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PYRENEE, LTD. v. WOCOM COMMODITIES

October 20, 1997

PYRENEE, LTD., a Liberian Corporation d/b/a Pyrenee Real Estate Holding Co., Inc., a California business enterprise, Plaintiff,
v.
WOCOM COMMODITIES LTD., a Hong Kong Corporation, and WOCOM LIMITED, a Hong Kong Corporation, Defendants.



The opinion of the court was delivered by: CASTILLO

 This suit represents the second attempt to litigate against the defendants in United States to recover for an alleged commodity fraud scheme that occurred principally in Hong Kong. In a previous case, plaintiff Pyrenee's President, Michael Mak, was unsuccessful in establishing jurisdiction over the defendant Wocom entities. See Mak v. Wocom Commodities Ltd., 1996 WL 388408 (N.D. Ill. 1996), aff'd, 112 F.3d 287 (7th Cir. 1997). Unfortunately, this "second bite at the apple" does not fare significantly better.

 Pyrenee brings this lawsuit alleging violations of the Commodity Exchange Act ("CEA") in connection with trades that Wocom Commodities or Wocom Limited placed (or, in some cases, feigned placing) on the Chicago Mercantile Exchange ("CME"). Instead of executing the trades as Pyrenee requested, Wocom allegedly "bucketed" some, that is, conducted the trades privately in its Hong Kong office, and "stole the ticks" on others, that is, placed the trades but misrepresented their price and kept the difference. The legality of these rather complicated schemes is not at issue here. As an initial matter, we must confront the jurisdictional issues that Wocom raises in its motion. Reduced to its essentials, the motion contends that this Court lacks subject matter jurisdiction and personal jurisdiction over Pyrenee's claims; should these grounds fail, Wocom urges us to dismiss the suit on forum non conveniens or statute of limitations grounds. Although we find subject matter and personal jurisdiction, we ultimately dismiss this suit for its resolution in Hong Kong, a more convenient forum under the circumstances. *fn1"

 A. The Parties' National Affiliations

 The Wocom entities are Hong Kong corporations that do business in Hong Kong. Hung Aff. P 2, 4; Li Aff. PP 2-3. From 1985 through 1990, Wocom Commodities ("WC") was a Hong Kong broker/dealer trading in spot bullion, foreign currency, foreign exchange, and United States commodities and futures. Hung Aff. P 2. Since 1990, WC has gradually limited its trading activities, and now deals only in Hong Kong spot bullion trading. Id. Wocom Limited ("WL") operated as an investment holding company until 1990, when it began acting as a broker in foreign currency, commodities and futures. Li Aff. P 2. Neither WL nor WC has ever had offices in the United States or solicited customers from the United States. Hung Aff. PP 4-6; Li Aff. PP 3-5. Nor have they registered as members of any United States exchange. Hung Aff. P 5; Li Aff. P 4. As non-members, WC and WL must rely on a United States-based registered futures commission merchant ("FCM") to place their customers' trades on American exchanges. Pl. Resp. Ex. 6.

 Pyrenee was organized under the laws of Liberia and is registered there as an "Offshore Company." Am. Compl. P 3; Def. Mot. Dismiss/S.J. ("Def. Mot.") Ex. D. Offshore companies are not permitted to trade in Liberia, which serves as a tax haven for businesses that operate elsewhere. Def. Mot. Ex. D. Pyrenee alleges that it does business in the United States as Pyrenee Real Estate Holding Co., a California business enterprise based in San Francisco and Menlo Park, CA. Am. Complt. P 3. Pyrenee claims that it is currently qualified to do business in California and continues to own real estate, conduct real estate ventures, and perform under contracts there. Id. But Pyrenee submits evidence of only one real estate transaction on California soil, and the evidence reveals that its status as a California corporation is uncertain. *fn3" We are left without a clear impression as to the location of Pyrenee's primary business activities, although Pyrenee alleges that it does not do business in Hong Kong.

 Pyrenee's President, Michael Mak, is a Hong Kong citizen and resident. Am. Compl. P 9; Def. Mot. Ex. B. From 1980 to 1985, he lived in California, directing the operations of Pyrenee Real Estate Holding Co. Pl. Resp. Ex. 2, P 4.

 B. Trading in Pyrenee's Account

 From May 1985 to June 1996, Mak conducted trading in the Pyrenee account from Hong Kong, spending much of his time in Wocom's offices for this purpose and for the purpose of placing trades in a personal account he maintained with Wocom. Pl. Resp. Ex. 2, P 5; Hung Aff. P 8. In July 1996, Mak went back to the United States for six months. Am. Compl. P 10. Mak remained in California until December 1996, all the while directing trading in Pyrenee's Wocom account. Pl. Resp. Ex. 2, P 6. Mak testifies that he frequently discussed Pyrenee's account with Wocom representatives on the phone during this time, but his affidavit does not specify who initiated the calls. Id. Wocom claims it had no idea that Mak had returned to the United States, or for that matter, that Pyrenee maintained offices in California as a real estate holding company. Supp. Hung Aff. PP 4-5. Wocom's Director and General Manager testifies that all daily confirmations of Pyrenee's trades were sent to Mak's Hong Kong address. Hung Aff. P 9. Mak states that the trade confirmations were forwarded to him in California, and contends that he made it clear to Wocom officials that California was his operational base in the latter half of 1996. Pl. Resp. Ex. 2, P 6; Am. Compl. P 10. According to Mak, Wocom acknowledged his change in residence by complying with requests to "notify" him (but it is unclear by what means) in California when various commodities reached threshold prices. Am. Compl. P 10.

 It was during the period of Mak's California residence -- July to December 1986 -- that Wocom allegedly began mishandling the Pyrenee account. Pyrenee claims that Wocom engaged in two distinct types of commodity fraud: "bucketing" and "stealing the ticks." See 7 U.S.C. § 6b. Bucketing has been described as

 
a method of doing business wherein orders of customers for the purchase or sale of commodities for future delivery, instead of being executed by bona fide purchases and sales with other traders, are simply matched and offset in the soliciting firm's own office and the firm itself takes the opposite side of the customer's orders.

 Purdy v. CFTC, 968 F.2d 510, 520 (5th Cir. 1992). In accordance with this scheme, Wocom allegedly ignored Mak's requests to place foreign currency trades for Pyrenee on the CME and conducted the trades in its own offices instead, putting itself on the opposite side and reaping the profits. Am. Compl. PP 14-19. Secondly, Wocom allegedly "stole the ticks" from trades that it actually placed for Pyrenee on the CME. Id. PP 21-24. In other words, Wocom placed Pyrenee's trades as requested, but then "confirmed the orders at a less favorable price than executed at the exchange and kept the difference." Id. P 22. Pyrenee allegedly did not discover this fraudulent activity until August 1994. Id. PP 12-13.

 C. The Hong Kong Litigation

 Mak returned to Hong Kong at the end of 1986 and, in 1990, filed suit in Hong Kong against Wocom in connection with trading on his personal account. Hung Aff. P 10. The Hong Kong action alleged improprieties in "spot" foreign currency transactions, which, in contrast to currency futures trades, are not conducted on any exchange. Pl. Resp. Ex. 2, P 9. The litigation centered on whether Wocom had followed Mak's instructions in making these trades, and included claims that Wocom had made and retained "secret profits." Hung Aff. Ex. 6 (Hong Kong Supreme Court's Judgment in Michael Mak v. Wocom Commodities Ltd.). Following a three-month trial ending in June 1994, the court ruled against Mak and in favor of Wocom's counterclaim. Id. at 63-64. The ruling was affirmed on appeal and currently awaits the next level of judicial review. Hung Aff. P 10.

 Through discovery conducted during the trial, Mak obtained in April 1994 Wocom's office order documents memorializing other transactions in Mak's personal account -- trades in commodity futures. Pl. Resp. Ex. 2, P 9. Because Mak could not tell from these documents whether all his futures trades had been placed, he retained a commodity futures expert in August 1994 to review the records. Id. P 10-11. The expert, Charles M. Seeger III, compared Wocom's documents with information recorded at United States exchanges revealing the actual dates, times, and prices of the trades, and concluded that Wocom's representations departed significantly. Seeger Aff. P 15.

 D. Actions in the United States

 Based on Seeger's analysis, Mak also filed suit in the United States alleging that Wocom had bucketed trades in his personal futures account. That suit, which was filed one year before this litigation, was dismissed on July 9, 1996 for lack of subject matter jurisdiction. See Mak v. Wocom Commodities Ltd., 1996 U.S. Dist. LEXIS 9522, 1996 WL 388408, at *8 (N.D. Ill. July 9, 1996). The Seventh Circuit affirmed the district court's ruling on June 17, 1997. See Mak v. Wocom Commodities Ltd., 112 F.3d 287, 291 (7th Cir. 1997). On July 18, 1996, while Mak's appeal was pending, Pyrenee brought this action in connection with its corporate account, alleging in Count I that Wocom bucketed Pyrenee's commodity futures trades and including in Count II a claim that was not formally asserted in Mak's action -- tick stealing from Pyrenee's futures trades. Pyrenee claims that Wocom's bucketing and tick stealing both violate section 4b of the CEA (7 U.S.C. § 6b). *fn5" We now turn to the issue of whether we have jurisdiction over these claims and, if so, whether we should nevertheless dismiss the action on forum non conveniens grounds.

 ANALYSIS

 I. Subject Matter Jurisdiction

 A. Legal Standards Governing Subject Matter Jurisdiction

 Federal Rule of Civil Procedure 12(b)(1) governs motions to dismiss for lack of subject matter jurisdiction. In ruling on a 12(b)(1) motion, the court must assume the allegations in the complaint are true and draw all reasonable inferences in favor of the plaintiff. Capitol Leasing Co. v. FDIC, 999 F.2d 188, 191 (7th Cir. 1993). Where, as here, the defendant challenges the existence of subject matter jurisdiction as a factual matter, the court may also look beyond the complaint "and view whatever evidence has been submitted on the issue . . . ." Id. The burden of proving jurisdiction rests with the plaintiff. Grafon Corp. v. Hausermann, 602 F.2d 781, 783 (7th Cir. 1979).

 The Seventh Circuit is clear on the jurisdictional analysis applicable to factual and legal circumstances that mirror those here: "subject matter jurisdiction over international disputes concerning commodity futures transactions is to be largely evaluated according to the 'conduct' and 'effects' tests set out in our decision in Tamari v. Bache & Co. (Lebanon) S.A.L., 730 F.2d 1103 (7th Cir. 1984)." Mak v. Wocom Commodities Ltd., 112 F.3d 287, 288-89 (7th Cir. 1997). The Tamari court held that it had subject matter jurisdiction over a dispute between nonresident aliens under the CEA involving trades within the United States even though the parties' other contacts took place outside the country. 730 F.2d at 1104. First, the court determined that Congress did not explicitly limit the CEA's reach to transactions originating within American borders. Id. at 1107. Second, the court looked to the Second Restatement on Foreign Relations Law, which establishes principles for exercising jurisdiction over alien defendants and their activities using the "conduct" and "effects" tests. Id. n.11. The conduct test "focuses on the foreigner's conduct within the United States as it relates to the alleged scheme to defraud," and authorizes jurisdiction when "the conduct occurring in the United States is material to the successful completion of the alleged scheme." Id. at 1108 (citations omitted). In contrast, the effects test considers whether foreign activities have "caused foreseeable and substantial harm to interests in the United States." Id. (citations omitted). Jurisdiction is proper if either test is satisfied. See North South Finance Corp. v. Al-Turki, 100 F.3d 1046, 1051 (2d Cir. 1996) (characterizing tests as "alternative"); Psimenos v. E.F. Hutton & Co., 722 F.2d 1041, 1045 (2d Cir. 1983) (finding jurisdiction based on conduct and declining to address whether effects test supplied "an independent basis for jurisdiction"); Continental Grain (Australia) Pty. Ltd. v. Pacific Oilseeds, Inc., 592 F.2d 409, 417 (5th Cir. 1979) ("Jurisdiction may be established by meeting the requirements of either, not both, the conduct or effects test."); Straub v. Vaisman & Co., 540 F.2d 591, 595 (3d Cir. 1976) (applying only conduct test); see also Tamari v. Bache & Co. (Lebanon) S.A.L., 547 F. Supp. 309, 311 (N.D. Ill. 1982) (noting that "the weight of authority" holds that meeting either test is sufficient). We now consider whether Pyrenee's CEA claims meet either test.

 B. Pyrenee's Bucketing Claim Fails Both the Conduct and Effects Tests

 To establish jurisdiction under the conduct test, the plaintiff must at the very least point to some United States activity by the defendant. Mak, 112 F.3d at 289; Tamari, 547 F. Supp. at 313. As the Mak court explained, "the transmission of commodity futures orders to the United States from foreign parties is an essential step in the consummation of any scheme to defraud through futures trading on the United States exchanges." Mak, 112 F.3d at 289 (citing Tamari, 730 F.2d 1103 at 1108). Pyrenee's bucketing claim fails the conduct test because it asserts that Wocom never executed on the CME the trades that Pyrenee requested. Rather, the entire bucketing scheme allegedly took place in Wocom's Hong Kong office, where Wocom matched and offset Pyrenee's orders and put itself on the opposite side of the transactions. In this respect, Pyrenee's bucketing claim is no different than the claim Mak advanced, which the Seventh Circuit soundly rejected as insufficient to meet the conduct test:

 
What Mak complains about under the CEA did not happen in the United States and involves people who were not in the United States. Everything regarding these particular trades happened or did not happen in Hong Kong. None of the parties or their agents have ever been located in the United States.
 
. . . .
 
Consequently, it is clear that the conduct test cannot be met in the present case, as no transaction took place on a domestic exchange (in fact, none of the events of this case took place in the United States).

 Id. The court likewise rejected as too "hypothetical" Mak's effects test argument that bucketing, in general, adversely affects United States interests by diverting business from American exchanges, potentially increasing transaction costs and distorting market prices. 112 F.3d at 290. We cannot distinguish the facts underlying Pyrenee's bucketing claim from Mak's in any material ...


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