UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
HIRATA CORPORATION, and )
HIRATA CORPORATION OF AMERICA )
)
Plaintiffs, )
)
vs. )
) Cause No.
DANIEL PORUSH; ) IP-98-0855-C-D/F
JORDAN BELFORT; )
EDWARD RATKOVICH; )
SOCRATES TECHNOLOGIES )
CORPORATION f/k/a MVSI, )
INCORPORATION; )
INTERNATIONAL DISPENSING )
CORPORATION; and )
PARAMOUNT FINANCIAL )
CORPORATION, )
)
Defendants, )
JUDGMENT
--------
The Court, having this day filed an Entry in this cause granting
Defendants Edward Ratkovich's, Socrates Technologies Corporation, f/k/a MVSI,
Incorporated's and Paramount Financial Corporation's motions to dismiss and
denying Plaintiffs Hirata Corporation's and Hirata Corporation of America's
motion to strike as moot, which Entry is in the following words and figures:
(H.I.),
IT IS THEREFORE CONSIDERED AND ADJUDGED that Plaintiffs' claims against
Defendant Edward Ratkovich are dismissed without prejudice for lack of personal
jurisdiction.
IT IS FURTHER CONSIDERED AND ADJUDGED that Plaintiffs'
<PAGE>
claims against Defendant Socrates Technologies Corporation, f/k/a MVSI,
Incorporated are dismissed without prejudice for lack of personal jurisdiction.
IT IS FURTHER CONSIDERED AND ADJUDGED that Plaintiffs' claims Defendant
Paramount Financial Corporation are dismissed for lack of personal jurisdiction.
Dated this 24th day of October, 2000.
/s/ S. Hugh Dillin
-----------------------------------
S. Hugh Dillin
United States District Judge
2
<PAGE>
Copies to:
Edward 0. DeLaney
Bart A. Karwath
BARNES & THORNBURG
11 South Meridian Street
Indianapolis, IN 46204
David C. Campbell
BINGHAM, SUMMERS, WELSH & SPILMAN
2700 Market Tower
10 West Market Street
Indianapolis, IN 46204-2982
Thomas Cullen, Jr.
Beth T. Sigall
JONES, DAY, REAVIS & POGUE
51 Louisiana Avenue Northwest
Washington, DC 20001
Kathleen A. Ellis
David Clarke, Jr.
Stuart M.G. Seraina
PIPER, MARBURY, RUDNICK & WOLFE
6225 Smith Avenue
Baltimore, MD 21209-3600
3
<PAGE>
DAVID C CAMPBELL
BINGHAM SUMMERS WELSH & SPILMAN
2700 MARKET TOWER
10 WEST MARKET STREET
INDIANAPOLIS IN 46204-2982
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
HIRATA CORPORATION, and )
HIRATA CORPORATION OF AMERICA )
)
Plaintiffs, )
)
vs. )
) Cause No.
DANIEL PORUSH; ) IP-98-0855-C-D/F
JORDAN BELFORT; )
EDWARD RATKOVICH; )
SOCRATES TECHNOLOGIES )
CORPORATION f/k/a MVSI, )
INCORPORATION; )
INTERNATIONAL DISPENSING )
CORPORATION; and )
PARAMOUNT FINANCIAL )
CORPORATION, )
)
Defendants, )
ENTRY
-----
This cause comes before the Court on Defendants Edward Ratkovich's,
Socrates Technologies Corporation, f/k/a MVSI, Incorporated's and Paramount
Financial Corporation's motion to dismiss and Plaintiffs Hirata Corporation's
and Hirata Corporation of America's motion to strike. For the following reasons,
Defendants' motions are granted and Plaintiffs' motion is denied as moot.
I. BACKGROUND
-------------
Defendants Daniel Porush and Jordan Belfort controlled the brokerage
house Stratton Oakmont. In August 1995 Stratton Oakmont underwrote the initial
public offering ("IPO") for Defendant Socrates Technologies Corporation, f/k/a
MVSI,
<PAGE>
Incorporated ("MVSI"). Stratton Oakmont also underwrote the IPO for Defendant
Paramount Financial Corporation ("Paramount") in January 1996.(1) After
underwriting these IPOs Stratton Oakmont acted as a market maker for MVSI and
Paramount securities and held itself out as being able to buy and sell these
securities on the secondary market.
However, Stratton Oakmont did more than just create markets for these
securities. Porush and Belfort entered into agreements with MVSI and Paramount
whereby MVSI and Paramount would register large blocks of securities in Porush's
and Belfont's names, or in the names of their nominees, in exchange for Stratton
Oakmont financing Paramount and MVSI and creating a market in Paramount and MVSI
securities. Furthermore, Porush and Belfort used this power over Paramount's and
MVSI's securities to control the market. Paramount and MVSI collaborated in
these efforts by allowing Porush and Belfort the requisite control over such
securities.. Defendant Edward Ratkovich, the founder and Chief Executive Officer
of MVSI, met with Porush and others at Stratton Oakmont to promote the sale of
MVSI securities and was a party to MVSI's agreement with Porush and Belfort. In
addition, Porush and Belfort caused Paramount and MVSI to make materially false
and fraudulent misrepresentations and omissions. These actions
----------------
(1) Stratton Oakmont underwrote the IPO for Defendant International
Dispensing Corporation in October 1996 as well.
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allowed Porush and Belfort to unlawfully create a demand for MVSI and Paramount
Securities and permitted Stratton Oakmont to engage in manipulative and
deceptive acts and practices in connection with the sales of these securities.
In the middle of 1996 George Frank, a stockbroker for Stratton Oakmont,
solicited several sales from an employee at Plaintiff Hirata Corporation of
America's ("Hirata") Indianapolis, Indiana office. Frank sold a large amount of
Paramount, MVSI and International Dispensing Corporation securities to Hirata
beginning on June 26, 1996 and ending on December 6, 1996. Hirata was unaware of
these transactions, and had no knowledge its employee was purchasing securities
from Stratton Oakmont until early 1997.
Ultimately, the wheels came off Porush's and Belfort's scheme. Federal
regulators closed Stratton Oakmont in December 1996 and the United States
Attorney for the Eastern District of New York filed informations against both
Porush and Belfort.
Hirata and its parent Plaintiff Hirata Corporation (collectively,
"Hirata") originally filed suit against Frank, Porush and John Does 1-10 on June
24, 1998. This Court granted Hirata a default judgment against Porush on January
21, 1999. The Court also dismissed Frank without prejudice on November 19, 1999.
Hirata then filed an amended complaint on January 3, 2000 naming the captioned
Defendants as parties to the suit. The
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Court has subsequently issued default judgments against International Dispensing
Corporation on June 16, 2000 and against Porush and Belfort on July 20, 2000. We
turn now to the merits of the remaining Defendants' motions to dismiss.
II. ANALYSIS
------------
As this is a motion to dismiss the Court must examine the sufficiency
of Hirata's amended complaint and determine whether Hirata can prove any set of
facts which would support its claims and entitle it to relief. CONLEY V. GIBSON,
355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 84 (1957); SCOTT V. CITY OF CHICAGO, ILL.,
195 F.3d 950, 951 (7th Cir. 1999). Further, when making this determination the
Court must take as true all factual allegations in Hirata's pleadings and draw
all reasonable inferences in its favor. FREDERICK V. SIMMONS AIRLINES, INC., 144
F.3d 500, 502 (7th Cir. 1998).
MVSI and Ratkovich contend that Hirata's amended complaint is infirm
and hence must be dismissed. In support of this proposition MVSI and Ratkovich
argue that: (1) the amended complaint is not pled with the specificity required
by Federal Rule of Civil Procedure 9(b); (2) the Court lacks personal
jurisdiction over MVSI and Ratkovich; and (3) Hirata's claims are time barred.
Paramount echoes these three grounds for dismissal and adds a fourth --- the
amended complaint fails to satisfy the pleading requirements of Fed. R. Civ. P.
8(a). Not surprisingly,
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Hirata vigorously disputes Defendants' assertions. As the Court cannot entertain
Hirata's claims if we lack jurisdiction, the Court will tackle that argument
first.
Personal jurisdiction over the parties is governed by Indiana law.
NUCOR V. ACEROS Y MAGUILAS DE OCCIDENTE, 28 F.3d 572, 579 (7th Cir. 1994);
SUMPTER V. AMERICAN TOBACCO CO., No. IP-98-0401-C-M/S, 2000 WL 1449851 at *8
(S.D. Ind. May 4, 2000) (McKinney, J.). According to Indiana law we may exercise
personal jurisdiction over MVSI, Ratkovich and Paramount only if: (1) Indiana's'
long-arm statute, Indiana Trial Rule 4.4, authorizes jurisdiction; and (2) if
the exercise of such jurisdiction comports with the Due Process Clause. NUCOR,
28 F.3d at 580, SUMPTER, 2000 WL 1449851 at *8.
There are two types of personal jurisdiction: general arid specific.
Hirata wisely does not attempt to proceed under general jurisdiction and instead
asserts that this Court has specific jurisdiction over Paramount, Ratkovich and
MVSI. Under specific jurisdiction, Paramount's, Ratkovich's and MVSI's
connection with Indiana must be such that they would reasonably anticipate being
haled into court in Indiana. WORLD-WIDE VOLKSWAGON CORP. V. WOODSON, 444 U.S.
286, 297, 62 L. Ed. 2d 490, 501 (1980); SUMPTER, 2000 WL 1449851 at *9.
The main stumbling block for Hirata is that none of the remaining
Defendants have had any direct contacts with Indiana.
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To compensate, Hirata espouses that this Court utilize the "conspiracy theory"
to exercise jurisdiction over Paramount, Ratkovich and MVSI. The conspiracy
theory holds that "the acts of a conspirator in furtherance of a conspiracy may
be attributed to the other members of the conspiracy." SUMPTER, 2000 WL 1449851
at *15. The rationale for exercising jurisdiction in this situation is that
"[i]f through one of its members a conspiracy inflicts an actionable wrong in
one jurisdiction, the other members should not be allowed to escape being sued
there by hiding in another jurisdiction." STAUFFACHER V. BENNETT, 969 F.2d 455,
459 (7th Cir. 1992). Here Hirata alleges that Paramount, Ratkovich and MVSI all
entered into agreements with Porush and Belfort to commit fraud. Frank, acting
as an agent for Porush and Belfort to further the conspiracy, contacted and
solicited sales from an employee at Hirata in Indiana. Hirata argues that under
the conspiracy theory, specific personal jurisdiction is proper over the
remaining Defendants because an agent of their conspiracy, Frank, had sufficient
contacts with Indiana such that the conspiracy could expect to be sued here.
Unfortunately for Hirata, Indiana has yet to address whether conspiracy
theory is appropriate under its long-arm Statute. SUMPTER, 2000 WL 1449851 at
*16. Indiana Trial Rule 4.4(A) provides that "[a]ny person or organization that
is a nonresident of this state... submits to the jurisdiction of the courts of
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<PAGE>
this state as to any action arising from the following acts committed by him or
her or his or her agent: (1) doing any business in this state...." Furthermore,
Courts have construed Ind. T.R. 4.4(A) as extending personal jurisdiction to the
limits of due process. NUCOR, 28 F.3d at 580; SUMPTER, 2000 WL 1449851 at *16.
In determining whether Indiana would adopt a conspiracy theory of
specific personal jurisdiction, the Court, as Judge Larry J. McKinney did in
SUMPTER, turns to Indiana's formulation of civil conspiracy. Civil conspiracy,
standing alone, is riot a cause of action in Indiana. SUMPTER, 2000 WL 1449851
at *17; WINKLER V. V.G. REED & SONS, INC., 638 N.E. 2d 1228, 1234 (Ind. 1994).
Therefore, to state a claim of civil conspiracy Hirata must demonstrate that
Paramount, Ratkovich and/or MVSI, by concerted action with Porush, Belfort
and/or Stratton Oakmont, "sought to accomplish some lawful purpose by unlawful
means." SUMPTER, 2000 WL 1449851 at *17; HUNTINGTON MORTGAGE CO. V. DEBRPTA. 703
N.E.2d 160, 168 (Ind. Ct. App. 1998).
The sale of securities is the lawful purpose of this conspiracy. The
unlawful means allegedly committed by Paramount, Ratkovich and/or MVSI is fraud.
Hirata's allegations of the raining Defendants' conspiracy to commit fraud are
basically lifted from Porush's and Belfort's informations:
58. As set out in the Superseding Informations, MVSI, International
Dispensing and Paramount, each as
7
<PAGE>
Issuers, had an agreement with Porush and Belfort to knowingly give
Porush and Belfort control over the disposition of the Issuers'
securities by registering large blocks of securities in the names of
Porush and/or Belfort and/or their nominees, and MVSI, International
Dispensing and Paramount each registered such securities pursuant to
their agreements.
59. Ratkovich worked closely with Porush and others at Stratton
Oakmont, visited Stratton Oakmont on a number of Occasions and promoted
the sale of MVSI securities to the public by Stratton Oakmont brokers,
and was a party to an agreement to allow Porush and Belfort to obtain
control over the disposition of the MVSI securities by registering
large blocks of MVSI securities in the names of Porush, and/or Belfort
and/or their nominees, and cause such securities to be so registered.
60. The purpose of these agreements with Porush and Belfort was to
allow Porush and Belfort and/or their nominees to manipulate the market
for the Issuers' securities and through that scheme obtain the money of
investors such as Hirata. Hirata was unaware of, and could not
reasonably have known of the agreements prior to the hire (sic) the
Superseding Information was made public.
61. In light of their conspiracy, MVSI, International Dispensing,
Paramount and Ratkovich are each jointly and severally liable for
Porush's and Belfort's unlawful conduct, including joint and several
liability for all damages and other relief, including attorney's fees
and costs, exemplary, punitive and treble damages and interest awarded
Hirata.
Plaintiffs' Second Amended Complaint at 14-15. Viewing these allegations as
true, the Court is convinced that Hirata has not provided sufficient evidence or
information establishing that Paramount, Ratkovich and MVSI have committed any
fraud. Indiana law states that "[f]raud is a material misrepresentation of a
past or existing fact, which is false, made with knowledge or
8
<PAGE>
reckless disregard of its falsity; and which causes reliance to the detriment of
the person relying on it." HARDY V. SOUTH BEND SASH & DOOR CO., 603 N.E. 2d 895,
901 (Ind. Ct. App. 1993). Constructive fraud is defined as: "a duty existing by
virtue of the parties' relationship, a representation or omission which violates
that duty, and detrimental reliance on the representation or admission by the
individual to whom the duty is owed." ID. None of Hirata's pleadings nor its
evidence demonstrate even a prima facie case of fraud as to the remaining
Defendants. Absent is any reliance by Hirata on Paramount's, Ratkovich's or
MVSI's misrepresentations or omissions. Indeed, Hirata had no knowledge
whatsoever of Paramount, Ratkovich or MVSI until well after all the
representations and transactions had concluded. This makes it impossible for
Hirata to even facially state that Paramount, Ratkovich or MVSI were part of a
civil conspiracy to commit either fraud or constructive fraud under Indiana law.
As a result, should Indiana recognize conspiracy theory jurisdiction, Hirata
cannot demonstrate that personal jurisdiction is appropriate in this case.
This situation is admittedly similar to the one feared in STAUFFACHER,
969 F.2d at 459 in that the Court's attempt to ascertain personal jurisdiction
becomes intertwined in the merits. Also lurking near the surface are the
legitimate concerns voiced by Paramount, Ratkovich and MVSI; mainly, whether
9
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Hirata has pled its allegations of fraud with particularity in accordance to
Fed. R. Civ. P. 9(b). (2) However, assuming the pleadings are sufficient to
withstand Rule 9(b) scrutiny, Hirata cannot demonstrate that the remaining
Defendants committed the unlawful act of fraud. Therefore, pleading issues
aside, the Court finds that it lacks personal jurisdiction over Paramount,
Ratkovich and MVSI based on the conspiracy theory because Hirata has failed to
make a prima facie case of personal jurisdiction. SUMPTER, 2000 WL 1449851 at
*22.
The Court also rejects Hirata's attempt to squeeze personal
jurisdiction over Paramount, Ratkovich and MVSI out of Hirata's
----------------------
(2) a close reading of Chief Judge Sarah Evans Barker's opinion in
HIRATA CORP. Y. J.B. OXFORD & CO., 193 F.R.D. 589 (S.D. Ind. 2000) reveals that
an aiding and abetting claim does not need to be pled with particularity. ID. at
597. However, contrary to Hirata's reading of that decision, allegations that a
defendant was involved in another's fraud (that other being Stratton Oakmont)
must be pled with particularity. ID. at 598.
(3) Hirata's argument that its allegations of Paramount's Ratkovich's
and MVSI's conspiracy to commit fraud are bolstered by the indictments against
Steven Madden are unpersuasive. Although the indictments from the Eastern and
Southern Districts of New York help shed some light on the activities of Porush
and Belfort while controlling Stratton Oakmont, the indictments do nothing to
help establish Paramount's, Ratkovich's or MVSI's involvement in any conspiracy.
Hirata's insinuation that because Steven Madden, Ltd. was an Issuer and has been
indicted for conspiring to commit securities fraud that the other Issuers must
also be guilty of such an offense is misplaced. The detail involved in the two
indictments against Steven Madden demonstrates that the Government had a prima
facie case of fraud against Steven Madden. Such evidence and detail as to
Paramount, Ratkovich and MVSI is completely lacking from Hirata's submissions.
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claims that Porush and Belfort violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), 18 U.S.C. ss. 1961 et seq. Hirata is correct that
RICO provides for nationwide service of process. 18 U.S.C. ss. 1965(b);
STAFFACHER, 969 F.2d at 460. However, Hirata has not alleged that Paramount,
Ratkovich or MVSI has violated RICO. The sole RICO allegation is against Porush
and Belfort in Count VI of the amended complaint arid does not accuse Paramount,
Ratkovich or MVSI of participating in the racketeering activity or the
racketeering enterprise. Therefore, Hirata can find no solace from RICO's
service provisions.
Hirata also argues that the Indiana Securities Act, specifically Ind.
Code ss. 23-2-1-16(b), provides nationwide service of process against Paramount,
Ratkovich and MVSI because they are issuers who have done business in Indiana
involving the sale of securities. This argument is unpersuasive. Hirata has not
shown that Paramount, Ratkovich or MVSI did any business in Indiana involving
the sale of securities. Granted, Hirata, an Indiana corporation, did purchase
paramount and MVSI securities. However, that purchase was through Stratton
Oakmont. There was no direct solicitation by Paramount or MVSI (or MVSI through
Ratkovich) to Indiana residents. To construe ss. 23-2-l-16(b) as providing
jurisdiction over any issuer whose securities were purchased on the secondary
market by Indiana residents would violate due process. As such, the Court finds
that ss. 23-2-1-
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16(b) only applies to an issuer who directly sells or offers to sell securities
in Indiana. Construed in this manner, the Indiana Securities Act does not offend
due process. The effect of this Constitutionally-sound construction, though, is
that the Indiana Securities Act does not provide a basis for personal
jurisdiction over Paramount, Ratkovich or MVSI.
III. CONCLUSION
---------------
Hirata has cast a large net of litigation in the hopes of recovering
the losses incurred by its unwitting involvement in Stratton Oakmont. However,
the net has entangled parties over which the Court has no jurisdiction. Even
assuming that Indiana would adopt the conspiracy theory of jurisdiction, Hirata
has failed to establish a prime facie case of personal jurisdiction over
Paramount, Ratkovich and MVSI. In addition, Hirata's claims that the Court has
personal jurisdiction over the remaining Defendants under RICO and the Indiana
Securities Act are unpersuasive. Consequently, Hirata's claims against
Paramount, Ratkovich and MVSI are dismissed for want of personal jurisdiction.
Furthermore, Hirata's motion to strike is denied as moot.
Dated this 24th day of October, 2000.
/s/ S. Hugh Dillin
------------------------------
S. Hugh Dillin
United States District Judge
12
<PAGE>
Copies to:
Edward 0. DeLaney
Bart A. Karwath
BARNES & THORNBURG
11 South Meridian Street
Indianapolis, IN 46204
David C. Campbell
BINGHAM, SUMMERS, WELSH & SPILMAN
2700 Market Tower
10 West Market Street
Indianapolis, IN 46204-2982
Thomas Cullen, Jr.
Beth T. Sigall
JONES, DAY, REAVIS & POGUE
51 Louisiana Avenue Northwest
Washington, DC 20001
Kathleen A. Ellis
David Clarke, Jr.
Stuart M.G. Seraina
PIPER, MARBURY, RUDNICK & WOLFE
6225 Smith Avenue
Baltimore, MD 21209-3600
13
