Before Castle, Senior Circuit Judge, and Pell and Sprecher, Circuit Judges.
Plaintiff appeals from the lower court's dismissal of its complaint for lack of subject matter jurisdiction. We affirm the dismissal and determine that the complaint did not allege sufficient facts to conclude that a certificate of deposit of a Bahamian banking and trust entity was a security under the Securities Exchange Act of 1934.
The plaintiff, the current trustee of several trusts, brought this action against several former directors of the previous trustee, Mercantile Bank and Trust Company; Mercantile's controlling corporate shareholder; and Mercantile's alleged former auditing firm, Price Waterhouse & Co. Mercantile was a Bahamian bank and trust company which acted as trustee for the trusts from June 3, 1971 to May 8, 1977. During that time, pursuant to its mandate to invest money for the benefit of the trusts, the bank purchased with trust assets its own certificates of deposit. Shortly thereafter, Mercantile's license to do business was suspended and it was placed in control of a Permanent Liquidator by Bahamian authorities, causing losses by the trust beneficiaries. The plaintiff charged that the bank's purchase of its own certificates of deposit constituted a violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78hh, and Rule 10b-5, 17 C.F.R. § 240.10b-5, and gave rise to common law claims of fraud, breach of fiduciary duty, and negligent misrepresentation.*fn1
Defendant Price Waterhouse & Co. moved to dismiss the complaint for lack of federal jurisdiction under the Securities Exchange Act because "(a) there are no "securities' in the transactions complained of; and (b) the conduct complained of is predominantly foreign and has an insufficient nexus with the United States."*fn2 Without specifying whether its action was based upon one or both of the asserted grounds, the district court granted the motion and dismissed the complaint. The plaintiff has appealed. Because federal question jurisdiction depends upon the existence of a "security" and because we find that none was properly alleged, we affirm.
Unlike most complaints relying on the presence of a security, plaintiff's complaint in this case neither incorporates nor attaches a copy of the instrument or document relied upon to sustain jurisdiction. Although not all securities must be evidenced by written documents, the provision of the Securities Exchange Act of 1934 which defines "security" lists a catalogue of what are ordinarily written documents. See 15 U.S.C. § 78c(a)(10).*fn3 The word "certificate" particularly implies the existence of a writing,*fn4 and the ordinary definition of a "certificate of deposit" is
A written acknowledgment by a bank or banker of a deposit with promise to pay to depositor, to his order, or to some other person or to his order.
Black's Law Dictionary (Rev. 4th ed. 1968). Nevertheless, as we stated above, a writing is not mandatory and its absence is not fatal.*fn5
In this case, however, we are not advised by the complaint whether the particular certificates of deposit are nonexistent and therefore were represented by wholly oral arrangements, or whether written certificates do exist but have been withheld from the plaintiff by Mercantile or by its Permanent Liquidator.
The absence of a physical document presents difficulties for the plaintiff because it must nonetheless prove the existence of subject matter jurisdiction based on the existence of a written or oral security not available for examination by the court. Although the complaint is relatively lengthy, it deals primarily with the nature of the conspiracy alleged to exist among the defendants and with the misrepresentations or nondisclosures of the conspirators. Virtually the only allegations purporting to describe the certificates of deposit are the following:
34. In fact, through the period indicated, contrary to its representations as to the investments it would make of trust funds, Mercantile Bank from time to time invested trust funds in excess of $500,000.00 in its own certificates of deposit. On information and belief, plaintiff states that none said (sic) certificates of deposit were guaranteed by INTERNATIONAL BANK. Plaintiff does not know the total amount of said investments, nor the amount thereof, if any, that were guaranteed by INTERNATIONAL BANK inasmuch as the information conveyed to the beneficiaries about said investments by Mercantile Bank was deliberately inaccurate. Plaintiff believes that there was in excess of a million and a half dollars so invested. Had the beneficiaries known of this they could have appointed an investment committee or removed Mercantile Bank as Trustee.
35. On or about December, 1976, advisors of the beneficiaries of the Trusts were informed that the Trusts had some three million five hundred thousand dollars not committed to liabilities or other investments. Mercantile Bank further informed the advisors of the beneficiaries that it intended to invest said funds in certificates of deposit in a bank or banks in London, England. Contrary to said representations said funds were invested, without the knowledge of the beneficiaries or any of their advisors, in certificates of deposit of Mercantile Bank. At that time Mercantile Bank knew it would not redeem the certificates of deposit.
In analyzing these allegations and in construing the statutory term "security," we keep in mind that the securities acts should be construed broadly as remedial legislation to effectuate their purposes. One of the central purposes of securities legislation is the protection of investors, and in effectuating that purpose, "form should be disregarded for substance and the emphasis should be on ...