed.2d 274 (1991) (hereinafter "Aramco"), the 1933 Act and the 1934 Act do not apply to extraterritorial offerings of securities. (Sapiens Mem. at 8.) In Aramco, the Court interpreted Title VII of the Civil Rights Act of 1964 and laid out guidelines for when a statute may be construed to apply to extraterritorial activities. The Court stated that unless "the affirmative intention of the Congress [is] clearly expressed, we must presume [a statute] is primarily concerned with domestic conditions." Id. at 248, 111 S.Ct. at 1230 (internal citations omitted). The Court further explained that, given the presumption against extraterritoriality, clear evidence that Congress intended to apply a statute extraterritorially is needed. Id. at 258, 111 S.Ct. at 1235. Mere boilerplate recitations will not do. Id. at 250-51, 111 S.Ct. at 1231-32.

Applying the reasoning in Aramco to this case, jurisdiction would not exist over these claims because the 1933 Act and the 1934 Act do not clearly apply to extraterritorial transactions. There is no clear evidence that Congress intended these statutes to apply to overseas transactions. See Itoba Ltd. v. Lep Group PLC, 54 F.3d 118, 121 (2d Cir.1995) ("It is well recognized that the Securities Exchange Act is silent as to its extraterritorial application"), cert. denied, ___ U.S. ___, 116 S.Ct. 702, 133 L.Ed.2d 659 (1996). Accordingly, under the Aramco standard, defendants' assertion that the overseas offering in this case is not subject to the 1933 Act or the 1934 Act would appear to be correct, and the complaint would be dismissed pursuant to Rule 12(b)(1) of the Fed.R.Civ.P.

In this Circuit, however, Aramco has never been applied to the 1933 Act or the 1934 Act. Instead, the Second Circuit has applied the "conduct" and "effects" test enunciated in Alfadda v. Fenn, 935 F.2d 475, 478 (2d Cir.), cert. denied, 502 U.S. 1005, 112 S.Ct. 638, 116 L.Ed.2d 656 (1991). Under the "conduct" and "effects" test, there is jurisdiction over an overseas offering (a) if "the defendant's conduct in the United States was more than merely preparatory to the fraud" and these actions caused the claimed losses, or (b) "where illegal activity abroad causes a `substantial effect' within the United States." Id. Chief Judge Friendly stated the rationale for this extraterritorial jurisdiction, writing, "[t]he New Yorker who is the object of fraudulent misrepresentations in New York is as much injured if the securities are of a mine in Saskatchewan as in Nevada." Leasco Data Processing Equip. Corp. v. Maxwell, 468 F.2d 1326, 1336 (2d Cir.1972).³ Since in Itoba, 54 F.3d at 121-22, the Second Circuit applied this test in 1995, four years after Aramco, there is no clear guidance that the test in Leasco is now inapplicable. Accordingly, the conduct and effects test utilized by the Second Circuit will be applied.

Here, plaintiffs have established jurisdiction under the "effects" prong of the Second Circuit's "conduct" and "effects" test, and therefore the "conduct" prong need not be analyzed. See, e.g., Alfadda, 935 F.2d at 478-480 (finding jurisdiction based on "conduct" prong alone.) Brompton, a Delaware Partnership, alleges it purchased notes in the offering.⁴ (Complaint ¶ 29.) This allegation weighs in favor of jurisdiction under the "effects" test. See Schoenbaum v. Firstbrook, 405 F.2d 200, 206 (2d Cir.1968) (the 1934 Act "reaches...