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May 25, 1982


The opinion of the court was delivered by: Getzendanner, District Judge.


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.

The Effects Test

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 securities market 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 and abroad.

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 ...

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