GATA (Gold Anti-trust Action)Lawsuit... Page 7
C. The BIS and Federal Officials Acting outside the Scope of their Authority Are "Persons" Subject to Suit under the Sherman Act.
Except as a plaintiff, the United States is not a "person" under the Sherman Act. Rex Systems, Inc. v. Holiday, 814 F.2d 994, 997 (CA4 1987). Jet Courier Services, Inc. v. Federal Reserve Bank of Atlanta, 713 F.2d 1221, 1228 (CA6 1983) (Federal Reserve System and Federal Reserve Banks). In a recent case, Name.Space, Inc. v. Network Solutions, Inc., 202 F.3d 573, 580-584 (CA2 2000), the Second Circuit considered at length the so-called federal instrumentality doctrine of immunity from antitrust liability, holding that for federal agencies the immunity is status-based because it is grounded in sovereign immunity, or, as the court put it (at 581), "is paradigmatically equivalent to that enjoyed by the United States itself, and therefore absolute." On the other hand, the court held that a government contractor was entitled only to an implied conduct-based antitrust immunity, and therefore must show that the specific conduct at issue was compelled by the terms of its government contract.
This decision by the Second Circuit is entirely consistent with the proposition that federal officials acting outside the scope of their legal or constitutional authority have no more claim to stand in the shoes of the United States for purposes of the Sherman Act than they do for purposes of sovereign immunity generally. What is more, this proposition carries special force when federal officials not only act outside their legal or constitutional authority, but also do so as market participants rather than as regulators.
In City of Columbia v. Omni Outdoor Advertising, Inc., 499 U.S. 365, 379 (1991), the Court held that principles of federalism and state sovereignty do not "allow plaintiffs to look behind the actions of state sovereigns to base their claims on 'perceived conspiracies to restrain trade' [citation omitted]." Then, in language that applies to this case, the Court added: "We reiterate that, with the possible market participant exception [emphasis supplied], any action that qualifies as state action is [exempt]." Actions by federal officials do not raise the principles of federalism that concerned the Court in City of Columbia. When federal officials act outside the scope of their authority as market participants and with intent to affect prices, there is no sound reason in policy or law to confer on them a Sherman Act exemption where normal application of principles of sovereign immunity would not.
III. THE BIS DEFENDANTS COMMITTED SECURITIES
AND COMMON LAW FRAUD BY SEVERAL DECEPTIVE
SCHEMES AND DEVICES REINFORCED BY NUMEROUS
MISSTATEMENTS AND OMISSIONS OF MATERIAL FACTS.
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 prohibit not just false or misleading statements or omissions but all manipulative or deceptive schemes or devices in connection with the purchase or sale of securities. 15 U.S.C. s. 78j(b); 17 C.F.R. s. 240.10b-5. The purpose of these provisions, as stated by Judge Friendly in Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 943 (CA2 1984), is "to make sure that buyers of securities get what they think they are getting and that sellers of securities are not tricked into parting with something for a price known to the buyer to be inadequate or for a consideration known to the buyer not to be what it purports to be."
The act covers a broad array of persons, including "a natural person, company, government, or political subdivision, agency, or instrumentality of a government" (15 U.S.C. s. 78c(a)(9)), but exempts "any executive department or independent establishment of the United States, ... or any officer, agent, or employee [thereof] acting in the course of his official duty as such ... [emphasis supplied]." 15 U.S.C. ss. 78c(c). Accordingly, as under the Sherman Act, federal officials acting wholly outside the scope of their legal or constitutional authority are neither excluded from the Exchange Act nor entitled to shield themselves from its coverage by invoking sovereign immunity.
A. By Illegally Suppressing Gold Prices, Concealing the Manipulation, and Failing to Set the Freeze-Out Price in Gold Francs, the BIS Defendants Corrupted the Process of Valuing and Paying for the Shares.
Contrary to the impression created by the defendants' memoranda, Rule 10b-5 is not limited to the misstatements or omissions as to material facts reached by subparagraph (b). Subparagraph (a) covers "any device, scheme or artifice to defraud," while subparagraph (c) encompasses "any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." Summarizing several early cases under Rule 10b-5 taken as a whole, the Second Circuit concluded that "deception may take the form of nonverbal acts" and "need not be deception in any restricted common law sense." Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 546 (CA2 1967). Included among the prohibited nonverbal acts that the court cited were "manipulation of market price and purposeful reduction of dividends in order to buy out minority shareholders cheaply." Id.
As implemented by the BIS defendants, the freeze-out transaction involved using four principal artifices to defraud the BIS's private shareholders: (1) taking advantage of the defendants' own undisclosed, illegal and on-going suppression of gold prices to acquire BIS shares at an artificially depressed price; (2) setting the freeze-out price in current Swiss francs rather than gold francs, the BIS's regular and required unit of account, and not offering payment to shareholders in an equivalent weight of gold; (3) employing a so-called "compulsory withdrawal" not authorized under the Convention or the Constituent Charter to disguise what amounted to an effective liquidation of the original BIS and its reorganization to a new purpose; (4) concealing an underlying intent to transfer the American issue at the freeze-out price to the Federal Reserve, thereby making the United States a full shareholding member of the BIS without obtaining either approval or appropriation by Congress as required under the Constitution.
The first two artifices are of substantially the same genre as those in Mutual Shares, supra; equally strong precedent covers the latter two as well.
B. By Acting without the Legal Authority They Misrepresented Themselves to Have, the BIS Defendants Foreclosed Plaintiff from Making a Voluntary Investment Decision and from Pursuing Other Remedies.
Securities and Exchange Commission v. Parklane Hosiery Co., 558 F. 2d 1083, 1088 (CA2 1977), involved a mandatory freeze-out or "going-private" transaction that did not require consent by the minority shareholders. However, the underlying purpose of the transaction -- to permit the controlling shareholder to pay personal debts with company funds -- was concealed. Had that purpose been known to the minority shareholders, "they, or others, might well have been able to enjoin the merger ... as having been undertaken for no valid corporate purpose." Accordingly, relief under Rule 10b-5 was allowed because the non-disclosed information deprived the minority shareholders of a possible remedy -- injunctive relief -- other than "their [statutory] choice to either accept the offering price or to exercise their right of appraisal."
The assertion that the BIS could freeze-out its private shareholders merely by amending its Statutes constituted a misrepresentation of its powers, which did not extend to modifying its unique corporate structure consisting of both public and private shareholders as expressly set forth in the Convention. Implementing this transaction as if it were a legal mandatory freeze-out was a brazen attempt to trick shareholders, not into making a voluntary tender, but into accepting an illegal seizure of their shares at an inadequate price. What is more, holding out the "Tribunal" under the Hague Agreement as equivalent to a "right of appraisal" amounted to rank deception for the reasons set forth in part IV below.
Both the lack of authority for the compulsory withdrawal and the plan to transfer the American issue to the Federal Reserve were highly relevant facts that, if disclosed to shareholders, would have affected not just their decision whether to litigate the transaction but also the forums and remedies available to them, especially U.S. holders of the American issue. If the BIS or Messrs. Greenspan, McDonough or Secretary Summers had disclosed an intent to transfer the American issue to the Fed, not to mention followed the constitutional procedures necessary to enable the Fed to purchase these shares, the transaction would have taken a quite different form with very different consequences for the plaintiff.
First, the question of paying "just compensation" for the American issue would have been considered by Congress as required by the Fifth Amendment. In that connection, the plaintiff and other American issue holders could have made their views known, particularly on the question of valuation, and might through this process have received an acceptable price in a voluntary transaction.
Second, had Congress failed to provide for adequate compensation but otherwise approved the purchase or taking of the American issue by or on behalf of the United States, the plaintiff and other holders would have had valid taking claims under the Tucker Act. Either way, the plaintiff would almost certainly have received a higher price for his shares than that paid by the BIS. And in either event, the plaintiff would not have been left with a choice between accepting an offer of less than one-half net asset value or filing a petition for relief in a foreign land before a biased tribunal lacking procedural due process.
Cases cited by the defendants relating to mandatory freeze-outs or mergers expressly authorized under state statutes granting dissenting shareholders a right of appraisal are inapposite. E.g., Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977) (Delaware short-form merger transaction); Grace v. Rosenstock, 228 F.3d 40 (CA2 2000) (minority freeze-out merger authorized under New York law); Isquith v. Caremark International, Inc., 136 F.3d 531, 534-536 (CA7 1998), cert. denied, 525 U.S. 920 (legal forced sale). None of these cases foreclosed a shareholder from making an investment decision that legally rested with him. Rather, the underlying rationale in all these cases was that the alleged misrepresentations or omissions touched only upon a decision -- whether to tender -- that under the law was not the investor's to make. What is more, in all these cases the dissenting shareholder had a state law right of appraisal through easily accessible judicial procedures meeting due process requirements.
C. Numerous Misstatements and Omissions by the BIS Defendants as to Material Facts Provide Further Evidence of Scienter.
The Private Securities Litigation Reform Act of 1995 (15 U.S.C. s. 78u-4 et seq.) added a new s. 21D to the Exchange Act, which included stricter pleading requirements for misleading statements and omissions (s. 21D(b)(1)) and state of mind (s. 21D(b)(2)). Informed by the decision of the First Circuit in Greebel v. FTP Software, Inc., 194 F.3d 185 (CA1 1999), this court has recently considered at length the stricter pleading requirements imposed by the PSLRA. In re Galileo Corp. Shareholders Litigation, 127 F.Supp.2d 251, 260 (D.Mass. 2001). Both of these cases involved only alleged misstatements or omissions as the grounds for liability. Accordingly, except as they underscore that inferences of scienter must be not just reasonable but "strong" under the PSLRA, they are of marginal or no relevance to this case.
The PSLRA was intended to curtail abusive securities class actions by rapacious lawyers and "to empower investors so that they -- not their lawyers -- exercise primary control over private securities litigation." Id. at 260. In this individual action by a private investor pro se, the defendants misapply the PSLRA's pleading requirements directed at misstatements and omissions to the plaintiff's allegations of fraudulent devices, schemes, acts or practices, and on that misconstruction argue that the complaint fails to allege with sufficient particularity detrimental reliance, transaction or loss causation, and scienter.
"Reliance provides the requisite causal connection between a defendant's misrepresentation and a plaintiff's injury. There is, however, more than one way to demonstrate the causal connection." Basic Inc. v. Levinson, 485 U.S. 224, 243 (1987). The plaintiff alleges that what should have been his voluntary investment decision -- to tender or not based on his evaluation of the fairness of the offer -- was taken from him without legal authority and under false pretenses, all as described previously.
Causation in Rule 10b-5 cases is often determined under a two-part test requiring both loss causation and transaction causation, phraseology that is more appropriate to misstatements or omissions than to devices, schemes, acts or practices to defraud. "'Loss causation' means that the investor would not have suffered a loss if the facts were what he believed them to be; 'transaction causation' means that the investor would not have engaged in the transaction had the other party made truthful statements at the time required." LHLC Corp. v. Cluett, Peabody & Co., 842 F.2d 928, 931 (CA7 1988), cert. denied, 488 U.S. 926. Both prongs of this causation test are met because the plaintiff would neither have suffered loss nor tendered his shares if the BIS defendants had acknowledged their lack of authority to compel such a transaction, their manipulation of gold prices, or their ultimate design to transfer his shares to the Federal Reserve.
The defendants also argue that the plaintiff has failed adequately to allege scienter, which in this context is "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Under the PSLRA, scienter may be shown by inference from indirect or circumstantial evidence, but the inferences must be both reasonable and "strong." Greebel v. FTP Software, Inc., supra, 194 F.3d at 195-196. Many different types of evidence may be considered to show scienter, but the First Circuit prefers "fact-specific inquiry" to "motive and opportunity patterns." Id. at 196. At the pleading stage, confidential sources need not as a general rule be revealed or named. Novak v. Kasaks, 216 F.3d 300, 313 (CA2 2000).
In the present case, strong inferences of scienter may be drawn from the unauthorized "compulsory withdrawal" of all privately held BIS shares, the undisclosed and per se illegal gold price fixing scheme, and the disregard of all normal procedures by which the United States joins public international organizations. These inferences take added strength from the many transparently false statements and material omissions (C. 71, 72, 88-89, 91) which, as the brief for J.P. Morgan Chase & Co. rightly points out (p. 15), fooled neither the plaintiff nor many other private shareholders.
Emphasizing that s. 10(b) "prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act [emphasis supplied]," the Court in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 177 (1994), refused to create liability for acts that merely aid or abet prohibited practices under s. 10(b) or Rule 10b-5 but are not themselves within the language of the statute or the rule. Morgan and its French subsidiary are not being sued as aiders or abetters. They were direct participants in the fraud from its inception, giving the BIS a sham appraisal, based in material part on gold prices they knew to be illegally suppressed, in connection with a transaction they knew to be unauthorized. The American issue was no more subject to compulsory withdrawal in 2000 or 2001 than in 1930, when Morgan certainly did not suggest any such possibility to the original purchasers.
Best Regards, J.T. |
