Opinion
00 CIV. 2284 (DLC), 00 CIV. 2498 (DLC)
May 14, 2001
Steven S. Honigman, Richard P. Swanson, Jonathan E. Polonsky, Veronica E. Rendon, Thelen Reid Priest LLP New York, N.Y. Attorneys for Plaintiffs Cromer Finance, Ltd. et al.
Jeffrey H. Squire, Richard L. Stone, Mark A. Strauss Kirby, McInerney Squire LLP New York, N.Y. Attorneys for Plaintiffs Cromer Finance, Ltd. et al.
Scott M. Berman, Berlack, Israels Liberman LLP New York, NY, Attorney for Plaintiffs Argos et al.
Robert E. Juceam, Gregg L. Weiner, Fried, Frank, Harris, Shriver Jacobson New York, N.Y. 10004-1980 Attorneys for defendants Ernst Young Bermuda, Fund Administration Services (Bermuda) Ltd., and Kempe Whittle Associates Limited Michael J. Dell Kramer Levin Naftalis Frankel LLP New York, NY., Attorney for defendant Deloitte Touche Bermuda.
OPINION ORDER
By Opinion and Order dated April 17 2001, this Court, among other things, denied in their entirety the motions to dismiss brought by defendants Ernst Young Bermuda ("EYB"), Fund Administration Services (Bermuda) Limited, ("FASB"), and Deloitte Touche Bermuda ("DTB"), and denied in part the motion to dismiss brought by defendant Kempe Whittle Associates Limited ("KW"). Now, these defendants move for reconsideration of that ruling. That motion is denied. Familiarity with the April 17, 2001 Opinion ("Opinion") is assumed, and defined terms have the meanings given them therein.
STANDARD
A motion for reconsideration should be granted only where the moving party demonstrates that the Court has overlooked factual matters or controlling decisions that were presented to it on the underlying motion. See S.D.N.Y. Local Civil Rule 6.3; Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2d Cir. 1995). Courts narrowly construe this standard and apply it strictly against the moving party "'so as to avoid repetitive arguments on issues that have already been considered fully by the court.'" Cohen v. Koenig, 932 F. Supp. 505, 506-507 (S.D.N.Y. 1996) (citation omitted). In addition, the moving party may not "'advance new facts, issues, or arguments not previously presented to the court.'" Bonnie Co. Fashions, Inc. v. Bankers Trust Co., 171 F.R.D. 79, 82 (S.D.N.Y. 1997) (citation omitted). The decision to grant or deny the motion is within the sound discretion of the district court. See Devlin v. Transportation Communications Int'l Union, 175 F.3d 121, 132 (2d Cir. 1999) (citing McCarthy v. Manson, 714 F.2d 234, 237 (2d Cir. 1983)).
DISCUSSION
I. Personal Jurisdiction
A. EYB, FASB, and KW
The Court found that there was general and specific jurisdiction over EYB and FASB under the Due Process Clause, and jurisdiction over KW under Section 302(a)(1), N.Y. C.P.L.R., as well as the Due Process Clause. With little or no reference to legal authority, these three defendants argue that the Court should have given greater weight to certain facts before finding that the plaintiffs had met their burden of presenting prima facie evidence of the existence of personal jurisdiction. None of their arguments persuade this Court that it should reconsider its Opinion.
EYB, FASB, and KW argue principally that the Court failed to address adequately the due process requirement that a defendant purposefully invoke the benefits and protections of the United States' laws in order to be subject to specific jurisdiction. The "purposeful availment" requirement provides that where a defendant
"deliberately" has engaged in significant activities within a State or has created "continuing obligations" between himself and residents of the forum, he manifestly has availed himself of the privilege of conducting business there, and because his activities are shielded by "the benefits and protections" of the forum's laws it is presumptively not unreasonable to require him to submit to the burdens of litigation in that forum as well.
Burger King Corp. v. Rudzewicz, 471 U.S. 462, 476 (1985) (citations omitted) (emphasis supplied); see also Kernan v. Kurz-Hastings, Inc., 175 F.3d 236, 243 (2d Cir. 1999).
In Burger King, the Supreme Court held that while the defendant-franchisee had no substantial physical ties with the forum, the dispute grew directly out of a contract negotiated with Burger King corporation, the forum-based franchisor, that "envisioned continuing and wide-reaching contacts" with Burger King in the forum. Id. at 480. The defendant-franchisee "most certainly knew that he was affiliating himself with an enterprise based primarily in [the forum state]" where the "decisionmaking authority was vested." Id. As in Burger King, these defendants "[e]shew[ed] the option of operating an independent local enterprise, [and] deliberately 'reached out beyond'" their own jurisdiction, id. at 479 (citation omitted), to "'purposefully derive benefit' from their interstate activities," id. at 473 (citation omitted).
As detailed in the Opinion, two of these Bermuda-based Ernst Young defendants contracted with Berger to administer a Fund that was managed from New York by Berger, who also directed the administrators' activities. In fact, one of the administrators' chief defenses appears to be that they were merely following Berger's instructions — all of which came from New York. The administrators received vital financial information about the Fund from New York and sent Fund information to existing investors or their investment managers as well as solicited new investors at New York and United States addresses. The administrators communicated with Berger in New York and had several substantive business meetings with him in New York, including meetings in which they successfully negotiated for the opportunity to do this work.
While it is certainly relevant that the service contracts between the Fund and both FASB and KW included a clause dictating that Bermuda law would govern, and that the FASB contract also provided for arbitration of any disputes in Bermuda, such clauses do not control whether there is personal jurisdiction over these defendants in an action brought by defrauded investors, but are rather two among many factors to consider in assessing contacts for jurisdictional purposes. Burger King, 471 U.S. at 481-82 and n. 24 (choice of law and binding arbitration clauses); Cutco Industries, Inc. v. Naughton, 806 F.2d 361, 366-67 (2d Cir. 1986) (same).
Similarly, while it is relevant that the client for whom these defendants performed their work was established under the laws of the British Virgin Islands, that fact cannot end the analysis, as these defendants appear to argue it should. The control and daily operation of the Fund — all of which was centered in New York — must also be considered.
In sum, there are no "talismanic jurisdictional formulas." Burger King, 471 U.S. at 485. "The facts of each case must always be weighed" and the "'quality and nature' of an interstate transaction" assessed. Id. at 485-86 (citation omitted). The relevant facts here, taken together, constitute prima facie evidence that the administrators purposefully availed themselves of the protections and benefits of American law, and in the case of KW, New York law.
The additional argument, made by each of these defendants, that the plaintiffs have failed to make a prima facie showing that there were American investors in the Fund, shall be addressed below in the discussion of DTB's motion.
EYB
EYB has pointed to no errors in the Court's extensive description of its intertwined relationship on one hand with the international Ernst Young enterprise, or on the other with the two entities it controls: FASB and KW. Instead, it stresses that it is nonetheless an independent, autonomous entity. The Opinion did not disregard that separate legal existence, and did not make any finding that it was appropriate to pierce the veil of the separate existence. The Opinion did, however, describe the reality of EYB's operations behind those corporate formalities. EYB chose to function generally, and specifically in connection with the Fund's work, through these intertwined relationships and the choices it made in that regard may be considered in an evaluation of its jurisdictional contacts with the United States.
EYB also argues that the solicitation letters it sent to the United States were letters from a directory of "'FASB Proposals' sent in response to inquiries rather than as solicitation of U.S. persons" (emphasis in original). Whether sent as part of a blind direct mail campaign or in "response" to an inquiry, its proposal letters were still sent to the United States to pitch business.
EYB next argues regarding the inferences to be drawn from documents. For example, that while EYB executed an EYI "Member's Pledge" that required it to prepare strategic plans conforming to the EYI international plan, it did not adhere to its pledge but made its own decisions regarding its goals and strategies. Arguments such as this do not alter in any way the determination that the plaintiffs have made a prima facie case for general jurisdiction over EYB.
Similarly, in its discussion of specific jurisdiction, EYB argues that the Court's reliance on acts done by personnel serving as officers of both EYB and either KW or FASB is misplaced since these EYB officers acted only on behalf of KW or FASB when working for the Fund. EYB has cited no law that would prevent a fact finder from relying on evidence of actions undertaken by its employees and principals in imposing liability on EYB. In any event, the ultimate resolution of whether their actions are properly attributed only to the two entities dominated by EYB or whether they should also be attributed to EYB is not appropriate at this stage of the litigation, where the only burden on the plaintiffs was to present prima facie evidence of jurisdiction over EYB.
EYB, FASB, and KW argue that a "preponderance of the evidence" standard should govern a motion made pursuant to Rule 12(b)(2), Fed.R.Civ.P., following discovery, rather than the prima facie standard used by this Court. In support of this argument, the defendants cite Volkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp., 751 F.2d 117, 120 (2d Cir. 1984). More recent Second Circuit cases, however, consistently hold that the prima facie standard governs where discovery has occurred in the absence of a hearing. See, e.g., Bank Brussels Lambert v. Fiddler Gonzalez Rodriguez, 171 F.3d 779, 784 (2d Cir. 1999); Metropolitan Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560, 567 (2d Cir. 1996).
KW
Because the federal claims against KW were dismissed as barred by the statute of limitations, the Court reached the additional issue for KW of whether there was jurisdiction based on New York's long arm statute. In doing so, the Court relied exclusively on KW's contacts with New York. Opinion at 55. Any suggestion by KW to the contrary is simply wrong.
For some reason it does not fully explain, KW argues that its work in connection with the Fund prior to February 1997, is irrelevant to a jurisdictional analysis. FASB replaced KW as Fund administrator in February 1997. The state claims that have survived the motions to dismiss have six year statutes of limitations and the extent to which KW purposefully availed itself of the privilege of conducting activities in New York at any point during that six year period is relevant. Top Form Mills, Inc. v. Sociedad Nationale Industria Applicazioni Viscosa, 428 F. Supp. 1237, 1247 n. 12 (S.D.N.Y. 1977), is not to the contrary. Its discussion was in the context of a finding of general jurisdiction, while the Opinion found jurisdiction over KW pursuant to Section 302(a)(1). KW points out that there is no evidence that KW itself, as opposed to FASB, sent monthly NAV statements to Fund investors or their managers in New York. While the specific documents provided to the Court were from 1999, at a time when FASB had replaced KW as the Fund administrator, these provided circumstantial evidence that KW made such mailings when the obligation to make the mailings fell on its shoulders.
Finally, KW points out that the Opinion erred in stating that it had signed the Ernst Young International Member Pledge. Apparently a different "Kempe Whittle" — also associated with EYB and operating from the same location and doing the same work — signed the pledge. This error, which occurred in the discussion of general jurisdiction over KW, had no impact on the Court's finding of personal jurisdiction over KW. Specifically, it affects neither the finding of "arising under" jurisdiction pursuant to Section 302(a)(1), nor the analysis of "reasonableness" under the Due Process Clause.
B. DTB
The Opinion based the finding of personal jurisdiction over DTB on a finding of specific jurisdiction under the Due Process Clause. DTB argues on reconsideration that the Opinion aggregated facts that, individually, are "erroneous or irrelevant." DTB identifies no dispute, however, as to most of the facts on which the Opinion relied. Instead, ignoring the bulk of evidence and mischaracterizing the finding of specific jurisdiction as "hing[ing] upon only three key assertions," DTB narrows its quarrel with specific jurisdiction to just three grounds. DTB argues first that the Opinion's finding — that the plaintiffs had provided prima facie evidence that "DTB understood" that its audits would be mailed to the Fund's shareholders and would reach United States residents, Opinion at 72 — is irrelevant since the plaintiffs have not yet proven that there actually were any investors residing in the United States.
To begin with, it is undisputed that the Offer Memo put DTB on notice that the Fund was open to tax-exempt American investors and DTB's assertion that the "Fund was targeted primarily to foreign investors" cannot change that fact. (Emphasis given by DTB.) DTB's own audits advised readers that the "Fund is designed to permit investors who are tax exempt United States investors or who are neither citizens or residents of the United States . . ." to participate. Plaintiffs have proven therefore that when DTB asked to audit the Fund and when it prepared its annual audits it fully "understood" that the Fund was open to United States investors.
DTB's reliance on Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326, 1342 (2d Cir. 1972), for the proposition that "even the marketing of the Fund to a narrow class of U.S. investors would not have been a sufficient basis for jurisdiction" is inapposite. This passage in Leasco applied the "effects test" as a basis for jurisdiction.
DTB has offered no evidence that it ever learned that its expectation was in error, or that it ever took steps to learn the actual identity of each of the investors to eliminate the possibility that its audits were having any impact on United States residents, or that this fact was material to it at any point during the performance of its work for the Fund. Inquiry of the administrators would have disclosed, of course, the solicitation of United States investors to join the Fund and the mailing of monthly NAV statements and its own annual audit reports to United States residents.
The parties involved in the motions for reconsideration, that is, each of the Bermuda defendants, discuss at length the issue of whether the systematic and undisputed mailings of monthly NAV statements and annual audits to the United States were to investors themselves or instead to their advisors and investment managers. The plaintiffs have pointed to the schedule of investors filed with the Bankruptcy Court in connection with the Fund's insolvency proceedings, and to what they characterize as 21 representative NAV statements sent to United States addresses, nine of which are New York addresses. Determination of whether and how many Fund investors, or beneficial owners of the vehicles which made the investments, or investment managers with discretionary trading authority, or simply investment advisors were residing in the United States can await full discovery. What is clear at this stage is that the plaintiffs have carried their burden of presenting prima facie evidence that these defendants' "conduct and connection with the forum State are such that [they] should reasonably [have] anticipate[d] being haled into court'" in the United States, Burger King, 471 U.S. at 474 (quoting World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980)), and that jurisdiction is not being asserted "solely as a result of 'random,' 'fortuitous,' or 'attenuated' contacts." Id. at 475 (citation omitted).
DTB appears to request halfheartedly an evidentiary hearing on the issue of the residency of Fund investors, stating that "if, arguendo, there were any real question about these issues" a hearing should occur immediately and citing Ball v. Metallurgie Hoboken-Overpelt, S.A., 902 F.2d 194, 197 (2d Cir. 1990). District courts have "'considerable procedural leeway'" in deciding motions to dismiss pursuant to Rule 12(b)(2) and may choose to "provisionally accept disputed factual allegations as true," holding the plaintiffs to a prima facie standard and not requiring an evidentiary hearing. Credit Lyonnais Securities (USA), Inc. v. Alcantara, 183 F.3d 151, 153 (2d Cir. 1999) (citation omitted). Even if DTB's statement in its reply constitutes an actual request for a hearing, that request is denied. The Court will not grant a request for an evidentiary hearing made in a reply submitted on a motion for reconsideration and based on an apparently faulty understanding of the Opinion.
DTB's second quarrel concerns the discussion of DTB's argument that it did not receive the financial information it used for its audits directly from Berger or Bear Stearns, but rather through FASB. The Opinion pointed out that DTB knew that the information "emanated from" the United States. Opinion at 72. DTB contends that even if the information had been received directly from Berger and Bear Stearns, it is irrelevant to the issue of jurisdiction, and that the Court overlooked the significance of Bank Brussels Lambert v. Fiddler Gonzalez Rodriguez, 171 F.3d 779 (2d Cir. 1999), and Mayes v. Leipziger, 674 F.2d 178 (2d Cir. 1982), in this regard.
The jurisdictional significance of the financial information received from the United States is not obscure. The audits DTB won the right to prepare were entirely based on New York financial data: the securities traded by the Fund were traded on American exchanges; the assets of the Fund were kept in New York. The records of the trading activity and the Fund assets were kept by New York institutions. The substance of the audit concerned New York events and data. It is relevant that the work DTB asked to perform required it to have access to this New York data.
DTB argues that the Second Circuit in Bank Brussels and Mayes held that personal jurisdiction did not exist over professionals even though those defendants "had much more extensive contacts with the forum" than DTB does here. Those cases were analyzed under the New York long arm statutes. Bank Brussels involved a Puerto Rico-based defendant law firm that was hired by New York-based banks to render an opinion as "special Puerto Rico Counsel" about a security interest in an asset — an oil refinery — located in Puerto Rico. Bank Brussels, 171 F.3d at 782. While the Second Circuit held that there was no jurisdiction under Sections 302(a)(1) and (2), it remanded for further findings regarding Section 302(a)(3). The Bank Brussels court noted that "one need not be physically present in order to be subject to jurisdiction," id. at 788, but found that the law firm had not projected itself into New York to render it subject to jurisdiction under Section 302(a)(1), id. at 788-89. In Mayes, the plaintiff hired a California attorney to represent her in litigation in California and sued the attorney for failure to file a timely notice of appeal in the California litigation. Mayes, 674 F.2d at 179. The plaintiff sought to exercise jurisdiction over the California attorney under the theory that her New York attorney was the agent of the California attorney, an argument that was quickly rejected, id. at 180, and alternatively under Section 302(a)(1). The court held that the defendant had not engaged in any purposeful activity in New York. Id. at 185-86.
Both of these cases stand in stark contract to the instant case. Bank Brussels and Mayes involved professionals functioning in their local for a on local issues — opining regarding a security interest in Puerto Rican property; litigating in California courts — on behalf of out-of-state clients. Here,
DTB sent a proposal to Berger in New York to prepare audits of New York trading and accounts for dissemination to investors in a Fund open to certain classes of United States investors as well as foreign investors. Based on these facts, and the others recited in more detail in the Opinion, the plaintiffs have shown that DTB "projected itself" into the United States in connection with its work for the Fund.
The last issue pressed by DTB in connection with the Opinion's finding of specific jurisdiction concerns the Opinion's statement that "[t]o perform its work, DTB relied in part on help from its United States based affiliates, who gathered information to mark the Fund's securities to market." Opinion at 72. DTB argues that this was a ministerial act. Ministerial or not, it had to be done and DTB chose to rely on its United States affiliate to do it. It is one more fact undermining any claim by DTB that its contacts with the United States in connection with the Fund were random, fortuitous or attenuated.
The bulk of DTB's motion concerns the Opinion's discussion of general jurisdiction, on which the Court did not ultimately base its finding of jurisdiction over DTB. Many of these arguments, however, either address the merits of the Cromer action or pluck sentences out of context. Other arguments assert that the Court should not rely on various facts in support of specific jurisdiction, when there is no suggestion in the Opinion that it did.
For example, DTB quarrels that DTT did not actually act as a purchasing agent for DTB.
For example, DTB argues that the fact that DTB used DTUS to perform actuarial services for its clients in 1998 and before is irrelevant as to whether DTB is subject to general jurisdiction in 2000, but neglects that portion of the Opinion that recites data for years including 2000. Opinion at 71.
DTB does point to two factual errors made by the Court — one in a footnote and one in the text. Nonetheless, neither of these errors, each of which the Court regrets, alters the more general statements for which these "facts" were cited. In any event, in each instance the discussion concerned the existence of general jurisdiction, not specific jurisdiction.
While the Opinion stated that David Boden "regularly travels" to Miami for meetings of partners assigned to the Deloitte Latin American, Carribean Regional Organization (LACRO) within DTT, Boden travels to Miami only once a year for such meetings, and communicates three or four times a year with a DTT employee via fax or email regarding LACRO matters. The use of the word "regular" may be understood to describe more frequent trips than the annual ones made by Boden. Nevertheless, this "fact" was only one of several supporting the finding in the text of the Opinion that DTB partners "travel" to the United States for business-related meetings. Opinion at 70.
The Opinion found that "[a]t least 50% of DTB's work is for 'exempt companies,' which are majority-controlled by another company located outside of Bermuda. Over 50% of those exempt companies are located in the United States." The sentence should have read "[a]t least 50% of DTB's auditing and accounting work is for 'exempt companies,' which are majority-controlled by another company located outside of Bermuda. Over 50% of the parents of those exempt companies are located in the United States" (additions underlined).
Finally, DTB argues on reconsideration that, as a small firm in Bermuda, it should not be forced to defend itself in New York.
The burden on DTB is highly relevant to the reasonableness of the exercise of jurisdiction over it. As discussed at length in the Opinion, DTB is part of an integrated worldwide business organization run from New York by DTT and it relies on its participation in this network in its marketing, client development, and in performing its work. Where DTB advertises its association with a world-wide network to solicit clients — as it specifically did when it wrote to Berger in New York — it is not unreasonable, in the context of this and all of the other facts considered in the Opinion, to expect DTB to defend itself in a United States court sitting in New York.
II. Subject Matter Jurisdiction
The primary argument advanced by the Bermuda defendants concerning subject matter jurisdiction is that, because this case does not involve a "fraud on the market," it does not implicate the protection of United States' securities transactions and enforcement of United States' securities laws. The Fund, however, was a vehicle designed to facilitate particular strategies for trading United States securities and those who purchased shares of the Fund believed that they were investing in United States securities markets. While the impact here is more remote than a situation involving a direct fraud on the market, the protections of the United States securities laws are nevertheless implicated. See Europe and Overseas Commodity Traders v. Banque Paribas London, 147 F.3d 118, 130 (2d Cir. 1998) (noting that "we have found [subject matter] 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").
The Bermuda defendants also repeat other arguments they had previously made against subject matter jurisdiction. The Opinion, however, did not overlook the fact that the Fund operated as an offshore-fund, Opinion at 48, or that the Bermuda defendants performed their work in Bermuda, id. at 49, or that foreign plaintiffs who are victims of securities fraud may nonetheless bring an action seeking redress under our laws assuming that there is otherwise a sufficient basis for the exercise of subject matter jurisdiction, as there is here, id. at 48.
Finally, the Bermuda defendants again raise in this context the plaintiffs' alleged failure to prove conclusively at this stage of the litigation that there were actually United States resident investors, although the Fund was open to certain classes of such investors. American investors were solicited to participate in the Fund. The precise classification of those United States residents who received the false information disseminated by the Bermuda defendants can await the illumination that will no doubt be shed by full discovery. At this stage, there is sufficient evidence to find subject matter jurisdiction over a fraud hatched in and run from New York, which was open and marketed to United States investors as a vehicle for trading United States securities, for the reasons described in the Opinion.
III. Choice of Law
Applying New York's interest analysis to the claim against DTB of aiding and abetting fraud, the Opinion held that New York and not Bermuda law would apply. DTB argues that the Court overlooked the strong interest of Bermuda in regulating the conduct of a Bermuda accounting firm. The Opinion did not overlook Bermuda's interest in this litigation. Opinion at 77.
DTB raises the entirely appropriate question of whether Bermuda would have a greater interest in applying its own law if a New York accounting firm had performed an audit in New York by relying on information received from a Bermudian investment manager. DTB's hypothetical, however, is incomplete.
If that New York accounting firm had contracted with an individual residing in Bermuda to audit a Fund managed by that individual from Bermuda, if that Fund's monies were deposited in Bermuda, if that Fund's investments were supposed to be in Bermuda securities traded on Bermuda exchanges, and if the Bermuda manager designed and managed a scheme to defraud the Fund's investors from Bermuda, only then would the interest analysis begin to parallel that involved in the Opinion. DTB would also have to add that the New York firm touted its membership in an international organization run from Bermuda and used the name and logo of that international organization on its audits to convey that its audits were prepared in conformity with the standards applied from Bermuda. Finally, DTB would have to add to its hypothetical that the audits containing fraudulent information were sent to many countries, including Bermuda, where either investors or their investment managers resided, while no such mailings went to New York residents. Having overlooked no facts or controlling decisions, the Court declines to reconsider the choice of law analysis in its Opinion.
DTB does not argue in its briefing on the motion to dismiss or in the pending motion that Bermuda law should apply because there were Bermuda investors in the Fund who were injured by the fraud.
CONCLUSION
The Court has considered each of the arguments made by defendants Ernst Young Bermuda, Fund Administration Services (Bermuda) Limited, Kempe Whittle Associates Limited, and Deloitte Touche Bermuda in their motions for reconsideration, and denies the motions.