II. QUESTIONS OF JURISDICTION AND SERVICE OF PROCESS WITH RESPECT TO CLAIMS UNDER THE SECURITIES EXCHANGE ACT.
Taking last things first, it is clear that if under 15 U.S.C. § 78aa this court has jurisdiction over the moving defendant banks, then the nationwide service of process provided for by section 78aa
would be applicable, and defendant banks could not object to the service which was made upon them. As a result, a key question to be disposed of here is the jurisdiction question. And with respect to the jurisdiction question moving defendants' case has some merit.
It bears repeating that plaintiff's complaint rests on two bases. First, plaintiff alleges that defendant banks participated in a conspiracy with other defendants to violate 15 U.S.C. § 78j (section 10(b) of the Securities Exchange Act), by using "in connection with the purchase * * * of any security registered on a national securities exchange * * any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors [here, Regulation Sec. 240.-10(b) (5)]." Second, plaintiff alleges that defendants violated Regulation U of the Federal Reserve Board, promulgated under the authority of the Securities Exchange Act, 15 U.S.C. § 78g.
In their challenge to the first basis for plaintiff's complaint, defendant banks suggest that plaintiff has not placed herself within the class of actions to which section 78aa applies. This is clearly not the case. There can be no doubt that a suit alleging conspiracy to violate the Securities Exchange Act comes within the jurisdictional boundaries set out by section 78aa. If defendants' concern is as to the sufficiency of the evidence standing behind plaintiff's complaint, that can be tested on another occasion. For jurisdictional purposes plaintiff's naked allegation here is sufficient. Cf. Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957), Baron v. Shields, 131 F. Supp. 370 (S.D.N.Y.1954). See Bell v. Hood, 327 U.S. 678, 682-683, 66 S. Ct. 773, 90 L. Ed. 939 (1946).
It is with respect to the second basis for plaintiff's complaint that defendants have a better point. Regulation U of the Federal Reserve Board prescribes limits of credit that may be extended for the purchase of stock where the loan is secured directly or indirectly by that or any other stock. At present, section 221.4 of Regulation U provides that "the maximum loan value of any stock * * * shall be 30 percent of its current market value * * *." Plaintiff alleges that the loans from the defendant banks to MILLING were indirectly secured by the SUGAR stock which was purchased with the loan money, and that the loan value provided for by Regulation U was exceeded by the banks. It is my conclusion that, although there is no problem for plaintiff jurisdictionally (i.e., from the point of view of the sufficiency of plaintiff's allegations) with respect to Regulation U, it is clear from the reported cases that a right of action for violation of the regulation (and also of the related Regulation T of the Federal Reserve Board) can accrue only in favor of those who stand in privity of contract with the lending bank. See Natkin v. Exchange National Bank of Chicago, 342 F.2d 675 (7th Cir. 1965); Meisel v. North Jersey Trust Co. of Ridgewood, New Jersey, 218 F. Supp. 274 (S.D.N.Y.1963). Although it could be argued that the privity requirements enunciated in those cases are ripe for change, or for waiver in the present case, two considerations compel an opposite conclusion: a) the plethora of suits against banks that might well follow from a relaxation of the rule, and the consequent adverse effect on banking and commerce, b) the fact that, in any event, the facts of the present case do not indicate that a waiver of the rule for the present plaintiffs would be proper or equitable at the present time. This court questions the applicability of defendant banks' alleged violation of Regulation U to the present case.
III. PLAINTIFF'S CAUSES OF ACTION UNDER STATE LAW.
As has been adverted to earlier, plaintiff's complaint contains a second count against all defendants, a count asserting this court's pendant jurisdiction and grounded on an accusation that defendants' activities constituted a common law fraud. Defendants contend that plaintiff cannot avail herself of the extraterritorial service of process provisions of 15 U.S.C. § 78aa to effect a valid service of process on them, as far as her common law fraud claim is concerned. Thus the question for decision here is whether 78aa is to be viewed as being broad enough to validate the service of process which was made in the present case.
The question just posited has caused a split in the decisions of the courts considering the question. See Cooper v. North Jersey Trust Co. of Ridgewood, New Jersey, 226 F. Supp. 972, 980 (S.D.N.Y.1964), which provides a listing of the cases holding each way. Courts which have held service of process to be valid with respect to such local causes of action have done so for reasons of judicial economy; courts deciding to the contrary have done so with citation to Rule 4(f) of the Federal Rules. That Rule provides, in its relevant provisions: "All process * * * may be served anywhere within the territorial limits of the state in which the district court is held, and, when a statute of the United States so provides, beyond the territorial limits of that state. * * *" (Emphasis added). To the courts deciding against the propriety of extraterritorial service of process for local pendant claims, the rule's permission for extraterritorial service of process upon passage of a proper statute has not been complied with in 15 U.S.C. § 78aa. According to that view, section 78aa is simply not specific enough to warrant an inference that it is one of those statutes contemplated by Rule 4.
I adopt this latter view. Judicial economy notwithstanding, the federal rules must come first. For an excellent and thorough discussion of the entire problem see Judge Caffrey's opinion in Wilensky v. Standard Beryllium Corp., 228 F. Supp. 703 (D.Mass.1964).
Moving defendant banks' motion to dismiss is denied, as qualified by this opinion.