for wrongs which would otherwise be actionable. Since this issue will not be foreclosed by the pending litigation, defendants' motion to dismiss or to stay must be denied.
Motion to Dismiss Count VIII and Count IX as it Relates to Count VIII
Count VIII alleges a violation by defendants of § 10(b) of the Act, 15 U.S.C. § 78(j)(b) and Rule 10(b)(5) of the SEC's rules promulgated thereunder. Plaintiffs allege that the defendants made certain fraudulent statements and misrepresentations in connection with the sale of SAN's outstanding shares of common stock to GK and the sale of ten SAN preferred shares by GK to SCA. Among the alleged misrepresentations made were that SAN was to continue as sublicensee under a license from Imperial Chemical Industries, that SCA would provide counter-signatures for guarantees and that the directors nominated by SCA for SAN's Board of Directors would act in the best interests of SAN.
Defendants contend that this court lacks subject matter jurisdiction over this claim because it involves the transfer of ownership of securities of a foreign corporation (SAN) to a foreign purchaser (GK) with the transfer taking place in the Netherlands.
The applicability of § 10(b) of the Act to stock transactions of foreign corporations has received extended discussion in three cases. Schoenbaum v. Firstbrook, 405 F.2d 200, mod. with respect to liability of one set of defendants, 405 F.2d 215 (2 Cir. 1968), cert. denied, 395 U.S. 906, 89 S. Ct. 1747, 23 L. Ed. 2d 219 (1969); Leasco Data Processing Equipment Corporation v. Maxwell, 468 F.2d 1326 (2 Cir. 1972); Travis v. Anthes Imperial Limited, 473 F.2d 515 (8 Cir. 1973). Each case held that the Act applied to the transaction involved in that case. Defendants contend that these decisions are limited to transactions which either have a demonstrable effect on American securities markets or involve the protection of an American investor.
We need not determine whether the protection afforded by § 10(b) is limited to an American investor since it is clear that sufficient conduct took place within the U.S. to allow applicability of § 10(b) beyond the U.S. and that the transaction in question has a significant impact on American securities markets. SCA is a publicly owned corporation whose stock is registered on the American Stock Exchange. Furthermore, it is alleged by plaintiffs that at least one of SAN's major shareholders is an American. The case before us is a far cry from the hypothetical situation posed by Judge Friendly in Leasco Data Processing Equipment Corporation v. Maxwell, 468 F.2d supra at 1338 in which a "German and a Japanese businessman met in New York for convenience, and the latter fraudulently induced the former to make purchases of Japanese securities on the Tokyo Stock Exchange." The agreement whereby the stocks were transferred in this case was made in the United States between an American Corporation and employees, at least one of whom is alleged to be an American, of a wholly-owned foreign corporation. And the alleged fraudulent acts took place in the United States. The result of SCA's alleged fraud may cause a serious if not a complete loss of a once wholly-owned company and that company's earnings. We cannot say that the impact on the American market is insignificant.
Finally, SCA's contention that the alleged misrepresentations cannot be construed as misrepresentations of fact is not properly dealt with on a motion to dismiss. Whether statements were made upon which SAN had no reason to rely because of existing legal relationships established in a license or other written agreement cannot be decided simply on the pleadings. The defendants have submitted no affidavits in support of this contention.
Now, September 27, 1973, it is ordered:
1. Defendants' motion to dismiss or stay Counts I through VII and IX are denied.
2. Defendants' motion to dismiss Count VIII and Count IX insofar as it relates to Count VIII is denied.
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