Opinion
00 Civ. 3965 (DAB)
September 5, 2002
ORDER
On September 4, 2001, Magistrate Judge Henry Pitman issued a Report and Recommendation recommending that Defendant's motion to dismiss be granted in one respect and Plaintiff's complaint be dismissed without prejudice.See 28 U.S.C. § 636(b)(1)(c); Local Civil Rule 72.1(d). Parties have submitted objections, which were fully submitted December 3, 2001.
28 U.S.C. § 636(b)(1)(C) requires the Court to make a "de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made." After conducting a de novo review, the Court may accept, reject, or modify, in whole or in part, the findings or recommendations made by the Magistrate. 28 U.S.C. § 636(b)(1)(C); see also Local Civil Rule 72.1(d).
The instant matter is a securities fraud action, in which Plaintiffs allege they purchased securities issued by Defendant International Transportation Network Group, Inc., due to reliance upon Defendants' alleged material misrepresentations and omissions. The facts in this matter are sufficiently set forth in Judge Pitman's Report and Recommendation and will not be repeated here.
Judge Pitman recommends that (1) Defendant BDO Binder and BDO International's motion to dismiss for lack of subject matter jurisdiction be denied due to sufficient activity in the United States to satisfy the conduct test; and (2) the action be dismissed pursuant to the doctrine offorum non conveniens, if all defendants consent to the jurisdiction of the courts of Hong Kong.
Judge Pitman makes additional alternative recommendations regarding BDO Seidman's motion to dismiss for failure to plead fraud with particularity and failure to state a claim, and those recommendations are discussed infra.
Regarding federal subject matter jurisdiction, Defendants BDO International and BDO Binder (collectively "BDO International") object that Judge Pitman misconstrued the prevailing test in the Second Circuit which is applied to matters where the securities transactions were primarily foreign in nature. Specifically, BDO International argues that Judge Pitman incorrectly utilized separate "conduct" and "effects" tests, despite the Second Circuit's admonition that the two tests should be applied as an "admixture" to prevent "mechanical application". See BDO Int. Obj. at 4. Correctly conflating the two tests, according to BDO International, and properly distinguishing the facts of Itoba Ltd. v. LEP Group PLC, 54 F.3d 118, 121-22 (2d Cir. 1995), mandates a conclusion on these facts that no domestic "effects" exist to confer subject matter jurisdiction on this Court.
This Court does not agree. As Judge Pitman correctly noted, in assessing jurisdiction, the Second Circuit has held that the relevant factors are conduct, effects, or a combination thereof. See Europe Overseas Commodity Traders, S.A. v. Banque Paribas London, 147 F.3d 118, 127-28 (2d Cir. 1998). Regardless of which test is utilized, the guide is always the underlying policy query of "whether there is sufficient United States involvement to justify the exercise of jurisdiction by an American Court." Itoba, 54 F.3d at 122. The fact that both Plaintiff and Defendant are foreign is not dispositive. See id. at 123 ("The conduct test does not center its inquiry on whether domestic investors or markets are affected, but on the nature of conduct within the United States as it relates to carrying out the alleged fraudulent scheme. . . .") (quotingPsimenos v. E.F. Hutton Co., 722 F.2d 1041, 1045 (2d Cir. 1983)). Moreover, contrary to the assertions of Defendant BDO International, the United States SEC filings of ITNG are the source of the alleged substantial misrepresentations of fraud with a purported deleterious effect on current and potential investors. The fact that the instant Plaintiffs, as foreign residents and investors, cannot and do not make any claims on behalf of domestic investors is not determinative of jurisdictional questions. To hold otherwise would be to allow the "admixture" of the conduct and/or effect tests set forth by the Second Circuit to be held hostage by Plaintiff's inability to affirmatively allege domestic effects. Such a conclusion is inimical to the concerns governing the application of federal securities laws to foreign securities transactions in the first place. Accordingly, all of the facts cited by Judge Pitman, RR at 18-20, weighed as a whole, support an exercise of jurisdiction by this Court.
Moving on to the second recommendation that the action be dismissed pursuant to the doctrine of forum non conveniens, Plaintiff objects that Magistrate Judge Pitman "upended the strong presumptions against such dismissals, misconceived the location of plaintiffs' injury, underestimated the many business and family connections between plaintiffs and United States, overlooked the substantial importance of this case to United States investors, misconstrued the importance of witnesses, documents, and the language in this matter, and erroneously permitted various defendants to benefit from ITNG's failure to comply with its contractual duties under the forum selection clause." Pl.'s Obj. at 6-7. Plaintiff's argument is unpersuasive. Despite the strong favorable presumption applied to the Plaintiff's choice of forum, the factors elucidated in Alfadda v. Fenn, 159 F.3d 41 (2d Cir. 1998), weigh overwhelmingly in support of dismissing the action in favor of a forum in Hong Kong. Hong Kong has uniformly been considered an adequate alternative forum for commercial disputes, see RR at 22-23, and Plaintiffs have adduced no facts or case law to the contrary. Further, Plaintiff's attempts to characterize the true situs of the harm as the Southern District of New York rather than China are unavailing. While this Court agrees that the allegedly fraudulent SEC filing by ITNG has potential domestic impact, that impact is dwarfed by the vast majority of conduct in and impact upon China. This case is clearly distinguishable from the Second Circuit's decision in DiRienzo v. Philips Servs. Corp., 2000 WL 33725106, at *5 (2d Cir. April 1, 2002), where in addition to filing statements with the SEC, the Defendant in that case "conduct[ed] the bulk of its business in the United States" and the Plaintiffs were United States citizens, most of whom engaged in their stock transactions within the United States.
Similarly, Magistrate Judge Pitman correctly found that the private interest factors weigh in favor of dismissal pursuant to forum non conveniens, despite Plaintiff's self-serving assumptions that the need for document discovery is virtually non-existent and regardless of their mention in the Complaint, only a "handful of relevant witnesses in this matter are domiciled in China." Pl.'s Obj. at 11. Taken as a whole, the factors delineated by Judge Pitman support a dismissal on the grounds offorum non conveniens.
Plaintiff's argument that a forum selection clause in a purchase agreement between Plaintiff and the defaulting Defendant ITNG somehow binds the other non-party Defendants is specious. See RR at 35-6.
A more difficult question arises regarding the propriety of conditioning the dismissal on the consent of all Defendants to jurisdiction in Hong Kong. It is certainly true that courts routinely condition forum non conveniens dismissals in order to protect the party opposing dismissal from being left with no remedy. See Blanco v. Banco Indus. de Venezuela, S.A., 997 F.2d 974, 984 (2d Cir. 1993) (collecting cases). However, such conditions are appropriate only where the foreign court would not provide an adequate alternative in the absence of such a condition. See Jota v. Texaco, Inc., 157 F.3d 153, 160 (2d Cir 1998) (holding that whether an adequate forum exists in the foreign nation depends upon whether the defendant is subject to or has consented to the assertion of jurisdiction against it in the foreign forum") (emphasis added); In re Union Carbide Corp. Gas Plant Disaster at Bhopal, India in Dec., 809 F.2d 195, 203-4 (2d Cir. 1987) ("The first condition, that UCC consent to the Indian court's personal jurisdiction over it and waive the statute of limitations as a defense, are not unusual and have been imposed in numerous cases where the foreign court would not provide an adequate alternative in the absence of such a condition"); Constructora Spilimerg, C.A. v. Mitsubishi Aircraft Co., Inc., 700 F.2d 225, 226 (5th Cir. 1983) (conditioning dismissal where "it is not clear that the Venezuelan court urged by the seller as most practicable has personal jurisdiction over the seller"). Even when the district court "justifiably believes" that there is an adequate alternative forum, it is advisable to make any dismissal conditional in nature when there is uncertainty or conflict between expert opinions with regard to foreign jurisdictional law." Schertenleib v. Traum, 589 F.2d 1156, 1163 (2d Cir. 1978).
Judge Pitman expressed some concern about whether all the Defendants would be subject to jurisdiction in China. See RR at 38. It appears clear to the Court that while it is likely, there is still some doubt as to the ability of Plaintiffs to submit Defendants to the jurisdiction of the Hong Kong courts. See BDO Seidman Obj at 8-9 (discussing difference of opinion between Plaintiff and Defendant BDO International's expert on issue of Hong Kong jurisdiction). Consequently, in an excess of caution, a conditional dismissal is appropriate to protect the Plaintiff's interest.
Judge Pitman considers the issue of whether all defendants are subject to jurisdiction in China as part of a final balancing of factors. However, this Court believes the inquiry is more appropriately considered under the threshold determination that an adequate alternative forum exists. See Alfadda, 159 F.3d 41, 45-46 (2d Cir. 1998).
All Defendants, with the exception of BDO Seidman, consent to jurisdiction in Hong Kong. See Weisz Aff ¶ 2, BDO International Obj. at 9-10. BDO Seidman does not wish to consent at this juncture, arguing that it would be inequitable to require a decision now when Seidman's motion to dismiss for failure to state a claim remains unresolved. See Weisz Aff ¶ 3. This Court agrees, and will move to the merits of BDO Seidman's motion to dismiss.
Defendant ITNG has never appeared in this action and accordingly, a default judgment was entered against it on November 14, 2000.
Judge Pitman has recommended that all four claims brought against BDO Seidman (First, Third, Fifth and Sixth) be dismissed: the First and Fifth Claims with prejudice for failure to state claims upon which relief can be granted; the First (to the extent it is based upon fraud), Third and Sixth for failure to meet the particularity requirement fo Rule 9(b) with leave to replead. Plaintiff objects to the dismissals based on Rule 9(b), arguing that evidence of BD Seidman's participation in the fraudulent conduct lies solely within its own knowledge and control and Plaintiff should be subject to less stringent particularity requirements at this stage of the pleading. See Pl.'s Obj at 14. However, as Judge Pitman correctly found, the group pleading doctrine does not apply here based upon the attenuated relationship between BDO Seidman and the transaction at issue or the issuer. See RR at 45-46. Plaintiff's reiteration of its argument that it is in no position to adduce facts that would meet the Rule 9(b) pleading requirements leads this Court to believe that indeed, no amount of repleading will allow Plaintiff to adduce facts sufficient to state a claim of fraud against Defendant BDO Seidman. See Pl.'s Obj at 15 ("The precise contours of BDO Seidman's relationship with BDO International and ITNG is known only to itself, and cannot be pleaded with greater specificity at this time.").
The Court also concurs with Judge Pitman's finding that the First and Fifth claims are appropriately dismissed pursuant to Fed.R.Civ.p. 12(b)(6). The overwhelming weight of authority holds that Section 12(a)(2) does not reach private transactions and Plaintiffs have proffered no relevant case to the contrary. See RR at 47-50. Moreover, Plaintiffs do not meet the pleading requirements to assert a claim for negligent performance of accounting duties. See Securities Investor Protection Corp. v. BDO Seidman, LLP, 222 F.3d 63, 73-74 (2d Cir. 2000); RR at 50-51. Having reached the merits of BDO Seidman's motion to dismiss and given the paucity of allegations connecting said Defendant to the alleged fraud, equitable considerations weigh in favor of dismissing BDO Seidman from the action and then granting the motion of the remaining defendants to dismiss pursuant to forum non conveniens. See, e.g.,Odyssey Re (London) Ltd. v. Stirling Cooke Brown Holdings Ltd., 85 F. Supp.2d 282, 291 (S.D.N.Y. 2000) (dismissing claims against one defendant outright and then granting other defendants' motion to dismiss pursuant to forum non conveniens).
Accordingly, for the foregoing reasons, it is ORDERED AND ADJUDGED as follows:
1. The Report and Recommendation of United States Magistrate Judge Pitman dated September 4, 2001 be and the same hereby is approved, adopted, and ratified by the Court of Judge Pitman's recommendation that Defendants BDO International and BDO Binder's motion to dismiss the complaint for lack of subject matter jurisdiction be DENIED;
2. The Report and Recommendation of United States Magistrate Judge Pitman dated September 4, 2001 be and the same hereby is approved, adopted, and ratified by the Court of Judge Pitman's recommendation that BDO Seidman's motion to dismiss pursuant to Rules 9(b) and 12(b)(6) be GRANTED;
Specifically, BDO Seidman's motion to dismiss the First Claim, to the extent it is based on fraud, the Third Claim and the Sixth Claim is granted with leave to amend. Plaintiff's First and Fifth Claims are dismissed for failure to state claims on which relief can be granted.
3. The Report and Recommendation of United States Magistrate Judge Pitman dated September 4, 2001 be and the same hereby is approved, adopted, and ratified by the Court of Judge Pitman's recommendation that Defendants BDO International and BDO Binder's motion to dismiss the complaint pursuant to the doctrine of forum non conveniens be GRANTED in favor of jurisdiction in Hong Kong;
3. The Clerk of the Court is directed to close this case.