Opinion
01 Civ 3999 (RWS)
August 15, 2001
SECURITIES AND EXCHANGE COMMISSION, Attorney for Plaintiff, Washington, DC, By: MARK KREITMAN, ESQ., KEVIN O'ROURKE, ESQ., WILLIAM R. BAKER, III, ESQ., LAWRENCE A. WEST, ESQ., NEIL J. WELCH, JR., ESQ., JOSE M. RODRIGUEZ, ESQ., Of Counsel.
CRAVATH, SWAINE MOORE, Attorney for Defendants Martha Baranda de Igartua and Ana Igartua Baranda de Duclaud, New York, NY, By: JOHN E. BEERBOWER, ESQ., Of Counsel.
HOGAN HARTSON, Attorney for Defendants Elvira Baranda Garcia and Maricruz Lozano Ledezma, New York, NY, By: IRA M. FEINBERG, ESQ., LYNDON M. TRETTER, ESQ., Of Counsel.
OPINION
Defendants Maricruz Lozano Ledezma ("Lozano"), Elvira Baranda Garcia ("E. Baranda"), Martha Baranda de Igartua ("M. Baranda") and Ana Igartua Baranda de Duclaud ("A. Igartua") have moved to dismiss the action against them for lack of personal jurisdiction pursuant to Fed.R.Civ.P. 12(b)(2). For the reasons set forth below, the motions will be denied with leave to refile after the close of discovery.
The Parties
Plaintiff Securities and Exchange Commission ("SEC") is a governmental agency charged with the task of ensuring compliance with federal securities laws.
Defendant Alejandro Duclaud Gonzalez de Castilla ("A. Duclaud") is married to defendant Ana Igartua Baranda de Duclaud. Both are residents and citizens of Mexico. At all times relevant to this action, he was a partner in the Mexico City law firm of Franck, Galicia, Duclaud and Robles, S.C. ("Franck, Galicia").
Alejandro Duclaud is the settlor, or creator, of nominal defendant Anushka Trust. The Anushka Trust is governed by English law and beneficially owns all the stock of Anushka Holdings, Ltd. The Anushka Trust makes equity investments through an account at PaineWebber, Inc. ("PaineWebber"), including the CompUSA trades at issue in this action.
Defendant Jose Antonio- Duclaud Gonzalez de Castilla ("J. Duclaud"), like his brother, Alejandro Duclaud, is a Mexican citizen and resident who practices law.
Jose Antonio Duclaud is the settlor, or creator, of nominal defendant Caribbean Legal Trust, which beneficially owns all the stock in Caribbean Legal Holdings, Ltd. ("Caribbean Legal Holdings"). The Carribean Legal Trust makes equity investments through an account at PaineWebber, including the CompUSA trades at issue in this case.
Defendant Pablo Velazquez Baranda ("Velazquez") is a Mexican citizen and resident. His cousin, defendant Ana Igartua, is married to Alejandro Duclaud. Velazquez traded CompUSA stock through an account at Lehman Brothers, which he held in his own name jointly with his wife, defendant Maricruz Lozano Ledezma, and his mother, defendant Elvira Baranda Garcia, who are both also Mexican citizens and residents. Lozano does not work outside the home, although she was formerly involved in foreign (non-U.S.) exchange trading at a brokerage firm in Mexico.
Defendant Rodrigo Igartua Baranda, a Mexican citizen and resident, is a professional financial advisor who acts as the Chairman and Chief Executive Officer of SB Asesores S.A. de C.V. ("S.B. Asesores"), and is the president of defendant Antares Holdings Investment, Ltd. ("Antares"), an off-shore company established in order to facilitate his investments. Rodrigo Igartua Baranda is a cousin of defendant Pablo Velazquez Baranda, and is Alejandro Duclaud's brother-in-law. Both Alejandro and Jose Antonio Duclaud are Igartua's clients, and Alejandro and Rodrigo are involved in a real estate project together in Acapulco. Three of Igartua's brokerage accounts have been frozen in this action, including a personal account held at Lehman Brothers, the Antares PaineWebber account, and a Lehman Brothers account held jointly with his mother, defendant Martha Baranda de Igartua ("M. Baranda"), and his sister, defendant Ana Igartua Baranda de Duclaud ("A. Igartua"). Both women are Mexican citizens and residents.
Ignacio Guerrero is an Executive Director of Banco Internacionale ("BITAL"), one of the largest banks in Mexico. He is also the beneficial owner of defendant Banrise Limited BVI, an entity formed under the laws of Ireland in the mid-1990's, and reorganized under the law of the British Virgin Islands in the summer of 1999, which trades through Beta Capital Management, L.P. ("Beta Capital"), in Miami, Florida.
Background
The facts giving rise to this action have been set forth in a prior opinion of this Court, familiarity with which is assumed. See S.E.C. v. Gonzalez de Castilla, 132 F. Supp.2d 402 (S.D.N.Y. 2001). In short, this action alleges that defendant Alejandro Duclaud received and passed on to his friends and family inside information of an impending tender offer for CompUSA, Inc. ("CompUSA"). Each of the defendants made lucrative trades in CompUSA stock in the month prior to the public announcement of the tender offer.
Pablo Velazquez Baranda's wife, Maricruz Lozano Ledezma, and mother, Elvira Baranda Garcia, are named as beneficial owners on Velazquez's Lehman Brothers account (the "Velazquez joint account"), through which insider trading allegedly took place. Both women signed client agreement and tax forms for the account, Lozano at the Lehman Brothers office when the account was opened during a vacation in Miami, and E. Baranda in Mexico. (Lozano Decl. ¶ 4; E. Baranda Decl. ¶ 3).
Affidavits from all three nominal account holders attest that Velaquez asked the women to add their names to the account so that they would have ready access to the funds in case of his untimely death. (Lozano Decl. ¶ 3; E. Baranda Decl. ¶ 3; Velazquez Decl. ¶ 5.) Both Lozano and E. Baranda considered the money in the account to be Velazquez's and have had nothing to do with the account. (Lozano Decl. ¶¶ 5, 6; E. Baranda Decl. ¶¶ 4, 5.) Moreover, both women confirmed Velazquez's deposition testimony that they played no part in the CompUSA trades, and had no knowledge that he had made them until after the fact. ((Lozano Decl. ¶ 6, E. Baranda Decl. ¶ 5; Velazquez Decl. ¶ 5.) Neither woman has ever conducted business in the United States or owned real or personal property here other than their interest in the Velazquez joint account. (Lozano Decl. ¶¶ 7, 8; Baranda Decl. ¶¶ 6, 7.)
Rodrigo Igartua Baranda and his and sister, Ana Igartua Baranda de Duclaud, are named as beneficial owners in the Lehman Brothers account of his mother, Martha Baranda de Igartua (the "Igartua joint account"). (M. Baranda Decl. ¶¶ 6-8). The money in the account derives from life insurance and the estate of Martha Baranda's late husband. (M. Baranda Decl. ¶ 3.). As she has no investing experience, Rodrigo Igartua has made all the investment decisions for the account, and suggested that he and Ana be named as beneficiaries of the account for estate planning purposes. (M. Baranda Decl. ¶¶ 5-7.) The account statements are sent only to Rodrigo. (M. Baranda Decl. ¶ 9.)
Igartua's account was originally opened at Smith Barney, transferred to PaineWebber, Inc. ("PaineWebber"), and finally replaced by a similar account at Lehman Brothers. (See Salama Aff. Exs. C, D (account opening documents); M. Baranda Decl. ¶¶ 5-8.)
The Igartua joint account is the only property interest Martha Baranda has in the United States. (M. Baranda Decl. ¶ 1, 11.) Aside from accompanying her husband to Houston for his cancer treatment in the years prior to his death in 1996, and accompanying her daughter and granddaughter to Houston, and San Diego to treat her granddaughter's medical problem, Martha Baranda's only other United States contacts are occasional vacations. (M. Baranda Decl. at ¶ 4.)
Ana Igartua is part owner of a children's clothing store in Mexico City, and spends the rest of her time at home with her six year-old daughter. (A. Igartua Decl. ¶ 3.) She has no investing experience and has never made any investment decisions in her mother's account, or any other. (A. Igartua Decl. at ¶ 8.) Aside from her nominal interest in the Igartua joint account and a Bear Stearns account she holds jointly with her husband, Alejandro Duclaud, she possesses no real or personal property in the United States. (A. Igartua Decl. at ¶ 7.) Like her mother, Ana Igartua's only other contacts with the United States arise from occasional visits. (A. Igartua Decl. ¶ 9.)
Consistent with his usual practice for the Igartua joint account, Rodrigo directed the purchase CompUSA shares in January 2000 and sold them some time thereafter. (M. Baranda Decl. ¶ 9, 10.) Neither Martha Baranda nor Ana Igartua had any knowledge that Rodrigo had traded in CompUSA stock until after the fact. (M. Baranda Decl. ¶ 10; A. Igartua Decl. ¶ 6.)
Maricruz Lozano Ledezma and Elvira Baranda Garcia filed a motion to dismiss for lack of personal jurisdiction on June 11, 2001. The motion was deemed fully submitted on July 18, 2001, after the SEC's opposition and a reply brief were filed. Martha Baranda de Igartua and Ana Igartua Baranda de Duclaud filed a motion to dismiss for lack of personal jurisdiction on June 26, 2001. This motion was deemed fully submitted on July 25, 2001 after the filing of the SEC's opposition and the movants' reply brief. As both motions raise essentially the same argument in support of a dismissal for lack of personal jurisdiction, they are addressed together in this opinion.
Discussion
The moving defendants (the "movants") contend that this Court lacks personal jurisdiction over them because they merely hold joint bank accounts in the United States through which other defendants traded in CompuSA stock. In short, they contend that passive account ownership is insufficient contact to establish personal jurisdiction where the action arises out of trades made by other defendants. The SEC essentially maintains that personal jurisdiction exists over the movants because this action arises out of their ownership of the joint brokerage accounts.
I. Legal Standards
Section 27 of the Securities and Exchange Act, 15 U.S.C. § 78aa, grants United States District Courts personal jurisdiction to the full extent of the Due Process Clause of the Fifth amendment. SEC v. Unifund SAL, 910 F.2d 1028, 1033 (2d Cir.), reh'g denied, 917 F.2d 98 (1990). The Due Process Clause requires first that the defendant have "certain minimum contacts with [the forum] such that the maintenance of the suit does not offend "traditional notions of fair play and substantial justice.'" International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 158, 90 L.Ed. 95 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463, 61 S.Ct. 339, 342-43, 85 L.Ed. 278 (1940)). It is essential that the defendant has committed some act "purposely availing [her]self of the privilege of conducting activities in the forum State, thus invoking the benefits and protections of its law." Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985). For specific jurisdiction to exist, the suit must "`aris[e] out of or [be] related to the defendant's contacts with the forum.'"Metropolitan Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560, 567-68 (2d Cir. 1996) (quoting Helicopteros Nacionales de Colombia v. Hall, 466 U.S. 408, 414-16 nn. 8-9 (1984)).
Where, as here, federal court jurisdiction is premised on a federal statute rather than diversity of citizenship, the forum applicable for contacts analysis is the United States rather than the forum state. See SEC v. Knowles, 87 F.3d 413, 417 (2d Cir. 1996); SEC v. Softpoint, Inc., No. 95 Civ. 2951 (GEL), 2001 WL 43611, *5 (S.D.N.Y. Jan. 18. 2001).
In contrast, general jurisdiction may exist if, looking at the contacts as a whole, "the defendants' business contacts with the United States have been "continuous and systematic," although unrelated to the lawsuit. Helicopteros Nacionales de Columbia v. Hall, 466 U.S. 408, 416 (1984); see Aerogroup Int'l. Inc. v. Marlboro Footworks, Ltd., 956 F. Supp. 427, 439 (S.D.N.Y. 1996) (quoting Metro. Life Ins., 84 F.3d at 570). Although they have not specifically argued in favor of either form of personal jurisdiction, the lack of evidence that any of the movants had systematic contacts with the United States leads the Court to address only the question of specific jurisdiction.
If minimum contacts exist, a Court must also inquire whether it would be reasonable to require the defendant to litigate in the forum. See Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 107 S.Ct. 1026, 94 L.Ed.2d 92 (1987). The Supreme Court has directed that the following factors be considered when conducting the reasonableness analysis:
(1) the burden that the exercise of jurisdiction will impose on the defendant; (2) the interests of the forum state in adjudicating the case; (3) the plaintiff's interest in obtaining convenient and effective relief; (4) the interstate judicial system's interest in obtaining the most efficient resolution of the controversy; and (5) the shared. interest of the states in furthering substantive social policies.Metropolitan Life Ins., 84 F.3d at 568 (citing Asahi, 480 U.S. at 113-14.) The Second Circuit has found the exercise of personal jurisdiction to be reasonable where "a defendant has acted in such a way as to have caused consequences' in the forum state." Unifund, 910 F.2d at 1033 (citing Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326, 1340 (2d Cir. 1972)).
The plaintiff bears the burden of establishing minimum contacts over the defendants in a Rule 12(b)(2) motion to dismiss. See Metropolitan Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560, 566 (2d Cir. 1996). The nature of this burden depends on the procedural posture of the case. Motions made before discovery may be defeated by a prima facie showing based solely upon the facts alleged in the complaint. See Chaiken v. VV Pub. Corp., 119 F.3d 1018, 1025 (2d Cir. 1997).
However, where extensive discovery pertaining to personal jurisdiction has been produced yet no evidentiary hearing has been held, "`the plaintiff's prima facie showing, necessary to defeat a jurisdiction testing motion, must include an averment of facts that, if credited by (the ultimate trier of fact], would suffice to establish jurisdiction over the defendant.'" Kernan v. Kurz-Hastings. Inc., 175 F.3d 236, 240 (2d Cir. 1999); accord Bank Brussels Lambert v. Fiddler Gonzalez Rodriguez, 171 F.3d 779, 784 (2d Cir. 1999). Under those circumstances, the plaintiff must not only allege facts to defeat a motion to dismiss for lack of personal jurisdiction after discovery; "[a]t that point, the prima facie showing must be factually supported." Ball v. Metallurgie Hoboken-Overpelt. S.A., 902 F.2d 194, 197 (2d Cir. ), cert. denied, 498 U.S. 854, 111 S.Ct. 150, 112 L.Ed.2d 116 (1990).
The parties have expedited the discovery process in this action. Since the complaint was filed on May 10, 2001, the SEC has taken depositions of Alejandro Duclaud, Jose Antonio Duclaud, Pablo Velazquez, Rodrigo Igartua, and Ignacio Guerrero, and gathered tens of thousands of pages of documents from five defendants and multiple non-parties. The SEC has obtained documents pertaining to the creation of both joint accounts and deposition testimony from joint account holders Alejandro Duclaud and Rodrigo Igartua, who each attest that the female defendants had no involvement with the accounts or the specific CompUSA trades after signing the account opening documents. However, none of the movants has been deposed. The parties disagree as to why these depositions have not yet been taken. Regardless of the cause, the fact remains that none of the moving defendants has been deposed, and there is little discovery probative of facts pertaining to personal jurisdiction other than the account documents. Accordingly, the lower, pre-discovery standard of proof will be applied to these motions, and the SEC must merely make out a prima facie case for personal jurisdiction to survive these motions to dismiss.
The SEC claims that Lozano and Elivira Baranda "failed to appear for their noticed May 18, 2001 depositions," (SEC June 15, 2001 Br. at 2). In contrast, these movants contend that this deposition was "adjourned by mutual agreement" (Loz. Reply Br. at 5 n. 4), and that they proposed a telephonic deposition, an offer which the SEC "inexplicably" declined (Id.). Although telephonic depositions are "broadly permitted in this jurisdiction," vhere a party objects, they are conducted only after being authorized by a court order pursuant to Fed.R.Civ.P. Rules 28(b) (allowing for deposition to proceed in foreign country under certain conditions) and 30(b)(7) ("the court upon motion may order that a deposition be taken by telephone."). Advani Enterprises. Inc. v. Underwriters at Lloyds, No. 95 Civ. 4864 (CSH), 2001 WL 1568255, *2 (S.D.N.Y. Oct. 19, 2000).
It would be improper to give weight to the depositions testimony at this point because discovery is not yet complete. Accordingly, only the affidavits submitted with this motion have been considered.
"[W]here the issue is addressed on affidavits, all allegations are construed in the- light most favorable to the plaintiff and doubts are resolved in the plaintiff's favor," Whitaker v. American Telecasting, Inc., Nos. 99-9275(L), 00-7313 (CON), 2001 WL 838231, * 11 (2d Cir. July 25, 2001) (alterations in original) (citation and internal quotations omitted), although the court must not make "argumentative inferences" favoring the plaintiff, Robinson v. Overseas Military Corp., 21 F.3d 502, 507 (2d Cir. 1994). See also A.I. Trade Finance. Inc. v. Petra Bank, 989 F.2d 76, 80 (2d Cir. 1993) (Doubts must be resolved in favor of plaintiff "notwithstanding a controverting presentation by the moving party.").
If minimum contacts are shown, the movants bear the burden to show that the exercise of personal jurisdiction would be unreasonable. See Burger King, 471 U.S. at 478; Metro. Life Ins. Co., 84 F.3d at 568.
II. The SEC Has Met its Pre-Discovery Burden to Establish Personal Jurisdiction
Construed in the light most favorable to the SEC, the complaint makes out a prima facie case for specific personal jurisdiction. In particular, the complaint alleges that the movants traded CompUSA stock through their joint accounts on a date just prior to the public announcement of the tender offer (Compl. ¶¶ 12, 39, 40).
Specifically, the complaint alleges: "On January 20, 2000 Defendants Martha Baranda de Igartua, Ana Igartua and Rodrigo Igartua bought 20,000 shares of CompUSA common stock at $5.5625 per share for a cost of $112,154 through their account at PaineWebber" (Compl. ¶ 39), and that "[o]n January 21, 2000, Pablo Velasquez [sic] Baranda, Elvira Baranda Garcia and Maricruz Lozano Ledezma bought 30,000 shares of CompUSA common stock at $6.208 per share for a cost of $187,182 through their account at Lehman Brothers." (Compl. ¶ 40.) The only other reference to the movants is the allegation that they "appear to be relatives of Alejandro Duclaud." (Compl. ¶ 12.)
A. Mimmum Contacts
That the trades were executed through a branch office of an American bank is merely "one slight point of contact with the United States," although the SEC heavily relies on this factor in its brief. Unifund, 910 F.2d at 1033; see also Casio Computer Co. Ltd. v. Sayo, 98 Civ. 3772, 2000 WL 1877516, at *26 (S.D.N.Y. Oct. 13, 2000) (ownership and transfer of money to New York bank accounts held insufficient to establish personal jurisdiction under RICO); Weinberg v. Colonial Williamsburg, Inc., 215 F. Supp. 633, 639- 40 (E.D.N.Y. 1963) ("Certainly the mere existence of a bank account is not conclusive as to the fairness of subjecting defendant to suit in this forum" under federal due process analysis). Though the bank accounts may constitute contacts with the United States, this litigation did not "arise out of or relate to" the opening of or maintenance of the Velazquez and Igartua joint accounts, Burger King, 471 U.S. at 472 (quoting Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 774 (1984)), but rather stems directly from the movants' alleged insider trading.
The dispositive contact with the United States is the effect the alleged insider trading had on the value of CompUSA and on the American investors who traded in its stock on the New York Stock Exchange. See Unifund, 910 F.2d at 1033 (finding sufficient contacts for specific personal jurisdiction due to the "rather direct and unmistakably foreseeable effect" of alleged insider trading on United States shareholders). Other courts addressing insider trading claims before discovery was completed have reached the same conclusion. In S.E.C. v. Euro Sec. Fund, No. 98 Civ. 7347 (DLC), 1999 WL 768801 (S.D.N.Y. Feb. 17, 1999), for example, the Honorable Denise Cote considered a motion to dismiss for lack of personal jurisdiction under similar circumstances, where the complaint alleged that defendants "themselves, while in the possession of material, nonpublic information, purchased or caused to be purchased . . . stock in violation of Sections 10(b) and 14(e) of the Exchange Act." 1999 WL 768801, *3 Accepting the allegation as true under the pre-discovery standard, Judge Cote held that "there is little question that it is proper for this Court to exercise personal jurisdiction over them for claims arising out of those trades." Id. See also Ranger Oil Ltd. v. Petrobank Energy and Resources Ltd., No. 00 Civ. 3139 (SHS), 2000 WL 33115906, *7 (S.D.N.Y. May 28, 2000) (finding personal jurisdiction over foreign defendants alleged to have engaged in insider trading in the context of a tender offer).
The movants contend that because none of them authorized the CompUSA trades or was even aware that the trading had taken place until after the fact, their mere passive ownership of the joint accounts is insufficient contact to confer jurisdiction. Under the burden of proof applicable to this stage of the proceedings, however, defendants cannot prevail on a motion to dismiss simply by presenting affidavits that controvert the SEC's prima facie case. See A.I. Trade Finance. Inc. v. Petra Bank, 989 F.2d 76, 80 (2d Cir. 1993) (doubts must be resolved in plaintiff's favor "notwithstanding a controverting presentation by the moving party."). Although the defendants' affidavits create doubt about their role in the alleged insider trading, but "where the issue is addressed on affidavits, all allegations are construed in the light most favorable to the plaintiff and doubts are resolved in the plaintiff's favor." Whitaker v. American Telecasting. Inc., — F.3d — , Nos. 99-9275(L), 00-7313 (CON), 2001 WL 838231, *11 (2d Cir. July 25, 2001).
Although the movants allege that defending this action would cause them undue hardship, expense, and inconvenience disproportionate to the SEC's interest in enforcing the securities laws, they have not demonstrated that this is one of those "rare cases" in which inconvenience to the parties outweighs the reasonableness of jurisdiction. See Softpoint, 2001 WL 43611, at *5 (quoting Asahi, 480 U.S. at 116) (Brennan, J., concurring)). Each of the Met Life factors weighs in favor of exercising personal jurisdiction. The United States has a strong interest in enforcing the securities laws. The complaint, which is deemed true for the purposes of this motion under the pre-discovery standard, alleges that the movants purchased and sold CompUSA stock on the basis of inside information in violation of securities laws. As such, the exercise of personal jurisdiction over them along with the other named defendants in this action will effectively and efficiently vindicate the interests of the forum.
In short, the allegation that the movants engaged in insider trading in a United States corporation traded on the New York Stock Exchange is sufficient to make out a prima facie case that they purposely availed themselves of the benefits of United States law, and in so doing directly and foreseeably harmed United States investors. Therefore, the SEC has met its prediscovery burden to establish both minimum contacts and the reasonableness of exercising personal jurisdiction over the movants.
Conclusion
For the foregoing reasons, the motions are denied with leave to ref ile after the close of discovery.
It is so ordered.