The opinion of the court was delivered by: WHIPPLE
The plaintiff Securities and Exchange Commission instituted this action for injunctive and other relief against nine individual and corporate defendants. As set forth in detail infra, the complaint alleges numerous violations of Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), together with Rule 10b-5 thereunder, 17 CFR 240.10b-5. Additionally, there is a cross-claim in the cause which is not material at this stage of the proceedings.
With the exception of Alexander Kasser, who has yet to be served with process, all of the defendants have moved for dismissal of the complaint pursuant to Fed. R. Civ. P. 12(b)(1), asserting lack of subject matter jurisdiction. Should this Court deny those motions, defendants Brown, Chastek, River Sawmills Co. and Blue Construction Corporation have filed several alternative motions of which only the following are presently under consideration: (1) that the Manitoba Development Corporation (the allegedly defrauded Canadian entity) be joined as a party, or failing such joinder, that the action be dismissed for failure to join an indispensable party; and (2) that plaintiff's demand for an accounting and restitution by defendant Brown to the Manitoba Development Corporation be stricken. Consideration of the remaining motions has been deferred pending disposition of the applications which are presently before the Court.
For the purposes of this motion, all well pleaded allegations of the complaint must be accepted as true. Sabolsky v. Budzanoski, 457 F.2d 1245, 1249 (3rd Cir.), cert. denied, 409 U.S. 853, 34 L. Ed. 2d 96, 93 S. Ct. 65 (1972); Lasher v. Shafer, 460 F.2d 343, 344 (3rd Cir. 1972).
Count I of the complaint indicates that during the mid-1960's the Canadian provincial government of Manitoba sought to interest private enterprise in the creation of a forestry complex at the Pas, Manitoba. An organization called the Manitoba Development Fund (hereinafter M.D.F.), now known as the Manitoba Development Corporation, was created by the government to oversee the development and financing of the project. In 1965 Monoca A.G., a Swiss corporation allegedly owned and controlled by defendant Alexander Kasser, a United States citizen, received an option to develop the complex. Oskar Reiser, a Swiss national, negotiated the option on behalf of Monoca A.G. which, according to the complaint, purported to represent diverse European and American investors in the pulp and paper industry.
In January 1966, negotiations were held in New York, New York between Reiser and Manitoba officials concerning plans for the forestry project. On February 24, 1966 the Province of Manitoba signed an agreement in Canada with defendant Churchill Forest Industries (Manitoba), Ltd. (hereinafter C.F.I.). Under that contract C.F.I. was granted timber concessions in exchange for its commitment to develop, own, and operate the forestry complex. C.F.I. had been incorporated in Canada and was represented to be a subsidiary of Monoca. The defendant Kasser, however, allegedly concealed his complete ownership of both corporations.
The complaint asserts that in furtherance of the scheme defendant Kasser and others fraudulently induced the M.D.F. to enter an investment contract with C.F.I. That contract, entitled a Master Finance Agreement, was negotiated partially in New York but was executed in Canada on November 19, 1966. The agreement provided for the establishment of a forestry complex to be owned and operated by C.F.I. Financing for the project was to emanate principally from the M.D.F., but C.F.I. was required as a condition of the agreement to furnish substantial amounts of its own invested equity capital. The Master Finance Agreement defined said equity capital as money paid in cash for shares of C.F.I. stock, and expressly excluded the use of retained earnings and government grants under the so-called Canadian Area Development Incentive Act (hereinafter A.D.A.).
The very substance of the fraud upon which the complaint is based stems from alleged violations of this provision in the Master Finance Agreement. The defendants, according to the complaint, used elaborate and complex methods of concealing the true nature of the purported equity capital investment in C.F.I.
By way of background, the complaint avers that Kasser's only role in the preliminary negotiations was that of president of the defendant Technopulp Incorporated (hereinafter Technopulp), a New Jersey corporation. When the Master Finance Agreement was signed, the M.D.F. approved a May 1966 engineering and management services contract signed by Kasser for Technopulp and Reiser for C.F.I., which was represented by defendants to be an arms-length transaction. Furthermore, the M.D.F. executed an agreement with Monoca A.G. in which Monoca represented that it would invest a minimum of $5,000,000 in C.F.I. stock by March 31, 1971. As in the Master Finance Agreement, the consideration for these shares was not to come from retained earnings of C.F.I. or from A.D.A. grants. Monoca claimed that it had a substantial interest in C.F.I. and that it would fully disclose any change in corporate ownership. Mr. Kasser was represented as having only a minor shareholder interest in Monoca. This so-called "Monoca Agreement", like the other contracts with the M.D.F., was not executed in the United States.
The complaint alleges further that, in employment of the scheme, defendants Kasser and Stephen Mochary, a New Jersey attorney, incorporated the defendant Churchill Pulp Mill, Ltd. (hereinafter Churchill Pulp) in Nevada during June 1969. On June 15, 1969 Technopulp and C.F.I. were consolidated into Churchill Pulp as wholly owned subsidiaries, a structural change which according to the allegations was never disclosed to the M.D.F. Through this device, it is asserted that the defendants were able to "channel" loan disbursements from the M.D.F. and earnings from the project into purported investments in C.F.I. stock.
It appears that Churchill Pulp, through an assignment to it by Kasser of his rights to C.F.I. stock, became responsible for investing the $5,000,000 in equity capital to which Monoca had agreed in the Monoca contract. This assignment was allegedly confirmed in a letter mailed by Mochary from Montclair, New Jersey to Kasser, whose address is not given. It is alleged that the M.D.F. was never informed of either assignment. As indicated infra, Churchill Pulp was eventually to hold the C.F.I. stock through its nominee, the Swiss Bank Corporation.
Paragraph 33 of the complaint contains allegations as to the "mechanics" of funneling M.D.F. money into C.F.I. stock in order to satisfy the requirements of the Master Financing Agreement. The defendants are claimed to have engaged in direct "recycling" of monies advanced as loans by the M.D.F. The scheme allegedly operated in the following manner: After having requisitioned certain monies from the M.D.F. to purportedly pay development costs, C.F.I. would deposit money in the Royal Bank of Canada At Winnipeg, Manitoba in an amount equal to the required percentage of equity investment for the requisition. When the Royal Bank confirmed that it received a deposit designated for stock purchases, the Canadian C.F.I. attorney would certify to the M.D.F. that such funds were received and would issue an appropriate amount of C.F.I. stock in the name of the Swiss Bank Corporation. The M.D.F. would then authorize disbursements of the loan requisition, and C.F.I. would complete the cycle by issuing debentures to the M.D.F. for the loan. While paragraph 33 does not specifically allege that the monies deposited in the Royal Bank were part of the same funds disbursed by the M.D.F., there are generalized allegations to that effect contained elsewhere in the complaint. It is thus assumed for the purpose of this motion that the same monies paid to C.F.I. in Canada were henceforth transferred to the Royal Bank as purported equity investments.
Another aspect of the scheme involved the New York office of the Swiss Bank Corporation into which defendants Kasser and Mochary allegedly channeled funds from the middle of June, 1969 until March of 1970. The Swiss Bank was instructed in letters from Mochary to transfer this money by wire from New York to the Royal Bank of Canada in Winnipeg, Manitoba, for the purchase of C.F.I. stock in the Swiss Bank's name. The Swiss Bank held this stock as nominee for Churchill Pulp, whose beneficial ownership was never disclosed to the M.D.F. The complaint asserts that over $3,000,000 in purported stock purchases were routed from Mochary's Montclair, New Jersey office to the New York conduit, and then by wire to the Royal Bank in Winnipeg. Approximately $1,700,000 of this sum was allegedly contributed by Technopulp in the form of dividends to its parent, Churchill Pulp.
The first count of the complaint indicates that a total of more than $38,000,000 was advanced by the M.D.F. to C.F.I. in the form of "loan disbursements and working capital loans". Defendants issued and delivered C.F.I. debentures to the M.D.F. in the total face amount of $40,700,000. In late 1970, C.F.I. defaulted on its interest payments and a receivership action was instituted in January, 1971. The M.D.F. was awarded all of its remaining assets by the Court of Queens Bench in November, 1973.
Count II of the S.E.C.'s complaint alleges similar fraudulent acts on the part of the following defendants: Kasser, Mochary, James M. Brown, Jr., Chester Chastek, River Sawmills Company, a Delaware corporation (hereinafter River) and Blue Construction Corporation, a Delaware corporation (hereinafter Blue). The events contained in this Count occurred from January 1968 until January 16, 1974, the date of the complaint.
The details of the alleged fraud follow a pattern similar to the acts described in the first count. In early 1968, the M.D.F. began to explore the economic feasibility of constructing a large sawmill at the Pas, Manitoba. For various reasons, the M.D.F. insisted on independent ownership of this project. In the summer of 1968, Kasser brought together the M.D.F. and defendant James M. Brown, Jr., who was chairman of a well-established, successful lumber operation called the Pact River Company which owned sawmills in the United States and Canada. Together with Kasser, Brown represented to the M.D.F. that he was willing to invest substantial sums of his own money and to assume the ownership and development of the sawmill.
In January, 1968, according to the complaint, defendants Kasser, Brown and Chester Chastek had met in Montclair, New Jersey to formulate a plan for developing the sawmill. Kasser and Brown agreed that the project would be a joint venture and that Kasser would lend Brown one-half of the front money to promote the operation. Furthermore, River would own the sawmill while Blue would construct a smaller mill for Churchill Pulp and would be the parent corporation for River.
In February, 1968, Kasser sent Brown a check for $25,000 to assist in the formation of Blue and was given the option to convert this loan into half the equity securities of Blue. During the same month, C.F.I. contracted with Blue in Montclair, New Jersey for the construction of a small sawmill at the Pas for the sum of $3,900,000. At a Sicily, Italy meeting in April, 1968, the defendants agreed to apply profits from the small sawmill toward equity in the larger project, with the balance of such equity to be provided through a Swiss bank loan. In late June, River entered into a construction contract with Blue for the large sawmill. The complaint does not specify where this contract was executed.