The opinion of the court was delivered by: Getzendanner, District Judge.
MEMORANDUM OPINION AND ORDER
This matter is before the court on the motion of defendant
Bache & Co. (Lebanon) S.A.L. ("Bache Lebanon") for judgment on
the pleadings or, in the alternative, for summary judgment.
Defendant asserts three grounds for its motion: lack of
subject matter jurisdiction; collateral estoppel; and no right
of action under the Commodity Exchange Act, 7 U.S.C. § 1-24
(the CEA) and associated rules and regulations. For the reasons
that follow, the motion is denied, except as to the alleged
violations of the exchange rules.
Subject Matter Jurisdiction
Plaintiffs Abdallah Tamari, Ludwig Tamari and Farah Tamari
(the Tamaris) are Lebanese citizens and residents of that
country. Defendant Bache Lebanon is a wholly-owned subsidiary
of Bache & Co., Inc., a Delaware corporation ("Bache
Delaware")*fn1, and it is a Lebanese corporation having its
sole office in Beirut, Lebanon. The Tamaris allege that Bache
Lebanon solicited commodity futures orders (apparently for
silver, coffee and pork bellies, among other commodities) from
them in Lebanon and then transmitted such orders by wire from
its Beirut office to Bache Delaware's Chicago offices for
execution on the Chicago Board of Trade (the CBOT) and the
Chicago Mercantile Exchange (the CME).*fn2 They further
allege that Bache Lebanon made misrepresentations regarding
its expertise, gave false advice on market conditions,
mismanaged their accounts, and breached its fiduciary duty.
Their complaint has two counts, the first under the CEA, and
the second for common-law fraud.
The CEA has been held to have extraterritorial application
in some circumstances, Commodity Futures Trading Commission v.
Muller, 570 F.2d 1296, 1299 (5th Cir. 1978). Both parties, in
arguing for and against the applicability of the CEA to the
circumstances in this case, have primarily relied on the case
law in analogous securities law cases. There is a substantial
body of such case law defining the transnational scope of the
Securities Act of 1933 and the Securities Exchange Act of 1934.
See generally the cases and articles listed in Continental
Grain (Australia) Pty., Ltd. v. Pacific Oilseeds, Inc.,
592 F.2d 409, 413 (8th Cir. 1979).*fn3
In these cases, courts have developed two related doctrines
for analyzing transnational problems, the effects test and the
conduct test.*fn4 While some courts have indicated that both
tests must be satisfied in order to sustain subject matter
jurisdiction, the weight of authority holds that meeting
either test establishes jurisdiction. Continental Grain, supra,
592 F.2d at 417 (8th Cir. 1979) (jurisdiction may be
established by meeting either test); Straub v. Vaisman & Co.,
540 F.2d 591, 595 (3d Cir. 1976) (conduct alone sufficient from
a jurisdictional standpoint); Leasco Data Processing Equipment
Corp. v. Maxwell, 468 F.2d 1326, 1334 (2d Cir. 1972) (same).
This court need not resolve the issue, however, as under each
test jurisdiction exists here.
Under the effects test, courts sustain jurisdiction over
conduct occurring in foreign countries when that conduct
causes foreseeable and substantial harm to interests within
the United States, that is, when there is a substantial impact
on domestic investors or on the domestic market. The doctrinal
basis for this test derives from the Restatement (Second) of
Foreign Relations Law of the United States § 18.*fn5 The first
court to formulate and apply the effects test was the Second
Circuit in Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir.),
aff'd as to jurisdiction and rev'd on other grounds,
405 F.2d 215 (2d Cir. 1968) (en banc), cert. denied sub nom., Manley v.
Schoenbaum, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969).
In Schoenbaum, an American shareholder in a Canadian
corporation brought a derivative suit alleging fraud in
violation of the 1934 Securities Exchange Act. The challenged
transaction occurred in Canada, but it involved Canadian stock
registered on the American Stock Exchange. The court held that
the securities laws applied extraterritorially in that case "in
order to protect domestic investors who have purchased foreign
securities on American exchanges and to protect the domestic
from the effects of improper foreign transactions in American
securities." 405 F.2d at 206.
The effects test enunciated in Schoenbaum was later limited
by two cases from the Second Circuit decided on the same day,
Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2d Cir.), cert.
denied sub nom., Bersch v. Arthur Andersen & Co.,
423 U.S. 1018, 96 S.Ct. 453, 46 L.Ed.2d 389 (1975) and IIT v. Vencap,
Ltd., 519 F.2d 1001 (2d Cir. 1975). In Bersch, a plaintiff
class consisting of thousands of shareholders, most of whom
were foreign, had purchased stock in an international
corporation organized under the laws of Canada. The named
plaintiff, an American, brought an action against various
American and foreign underwriters and an American accounting
firm. The challenged public offering had been deliberately
structured to avoid sales in America, but despite this some
sales had been made to Americans, both within the United States
One of the grounds for jurisdiction asserted in
Bersch was the adverse general effect the collapse of the
international corporation had on the American stock market,
even though its securities were not traded on American
exchanges. To support this assertion, plaintiffs submitted an
affidavit from an economics professor. The Bersch court
rejected this argument, stating:
[W]e do not doubt that the collapse of IOS after
the offering had an unfortunate financial effect
in the United States. Nevertheless we conclude
that the generalized effects described by
Professor Mendelson would not be sufficient to
confer subject matter jurisdiction over a damage
suit by a foreigner under the anti-fraud
provisions of the securities laws.
519 F.2d at 988. See also Recaman v. Barish, 408 F. Supp. 1189,
1199 n. 11 (E.D.Pa. 1975) (study showing general adverse impact
on economy in case where securities were not traded on ...