The opinion of the court was delivered by: RAMBO
Background and Procedural History
This case is brought by the City of Harrisburg (hereinafter referred to as Harrisburg or the City) against Bradford Trust Company (Bradford), a New York financial and banking institution. The Complaint, filed on April 1, 1985, alleges violation of the federal securities laws, Section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b), and Rule 10(b)-5, 17 C.F.R. 240.10b-5, as well as common-law fraud and misrepresentation.
For purposes of the present motion to dismiss, the allegations of the complaint will be taken as true. The substance of Harrisburg's claim is that it suffered serious financial losses due to Bradford's fraudulent acts in connection with certain "repurchase transactions," also known as "repo agreements." Under these agreements, Harrisburg purchased securities from one E.S.M. Government Securities, Inc. (E.S.M.), a Florida corporation.
E.S.M. agreed to repurchase the securities on a certain date and at a certain price, which would yield a profit to the City on the funds invested. E.S.M. allegedly represented to the City that these securities were being deposited with Bradford in a segregated account for the City. Bradford also allegedly represented to the City "that the government securities being purchased by the City from E.S.M. were in the custody of Bradford and were being held by Bradford in a segregated account for the City of Harrisburg." Complaint, para. 10. Harrisburg claims that these representations were false. Further, the City alleges that Bradford failed to disclose "that it was or would become a substantial creditor of E.S.M. thereby creating a conflict of interest with its duties as a fiduciary," and also "failed to disclose that it would sell collateral for its own benefit and to the detriment of the City of Harrisburg, which it did." Complaint, para. 11.
As a result of Bradford's allegedly fraudulent and tortious conduct, Harrisburg claims that it suffered losses in excess of three million, six hundred thousand dollars, for which it seeks to be compensated. The City further requests punitive and exemplary damages as well as incidental and consequential damages, interest, and costs.
Presently before the court is the defendants' Motion to Dismiss filed on May 22, 1985. By order dated July 25, 1985, this court ruled that the motion would be converted to a Motion for Summary Judgment in view of the factual material which had been submitted by the parties. Upon defendant's request for clarification, submitted via letter dated July 29, the court subsequently modified that order and ruled that only the 12(b)(2) and 12(b)(3) prongs of the motion were to be converted; the 12(b)(6) and 9(b) motions, raising no factual issues, would remain as such.
Thus, the instant motion consists of three parts:
(2) a motion to dismiss for failure to state a claim upon which relief can be granted, Fed.R.Civ.P. 12(b)(6); and
(3) a motion to dismiss for failure to plead the allegations of fraud with sufficient particularity, as required by Federal Rule of Civil Procedure 9(b).
The court will proceed to address the merits of these motions seriatim.
1. Personal Jurisdiction and Venue
The defendant has moved to dismiss, inter alia, on the ground that this court lacks in personam jurisdiction, and that venue is improper in this district. Fed.R.Civ.P. 12(b)(2) and (3). Bradford contends that the court lacks jurisdiction both under the federal securities laws and under the Pennsylvania statutes which provide the basis for federal diversity jurisdiction. Because this court finds that it has jurisdiction pursuant to the federal statute, we need not address the state law argument.
Section 27 of the Securities and Exchange Act of 1934 provides in pertinent part that
any suit or action to enforce any liability or duty created by this title or rules and regulations thereunder . . . may be brought in any . . . district . . . wherein any act or transaction constituting the violation occurred . . . or in the district where the defendant is found or is an inhabitant or transacts business, and process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found.
15 U.S.C.S. § 78aa (Lawyers Edition 1983). It is well settled that this authorization of nationwide service of process is constitutionally valid.
Congress has the power to provide for the reach of service of process to the outer limits of the reach of its legislative power which, of course, is anywhere in the United States or its territories. . . . If suit under the Federal securities antifraud acts and rules thereunder is brought in a ...