IRVING R. KAUFMAN, Chief Judge:
A mere glimpse into the multifarious financial manipulations of Robert Vesco reveals a web of corporate and personal transactions of astonishing intricacy. Although the appellants before us do not include Mr. Vesco, himself, who we note parenthetically has refused to return to the Southern District of New York
On November 27, 1972, the Securities and Exchange Commission [SEC] filed a complaint in the Southern District of New York, SEC v. Vesco et al., 72 Civ. 5001, against 42 individual and corporate defendants
On March 16, 1973, ICC, without admitting or denying the allegations in the Commission's complaint, consented to the entry of final judgment against it in the SEC action.
The order also provided that the newly-appointed board of directors "shall replace the existing board of directors of International Controls, and shall have full power under applicable corporate law to conduct the affairs of International Controls in conjunction with the Special Counsel. . . ."
Given this mandate, Special Counsel David Butowsky, on June 7, 1973, filed a complaint on behalf of ICC against 32 individual and corporate defendants,
Since Robert L. Vesco, the principal orchestrator of the alleged fraud, had already fled the United States and resisted efforts to induce him to return, ICC moved quickly to prevent the dissipation of assets to which it would be entitled if its lawsuit should be successful. Accordingly, ICC first obtained temporary restraining orders and then, on July 3, 1973, secured preliminary injunctions against Vesco & Co. and the Fairfield Group. Vesco & Co. was enjoined from disposing of the 846,380 shares of ICC
Having sketched the broad outlines of the litigation resulting from Vesco's extraordinarily complex manipulations, and which spawned the three appeals before us, we can now turn to the specific claims asserted by each appellant. Although of common origin, each appeal rests on factual and legal contentions sufficiently different to warrant separate discussion.
II. THE FAIRFIELD GROUP APPEAL
The factual basis for the preliminary injunction issued against the Fairfield Group is not disputed. Thus, Judge Stewart did not find it necessary to hold an evidentiary hearing as a predicate to granting injunctive relief. See SEC v. Frank, 388 F.2d 486 (2d Cir. 1968). On its part, ICC filed four affidavits in support of its motion: (1) by David Butowsky, Special Counsel; (2) by Allen Shinn, a court-appointed director and President of ICC; (3) by Laurence B. Richardson, Jr., former President, Chief Operating Officer and director of ICC; (4) by Malcolm McAlpin, a former director of ICC. In response, the Fairfield Group submitted an affidavit by Joel M. Grady, President of Skyways and Fairfield Aviation, Executive Vice President of Fairfield General, and a director of all three corporations.
During the six-month period from June to December 1971, ICC spent $600,000-$700,000 to refurbish the plane. These improvements, however, were not of the sort generally associated
On November 19, 1971, ICC incorporated Fairfield General as a wholly-owned subsidiary. Subsequently, on December 8, 1971, at a board of directors meeting crucial to the alleged fraud, the ICC board first approved the transfer of ICC's Fairfield Aviation stock to Fairfield General, in return for additional stock in Fairfield General and second, voted to issue all of the Fairfield General stock to the shareholders of ICC as a dividend in kind. Both Richardson and McAlpin, members of the board of directors on December 8, stated in their affidavits that, at the time of this meeting, they had not been informed either of the improvement expenditures or of the termination and ownership of improvements provisions of the Boeing 707 lease and, had they known of these facts, they would not have approved the dividend of the Fairfield General stock.
Based on the foregoing facts, ICC claims in its complaint that it was fraudulently deprived of the Boeing 707 aircraft since, as a result of the spin-off of Fairfield General and its wholly-owned subsidiaries, Fairfield Aviation and Skyways, that asset is no longer under its control. Moreover, in exacerbation of this loss, ICC contends that it remains obligated to Skyways under the onerous 707 lease. ICC claims that the motive for the spin-off was Vesco's concern that he might lose control over ICC and, as a consequence, be forced to relinquish his personal use of the 707. Accordingly, to foreclose that eventuality, Vesco sought to shelter the aircraft in a corporate shell free from ICC's control, a corporation such as Fairfield General in which all of the directors were Vesco associates.
The Fairfield Group responded by filing a motion to dismiss the complaint, asserting a lack of subject matter jurisdiction under the 1934 Act. They urged that while ICC may have stated a claim of internal corporate mismanagement, it had not stated or proved a claim cognizable under Section 10(b), the only section of the 1934 Act relied on by ICC, and Rule 10b-5 thereunder. Absent subject matter jurisdiction under the 1934 Act, moreover, the Fairfield Group contended that the suit must be dismissed as to them because, as New Jersey corporations doing no business in New York, service of process could only be valid under the provision for nationwide service of process, 15 U.S.C. § 78aa, if the 1934 Act were applicable.
A. Subject Matter Jurisdiction
Under Section 10(b)
Section 10 of the 1934 Act provides:
Rule 10b-5 of the Commission provides:
in connection with the purchase or sale of any security.
It is now well-settled that the failure or refusal of a majority of a board of directors to disclose to the remaining directors pertinent information, as Richardson and McAlpin claimed was the case concerning the dividend of Fairfield General stock, constitutes a "fraud" upon ICC within the meaning of section 10(b) and Rule 10b-5. Ruckle v. Roto American Corp., 339 F.2d 24 (2d Cir. 1964). The critical question remains, however, whether that "fraud" was perpetrated on ICC "in connection with the purchase or sale of any security." Haberman v. Murchison, 468 F.2d 1305 (2d Cir. 1972); Iroquois Industries, Inc. v. Syracuse China Corp., 417 F.2d 963 (2d Cir. 1969), cert. denied, 399 U.S. 909, 90 S.Ct. 2199, 26 L.Ed.2d 561 (1970); Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L. Ed. 1356 (1962).
ICC contends that its exchange of Fairfield Aviation stock for Fairfield General stock constituted the requisite "sale." Although the definition of "sale" under the 1934 Act is indeed a broad one — including "any contract to sell or otherwise dispose of" (15 U.S.C. § 78c(a)(14)) — we cannot agree that by transferring its ownership of Fairfield Aviation to its wholly-owned subsidiary, Fairfield General, ICC in any sense "disposed of" its Fairfield Aviation stock. Quite simply, as long as ICC retained sole ownership of Fairfield General, it retained complete control over Fairfield Aviation and thus relinquished nothing in the exchange. Accordingly, that self-dealing transaction does not appear to satisfy the "purchase or sale" requirement of § 10(b) and Rule 10(b)-5. Cf. Blau v. Mission Corp., 212 F.2d 77, 80 (2d Cir.), cert. denied, 347 U.S. 1016, 74 S.Ct. 872, 98 L.Ed. 1138 (1954);
ICC also suggests that its dividend in kind of the Fairfield General stock represented a "sale" under the relevant statute and rule. It urges us to follow a recent line of cases holding that such subsidiary spin-offs constitute "sales" for purposes of the Securities Act of 1933 [1933 Act], 15 U.S.C. § 77a et seq., thus requiring a registration statement to be filed covering the subsidiary's shares, as in fact Fairfield General did file in this instance.
Finding the analogy to Harwyn and its progeny inapt, we searched, but in vain, for a precedential response to the precise question whether a dividend of portfolio securities might satisfy the "purchase or sale" requirement of § 10(b) and Rule 10b-5. Our attention, of course, was directed to the seminal case construing "purchase" and "sale" in the context of § 16(b) of the 1934 Act, Shaw v. Dreyfus, 172 F.2d 140 (2d Cir.), cert. denied, 337 U.S. 907, 69 S.Ct. 1048, 93 L.Ed. 1719 (1949). In Shaw, a divided panel of this Court held that the receipt of stock rights, essentially analogous to a stock dividend because issued on a pro rata basis to all shareholders, did not constitute a "purchase" of those rights by the stockholders. Although apprised of the broad definitional language of "purchase"
The Fairfield Group strenuously argues that our decision in Shaw governs the instant case. They contend that the ICC dividend in kind of the Fairfield General securities is identical with the rights distribution in Shaw because
SEC v. National Securities, Inc., 393 U.S. 453, 466, 89 S.Ct. 564, 571, 21 L.Ed.2d 668 (1969).
We must, therefore, in accordance with the teaching of National Securities, consider whether the fraudulent conduct alleged, in this case the withholding of information pertinent to the issuance of a portfolio security dividend, "is the type of fraudulent behavior which was meant to be forbidden by the statute and the rule." Id. 393 U.S. at 467, 89 S.Ct. at 572. In seeking to effectuate the purpose of § 10(b), we recognize that it "must be read flexibly, not technically and restrictively." Supt. of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6, 12, 92 S.Ct. 165, 169, 30 L. Ed.2d 128 (1971). Moreover, the Court, in Bankers Life, emphasized that § 10(b) was intended by Congress to protect investors, including corporations, from deceptive devices and contrivances which would inhibit informed decisionmaking in the course of securities transactions. And, the Court quoted with approval the following language from Shell v. Hensley, 430 F.2d 819, 827 (5th Cir. 1970):
Supt. of Insurance v. Bankers Life & Cas. Co., supra, 404 U.S. at 13, 92 S.Ct. at 169.
In light of this umbrella of protection placed over securities transactions by § 10(b), we are of the view that ICC must be deemed to be a "seller" of its Fairfield General stock at the time it disposed of its Fairfield General portfolio securities by way of a dividend in kind to its shareholders. The decision whether to retain or spin-off a subsidiary is indeed an important one for the parent corporation. The possible asset drain must be weighed against such considerations as the desirability of removing the blight of an unprofitable subsidiary from the consolidated income statistics reported to the public. In any event, it is a transaction involving, as it unquestionably does, the disposition of securities and, therefore, one for which the corporation is well deserving of and entitled to the protection of § 10(b).
And, to be sure, the creditors of ICC may be significantly and adversely affected when the asset base of the corporation is eroded by a portfolio security dividend.
We therefore reject our dissenting brother's paean to literalness in construing the term "sale" to require the passage of consideration in order to inject the requisite significance into the disposition of securities. Learned Hand wisely counselled:
Cabell v. Markham, 148 F.2d 737, 739 (2d Cir. 1945). Accordingly, although in other contexts the term "sale" might appropriately be construed more narrowly,
B. The Venue Question
The Fairfield Group asserts a second jurisdictional defect in this action, contending that venue was improperly
In this case, ICC claims that a § 10(b) violation occurred when it was fraudulently induced to spin-off its Fairfield General subsidiary. An essential element of that fraudulent scheme was the actual mailing of the spin-off dividend to the ICC shareholders. It is uncontroverted that the mailing was performed by ICC's transfer agent, the Marine Midland Bank, from its offices in Manhattan. Accordingly, since "any use of instrumentalities of the mails or other interstate facilities made within the forum district constituting an important step in . . . [the] consummation [of the fraudulent scheme] is sufficient", Hooper v. Mountain States Securities Corp., 282 F.2d 195, 204-205 (5th Cir. 1960), cert. denied, 365 U.S. 814, 81 S.Ct. 695, 5 L.Ed.2d 693 (1961), venue in the Southern District of New York is proper.
C. The Preliminary Injunction
With these jurisdictional hurdles behind us, we have little difficulty in affirming the preliminary injunction insofar as it restrains the Fairfield Group from disposing of the Boeing 707. Although an extraordinary remedy, a preliminary injunction is properly granted to preserve the status quo pendente lite where the balance of hardships tips decidedly toward the party requesting the temporary relief and that party has raised questions going to the merits so serious, substantial, and difficult as to make them a fair ground for litigation and thus for more deliberate investigation. Sonesta International Hotels Corp. v. Wellington Associates, 483 F.2d 247, 250 (2d Cir. 1973); Checker Motors Corp. v. Chrysler Corp., 405 F.2d 319, 323 (2d Cir.), cert. denied, 394 U.S. 999, 89 S.Ct. 1595, 22 L.Ed.2d 777 (1969); Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738, 740 (2d Cir. 1953). ICC has easily satisfied both requirements.
Richardson and McAlpin, both former directors of ICC, have stated in their affidavits that information material to their decision to approve the spin-off of Fairfield General was withheld from them. Although raising an interesting application of the fraud provisions under § 10(b), these uncontroverted statements certainly present "a fair ground for litigation and thus for more deliberate investigation." Id.
That the balance of hardships tips decidedly in favor of ICC cannot fairly be questioned. It appears from the record that the Boeing 707 is now
D. The New Jersey Suits by Skyways and the Fairfield Group
We turn finally to appellants' contention that the district court was without authority to enjoin the prosecution of the pending state court actions, one of which was instituted by Skyways to enforce the Boeing 707 lease, while the second was initiated by the Fairfield Group to recover certain books and records which ICC has refused to release to the Group. The limited authority of a federal court to stay a pending state court proceeding is embodied in 28 U.S. C. § 2283 which states:
Moreover, in construing this statute, we are counselled to resolve
Atlantic Coast Line Railroad Co. v. Brotherhood of Locomotive Engineers, 398 U.S. 281, 297, 90 S.Ct. 1739, 1748, 26 L.Ed.2d 234 (1970). In light of this presumption against interference, we must agree with the Fairfield Group that the district court erred by enjoining the prosecution of the two state court suits.
In support of its request for this relief, ICC urges that the district court possessed the requisite authority under § 21(e) of the 1934 Act (15 U.S. C. § 78u) which, argues ICC, satisfies the "except as expressly authorized by Act of Congress" language of § 2283.
Although this language empowers the SEC alone to obtain injunctive relief, we have held that, under certain circumstances, it may be construed to authorize a private party to enjoin a pending state
ICC contends that our holding in Gittlin is applicable to this case. Its argument, accepted by Judge Stewart, is basically that but for the spin-off of Fairfield General, a transaction fraudulently induced in violation of § 10(b), neither Skyways nor the balance of the Fairfield Group would enjoy the independent status effectively required to sue its former parent. Thus, ICC concludes that, as in Gittlin, where Gittlin's state court action against Studebaker was permanently enjoined because Gittlin had obtained the necessary stockholder authorizations by violating the Proxy Rules issued under § 14(a) of the 1934 Act, here too, the state court actions are predicated on violations of the securities laws.
There is, however, a critical distinction between Gittlin and the instant case. In Gittlin, the injunction issued after a decision on the merits holding that Gittlin had, in fact, violated § 14(a), while in this case, ICC's claim of a § 10(b) violation, though presenting a fair ground for subject matter jurisdiction and a temporary injunction has yet to result in a judgment on the merits after trial. To be sure, the SEC, under § 21(e), is empowered to secure a preliminary injunction, but, in view of the explicit words of caution appearing in Atlantic Coast Railroad, we decline to extend the Gittlin rationale to the facts of this case.
This conclusion, moreover, is buttressed by our decision in Vernitron Corporation v. Benjamin, 440 F.2d 105 (2d Cir.), cert. denied, 402 U.S. 987, 91 S.Ct. 1664, 29 L.Ed.2d 154 (1971), decided subsequent to Gittlin. In Vernitron, a preliminary injunction was sought and granted to restrain a pending state court action which, the moving party claimed, was brought to enforce a contract obtained by fraudulent conduct violative of § 10(b). We reversed, finding Gittlin "inapposite in that the prosecution of the state action there relevant would itself have furthered the violation of the Securities Exchange Act." Vernitron Corporation v. Benjamin, supra, 440 F.2d at 108. Since the facts here bear greater resemblance to Vernitron than Gittlin, we believe our decision in Vernitron to be the more applicable. Accordingly, we vacate so much of the preliminary injunction against the Fairfield Group that enjoins further prosecution of the two actions pending in New Jersey Superior Court, without prejudice to renewal of the application upon a showing that prosecution of these actions has interfered or threatens to interfere with the district court's jurisdiction or a judgment issued by it.
III. THE VESCO & CO. APPEAL
The circumstances surrounding appellant Vesco & Co.'s alleged role in the purported scheme to defraud ICC are, in the context of this sprawling and labyrinthine lawsuit, remarkably straight-forward. Indeed, our knowledge of the details relating to Vesco & Co. derives principally from an affidavit submitted by Milton Stern, counsel for Vesco & Co., in support of its unsuccessful motion to dismiss the complaint. Vesco & Co., it appears, was incorporated in Delaware on July 12, 1972 as an estate planning device for Robert Vesco. At that time, Vesco exchanged 800,000 shares of ICC common stock for all of the preferred stock of Vesco & Co. The common stock of Vesco & Co. is owned by Patricia Vesco, Vesco's wife, as custodian for Vesco's children. The sole asset of Vesco & Co. is the block of ICC common stock which, through the additional contributions of Vesco's children, totals 846,380 shares. Furthermore, we have been advised that the officers of Vesco & Co. are Mrs. Vesco and defendant Shirley Bailey, Vesco's personal secretary.
On facts such as these, which can hardly be characterized as common, routine or without the semblance of taint,
A. Vesco & Co.'s Preliminary Defenses
In attacking the preliminary injunction, Vesco & Co. contends — as did the Fairfield Group — that the district court lacked subject matter jurisdiction under the 1934 Act. It adds that this jurisdictional basis is essential here because in personam jurisdiction over Vesco & Co., a Delaware corporation doing no business in New York, can only be sustained under the nationwide service of process authorized by the 1934 Act, 15 U.S.C. § 78aa — an issue raised also in the Fairfield Group appeal. The district court denied this claim holding that, as a court of equity, it could pierce the corporate veil and treat Vesco & Co. as the equivalent of its dominant shareholder, Vesco. Thus, since ICC had unquestionably stated a claim under § 10(b) against Vesco, the court had jurisdiction as well over Vesco & Co. We agree.
Although we need not labor the principle that the law will ordinarily treat the corporation as an entity distinct from its shareholders, it is equally well-established that "whenever it is necessary to relieve or to protect from frauds, the corporation may be disregarded as against the responsible parties." 1 Fletcher Cyc. Corp., Perm.Ed. § 44; Cf. In re Gibraltor Amusements, Ltd., 291 F.2d 22 (2d Cir.), cert. denied, 368 U.S. 925, 82 S.Ct. 360, 7 L.Ed.2d 190 (1961). In this case, we note that ICC's detailed allegations of fraud against Vesco, personally, have now ripened into a default judgment.
Vesco & Co. also contends that the complaint was defective in failing to state a valid claim against it. Admittedly, the solitary reference to Vesco & Co. in ¶ 5(r) of the complaint — "a Delaware corporation to which defendant Vesco and his children have transferred certain of their assets" — is not replete with detail. Yet, the "notice pleading" mandated by Rule 8(a) of the Federal Rules of Civil Procedure requires that the complaint be construed liberally, Conley v. Gibson, 355 U.S. 41, 79 S.Ct. 99, 2 L.Ed.2d 80 (1957); Dioguardi v. Durning, 139 F.2d 774 (2d Cir. 1944); and "jurisdiction . . . is not defeated . . . by the possibility that the averments might fail to state a cause of action on which . . . [the pleader] could actually recover." Bell v. Hood, 327 U.S. 678, 682, 66 S.Ct. 773, 776, 90 L.Ed. 939 (1946). See A. T. Brod & Co. v. Perlow, 375 F.2d 393, 398 (2d Cir. 1967). Accordingly, in view of the more than adequate allegations of fraud against Vesco, the allegation that he transferred certain assets to Vesco & Co. was sufficient to suggest that ICC would urge a piercing of the corporate veil as the basis for judgment against Vesco & Co.
B. The Preliminary Injunction
Turning to the propriety of the injunctive relief fashioned by the district court, we find, for the reasons substantially set forth in Part II, that the district judge was well within his discretion in enjoining the disposition of the 846,380 shares of ICC common stock. With Vesco now well beyond the reach of ICC and the United States, this large and perhaps controlling block of ICC common stock is indeed a critical asset should ICC prevail on the merits against Vesco & Co. Sale of the stock would only aggravate the alleged fraud. Indeed the Vesco family, as sole shareholders, are unlikely to evidence concern over improper disposal of this asset. Moreover, as a holding company, Vesco & Co. will hardly experience any disruption in operations — an element to be considered by the district court in evaluating the appropriateness of an asset freeze. See SEC v. Manor Nursing Centers, Inc., supra, 458 F.2d at 1106. Accordingly, the balance of hardships once again tilts in ICC's direction.
The other half of the preliminary injunction equation set forth by Hamilton Watch and its progeny — the existence of serious questions establishing a fair ground for further litigation — has also been satisfied by ICC in its claim against Vesco & Co. That Vesco, himself, is responsible to ICC because of his fraudulent scheming, has now been established by the default judgment. The only question which remains, therefore, is whether ICC may pierce the corporate shell and reach the assets contained within it. As we have already made
C. The New Jersey Suit by Vesco & Co.
That portion of the preliminary injunction restraining Vesco & Co. from prosecuting its pending state court action still remains for our consideration. The state suit, filed in the Chancery Division of the Superior Court of New Jersey, is based on a complaint containing four counts in a derivative action filed by Vesco & Co. on behalf of ICC. Counts one and two seek compensatory and punitive damages against Laurence Richardson, a former director, and Gary Benjamin, a former officer of ICC for alleged breach of their fiduciary obligations to the company. Count three charges that ICC "has paid, or is contemplating payment of, the personal legal fees and expenses" for three former directors, Richardson, Frank Beatty, and Wilbert Snipes, incurred in their defense of actions against them for mismanagement. Vesco & Co. prays for an injunction against future payments, and the return of any such reimbursements to date. Finally, count four of the complaint alleges that the former board of directors of ICC "abdicated their responsibilities as directors" by consenting to the "Final Judgment of Permanent Injunction and Appointment of Special Counsel and Directors" which terminated ICC's involvement in SEC v. Vesco et al., supra. As relief, Vesco & Co. seeks, inter alia, to enjoin the court-appointed board of directors from exercising their duties.
In granting ICC's request to enjoin this lawsuit, Judge Stewart relied on the exception in § 2283 which authorizes a federal court to stay a state court proceeding "to protect or effectuate its judgments." Although Atlantic Coast Railroad teaches that this exception must be narrowly construed, it clearly supports injunctive relief restraining count four of Vesco & Co.'s New Jersey action. This count represents a direct assault on the Final Judgment entered by Judge Stewart in SEC v. Vesco et al., supra, and constitutes an attempt to frustrate the court's order appointing a new board of directors for ICC by seeking to enjoin the functioning of the board. Accordingly, we have little difficulty in sustaining the preliminary injunction restraining Vesco & Co. from proceeding with count four of its complaint.
We reach a contrary conclusion, however, with respect to the remaining counts of this state suit. We do not find in these counts the kind of real or potential conflict with the Final Judgment in SEC v. Vesco et al., supra, which we believe is required to justify the disfavored intervention into the orderly proceedings of a state court. Although the Final Judgment vests Special Counsel with the power to prosecute claims on behalf of ICC, the court's order does not purport to override the traditional right of a stockholder to sue on the corporation's behalf. See 13 Fletcher Cyc. Corp., Perm.Ed. § 5940. Even were we to accept ICC's contention that appointment of Special Counsel and a new board of directors was equivalent to the appointment of a receiver, it is well-settled that a derivative suit could be instituted, provided a proper demand had been made and refused by the receiver. Lucking v. Delano, 129 F.2d 283, 286 (6th Cir. 1942); 13 Fletcher Cyc. Corp., Perm.Ed. § 5966. Accordingly, we vacate so much of the preliminary injunction which restrains Vesco & Co. from prosecuting counts one — three of its pending state court action, without prejudice to renewal of the application upon a showing that prosecution of these counts has interfered or threatens to interfere with the district court's jurisdiction or a judgment issued by it.
IV. THE ANDEAN APPEAL
The seeds of Andean's involvement in the instant lawsuit were planted on July 27, 1973. On that date, United States Customs officials seized the yacht, Patricia III, while it was undergoing repairs at the Merrill Stevens Dry Dock Company in Miami, Florida. The yacht was of Panamanian registry, the registration certificate having been issued to Andean, a Panamanian corporation. The vessel was seized for allegedly failing to pay duties pursuant to relevant Tariff Schedules of the United States. These payments are required as duty assessments on yachts of foreign origin which enter the United States while chartered to or owned by a resident of the United States. In this instance Vesco was that American resident.
One week after the yacht's seizure by the United States, on August 3, ICC moved for and Judge Ward granted a temporary restraining order enjoining Vesco from removing the yacht from its Miami berth.
In an effort to support its serious charges, ICC deposed Roland Boddy, Captain of the Patricia III, and Joseph Sutton, President of Merrill Stevens. ICC also sought to take the deposition of Eusebio Morales, Andean's sole shareholder, but Morales refused to appear in Miami for the deposition despite Judge Stewart's order so requiring.
On October 2, 1973, an evidentiary hearing was held before Judge Stewart at which David Warham, former Controller of PRL, and Charles Bliven, a yacht broker who arranged the sale of the Patricia III to Andean, testified on behalf of ICC. Three days later, on October 5, 1973, the district judge issued his preliminary injunction, enjoining Andean and Columbus Trust from moving
A. The Preliminary Injunction
At the outset, we note that the question before us is quite narrow. Since both Vesco, against whom a default judgment has already been entered, and Columbus Trust, a Bahamian corporation, are effectively immunized from execution because they both are beyond the reach of the court, enjoying the protection of the Bahamian government, it is indisputable that ICC would be irreparably harmed should we permit this yacht, valued in excess of one million dollars, to depart our shores and sail to other lands, perhaps to a rendezvous with her alleged owner Vesco. Accordingly, with the balance of hardships so obviously in ICC's favor, we need decide only whether Judge Stewart abused his discretion in determining that serious questions were raised concerning the source or sources of the funds used to purchase the yacht and Columbus Trust's alleged role in defrauding ICC. Sonesta International Hotels Corp. v. Wellington Associates, supra; Checker Motors Corp. v. Chrysler Corp., supra; Hamilton Watch Co. v. Benrus Watch Co., supra. After a careful review of the record, we find no abuse.
Morales's affidavit discloses that Andean was formed in February, 1973, when Morales contributed $10,000 in return for all of the corporation's stock. After its incorporation, neither Andean nor Morales played more than a passive role in the purchase or operation of the Patricia III. Instead, it was Aberle who negotiated for the acquisition of the yacht from Charles Bliven & Co., yacht brokers. On May 14, 1973, Columbus Trust wired $1,326,000 to Bliven, and Andean took title to the yacht.
Thereafter, Andean entered into a charter party with Mackinley Limited, a Bahamian corporation whose interest in chartering a luxury yacht had, according to Aberle, initially prompted his negotiations with Bliven. Mackinley, however, was hardly a stranger to Aberle, who, coincidentally, happened to be Mackinley's Secretary. Moreover, it does not appear wholly without significance or is it perhaps simply another coincidence, that a letter sent by Aberle to the Registrar-General of Nassau in February, 1973 stated that Vesco was appointed as Director and President of Mackinley. To add yet a third curious note, we find that Aberle subsequently termed this appointment "incorrect" in a second letter to the Registrar-General, sent shortly after the first, in which Aberle made the rather unusual request that the first letter be returned. In any event, Mackinley's strange background aside, it arranged with Andean for a one-year charter, with an option to renew for five additional one-year periods, at the rate of $30,000 per month.
On June 20, 1973, Vesco, Patricia Vesco, his wife, and Vesco's family boarded the yacht (renamed Patricia III after its purchase) and Vesco and his family remained it sole users until shortly before it put into Miami for repairs. The record discloses that Vesco submitted plans for the extensive refurbishing and refitting of the yacht's interior. Indeed, in July, 1973 a check for $40,000 was issued by Patricia Melzer [Mrs. Vesco's maiden name], on behalf of Mackinley, Ltd., to Merrill Stevens Dry Dock Company
Turning our attention to Columbus Trust and its pedigree, we observe that it was incorporated by Aberle and one Dobbie in 1969 as a vehicle for those seeking to invest capital in the Bahamas, a tax haven not unknown to the initiated. By 1973, Dobbie's interest was acquired by the Bahamas Commonwealth Bank, Ltd. [BCB], a defendant in this lawsuit. BCB was in turn controlled by Norman LeBlanc, another defendant and both are also defendants in SEC v. Vesco et al., supra, against whom default judgments have been entered in the SEC action.
In March, 1973, Aberle and two other Bahamians purchased BCB's interest in Columbus Trust. In that same month, according to Warham's testimony at the evidentiary hearing before Judge Stewart, PRL, of which LeBlanc was a director, arranged to have Columbus Trust manage the not insignificant sum of $40,750,000 then held in certificates of deposit in PRL's account in London. Warham also testified that this important arrangement was concluded at the behest of Vesco, who, though neither a director nor officer of PRL, appeared to have a strong influence over the management of PRL's funds. Finally, Warham described in some detail a series of transactions by which PRL — which was controlled by a corporation (Value Capital Limited) in which ICC owned a controlling interest — was subsequently transferred by Vesco, through ICC's sale of its interest in Value Capital Limited, to a corporation dominated by LeBlanc. This series of transactions have been alleged by both the SEC and ICC to have violated the securities laws.
Once Columbus had control of PRL's $40,750,000 it proceeded to purchase $5,700,000 in Costa Rican bonds from BCB. Another $3,350,000 is, according to Coakley's affidavit and a telex exhibit from a Panama bank, deposited in the Banco Nacional de Panama. The balance of $31,700,000 remains in London, frozen in PRL's account by an order of the English Chancery Court.
Upon the foregoing, we can hardly say that ICC has failed to raise serious questions concerning the source of funds used to purchase the Patricia III. One thing appears clear: Andean performed no function other than that of a mere nominee or shell. Aberle undertook all negotiations for the yacht's acquisition, and it is undisputed that Columbus Trust supplied both the $1,326,000 purchase price and the substantial sums subsequently required to repair and refit the yacht. Moreover, at the evidentiary hearing, ICC submitted an audited financial statement of Columbus Trust revealing a net worth of only $266,808 as of March 31, 1972. Although this net worth figure related to a period more than one year prior to the yacht's purchase, we are unaware of any effort by Columbus Trust to rebut this evidence by introducing a more recent financial statement, although such information is under the control of Columbus Trust. We conclude on the totality of circumstances that ICC has made a sufficient showing of Vesco's interest in the yacht to sustain the injunctive relief granted.
B. The Posting of Security
Andean claims that the district court erred in denying its request for security by ICC, pursuant to Fed.R.Civ.P. 65(c). Rule 65(c) states, in pertinent part:
In construing this language, we have stated that, especially in view of the phrase — "as the court deems proper" — the district court may dispense with security where there has been no proof of likelihood of harm to the party enjoined. Ferguson v. Tabah, 288 F.2d 665, 675 (2d Cir. 1961). See also Urbain v. Knapp Brothers Manufacturing Co., 217 F.2d 810 (6th Cir. 1954), cert. denied, 349 U.S. 930, 75 S.Ct. 772, 99 L.Ed. 1260 (1955). Andean argues, however, that its inability to move the yacht has been costly, both in the loss of charter revenues and in additional maintenance expenses. ICC's response to this is quite simple. It claims that even were the restraint lifted, Andean would be unable to remove the yacht because of a forfeiture action brought by the United States in the Southern District of Florida for the unpaid assessed duties.
Subsequent to the argument of this case, we received a copy of findings of fact and conclusions of law signed by Judge Mehrtens in the actions pending before him in Florida. Although he found Andean liable for customs duties in the amount of $60,000, and indebted to the Merrill-Stevens Dry Dock Company in the sum of $77,474 for breach of a repairs and improvements contract, Judge Mehrtens denied the Government's claim for forfeiture. Thus, should Andean satisfy these judgments, it would be barred from removing the Patricia III only by the preliminary injunction granted below. Accordingly, in light of the Florida dispositions, we remand to the court below for reconsideration of Andean's motion for security.
Although we have scarcely plumbed the depths of Vesco's alleged financial manipulations, we have attempted to describe the intricacies of the web spun by him and his associates in their alleged scheme to ensnare the assets of ICC and its subsidiaries. Emerging from this maze of securities schemes, of corporate shells and subsidiary spin-offs, one point stands out in bold relief: the ingenious plotter cannot find a medium more supple than the world of securities to effectuate his design. Thus, we find in these appeals further proof of the wisdom in adopting a flexible approach to the application of Section 10(b), a judicial construction consonant with that Section's broad prophylactic purpose. Confidence in our securities markets can only be maintained by establishing a protective shield which cannot be circumvented by recourse simply to the novel, to the unexpected, or to entanglements difficult to unravel. We remand to the district court for further proceedings not inconsistent with this opinion.
MULLIGAN, Circuit Judge (concurring in part and dissenting in part) :
This dissent is limited to the Fairfield Group Appeal covered in Part II of the majority opinion, and in particular to that section thereof which holds that the "purchase or sale" requirement of the Act has been satisfied in this case.
The crucial question here is whether or not some deceptive device or scheme was employed by Vesco and his group "in connection with the purchase or sale of any security" within the meaning of § 10(b) and Rule 10b-5. The theory of plaintiff International Controls Corp. (ICC) is that Vesco, a corporate buccaneer, was intent upon securing for his personal use a Boeing 707, which was owned by Skyways Leasing Corp. and leased to ICC on terms which were distinctly disadvantageous to ICC. In addition it had been redesigned and refurbished at great expense to ICC to satisfy
The first question is whether or not the fraud practiced was "in connection with" the sale or purchase of securities. The pattern of misbehavior urged is novel and no precedent is adduced to support the proposition that it is connected to a security sale. However, I agree that the statute is to be construed liberally, and not restrictively, where its terms permit flexibility. Superintendent of Ins. v. Bankers Life & Cas. Co., supra, 404 U.S. at 12, 92 S.Ct. 165.
Vesco had originally secured the Boeing 707 through Skyways, the wholly-owned subsidiary of Fairfield Aviation Corp. Fairfield Aviation, in turn, was totally owned by ICC. The negotiation of the lease and the transformation of the commercial plane into a luxury air carrier were achieved by Vesco without any sale or purchase of securities. The theory of the complaint here is that, because Vesco, not otherwise a worrisome type, was concerned that the theretofore complacent and amenable board of ICC might prove troublesome, he engineered a series of devious moves to ensure his continuing use of a corporate asset for private pleasure. Fairfield General Corp. was therefore created, and all of the shares of Fairfield Aviation, were transferred to it. A dividend of Fairfield General shares to the stockholders of ICC was then declared by the board of ICC. As a result of these activities, Skyways and the plane came under the control of Vesco and three associates, who made up the board of directors of Fairfield General.
Obviously, the manipulation charged is indeed intricate, and separating the flim from the flam may well prove to be difficult. In any event, whether there exists between the fraud allegedly practiced upon ICC and the spin-off a nexus sufficient to satisfy the "in connection with" requirement of the statute (see Note, The Controlling Influence Standard in Rule 10b-5 Corporate Mismanagement Cases, 86 Harv.L.Rev. 1007, 1010-15 (1973)) presents a question we need not now determine definitively. Since this is an appeal from a preliminary injunction which merely maintains the status quo, with the balance of hardships tipping sharply in ICC's favor and serious litigable issues presented, there is enough to sustain the injunction without determining the question with finality. See Exxon Corp. v. City of New York, 480 F.2d 460, 464 (2d Cir. 1973); Gulf & Western Indus., Inc. v. Great Atlantic & Pacific Tea Co., 476 F.2d 687 (2d Cir. 1973); A.H. Bull Steamship Co. v. National Marine Engineers' Beneficial Ass'n, 250 F.2d 332, 337 (2d Cir. 1957); American Federation of Musicians v. Stein, 213 F.2d 679 (6th Cir.), cert. denied, 348 U.S. 873, 75 S.Ct. 108, 99 L.Ed. 687 (1954); 601 West 26 Corp. v. Solitron Devices, Inc., 291 F.Supp. 882
A key jurisdictional question remains. Was there a "purchase or sale" of securities here under § 10(b) and Rule 10b-5? The majority, while finding no "purchase or sale" in the exchange of securities between Fairfield Aviation and Fairfield General, finds the spin-off, the stock dividend of Fairfield General shares to the stockholders of ICC, to be such a "purchase or sale" within the 1934 Act and Rule. It is at this point that I respectfully but firmly part company with the majority.
Chief Judge Kaufman candidly admits that there is no precedent for the holding in this case, and, it should be added, the technique adopted by the majority was not even suggested by the appellee or by the SEC in its amicus brief. The majority simply equates purchase and sale with acquisition and disposition of securities, even though no consideration or value or price is involved in the transaction. This is not only unprecedented, but is contrary to the holding of the court in Shaw v. Dreyfus, 172 F.2d 140 (2d Cir.), cert. denied, 337 U.S. 907, 69 S.Ct. 1048, 93 L.Ed. 1719 (1949). The question before the court there was whether the receipt of stock rights concededly tantamount to a stock dividend was within the "purchase or sale" definition of the 1934 Act, § 3(a)(13) & (14), 15 U.S.C. § 78c(a)(13) & (14), which is precisely the definitional section involved here. While § 16(b), rather than § 10(b), was the provision allegedly violated in Shaw, the court there, in applying the definition of "purchase or sale," stated: "The popular or accepted import of words furnishes the general rule for the interpretation of statutes." Id. at 142 (footnote omitted). The court found that "purchase or sale" means that some price or consideration must be involved in the transaction in shares. Since the popular and accepted meaning of "purchase or sale" still imports consideration, and since there is admittedly no precedent for any § 10(b) construction which would eliminate consideration, I fail to see any basis for a differing interpretation. In fact, it is not so much an interpretation as it is an evisceration. Surely the use of "purchase or sale" was an indication that Congress intended to place certain limitations upon the scope of § 10(b). Congress did not declare that § 10(b) was to apply to all "transactions involving securities" or all "dispositions of securities." Instead, it chose terms which have had, and still retain, a conceptual significance now abandoned. In effect, the majority is construing "purchase or sale" to include no purchase and no sale. If another definition of the coverage of the Act is to be provided, it must be provided by Congress and certainly not by a panel of this court.
Section 3(a)(13) & (14) of the Act defines "purchase or sale" to include a contract to acquire or dispose of securities. There was here no contract to dispose of or to acquire securities, and there was no sale by ICC or purchase by ICC stockholders. The corporation received nothing in exchange for the dividend and the stockholders paid nothing. If a corporate spin-off of a "portfolio subsidiary" is a purchase or sale simply because it involves a stock transaction or the disposition of securities by a corporation, then a normal corporate stock dividend, a gift of shares or a distribution of securities by a fiduciary can also be found to be a purchase or sale. The majority states that the scope of protection under § 10(b) extends to "those who engage in transactions eventuating in the acquisition or disposition of securities." If there is to be any limitation upon the cases to which this broad definition may be applied in the future, the majority opinion gives no indication of what the guidelines may be, thus opening the door to future litigation which will require continuing appellate interpretation.
The majority emphasizes that the misbehavior here is the type meant to be proscribed by § 10(b) and that the statute
The protection of the statute and the Rule is extended only to a "seller or purchaser." This has been the law of this circuit and other circuits
Although Vesco is at best an unsympathetic figure, and his hegira, whether to the Bahamas, Costa Rica or even to Glubbdubdrib, hardly inspires confidence in his character, this is not adequate cause for a panel of this court to rewrite the statute and ignore precedent. "[W]e are not free to adopt a construction that not only strains, but flatly contradicts, the words of the statute." Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 427, 92 S.Ct. 596, 601, 30 L.Ed.2d 575 (1972).
I respectfully dissent.
Id. at 108.