Sec. L. Rep. P 90,223
AND OVERSEAS COMMODITY TRADERS, S.A., Plaintiff-Appellant,
PARIBAS LONDON, Paribas Global Bond Futures Fund, Paribas Asset
Ltd. and John Arida, Defendants-Appellees.
States Court of Appeals,
Feb. 5, 1997.
June 4, 1998.
WINTER, Chief Judge, OAKES and CABRANES, Circuit Judges.
Senior Circuit Judge:
and Overseas Commodity Traders, S.A. ("EOC"), a Panamanian corporation,
appeals from a final judgment dismissing EOC's complaint pursuant to a
Memorandum-Decision of the United States District Court for the Southern
District of New York, Barbara S. Jones, Judge, dated June 19, 1996, as
amended June 28, 1996. Europe
and Overseas Commodity Traders, S.A. v. Banque Paribas London, 940 F.Supp.
528, 530 n. 1 (S.D.N.Y.1996). EOC's sole business is the investment
of its capital in securities and other ventures. It is wholly
owned by Alan Carr, a citizen of Canada. Defendant-Appellees are Banque
Paribas ("Paribas"), Paribas Global Bond Futures Fund, S.A. (the "Fund"),
Paribas Asset Management Ltd. ("PAM"), and John Arida, a U.K. national
who works as an account manager in the London, England, office of Paribas.
Paribas is a French bank; the Fund is organized under the laws of Luxembourg;
and PAM is a Bahamian corporation which manages the Fund.
transaction underlying this dispute is entirely foreign inasmuch as there
is no U.S. party, but not, strictly speaking, wholly extraterritorial in
that EOC alleges that an offer to sell foreign securities was made over
the telephone and facsimile to its sole shareholder and agent, Alan Carr,
who was in Florida, and both parties agree that orders to purchase securities
were placed from Florida. We therefore address the question whether phone
calls and facsimiles to a person on U.S. soil provide enough of a connection
to the United States to implicate the registration and fraud provisions
of U.S. securities laws, and give us jurisdiction thereunder.
complaint, filed on October 14, 1994, asserts eleven claims. Five are based
on federal securities law including the sale of unregistered securities
pursuant to Section 12 of the 1933 Act, 15
U.S.C. § 77l(1); sale of securities of an unregistered investment
company pursuant to the Investment Company Act of 1940, 15
U.S.C. § 80a-7 et seq.; false and misleading statements pursuant
to Section 12 of the 1933 Act, 15
U.S.C. § 77l(2); deceptive practices
pursuant to Section 10b of the 1934 Act, 15
U.S.C. § 78j and Rule 10b-5, 17
C.F.R. § 240.10b-5; and control person liability pursuant to 15
U.S.C. § 78t. The remaining claims are based on Florida Blue Sky
laws and Florida common law.
in April of 1995 and prior to any discovery, moved to dismiss the complaint
for lack of subject matter jurisdiction, lack of personal jurisdiction
over three of the defendants, and forum non conveniens. Although defendants
sought permission from the district court also to move for dismissal on
the grounds of failure to state a cause of action, the district court ordered
the defendants to address only the jurisdictional and forum non conveniens
issues. See Order dated March 14, 1995, 94 Civ. 7471 (Batts, Deborah A.,
Judge ). Paribas submitted declarations from Arida; John Baker, the Compliance
Officer of the London branch of Paribas; Pierre Corbiau, Secretary of the
Fund; Denis Coulon, Director of PAM; and Andrew Charles Smith, a member
of the Bar of England and Wales experienced in the commercial and business
law of England. The bank also offered a copy of its Investment Agreement
with EOC. EOC submitted a declaration of Carr. After a hearing, the district
court requested additional information *121
factual issues pertinent to the jurisdictional questions. EOC submitted
a second Carr declaration, which contradicted in significant respects defendants'
factual allegations, and defendants submitted further statements from Baker.
as: 147 F.3d 118, *121 )
issued her decision of dismissal on June 19, 1996. EOC filed notice of
appeal on July 19, 1996. We have appellate jurisdiction pursuant to 28
U.S.C. § 1291. On July 11, 1997, following oral argument in this
case, we invited the Securities and Exchange Commission ("SEC") to submit
an amicus curiae brief, which it did on October 9, 1997.
as: 147 F.3d 118, *121)
facts of this case, though disputed, are sparse. We nevertheless attempt
to sketch them in sufficient detail to provide background for the opinion
that follows. In so doing, we state the allegations of the complaint, but
also indicate some of the points which the defendants strongly dispute.
Inc., 484 U.S. 49, 68, 108 S.Ct. 376, 387, 98 L.Ed.2d 306 (1987) (Scalia,
J., concurring in part and concurring in the judgment), "[i]t is well ingrained
in the law that subject-matter jurisdiction can be called into question
either by challenging the sufficiency of the allegation or by challenging
the accuracy of the jurisdictional facts alleged." (citing inter alia Land
v. Dollar, 330 U.S. 731, 735 n. 4, 67 S.Ct. 1009, 1011 n. 4, 91 L.Ed. 1209
(1947)). See also Transatlantic
Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 108 (1997)
(court may refer to any material in the record to establish its subject
matter jurisdiction). However, as this court recently cautioned in Itoba
Ltd. v. Lep Group PLC, 54 F.3d 118, 125 (2d Cir.1995), "a plaintiff
... should not be deprived of its day in an American court by a Rule 12(b)(1)
order based on erroneous facts...." In a close case, the factual basis
for a court's subject matter jurisdiction may remain an issue through trial,
and, if and when doubts are resolved against jurisdiction, warrant dismissal
at that time. See Leasco
Data Processing Equip. Corp. v. Maxwell, 468 F.2d 1326, 1330 (2d Cir.1972).
account at Paribas was established in London in 1992. The "Non- discretionary
Investment Agreement" between EOC and Paribas was executed on October 22,
1992, by EOC directors Ian F. Leger and Herbert W. Marvelly. In this
agreement, EOC gave a corporate registration address in Panama and a mailing
address in Monaco. The company also represented that its directors' meetings
take place in Monaco, and named an agent for service of process in England.
October of 1993, Carr was visiting England, as he often does in the autumn.
Arida, on October 7, there informed him that a substantial amount of cash
had accumulated in EOC's account, and offered to recommend an attractive
investment opportunity for the money. Carr says he expressed interest in
the proposal, but explained to Arida that he was preparing to leave for
Florida on the 9th and that he would be happy to hear more after his arrival.
a series of telephone conversations which began on October 14, Carr and
Arida resumed their discussion of EOC's investment in the Fund as planned
after Carr's arrival in Florida. The parties agree that each party initiated
at least some of these calls. Carr claims that these conversations with
Arida were their first significant discussion of the Fund. Carr also alleges
that Arida misled him by conveying the following facts, which EOC now claims
are not accurate: (a) the Fund was overseen by Paribas's proprietary trading
desk; (b) the investors' capital in the Fund was traded along with Paribas's
own capital; and (c) the Fund traded securities based primarily on technical
as opposed to fundamental considerations. In reliance on these statements,
Carr says that from Florida he ordered EOC's first purchase of shares of
the Fund on October 18, 1993. He also alleges
that these representations were repeated on the occasion of each of his
subsequent six purchases which, together with the October 18 purchase,
totaled some $1,800,000. Carr further alleges that the defendants at the
time of his initial purchase *122
to provide him with weekly statements of the Fund's net asset value, but
concealed from him the true net asset value of the Fund during the period
of his later purchases.
as: 147 F.3d 118, *122)
disputes this version of the events. He claims that his first significant
conversation with Carr about the Fund occurred while Carr was still in
England. He also asserts that Carr ordered the first purchase of Fund shares
from England. In support of Arida's story, Paribas offers a copy of a facsimile
transmission, dated October 8, from its London office to the Fund in Luxembourg
placing an order for five shares. This transmission, which does not list
a purchase price, also does not name Carr or EOC as the party for whom
the transaction was made. It does, however, list an account number. Unfortunately,
the record does not demonstrate whether the number identifies EOC.
counters with a letter sent to Carr by Arida listing October 18 as the
day of the first purchase of Fund shares and the number purchased as ten.
Paribas explains that the October 8 order for five shares was combined
with a second order for five shares, which was placed on October 14, to
make the ten shares described in Arida's letter. The bank further explains
that a transaction ordered on the 8th would have
been valued, or priced, on the 18th, because of Fund Rules. The net asset
value per share of the Fund is determined weekly on each Monday that is
a bank business day in Luxembourg. Shares of the Fund may only be purchased
on such days. Applications to purchase shares must be received in Luxembourg
not later than 1:00 p.m. on the second business day preceding a valuation
day (presumably most often a Thursday as here). October 8, 1993, being
a Friday, any application received on that day would not have been valued
on the following Monday, October 11, but would have been required to wait
until the next Monday, which was the 18th. Thus, Fund rules require that
orders placed on the 8th and the 14th would both be finalized on October
in turn, says that Paribas promised him that these rules would not apply
to EOC, because of the large size of its transactions. He also avers that
Arida may have misunderstood their preliminary discussion as authorization
to buy, or impetuously placed the initial order before Carr had consented
to the purchase. Such is the disagreement concerning the date and place
of the first purchase. Both parties agree, however, that at least six buy
orders were placed by Carr on behalf of EOC from his vacation home in Florida.
after EOC's first purchase, Carr says he told a Florida acquaintance, Matthew
O'Brien, about the Fund, and passed along to him Arida's description of the
Fund. There is no statement in the record from O'Brien, so the following
facts are drawn from Carr's affidavit. O'Brien, in October of 1993, was
a legal alien residing in a house he owned in Florida. He has since become
a U.S. citizen. He contacted Paribas on Carr's advice, and, after hearing
the same alleged misrepresentations as Carr, invested at least $100,000
in the Fund. Like EOC, O'Brien sustained substantial losses.
"Application Form," which is dated October 19, 1993, for the purchase of
3 shares valued at U.S. $87,000, is included in the record. O'Brien there
represents his nationality as British, and gives a London address and telephone
number. A typed note at the bottom of the form explains "I am presently
visiting the United States on business" and lists a mailing address and
phone number in Florida. We discuss the significance of O'Brien at the
end of the opinion, because the allegations concerning him have little
impact on our jurisdiction over EOC's federal claims.
district court found that O'Brien resided in England at the time of his
purchase, that plaintiff EOC's principal place of business was in Monaco,
and that the initial purchase of Fund shares occurred on October 8, 1993,
a date when both parties agree Carr was still in England. Europe
and Overseas, 940 F.Supp. at 532. The court also relied on the sworn
statement of Corbiau, Secretary of the Fund, id.
at 533, that "[i]nsofar as I am aware, no investor
in the Fund is a U.S. citizen or resident." But, because *123
discovery was conducted, this statement was not confirmed by independent
as: 147 F.3d 118, *123)
do not think that the district court needed to conclude, contrary to plaintiff's
assertions, that O'Brien resided in England or that the plaintiff's principal
place of business was in Monaco. We think that it could have based its
holding only on findings that EOC and O'Brien made such representations
to Paribas, and, thus, Paribas reasonably trusted that at all times during
these transactions the bank was dealing with an English individual and
a Panamanian corporation with offices in Monaco.
reasons discussed next, even accepting as true EOC's allegations that the
initial offer to sell Fund shares occurred while Carr was in Florida, the
transactions between EOC and Paribas did not implicate the prescriptive
jurisdiction of the federal securities laws.
EOC emphasizes in its briefs to this court that the district court did
not discuss the claims at the heart of this case: sale of unregistered
securities of an unregistered investment company to an individual on U.S.
soil in violation of §§ 5 and 12 of the Securities Act of 1933
[FN2] and of the Investment Company Act of 1940. EOC seeks rescission of
its purchase and reimbursement of the money it
invested in the Fund.
Section 12 of the 1933 Act, 15
U.S.C. § 77l, creates civil liability for any person who offers
or sells a security in violation of § 5 of the Act, 15
U.S.C. § 77e.
Registration under the 1933 Act.
claims that the same "conduct and effects test," which this circuit applies
to determine the extraterritorial scope of the fraud provisions of the
federal securities laws, should be applied to determine the appropriate
reach of the federal registration requirements. The relevant "conduct,"
EOC maintains, was the solicitation and sale of unregistered securities
in the United States, and the relevant "effect" was the consummation of
the sale of unregistered securities to a person within the United States.
In other words, EOC appears to argue that any solicitation of unregistered
securities within the territory of the United States is within the scope
of the registration laws, and thus forbidden, without regard to the identity
or nationality of any party.
The decided law of this circuit clearly states that the antifraud provisions
may reach certain transactions not within the registration requirements
of our securities law. Consolidated
Gold Fields PLC v.Minorco, S.A., 871 F.2d 252, 262
(2d Cir.1989) ("As we observed in Bersch
... the antifraud provisions of American securities laws have broader extraterritorial
reach than American filing requirements.") (citing Bersch
v. Drexel Firestone, Inc., 519 F.2d 974, 986 (2d Cir.1975)); see also
519 F.2d at 986 ("It is elementary that the anti-fraud provisions of
the federal securities laws apply to many transactions which are neither
within the registration requirements nor on organized American markets.")
supra, note 1, 468 F.2d at 1335-37). We therefore reject EOC's assertion
that the "same standard" applies to the antifraud and registration laws,
if EOC means that the registration and fraud provisions are coextensive.
The analysis of jurisdiction to prescribe rules governing foreign transactions
is guided by "the nature and source of the claim asserted." See Zoelsch
v. Arthur Andersen & Co., 824 F.2d 27, 33 n. 4 (D.C.Cir.1987) (comparing
the role of the underlying claim in subject matter jurisdiction analysis
to that in other "threshold issues" such as standing).
In contrast to the antifraud provisions of the 1934 Act, the SEC has provided
some guidance as to the applicability of registration requirement of the
1933 Act to foreign transactions. [FN3] We turn first to this *124
[FN4] However, we acknowledge that our precedent determining the extraterritorial
reach of related provisions of the U.S. securities laws may provide some
assistance in filling any gaps in the SEC's treatment
of the scope of the registration provisions.
as: 147 F.3d 118, *124)
We, of course, honor an agency's reasonable interpretation of a statute
that Congress has entrusted the agency to administer. See, e.g., Chevron
U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-45,
104 S.Ct. 2778, 2781-83, 81 L.Ed.2d 694 (1984); see also Henry P. Monaghan,
and the Administrative State, 83 Colum. L.Rev. 1 (1983) (legitimizing
judicial deference to agency constructions of federal statutes in light
of the doctrine of the separation of powers) ("[A court] would be violating
legislative supremacy by failing to defer to the interpretation of an agency
to the extent that the agency had been delegated law-making authority."
Id. at 28.).
Although our analysis below is attentive to specific SEC regulations, it
is nonetheless distinct from consideration of the merits. In this motion
to dismiss for lack of subject matter jurisdiction, the only issue is whether
the registration requirement of § 5 conceivably applied with respect
to the parties who are resisting its application. If it does not, the parties'
conduct was outside the prescriptive jurisdiction of the United States.
v. Hood, 327 U.S. 678, 682-83, 66 S.Ct. 773, 90 L.Ed. 939 (1946) ("[A]
suit may sometimes be dismissed for want of
where the alleged claim under the Constitution or federal statutes clearly
appears to be immaterial and made solely for the purpose of obtaining jurisdiction
or where such a claim is wholly insubstantial and frivolous.") We therefore
address only the application of the requirement to this conduct and not
any defenses or other issues that might be relevant to the merits.
5 prohibits any person from offering or selling a security in interstate
commerce unless it is registered. "The elements of [an] action for violation
of Section 5 are (1) lack of a registration statement as to the subject
securities; (2) the offer or sale of the securities; and (3) the use of
interstate transportation or communication and the mails in connection
with the offer or sale." In re Command Credit Corp., 1995 WL 279776, *2
(S.E.C. Apr. 19, 1995). Section 12 provides a rescissionary remedy to persons
who purchase unregistered securities in violation of § 5. The terms
"offer" and "sell" were construed broadly by the Court in Pinter
v. Dahl, 486 U.S. 622, 644-47, 108 S.Ct. 2063, 2077-78, 100 L.Ed. 658 (1988),
to reach agents for sellers, such as Paribas, though agents for buyers
were not discussed.
Regulation S, which was issued by the SEC and became effective on May 2,
1990, there are two ways that a sale of securities could fall outside §
5's registration requirement. First, a transaction
could be "outside the United States," and, second, it could fall into either
one of two exceptions defined by the SEC. As the SEC explained in the statement
accompanying the new rule, Regulation S adopts a "territorial approach"
to § 5. [FN5] Offshore Offers and Sales, Securities Act Release No.
Fed.Reg. 18306, 18307 (May 2, 1990). It does so by setting out a general
rule that offers, offers to sell, and sales of securities made outside
the United States are not subject to the registration requirement of §
5, while those within the United States must be registered. 17
C.F.R. § 230.901 (1996). The two so-called "safe harbor" exemptions
permit the issuance and resale of securities under certain specified conditions.
Offerings and resales meeting these conditions are deemed to take place
outside the United States for the purpose of § 5. See 17
C.F.R. §§ 230.903 (issuers), 230.904 (resellers).
The SEC statement explains: "Rule 901(a) is a general statement of the
applicability of the registration provisions of the Securities Act. The
General Statement provides that any offer, offer to sell, sale, or offer
to buy that occurs within the United States is subject to section 5 of
the Securities Act, while any such offer or sale that occurs outside the
United States is not subject to section 5. The determination as to whether
a transaction is outside the United States will be based on the facts and
of each case.... For a transaction to qualify under the General Statement,
both the sale and the offer pursuant to which it was made must be outside
the United States." SEC Release No. 33-6863, 55
Fed.Reg. at 18309 (footnote omitted).
We first examine the safe harbors to determine if either one clearly applies
to this transaction. The issuer safe harbor appears to be the only exemption
plausibly available to the Fund. Paribas, acting as an agent for the Fund,
distributed shares to the public, bringing the bank within the definition
of an issuer. See 17
C.F.R. § 230.903. Two general conditions, however, must be met
for either of the safe harbors to apply: first, no "directed selling efforts"
may be made in the United States. The release defines "directed selling
efforts" as marketing efforts such as mailings or seminars in the United
States designed to induce the purchase of securities purportedly being
distributed abroad. SEC Release No. 33-6863, 55
Fed.Reg. at 18311. Second, any offer or sale must fit the definition
of an "offshore transaction," which requires inter alia that no offer be
made to a person in the United States. [FN6]
the facts alleged by EOC in this case, we cannot say that the Fund can
clearly rely on the issuer safe harbor. EOC says that Arida's representations
made over the telephone and facsimile to Carr in Florida resulted in his
entering a purchase order on behalf of EOC. This alleged conduct could
qualify as either "directed selling efforts" or a forbidden offer to a
person in the United States. For example, the SEC explained in its release,
"offers and sales to transients in the United States are transactions in
the United States and may not be part of an offering relying on the safe
harbors of Regulation S." SEC Release No. 33-6863, 55
Fed.Reg. at 18316 n. 115. Although Carr was merely an agent acting
on behalf of an offshore corporation with its accounts offshore, we cannot
say definitively on a Rule 12 motion that such an agent can never qualify
as a "person in the U.S." for the purposes of the safe harbors.
as: 147 F.3d 118, *125)
A transaction not within either of the safe harbors may still be outside
of the United States within the meaning of 17
C.F.R. § 230.901. We believe the purchases by EOC ordered by Carr
were such foreign transactions. Proposed versions of Regulation S included
a list of factors to be considered in determining whether an offer or sale
occurs outside of the United States, but in response to comments on the
proposals, the list was deleted in the final version. [FN7] SEC Release
No. 33-6863, 55
Fed.Reg. at 18309. The SEC explained that
"[t]he determination as to whether a transaction is outside the United
States will be based on the facts and circumstances of each case." Id.
Our research has uncovered no case or decision of the SEC construing §
230.901 with respect to transients visiting the United States, so we
work on an essentially blank slate.
The deleted factors were "the locus of the offer or sale, the absence of
directed selling efforts in the United States, the likelihood of the securities
sold coming to rest outside the United States, and the justified expectations
of the parties to the transaction as to the applicability of the registration
requirements of the U.S. securities laws." Offshore Offers and Sales, Securities
Act Release No. 33-6779, 53
Fed.Reg. 22661, 22661-2 (proposed June 17, 1988).
We believe that the conduct and effects test used to determine the reach
of the anti-fraud provisions of U.S. securities laws can be adapted to
analyze what is outside the specific safe harbors yet still "outside the
United States" under Regulation S. The conduct and effects test was developed
by the courts in the absence of clear Congressional guidance as to the
jurisdictional reach of the antifraud provisions of the securities laws.
v. Fenn, 935 F.2d 475, 478 (2d Cir.1991). To discern "whether Congress
would have wished the precious resources of the
United States courts and law enforcement agencies to be devoted to" such
519 F.2d at 985, courts have looked to the underlying purpose of the
anti-fraud provisions as a guide. See, e.g., Schoenbaum
v. Firstbrook, 405 F.2d 200, 206 (2d Cir.1968) (finding that extraterritorial
application of the 1934 Act was appropriate where necessary to protect
American investors), modified on other grounds, 405
F.2d 215 (1968) (en banc). The antifraud provisions are designed to
remedy deceptive and manipulative conduct with the potential to harm the
public interest or the interests of investors. See H.R.Rep. No. 1838, at
32-33 (1934), reprinted in 1 Alan R. Bromberg & Lewis D. Lowenfels,
Bromberg and Lowenfels on Securities Fraud & Commodities Fraud §
2.2(331) (2d ed.1997). In outlining the extraterritorial reach of these
provisions, courts have reasoned that Congress would not want the United
States to become a base for fraudulent activity harming foreign investors,
or "conduct," see Psimenos
v. E.F. Hutton & Co., 722 F.2d 1041, 1045 (2d Cir.1983), and that
Congress would want to redress harms perpetrated abroad which have a substantial
impact on investors or markets within the United States, or "effects."
405 F.2d at 206; Consolidated
Gold Fields, 871 F.2d at 261- 62. However, because it is well-settled
in this Circuit that "the anti-fraud provisions of American securities
laws have broader extraterritorial reach than American filing requirements,"
at 262, the extent of conduct or effect in
the United States needed to invoke U.S. jurisdiction over a claimed violation
of the registration provisions must be greater than that which would trigger
U.S. jurisdiction over a *126
of fraud. To adapt the conduct and effects test for use in interpreting
the registration provisions, we must take into account Congress's distinct
purpose in drafting the registration laws.
as: 147 F.3d 118, *126)
passed the registration provisions "to assure full and fair disclosure
in connection with the public distribution of securities." James D. Cox
et al., Securities Regulation 45 (1991). Through mandatory disclosure,
Congress sought to promote informed investing and to deter the kind of
fraudulent salesmanship that was believed to have led to the market collapse
of 1929. Id. at 14 (citing H.R.Rep. No. 85 (1933)). The registration provisions
are thus prophylactic in nature. Seen in this light, the registration provisions
also can be said to aim at certain conduct with the potential for discernible
effects. Specifically, the registration provisions are designed to prevent
the offer of securities in the United States securities market without
accompanying standardized disclosures to aid investors, a course of conduct.
This conduct, in turn, has the effect of creating interest in and demand
for unregistered securities. To avoid this result, in keeping with Congress's
purpose, the registration provisions should apply to those offers of unregistered
securities that tend to have the effect of creating a market for unregistered
securities in the United States; and by "creating a market" we do not mean
to imply that the conduct must be directed at a large number of people.
Commissioner's release accompanying Regulation S, as well as the early
version of Regulation S, support the application of this conduct and effects
test. The factors originally listed in Regulation S pertaining to when
an offer or sale of a security occurs outside the United States largely
pertain to efforts to create a market in the United States for unregistered
foreign securities. These factors were "the locus of the offer or sale,
the absence of directed selling efforts in the United States, and the justified
expectation of the parties to the transaction as to the applicability of
the registration requirements of the U.S. securities laws." Offshore Offers
and Sales, Securities Act Release No. 33-6779, 53
Fed.Reg. 22661, 22661-2 (proposed June 17, 1988). Such a test is also
consistent with earlier statements by the SEC about the scope of the registration
provisions. See, e.g., SEC Release No. 33-6863, 55
Fed.Reg. at 18308 ("The Commission, however, historically has recognized
that registration of offerings with only incidental jurisdictional contacts
should not be required."); see also Registration of Foreign Offerings by
Domestic Issuers, Securities Act Release No. 33-4708, 1964 WL 3661 (July
9, 1964) (stating that U.S. corporations could safely distribute unregistered
securities abroad to foreign nationals, if distribution were effected
in a manner that would result in the securities coming to rest abroad);
Vizcaya Int'l N.V., SEC No-Action Letter, 1973 WL 11880, at *4 (Apr. 4,
1973) (extending the position of Release No. 33-4708 to foreign corporations).
nearly de minimis U.S. interest in the transactions presented in the instant
case precludes our finding that U.S. jurisdiction exists under the more
limited conduct and effect standard appropriate under the registration
provisions of the 1933 Act. Under the facts as alleged by EOC, there was
conduct in the United States because Arida called Carr here and Carr executed
his order here. However, the conduct was not such as to have the effect
of creating a market for those securities in the United States. Carr's
presence here was entirely fortuitous and personal, and the actual purchaser
of shares in the Fund was an offshore corporation without a place of business
here. [FN8] Although the offer or sale of an unregistered security to an
agent of a foreign company in the United States may in some cases tend
to create a market for the security in the United States, this is not such
a case. EOC was conducting no business in the United States through Carr,
nor otherwise benefitting from his presence here. Nor did the transaction
U.S. broker or other U.S. financial entity. Arida, on his part, did nothing
to encourage a market for securities in the United States. He made no calls
or solicitations to individuals he had reason to suspect were American
as: 147 F.3d 118, *127 )
residents in the United States, and he directed no general sales efforts
here. Accordingly, we hold that the securities sold to EOC did not fall
under the registration requirements of the 1933 Act, and that we therefore
lack subject matter jurisdiction over EOC's § 5 claims.
as: 147 F.3d 118, *127)
While my colleagues do not agree, the author of this opinion would add
course, we do not attempt in ruling on this case to provide a set of definitive
rules to govern future transactions. Nor do we mean to suggest that standards
developed under the anti-fraud provisions may be incorporated wholesale
into the registration context. The exact contours of the conduct and effects
test, as applied to registration cases, must remain to be defined on a
Investment Company Act of 1940.
The SEC has clearly said that compliance with Regulation S does not excuse
non-compliance with the Investment Company Act of 1940. [FN9] See SEC Release
F.R. at 18316 n. 108. Section 7(d), which governs the Investment Company
Act's application to foreign companies, prohibits any investment company
which is not organized under the laws of the United States or of a State
to use the means of interstate commerce to offer for sale or sell "in connection
with a public offering" any security of which it is the issuer. 15
U.S.C. § 80a-7(d). Section 7(d) by its terms only prohibits public
offerings by foreign investment companies (absent receipt of an order from
the Securities and Exchange Commission). EOC has not alleged that Fund
shares were sold by Paribas in connection with a public offering in the
United States, and there is no evidence to support such a claim. There
is no evidence of a general solicitation in the United States or that offers
were made to persons who were not wealthy, sophisticated investors. See,
v. Johnson, 892 F.2d 1328, 1337 (8th Cir.1989). The defendants were,
thus, not subject to the Investment Company Act.
EOC does not address the issue whether there is a private right of action
to enforce § 7(d). We assume for the purpose of this appeal, though
we by no means hold, that one exists.
As discussed above, the antifraud provisions of the securities laws have
been held to reach beyond the registration requirement of the 1933 Act.
Our conclusion with respect to registration does not therefore eliminate
the possibility that jurisdiction could be found under § 10(b) of
the 1934 Act (codified at 15
U.S.C. § 78j) and Rule 10b-5 (17
C.F.R. § 240.10b-5). [FN10] Congress's power to impose civil penalties
for fraud in predominately foreign securities transactions is limited only
by the Due Process Clause of the Fifth Amendment. In a long line of decisions
stretching back to Schoenbaum,
this circuit has recognized that the federal securities laws do not reach
this constitutional limit. [FN11] We have looked for conduct, see, e.g.,
468 F.2d at 1333-34; effects, see, e.g., *128
405 F.2d at 206-09; or a combination thereof, see, e.g., Itoba,
supra, note 1, 54 F.3d at 122, in the United States to arrive at "our
best judgment as to what Congress would have wished if these problems [of
extraterritorial application] had occurred to it." Bersch,
519 F.2d at 993 (footnote omitted).
as: 147 F.3d 118, *128)
The complaint also alleged a violation of the fraud provision of §
12 of the 1933 Act (15
U.S.C. § 77l(2)). Appellant's brief to this court does not advance
this provision as a basis for our assertion of jurisdiction apart from
§ 10(b), or cite us to any case considering § 12 as
The 1934 Act states at § 30(b) that it "shall not apply to any person
insofar as he transacts a business in securities without the jurisdiction
of the United States, unless he transacts such business in contravention
of such rules and regulations as the Commission may prescribe as necessary
or appropriate to prevent the evasion of this chapter." 15
U.S.C. § 78dd(b). But, the SEC has provided no such guidance for
the antifraud provisions of the 1934 Act, leaving the courts to decide
the application of § 10(b) with reference to the statute and its purpose
Perhaps the most difficult cases under the conduct test have concerned
activity in the United States that causes, or plays a substantial part
in causing, harm to foreign interests overseas. By contrast, as stated
above, the effects test concerns the impact of overseas activity on U.S.
investors and securities traded on U.S. securities exchanges. [FN12] See
AG v.Compagnie Internationale Pour L'Informatique
CII Honeywell Bull S.A., 606 F.2d 5, 9-10 (2d Cir.1979); Itoba,
54 F.3d at 124. Telephone calls and facsimile transmissions conveying
offers to sell securities and investment information could be characterized
as either conduct or effects in the United States. [FN13]
As formulated in Bersch,
the effects test concerns sales to "Americans resident in the United States."
F.2d at 993. We agree with the opinion expressed by Judge Motley in
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 1983 WL 1360, *3 (S.D.N.Y.
Sept. 8, 1983) that "the United States would have a greater interest
in protecting foreigners residing within its borders than foreigners resident
abroad" and that, for this reason, U.S. residence of individual investors--not
American nationality--must be the focus of the effects test. See Restatement
of Foreign Relations § 416(1)(a)(ii) (1987) ("The United States may
generally exercise jurisdiction ... with respect to ... any offer to enter
into a securities transaction, made in the United States by or to a national
or resident of the United States.") Indeed, as Judge Motley noted, O'Driscoll,
1983 WL 1360 at *4, since alienage is a protected class under the Constitution,
v. Richardson, 403 U.S. 365, 91 S.Ct. 1848, 29 L.Ed.2d 534 (1971),
limiting the effects test to citizen investors
be constitutionally suspect. Plaintiff EOC is, however, a foreign corporation,
and even Carr was only vacationing in the United States. We see no reason
that the U.S. interest in protecting transients, who benefit from the protection
of their own national governments, should be as great as that in protecting
Gold Fields, 871 F.2d at 262 (describing the transmittal of offering
documents to the United States as an effect); Leasco,
468 F.2d at 1335 ("[W]e see no reason why, for the purposes of jurisdiction
to impose a rule, making telephone calls and sending mail to the United
States should not be deemed to constitute conduct within it.")
If evaluated as an effect, the U.S. interest affected by this transaction
is indiscernible for reasons already discussed: the plaintiff is a Panamanian
corporation; the individual who placed the purchase orders, and who ultimately
suffered any losses, is a Canadian citizen; the securities are not traded
on a U.S. exchange; and no effect on a U.S. affiliated company is alleged
by EOC. There is, thus, no U.S. entity that Congress could have wished
to protect from the machinations of swindlers. [FN14] Cf. IIT
v. Vencap, Ltd., 519 F.2d 1001, 1017 (2d Cir.1975) (declining jurisdiction
under the effects test over an allegedly fraudulent sale of foreign securities
to a British investment trust with 300 U.S. investors
who formed .2% of the trust's fundholders).
EOC objects that the motion to dismiss was granted before discovery was
permitted to ascertain the extent of U.S. holdings in and losses from the
Fund. The extent of U.S. holdings is often relevant to the issue of whether
some alleged frauds affected the United States, but we do not think this
is such a case. All the alleged fraudulent representations were made by
Arida (or others at Paribas) to Carr personally and perhaps also to O'Brien.
The misrepresentations concerned the management and investment practices
of the Fund which Carr claims induced him to buy an investment that was
not in fact within his investment strategy. Thus, these were by no means
the sort of public misrepresentations, such as concealment of a large liability
or overstating earnings, that would implicate all U.S. holders of Fund
shares, and they are therefore not relevant to the fraud claims.
analysis becomes somewhat more difficult when we turn to the conduct test.
The conduct test in this circuit has been stated in two parts as follows:
anti-fraud provisions of the federal securities laws ... [a]pply to
losses from sales of securities to Americans resident abroad if, but only
if, acts (or culpable failures to act) of material importance in the United
States have significantly contributed thereto; but ... [d]o not apply to
losses from sales of securities to foreigners outside the United States
unless acts (or *129
failures to act) within the United States directly caused such losses.
as: 147 F.3d 118, *129)
519 F.2d at 993. Or, alternatively, we have said more simply that activity
in the United States that is "merely preparatory" to a securities fraud
elsewhere will not implicate our antifraud laws. Itoba,
54 F.3d at 122 (citing Bersch).
EOC's allegations do not fit neatly into either of the two categories outlined
Clearly, EOC is not a U.S. entity: even were we to look through the Panamanian
corporate identity, its owner, a Canadian citizen, is still foreign. Yet,
on the other hand, EOC alleges solicitation and sale of securities within
the United States, and the second Bersch
category is specifically limited to sales outside the United States. EOC's
claim, thus, falls in yet another category which, although identified,
was not addressed in Bersch:
"losses to foreigners from sales to them within the United States." 519
F.2d at 993. EOC's is a novel factual pattern not squarely governed
by any of our decisions to date.
facts alleged by EOC, nonetheless, satisfy the requirement that U.S. activity
directly cause the harm to the foreign interest, which has in the past been
the key element of litigation involving the conduct test. Or, stated in
the alternative language we have sometimes used, Arida's communications
into the United States were more than "mere preparation" for the fraud.
EOC alleges that Arida solicited, offered to sell, and accepted a purchase
order for securities from Carr when he was in Florida. Carr also says he
relied upon the allegedly misleading information given to him from abroad
while he was present in the United States, and such reliance was the direct
cause of the loss sustained by EOC. Cf. Fidenas,
606 F.2d 5 (all parties were foreign, and this court declined jurisdiction
because conduct in the United States was secondary or ancillary to the
alleged fraud). The difficult question raised by EOC's allegations is whether
Arida's communications to Carr in Florida may be considered activity within
the United States for the purpose of the antifraud provisions of the security
laws sufficient to support the jurisdiction of this court under the 1934
Act. We believe that they were not.
Although phone calls (or any other communications into the United States)
soliciting or conveying an offer to sell securities ordinarily would be
sufficient to support jurisdiction, it would be inconsistent with the law
of this circuit to accept jurisdiction over this dispute, because the surrounding
circumstances show that no relevant interest of the United States was implicated.
In other words, a series of calls to a transient foreign national in the
United States is not enough to establish jurisdiction under the conduct test
without some additional factor tipping the scales in favor of our jurisdiction.
Without such added weight, the exercise of prescriptive jurisdiction by
Congress would be unreasonable within the meaning of the Restatement of
Foreign Relations [hereinafter Restatement] §§ 416(2) and 403
(1987), [FN15] and is particularly so when the transaction is clearly subject
to the regulatory jurisdiction of another country with a clear and strong
interest in redressing any wrong. We do not think Congress intended to
make the securities laws have such a broad reach or to make U.S. courts
available for such suits.
Section 416 of the Restatement addresses "Jurisdiction to Regulate Activities
Related to Securities." Subsection (2) of 416 provides:
the United States may exercise jurisdiction to prescribe with respect to
transactions or conduct other than those addressed in Subsection (1) depends
on whether such exercise of jurisdiction is reasonable in the light of
§ 403, in particular
whether the transaction or conduct has, or can reasonably be expected to
have, a substantial effect on a securities market in the United States
for securities of the same issuer or on holdings in such securities by
United States nationals or residents;
whether representations are made or negotiations are conducted in the
whether the party sought to be subjected to the jurisdiction of the United
States is a United States national or resident, or the persons sought to
be protected are United States nationals or residents.
403 includes a longer list of generally-applicable factors relevant to
the question whether the exercise of prescriptive jurisdiction is reasonable.
the past, we have found jurisdiction over a predominantly foreign securities
transaction under the conduct test when, in addition to communications
with or meetings in the United States, there has also been a transaction
on a U.S. exchange, economic activity in the U.S., harm to a U.S. party,
or activity by a U.S. person or entity meriting redress. [FN16] All of
these factors are absent from EOC's allegations. Avc
Nederland B.V. v. Atrium Inv. Partnership, 740 F.2d 148 (2d Cir.1984),
which Judge Friendly indicated was a very close case, id.
at 154, provides the strongest support of EOC's position, but does
not go far enough. Nederland
concerned the sale of an interest in a partnership formed by Dutch nationals
[FN17] for the purpose of investing in U.S. real estate. Plaintiff-purchaser
was also Dutch. Much of the negotiation during which the alleged misrepresentations
were made occurred in the United States, but the deal was concluded abroad.
Even though the consummation of the allegedly
fraud-tainted sale occurred outside the United States, Judge Friendly's
opinion found jurisdiction, after considering the many factors listed in
§ 403(2) of Tentative Draft No.2 of the current Restatement. [FN18]
Id. Specifically, the opinion found the extent of the activity within the
regulating state and the economic activity connecting both the plaintiff
and defendants to the United States weighed in favor of jurisdiction. Presumably,
although the opinion does not say as much, it considered the U.S. real
estate investments, which were the purpose of the partnership and the subject
of the alleged fraud, to be economic activity connecting the parties to
the United States within the meaning of § 403(2)(b) of the Tentative
Draft. In any event, we find Nederland
distinguishable for this reason. The sales by Paribas to EOC have no similar
connection to the United States: EOC invested in Europe; and Paribas's
offices in and any other connections to the United States have no relevance
to these transactions. We therefore find that the slight additional factor
of economic activity in the United States, which "tipped the balance" in
favor of jurisdiction in Nederland,
is absent from EOC's case.
as: 147 F.3d 118, *130)
The seller was a partnership of two Dutchmen formed under Georgia law,
but the court considered it a Dutch entity. Nederland,
740 F.2d at 154.
Section 403(2) of the Tentative Draft provided: "Whether the exercise of
jurisdiction is unreasonable is judged by evaluating all the relevant factors,
the extent to which the activity (i) takes place within the regulating
state, or (ii) has substantial, direct, and foreseeable effect upon or
the links, such as nationality, residence, or economic activity, between
the regulating state and the persons principally responsible for the activity
to be regulated, or between that state and those whom the law or regulation
is designed to protect;
the character of the activity to be regulated, the importance of regulation
to the regulating state, the extent to which other states regulate such
activities, and the degree to which the desirability of such regulation
is generally accepted;
the existence of justified expectations that might be protected or hurt
by the regulation in question;
the importance of regulation to the international political, legal or economic
the extent to which such regulation is consistent with the traditions of
the international system;
the extent to which another state may have an interest in regulating the
the likelihood of conflict with regulation by other states."
this case, there is no U.S. party to protect or punish, despite the fact that
the most important piece of the alleged fraud--reliance on a misrepresentation--may
place in this country. Congress may not be presumed to have prescribed
rules governing activity with strong connections to another country, if
the exercise of such jurisdiction would be unreasonable in the light of
established principles of U.S. and international law. See Restatement §
403. And, the answer to the question of what jurisdiction is reasonable
depends in part on the regulated subject matter. Id. cmt. c. ("[R]egulation
by the United States of the labor relations of a foreign vessel that regularly
calls on the United States may be unreasonable; regulation of the vessel's
safety standards may not be unreasonable.")
as: 147 F.3d 118, *131)
case illustrates the kind of circumstances in which it is unreasonable
to prescribe rules of conduct with respect to securities fraud, even when
a misrepresentation is made in the United States and reliance occurs on
U.S. soil. Section 10(b), although it sounds in the common law tort of
fraud, is part of a regulatory system that serves the public interest of
the United States in much the same way as banking and currency regulations.
This apparent purpose of protecting and regulating an entire system led
this court to extend, through the use of the effects test, the antifraud
provisions of these laws to activity not ordinarily within the "presumptive"
scope of legislation. See Equal
Employ. Opp. Comm'n v. Arabian American Oil Co., 499 U.S. 244, 248 111
S.Ct. 1227, 1230, 113 L.Ed.2d 274 (1991) (legislation presumptively
824 F.2d at 31 (same) (collecting cases). [FN19] The very considerations
that have led this court to conclude that Congress meant for the securities
antifraud laws to reach beyond our shores to certain fraudulent activities
abroad militate against finding subject matter jurisdiction over EOC's
complaint. It would be ironic if a foreign party seeking redress in a U.S.
court could sidestep the effect requirement by stretching our notions of
conduct in the United States to include telephone calls from abroad to
an agent/owner of that party here fortuitously. The situation is entirely
different from the difficult cases under the conduct test in which a U.S.
person or entity is the source of misleading information causing harm elsewhere.
The U.S. interest in punishing an English malfeasor working at a French
bank branch in London who caused no harm here is not apparent. We therefore
hold that the alleged solicitation, offer to sell, and purchases occurring
while Carr was present in Florida did not bring this otherwise entirely
foreign transaction within the antifraud provisions of U.S. securities
After adopting the Second Circuit's "conduct" test for the extraterritorial
application of U.S. securities fraud laws, Judge Bork's opinion in Zoelsch
noted "the test we adopt here does provide jurisdiction whenever any individual
is defrauded in this country,
of whether the offer originates somewhere else, for the actual consummation
of securities fraud in the United States in and of itself would constitute
domestic conduct that satisfies all the elements of liability." Zoelsch,
824 F.2d at 33 n. 4. We agree with this general statement, but think
it inapplicable when, as here, there is no U.S. citizen, resident or other
identifiable U.S. interest concerned.
O'Brien's relevance to this appeal.
O'Brien is not a plaintiff in this proceeding. Apparently recognizing,
however, that if he were, a marginally stronger case for subject matter
jurisdiction would be before us, EOC continues to press the facts of O'Brien's
case on this appeal as it did in the proceedings below. O'Brien purchased
shares in his own name, rather than through an offshore company as did
Carr. He also may have been a Florida resident at the time of his purchase,
even though he made contrary representations to Paribas. And, O'Brien may
not have had a preexisting relationship with Paribas at the time of his
purchase, but even this fact is not clear from Carr's declarations. Indeed,
we do not even know where O'Brien was at the time he executed his subscription
agreement, or from where the agreement was sent. Despite EOC's insistence,
we need not decide whether we would have jurisdiction over securities fraud
or registration claims brought by O'Brien, because he is not a party to
this action. Cf. Fidenas,606
F.2d at 8 (accepting on appeal a distinction drawn by the district
court between subject matter jurisdiction over the claims of individual
plaintiffs, on the one hand, and class actions or derivative suits, on
as an effect in the United States for the purpose of our jurisdiction over
the fraud alleged by EOC, it is hard to see what O'Brien adds to EOC's
position. First, O'Brien told the bank that he was a British subject, residing
in London, who could be reached in the United States where he was on business.
Thus, from the bank's point of view, he had no more of a connection to
the United States than did Carr or EOC. Second, any loss he sustained was
isolated; it did not have a significant impact on U.S. markets or investors.
We cannot see how he changes the lack of any U.S. interest in the alleged
fraud. Similarly, O'Brien adds little to EOC's registration claims: his
purchase does not support an inference that the bank offered unregistered
securities to a person it knew was a resident or citizen of the United
States. And, for the same reason, O'Brien cannot be considered evidence
of a U.S. market interest in the Fund. O'Brien's purchase does not, therefore,
present any reason to alter our conclusion that the sale to EOC was outside
the United States for the purpose of § 5.
decision of the district court dismissing plaintiff EOC's complaint for
lack of subject matter jurisdiction is affirmed.
as: 147 F.3d 118, *132)
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