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SEC v. Banca Delia Svizzera Italiana and Certain Purchasers of Call Options for |
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时间：2013-09-24
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Plaintiff, Securities Exchange Commission ("SEC"), moves this Court for an appropriate order pursuant to Fed. R. Civ. P. 37 for the failure and refusal of defendant, Banca Delia Svizzera Italiana ( "BSI" ) to provide the SEC with information relative to the identities of the principals for whom it purchased stock and stock options on American exchanges in St. Joe Minerals Corporation ( " St. Joe"), a New York corporation which produces natural resources.
The underlying law suit is an action by the SEC against the said defendant and unnamed others for an injunction and an accounting for violations of the insider trading provisions of the Securities Exchange Act of 1934, Sections 10 (b) and 14 (e), 15 U. S. C. ss 78j (b) and n (e) and Rules 10b - 5 and 14e - 3 promulgated thereunder.
Authority to bring this action resides in Section 21 (d) of the Exchange Act, 15 U. S. C. s 78u (d) . Jurisdiction of the Court is posited under Sections 21 (e) and 27 of the Exchange Act, 15 U. S. C. ss 78u (e) and 78aa.
Jurisdiction over BSI exists by virtue of BSI's doing business here. There is evidence in the record that BSI operates in New York at 44 Wall Street through a subsidiary corporation. ...
The issue posed to the Court is whether to compel a foreign party which transacted purchases on American securities exchanges to make discovery and answer interrogatories concerning its undisclosed principals where the acts of disclosure might subject that party to criminal liability in its home country. The Court has carefully balanced the interests at stake and considered the resisting party's professed good faith. It concludes that compelling the complete discovery demanded is not only justified in the instant case but required to preserve our vital national interest in maintaining the integrity of the securities markets against violations committed and/or aided and assisted by parties located abroad. Accordingly, an order should issue requiring full responses to the SEC's interrogatories.
The Facts
This action alleges insider trading on the part of BSI and its principals in the purchase and sale of call options for the common stock as well as the common stock itself of St. Joe. The options were traded through the Philadelphia Stock Exchange
and the stock was traded on the New York Stock Exchange both of which are reg-istered national exchanges. The purchases in question were made immediately prior to the announcement on March 11, 1981 of a cash tender offer by a subsidiary of Joseph E. Seagram & Sons, Inc. ( "Seagram" ) , an Indiana corporation for all of the common stock of St. Joe at $ 45 per share. Prior to the announcement of the tender offer St. Joe stock traded on the market at $ 30 per share.
The orders for the call options and the stock were placed close to the opening of trading on the exchanges on March 10, 1981, one day prior to Seagram's offer and announcement, at prices above the last quoted market price for the options and the stock. The options were due to expire in ten days, thereby significantly indicating an expectation that the price of St. Joe common stock would rise substantially and imminently.
BSI succeeded in purchasing approximately 1055 call options .... On the next day the stock opened sharply higher in price and the bank shortly instructed its brokers to close out the purchases of the options and sell 2 000 of the 3 000 shares of common stock acquired. These transactions resulted in a virtually overnight profit just short of $ 2 million.
Promptly on noticing the undue activity in the options market, the SEC investigated and based on its findings brought this suit. The SEC contends that there is a strong probability that the purchasers were unlawfully using material non-public information....
The SEC applied for and obtained a Temporary Restraining Order against the Irving Trust Company which held the proceeds of the sales of the options and of the common stock in BSI's bank account with Irving Trust. The Temporary Restraining Order also directed immediate discovery proceedings including the requirement that "insofar as permitted by law" BSI should disclose within three business days the identity of its principals. ...
The SEC endeavored by one or another procedural means, here and abroad, to obtain the identity of those who, along with the bank, were involved in the particular options purchases. No disclosure was forthcoming.... The SEC served formal interrogatories which were refined at the Court's suggestion to target the demanded disclosure in simplest terms.... Nonetheless, BSI declined to furnish the requested information voluntarily, adhering to its assertion of banking secrecy law....
The matter came before the Court for crystallization on November 6, 1981 and after hearing counsel, the Court announced an informal opinion that it had determined to enter an order requiring disclosure, to be followed by severe contempt sanctions if it was not complied with. One week was fixed for submission of the order by the SEC. Apparently, the decision of the Court had a catalytic effect. A waiver of Swiss confidentiality was secured by the bank and reported to the Court. Also reported was that the bank had furnished some but not all the answers to the demanded interrogatories. A further period was requested to endeavor to complete the requisite responses with leave to show that any omissions were either not within the bank's ability to respond or were due to inappropriate demands. This moved finality forward to November 20, 1981.
Since the Court is unable to predict whether ultimate compliance will be secured or whether other notions of confidentiality may be developed on behalf of the disclosed Panamanian customers of the bank, applicable to Switzerland or elsewhere, it becomes useful to analyze the legal situation posited. The principles to be applied will be similar and will serve the further purposes of this case.
1. The Supreme Court's Opinion in Societe
Any discussion of the issue posed here must begin with the Supreme Court's opinion in Societe Internationale Pour Participations Industrielles et Commerciales, S. A. v. Rogers, 357 U.S. 197 (1958) which is the Court's latest decision on the subject. Societe holds that the good faith of the party resisting discovery is a key factor in the decision whether to impose sanctions when foreign law prohibits the requested disclosure.
In Societe a Swiss holding company was suing for the return of property seized by the Alien Property Custodian during World War II. The district court dismissed plaintiffs complaint as a sanction for its refusal to comply with the Court's order to produce bank records, despite a finding that the Swiss government had constructively seized the documents and that plaintiff had shown good faith efforts to comply with the production order. Id. at 201 -02, 78 S. Ct. at 1090. The Court of Appeals affirmed.
The Supreme Court reversed. It held that where plaintiff was prohibited by Swiss law from complying with the discovery order and there was no showing of bad faith, the sanction of dismissal without prejudice was not justified. The Court indicated that a party who had made deliberate use of foreign law to evade American law might be subject to sanctions.
Under Societe, then, a foreign law's prohibition of discovery is not decisive of the issue. A noncomplying party's good or bad faith is a vital factor to consider.
2. The Law in This Circuit
Despite the teachings of Societe, three early Second Circuit cases appeared to view foreign law prohibitions as an absolute bar to ordering inspection or production of documents. ...
In any event the Second Circuit has clearly moved to a more flexible position. In two later cases, both affirming decisions of this Court, the Court of Appeals adopted a balancing test approach in which a foreign law's prohibition is but one of many factors to consider.
In the first of these, United States v. First National City Bank, 396 F. 2d 897 (2d Cir. 1968), the Court of Appeals upheld this Court's decision in In re First National City Bank, 285 F. Supp. 845 (S. D. N. Y. 1968) holding Citibank in contempt for its failure to comply with a subpoena duces tecum in an on-going grand jury inquiry into antitrust violations that presumably had occurred in this country. The sanctions imposed by this Court were a fine of $ 2 000 a day until Citibank complied and a sentence of up until 60 days imprisonment on its vice-president Citibank had resisted production of the documents claiming that compliance was forbidden by German law. This Court found that German public law did not prohibit disclosure and that moreover Citibank had not shown good faith in its attempts to comply....
The Court of Appeals accepted these findings. In affirming, it emphasized that the risk or absence of foreign criminal liability did not resolve the issue. It noted first that "(a) state having jurisdiction to prescribe or enforce a rule of law is not precluded from exercising its jurisdiction solely because such exercise requires a person to en-gage in conduct subjecting him to liability under the law of another state having jurisdiction with respect to that conduct." 396 F. 2d at 901, quoting Restatement (Second), Foreign Relations Law of the United States, s 39 (1) (1965) (Restatement of Foreign Relations) (emphasis supplied by the Court of Appeals) . It then balanced the interests at stake, looking for guidance to s 40 of the Restatement of Foreign Relations....
In the second of these more recent opinions Trade Development Bank v. Continental Insurance Co. , 469 F. 2d 35 (2d Cir. 1972) , the Second Circuit affirmed this Court's decision not to order a Swiss bank to comply with defendant's request to release the names of its customers. The plaintiff was suing the defendant insurer upon a fidelity bond to recover for losses caused by the bank employee's falsification of customer's records in Switzerland. This Court did not pass on plaintiffs allegations concerning the. prohibitions of Swiss law since it found the requested material to be unnecessary to defendant's case given that plaintiff had produced the transcripts of the accounts and other records of the bank's customers detailing the transactions. ...
In addition to the factors that ordinarily must be considered by the court in deciding whether to order a disclosure prohibited by the law of another state the relative unimportance of the information as to the clients' identity in the present proceeding was entitled to be considered. Id. at 41.... Clearly then the Second Circuit has moved away from the position that a foreign law's prohibition of discovery is an absolute bar to compelling disclosure. ...
Application of The Law to The Facts of This Case
BSI claims that it may be subject to criminal liability under Swiss penal and banking law if it discloses the requested information. However, this Court finds the factors in s 40 of the Restatement of Foreign Relations to tip decisively in favor of the SEC. Moreover, it holds BSI to be " in the position of one who deliberately courted legal impediments ... and who thus cannot now be heard to assert its good faith after this expectation was realized. " Societe, supra at 208-09 4. BSI acted in bad faith. It made deliberate use of Swiss nondisclosure law to evade in a commercial transaction for profit to it, the strictures of American securities law against insider trading. Whether acting solely as an agent or also as a principal (something which can only be clarified through disclosure of the requested information), BSI invaded American securities markets and profited in some measure thereby. It cannot rely on Swiss nondisclosure law to shield this activity.
1. The Vital National Interests at Stake
The first of the s 40 factors is the vital national interest of each of the States. The strength of the United States interest in enforcing its securities laws to ensure the integrity of its financial markets cannot seriously be doubted. That interest is being continually thwarted by the use of foreign bank accounts. ...
The Swiss government, on the other hand, though made expressly aware of the litigation, has expressed no opposition. In response to BSI's lawyers inquiries, the incumbent Swiss Federal Attorney General, Rudolf Gerber, said only that a foreign court could not change the rule that disclosure required the consent of the one who imparted the secret and that BSI might thus be subject to prosecution. ... Neither the United States nor the Swiss Government has suggested that discovery be halted... .
The Court of Appeals in United States v. First National City Bank, supra, found the fact that the governments concerned had not intervened of great importance. It observed that " when foreign governments, including Germany, have considered their vital national interests threatened, they have not hesitated to make known their ob-jections ... to the issuing court. " Id. at 904.It is also of significance that the secrecy privilege is one belonging to the bank customers and may be waived by them. It is not something required to protect the Swiss government itself or some other public interest. ...
2. Hardship Considerations and The Element of Good Faith
The second factor of s 40 of the Restatement of Foreign Relations is the extent and nature of the hardship that inconsistent enforcement actions would impose upon the party subject to both jurisdictions. It is true that BSI may be subject to fines and its officers to imprisonment under Swiss law. However, this Court notes that there is some flexibility in the application of that law. Not only may the particular bank involved obtain waivers from its customers to avoid prosecution, but Article 34 of the Swiss Penal Code contains a "State of Necessity" exception that relieves a person of criminal liability for acts committed to protect one's own good, including one's fortune, from an immediate danger if one is not responsible for the danger and one cannot be expected to give up one's good. ...
3. The Remaining s 40 Factors
The last three of the s 40 Restatement of Foreign Relations Law factors-the place of performance, the nationality of the resisting party , and the extent to which enforcement can be expected to achieve compliance with the rule prescribed by that state-appear to be less important in this Circuit. It is significant nevertheless that they too tip in favor of the SEC....
Conclusion
It would be a travesty of justice to permit a foreign company to invade American markets, violate American laws if they were indeed violated, withdraw profits and resist accountability for itself and its principals for the illegality by claiming their anonymity under foreign law.
There presently are sufficient indications that a waiver of confidentiality finally has unlocked the Swiss barrier heretofore asserted by BSI to disclosure. However, the SEC urges that the responses are partial only and that full compliance with demands for information is yet to be made. Consequently, to give BSI the opportunity to com-ply or show that it has complied to the extent of its ability or to furnish a proper indication that the remaining demands should be modified, a final order to be entered
hereon will be withheld for a further period until November 20, 1981. Meantime this decision shall constitute an order that BSI is directed to complete its answers to all of the demands in the SEC's First Interrogatories, pertaining to St. Joe.
So Ordered.
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