II. PLAINTIFF HAS STANDING TO ASSERT CLAIMS FOR
DAMAGES AND INJUNCTIVE RELIEF ARISING FROM
PRICE FIXING IN THE GOLD MARKET BECAUSE HE HAS
SUFFERED DIRECT INJURY AND IS THREATENED WITH
FURTHER HARM FROM THIS ILLEGAL CONDUCT.
The manipulative activities of the defendants in the gold market constitute horizontal price fixing and are illegal per se as set forth by the Supreme Court in United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223-224 (1940):
Under the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se. … Where the means for price-fixing are purchases or sales of the commodity in a market operation…, such power may be found to exist though the combination does not control a substantial part of the commodity. In such a case that power may be established if as a result of market conditions, the resources available to the combinations, the timing and the strategic placement of orders and the like, effective means are at hand to accomplish the desired objective. But there may be effective influence over the market though the group in question does not control it. Price-fixing agreements may have utility to members of the group though the power possessed or exerted falls far short of domination and control. … Proof that a combination was formed for the purpose of fixing prices and that it caused them to be fixed or contributed to that result is proof of the completion of a price-fixing conspiracy under s. 1 of the Act.
In United States v. Nippon Paper Industries Co., 109 F.3d 1 (CA1 1997), the First Circuit held that price fixing activities committed abroad which have a substantial and intended effect within the United States may form the basis not just for civil relief but also for criminal prosecution in U.S. courts.
A. Participation in Gold Price Suppression by Federal Officials Abusing their Authority Coupled with Failure of the DOJ to Enforce the Sherman Act Counsel against Denying the Plaintiff Standing.
If this case involved any commodity other than gold, or any price fixers less powerful than the world’s largest banks supported by top government officials, evidence like that contained in the complaint and the plaintiff’s affidavit would already have produced a major price fixing investigation by the Department of Justice — one very likely to lead to criminal indictments. Today the gold price is hundreds of dollars below its true equilibrium, causing enormous damage to the gold mining industry and to a number of smaller gold producing nations around the world, especially in southern Africa. By turning a blind eye toward manipulative activities that are becoming ever more obvious to knowledgeable observers and participants in the gold market, the DOJ emboldens the gold price fixers and nourishes cynicism about the nation’s true commitment to the rule of law and the Constitution.
The burden of pursuing legal relief from this per se illegal conduct should not fall on a private plaintiff, particularly when the mere commencement of a DOJ investigation, backed by issuance of a few Civil Investigative Demands to major bullion banks, would almost certainly terminate these illegal activities overnight. However, when such per se illegal conduct is alleged on credible evidence, involves top federal officials, and the DOJ declines to act, the courts should be very hesitant to deny standing to a private plaintiff who makes a strong case for standing under the standard Sherman Act criteria.
B. Under Standard Sherman Act Criteria, Plaintiff Has Standing to Bring Price Fixing Claims for both Damages and Injunctive Relief against the Defendant Bullion Banks.
Section 4 of the Clayton Act permits “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws” to sue for damages. 15 U.S.C. s. 15. Section 16 provides that any person “shall be entitled to sue for and have injunctive relief … against threatened loss or damage by a violation of the antitrust laws … .” 15 U.S.C. s. 26.
To establish standing to sue under the antitrust laws, a plaintiff must satisfy three injury-related requirements: (1) actual injury to business or property or, for injunctive relief, threatened harm; (2) that the injury or harm results from an antitrust violation; and (3) that the injury or harm is of a type that the antitrust laws are intended to prevent. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977). R. W. International Corp. v. Welch Food, Inc., 13 F.3d 478, 487 (CA1 1994).
However, for the narrowing categories of violations that remain per se illegal, the third test is met because “nothing more is needed for liability; the defendants’ power, illicit purpose and anticompetitive effect are all said to be irrelevant.” Addamax Corp. v. Open Software Foundation, Inc., 152 F.3d 48, 51 (CA1 1998). If there is some hypothetical per se violation where a plaintiff who meets the first two tests cannot meet the third, it is not horizontal price fixing. See Engine Specialties, Inc. v. Bombardier Ltd., 605 F.2d 1, 12-13 (CA1 1979).
1. Actual Injury and Threatened Harm to Plaintiff’s Property.
Injury to business or property includes personal as well as commercial property. Reiter v. Sonotone Corp., 442 U.S. 330, 341 (1979). Waldron v. British Petroleum Co., supra, 231 F.Supp. at 86-87. Accordingly, whether the plaintiff’s BIS shares or FCX gold preferred shares were or are personal or business investments is irrelevant.
With respect to injunctive relief, a plaintiff need not show injury to business or property; it is sufficient to show only that relief is necessary to prevent injury to his interests as opposed to someone else’s. Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 111 (1986). The plaintiff has a direct personal interest in: (1) the future dividends and redemption payment on his FCX gold preferred shares, all calculated arithmetically from the London PM gold price; and (2) determination of the correct price and net asset value for his BIS shares, which requires a calculation in Swiss gold francs.
2. Direct Relationship of Antitrust Violation to Plaintiff’s Injury.
In Associated General Contractors v. California State Council of Contractors, 459 U.S. 519 (1983), the Court set forth relevant factors to consider in determining whether an antitrust plaintiff meets the causative requirements for standing. These were distilled by the Sixth Circuit in Peck v. General Motors Corp., 894 F.2d 844, 846 (CA6 1990), into a useful five part framework: (1) the causal connection between the antitrust violation and the harm to the plaintiff, including whether the harm was caused intentionally; (2) the nature of the plaintiff’s injury, including whether the plaintiff is a consumer or competitor in the relevant market; (3) the directness of the injury, and whether and to what extent the damages may be speculative; (4) the potential for duplicative recovery or complex apportionment of damages; and (5) the existence of more direct victims of the antitrust violation. See also Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982).
The defendants challenge the plaintiff’s antitrust standing on two basic grounds: (1) he is not a purchaser or seller of gold bullion in a direct relationship with any of the defendants; (2) as a holder of BIS shares and FCX gold preferred shares, his damages from the alleged gold price fixing are too indirect and/or speculative. They rely chiefly on Kansas v. Utilicorp United Inc., 497 U.S. 199 (1990) (utilities’ customers lack standing to sue utilities’ gas suppliers for overcharges later passed on in customers’ bills). See Hannover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968); Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).
None of these indirect purchaser cases fits the facts of this case, which involves a unique commodity market — the gold market — and two different securities linked directly and with arithmetic precision to the price of gold. Two cases that directly support the plaintiff’s standing are Sanner v. Board of Trade of City of Chicago, 62 F.3d 918, 926-930 (CA7 1995), recently followed in In re Copper Antitrust Litigation, 98 F.Supp.2d 1039, 1051 (W.D.Wis. 2000).
Sanner involved soybean farmers who sold beans in the cash market at depressed prices allegedly caused by a CBOT resolution requiring certain traders to liquidate their long futures positions in beans. The Board argued that the farmers lacked standing because its resolution was directed only at the futures market, the farmers did not participate in that market, and their injuries were thus too indirect as well as being speculative and difficult to apportion.
The Seventh Circuit rejected these arguments, holding (at 929): “The futures market and the cash market for soybeans are thus ‘so closely related’ that the distinction between them is of no consequence to antitrust standing analysis.” [Citation omitted.] The court continued (id.): “[T]he injury the farmers claim to have suffered is in no sense ‘derivative.’ The farmers are not attempting to stand in the shoes of a third party or to complain of the secondary consequences arising from an injury to a third party.” And finally, noting that some courts have read McCready, supra, to require that a plaintiff’s alleged harm be a necessary incident of the antitrust violation, the court held (at 930): “[I]njury to the farmers was necessary to accomplish the [Board’s] allegedly anticompetitive scheme. The cash and futures markets for soybeans are so closely related that a directive issued toward one promised to invariably impact the other.”
Sanner was followed in In re Copper Antitrust Litigation, supra, 98 F.Supp.at 1043, 1049-1051, holding that a purchaser of copper in the cash market, where prices were set by reference to the price or a monthly average price of copper futures on the COMEX or London Metal Exchange, had standing to sue refiners and traders for price manipulation in the futures markets even though the plaintiff did not trade in those markets.
Both the dividend and redemption payments on the plaintiff’s FCX gold preferred shares are a direct arithmetic function of the London PM gold price, which is set while the COMEX is open (P.A. 27). In purpose and function, these payments are the exact equivalent of selling a specified weight of gold. They operate in substantially the same way as contractual gold clauses of earlier eras. Congress has expressly re-authorized securities providing for payment in gold, or in equivalent dollar value. 31 U.S.C. s. 5118(d)(2). See Adams v. Burlington Northern Railroad Co., 80 F.3d 1377, 1380-1381 (CA9 1996), cert. denied, 519 U.S. 864. Any manipulation of gold prices necessarily affects the value of payments under these securities in the same manner and to the same extent as it affects purchases and sales of bullion.
The connection between the plaintiff’s BIS shares and gold prices is still more direct. Even assuming that the BIS had authority to freeze-out its private shareholders, both its Statutes and its regular practice with respect to transactions on capital account required the Bank to price its shares in gold francs and to offer to pay in an equivalent weight of gold (C. 68-70).
The plaintiff’s FCX gold preferred shares are not, and his BIS shares were not, analogous to the common equity shares of gold mining companies. Such equity shares, unlike the securities involved in this case, derive their value indirectly from profits or losses on the business of mining gold. Many factors enter into that equation besides gold prices, as important as they are. What is more, none of the defendants suggests some other prospective plaintiff more directly affected by the manipulation of gold prices, such as the major gold mining companies with which they have relationships or connections (C. 44, 56, 59, 60, 61). Some of these companies take advantage of their inside knowledge of the manipulative scheme (C. 13, 41), while others are too dependent on financing from their gold bankers or on mining permits from government officials to dare challenge the price fixing cabal (C. 60).
The defendants’ argument that the complaint lacks sufficient allegations of a combination or conspiracy to affect gold prices is without merit. “Direct evidence of a conspiracy is not necessary: ‘[t]he requisite concerted action may be inferred from a course of dealing or from other circumstancial evidence.'” In re Copper Antitrust Litigation, supra, 98 F.Supp.2d at 1054 (citations omitted). DM Research, Inc. v. College of American Pathologists, 170 F.3d 53, 56 (CA1 1999), cited by defendants, was a “rule of reason” case in which, as the court noted, the pleading requirements are very different than for per se illegal conduct, where the purposes, reasons or motives of the defendants are irrelevant.
In any event, two directors of the BIS have confirmed manipulation of gold prices by central banks. Mr. Greenspan has stated publicly that central banks other than the Federal Reserve lease gold in response to price increases (C. 38-39; DOJ Ex. E). The Governor of the Bank of England has stated that in response to the 1999 rally in gold prices triggered by the Washington Agreement, the U.K. and the U.S. Fed “had to quell the gold price, manage it” because “a further rise would have taken down” one or more bullion banks (C. 55).
What is more, the plaintiff has set forth considerable detailed evidence regarding the alleged price fixing conspiracy: (1) the gold carry trade as a source of cheap funding for the bullion banks providing that gold prices remain stable or decline (C. 29); (2) the very large and dangerous short physical position (C. 32-33), confirmed by Mr. George’s statement; (3) the vast amount of statistical evidence demonstrating manipulation of gold prices beginning around 1994 (C. 46-48; P.A. 20, 26- 28); (4) the completely unexpected announcement of the British gold auctions, not to mention Deutsche Bank’s advance notice of it (C. 42); (5) the synchronization of British gold auctions with COMEX option expiration days in a manner designed to supply bullion banks with gold for delta hedging (P.A. 21-25); and (6) the dominant role that the defendants collectively play in the gold market, making any major manipulation of gold prices virtually impossible without their active and knowing support and participation.
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.
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.
Article 54(1) of the BIS’s Statutes provides that disputes “with regard to the interpretation or application of the Statutes of the Bank” arising between the BIS and its member banks or between it and its private shareholders “shall be referred for final decision to the Tribunal provided for by the Hague Agreement of January, 1930” (BIS.A. Ex. D).
This reference is not (as one might reasonably assume absent careful investigation) to the Permanent Court of Arbitration at the Hague. Rather, the reference is to an arbitration tribunal established under Article XV of the Agreement between Germany et al. Regarding the Complete and Final Settlement of the Question of Reparations, signed at The Hague on January 17, 1930 (104 L.N.T.S. 244) (P.A. Ex. B). The United States is not a signatory to this treaty, which adopted the “New Plan” (generally known as the “Young Plan”) for payment of Germany’s World War I reparations.
What is more, neither the United States nor the Federal Reserve has submitted itself to the jurisdiction of the Tribunal pursuant to the Brussels Protocol (197 L.N.T.S. 31) (P.A. 18-19). Nor, so far as is publicly known, have they yet done so by the purchase of BIS shares. Accordingly, the Tribunal cannot render a complete judgment on the plaintiff’s claims that run not only against the BIS but also against Messrs. Greenspan and McDonough, who are wholly outside its jurisdiction.
A. The Treaty’s Arbitration Tribunal Is Defunct.
The arbitration provision in the above-referenced treaty provided in relevant part (104 L.N.T.S. (P.A. Ex. B) 252-253):
1. Any dispute, whether between the Governments signatory to the present Agreement or between one or more of those Governments and the Bank for International Settlements, as to the interpretation or application of the New Plan shall … be submitted for final decision to an arbitration tribunal of five members appointed for five years ….
9. The present provisions shall be duly accepted by the Bank for the settlement of any dispute which may arise between it and one or more of the signatory Governments as to the interpretation or application of its Statutes or the New Plan.
The New Plan expired long ago, and with it any justification for the continued existence of this arbitration tribunal, which under the treaty had a mandate to hear disputes only between the BIS and signatory governments, not between the BIS and its shareholders.
The arbitration provision in the original Constituent Charter governing the BIS’s relationship with Switzerland similarly addresses only disputes with government. It provided (P.A. Ex. A, para. 11): “Any dispute between the Swiss Government and the Bank as to the interpretation or application of the present Charter shall be referred to the Arbitral Tribunal provided for by The Hague Agreement of January, 1930.”
In 1987, the BIS and the Swiss Federal Council entered into a new agreement regarding the Bank’s legal status in Switzerland (BIS.A. Ex. H). The first paragraph of article 27 of this agreement reenacts the arbitration clause of the old Constituent Charter. However, a new second paragraph provides a modern alternative to the lapsed arbitration tribunal under the Hague Agreement. Under the new paragraph, the parties can substitute an ad hoc panel of three members, with each party naming one member and the two designated members choosing a third as president.
Similarly, the BIS should have modernized Article 54(1) relating to arbitration of disputes with shareholders. It easily and quite appropriately could have designated the Permanent Court of Arbitration at the Hague as an alternative or substitute arbitration authority. The PCA regularly sets up arbitration tribunals to hear international disputes, and it has promulgated a modern set of rules for arbitration between international organizations and private parties.
Because the BIS failed to modernize Article 54(1), no arbitration tribunal was available to the plaintiff when he filed this case on December 7, 2000, in response to the freeze-out scheduled for implementation on January 8, 2001. Indeed, although requested to do, BIS officials failed to furnish him any information about the tribunal they now wish to invoke (P.A. 13). As they knew in December 2000 and for many years before, this tribunal had long ago ceased to exist notwithstanding that the treaty by its terms called for a permanently sitting body composed of members appointed for five-year terms, not an ad hoc panel chosen for specific disputes.
Nevertheless, although desuetude and World War II long ago rendered the tribunal defunct, BIS officials apparently set about trying to persuade the original signatory governments, at least two of which — France and Belgium — had a direct interest in the matter since parts of their own BIS issues were in private hands, to recreate the tribunal expressly for this case as well as others that were threatened over the freeze-out and have now materialized (P.A. 17). See, e.g., First Eagle Sogen Funds, Inc. v. Bank for International Settlements, No. 01 Civ. 0087 (RO) (S.D.N.Y.). As an ad hoc panel chosen expressly for these cases but without any input by private shareholders, this recreated arbitration tribunal under the Hague Agreement of 1930 is presumptively biased for lack of an impartial decision maker. Hooters of America, Inc. v. Phillips, 173 F.3d 933, 938-940 (CA4 1999) (arbitration denied where one party had total control over choice of arbitrators).
B. This Dispute Does Not Come within the Arbitration Clause.
Although the federal policy in favor of arbitration encompasses rights conferred by federal statutes, including the antitrust laws, “the first task of a court asked to compel arbitration of a dispute is to determine whether the parties agreed to arbitrate that dispute.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 626 (1985). The present dispute does not come within the scope of the arbitration clause, which does not cover any dispute between shareholders and the BIS but only disputes “with regard to the interpretation or application of the Statutes of the Bank.” This language cannot reasonably be read to include disputes involving price fixing under the Sherman Act, securities fraud under the Exchange Act or common law, or constitutional violations by U.S. officials serving as directors of the Bank.
Nor can this language reasonably be read to include the transaction at issue. Unlike corporate statutes in many U.S. jurisdictions, the Statutes of the BIS never provided authority or procedures for a freeze-out its private shareholders. Because the Constituent Charter incorporated within the Convention expressly provided for the American issue to be held privately, the freeze-out amounted to an amendment of the treaty itself, not the Statutes, and the dispute is therefore one arising under the Convention, not the Statutes.
C. Plaintiff Has Not Agreed to Arbitrate This Dispute.
The BIS claims that the plaintiff agreed to arbitrate this dispute by reason of Article 17 of the Statutes (BIS.A. Ex. D), and the statement on its share certificates in accordance therewith, that “ownership of shares … implies acceptance of the Statutes of the Bank” (P.A. Ex. G). However, as noted above, the Statutes contained no provision authorizing a “compulsory withdrawal” or freeze-out of private shareholders. Absent such a provision, private shareholders did not have reasonable notice that their shares could be withdrawn on a non-voluntary basis, let alone that in such event their only remedy would be arbitration before a defunct tribunal. What is more, the BIS has not — and almost certainly cannot — produce a single document published prior to its press release announcing the proposed freeze-out suggesting that it possessed this power.
Furthermore, the amendments to the Statutes adopted by the BIS to implement the freeze-out provide that shares withdrawn from private shareholders may be transferred to central bank shareholders at the same price (BIS.A. Ex. E, Art. 18A; P.A. Ex. N, Annex). Unless the American issue is so transferred, there will be no basis for continued U.S. participation in the BIS.
Under these circumstances, agents of the federal government acting indirectly through the BIS should not be allowed to circumvent the constitutional processes required for the United States to join the BIS, and particularly to avoid paying “just compensation” for shares of the American issue belonging to private U.S. holders. Accordingly, because this case involves an illegal interference with private property rights under both the Fifth Amendment and international law (Siderman de Blake v. Republic of Argentina, 965 F.2d 699, 712 (CA9 1992)), the existence of an agreement to arbitrate cannot be established without demonstrating either: (1) that American private shareholders waived their Fifth Amendment rights; or (2) that the tribunal effectively secures these rights.
Neither can be shown. The test for determining waiver of a constitutional right is “an intentional relinquishment or abandonment of a known right or privilege.” Brewer v. Williams, 430 U.S. 387, 404 (1977), and cases cited. The BIS defendants cannot meet this burden.
D. The Arbitration Tribunal Does Not Satisfy Due Process.
The tribunal’s “rules of procedure” are set forth in Annex XII to the treaty (P.A. Ex. B). These rules were designed for disputes between or among sovereign governments, or between them and the BIS, not for disputes between the BIS and its private shareholders. The rules do not provide for pre-trial discovery or the calling and examination of witnesses at trial. Rather, the proceedings are limited to written pleadings with attached documents and oral debates. Each party is required to pay not only its own expenses but also “an equal share of those of the Tribunal.” And, as already noted, recreation of the long-defunct tribunal and appointment of members to hear this specific case rested entirely under the control of the BIS and its government allies, rendering the tribunal inherently biased.
In Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the Court upheld application of an employment contract’s broad arbitration clause to an age discrimination claim under federal law. Although more limited than in federal courts, pre-trial discovery was available in Gilmer. Also, the employee was not required to pay any of the costs of arbitration. As the First Circuit recently stated: “Gilmer does not mandate enforcement of all arbitration agreements. Plaintiffs are not required to take their claims to biased panels or through biased procedures.” Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, 170 F.3d 1, 16 (CA1 1999). Accord, Hooters of America, Inc. v. Phillips, supra, 173 F.3d at 938-940. The notion that Fifth Amendment due process requirements can be met in the circumstances of this case by a biased arbitration proceeding in a foreign land and at great expense to the plaintiff cannot be seriously argued.
E. Plaintiff Is Entitled to Jury Trial on Disputed Issues of Arbitrability.
Under the Federal Arbitration Act (9 U.S.C. s. 1 et seq.), a party opposing arbitration is entitled to a jury trial on reasonably disputed issues of fact relating to: (1) the existence of an agreement to arbitrate, including whether there was fraud, duress or misrepresentation in connection with the making thereof; (2) the scope, meaning or coverage of the agreement to arbitrate; and (3) whether the opposing party is in default of the agreement. Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 54-55 (CA3 1980), and cases cited. See Doctor’s Associates, Inc. v. Distajo, 107 F.3d 126, 129-130 (CA2 1997), cert. denied, 118 S.Ct. 365. As set forth previously, all these defenses are raised by the plaintiff, who submits that the facts contained in his affidavit and the documents submitted therewith demonstrate that arbitration cannot be compelled as a matter of law. However, if the court finds that grounds for dispute exist as to any relevant facts with respect to the existence or scope of the alleged agreement to arbitrate, or the default of the BIS thereunder, the plaintiff requests trial by jury thereon.
A. This Action Is Not Cognizable under the Federal Tort Claims Act.
The attempt by the DOJ to remove Mr. Greenspan from the case by making a certification under 28 U.S.C. s. 2679(d)(1) and invoking the Federal Tort Claims Act is frivolous. The plaintiff does not and cannot make a claim under the FTCA against Mr. Greenspan. Its provisions, including s. 2679 as well as 28 U.S.C. 1346(b), do not apply to any claim “based upon the exercise or performance or failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion is abused.” 28 U.S.C. s. 2680(a). Nor do they apply to any claim “for damages caused by the fiscal operations of the Treasury or by regulation of the monetary system.” 28 U.S.C. s. 2680(i). And even if the FTCA did apply, it is not the exclusive remedy for a constitutional tort. 28 U.S.C. s. 2679(b)(2). Indeed, except for a few intentional torts relating to violations of the Fourth Amendment (28 U.S.C. s. 2680(h)), the law of the place doctrine generally prevents constitutional torts from being asserted under the FTCA. Franco de Jerez v. Burgos, 947 F.2d 527, 528-529 (CA1 1991), and cases cited.
B. Service on the BIS Satisfies the Hague Convention.
The BIS argues that it was not properly served under the Hague Convention (658 U.N.T.S. 163) because service was made under Article 10 allowing service by mail rather than under Article 5, which would require service by the designated Swiss cantonal authority for Basle of a German translation of the complaint. As the BIS correctly points out, Switzerland accepted the Hague Convention subject to a reservation under Article 21 objecting to use “in its territory” of methods of service allowed under Article 10. The BIS does not allege any prejudice or harm arising from receiving a complaint in its principal working language, nor does it challenge jurisdiction on constitutional or due process grounds. Its pettifogging effort to inflict unnecessary translation expense on the plaintiff rests on the assumption that its headquarters in Basle should be considered Swiss territory for purposes of the Hague Convention.
This assumption is mistaken. Switzerland has granted the BIS a quasi-sovereign status under the agreement between the Swiss Federal Council and the BIS relating to the Bank’s legal status in Switzerland (BIS.A. Ex. H). Articles 1 and 2, respectively, recognize the BIS as an “international legal personality” and an “international organization.” Article 3, paragraph 1, provides that its premises “shall be inviolable,” and continues: “No agent of the Swiss public authorities may enter therein without the express consent of the Bank.” This provision suggests that a Swiss cantonal authority cannot even serve the Bank without its permission. Paragraph 3 grants the BIS “police power over its premises.” Article 24 contains a disclaimer by Switzerland of “any international responsibility for acts or omissions of the Bank” or its officials.
As a result of these provisions, Switzerland has waived any interest it that might have had under the Hague Convention in how legal process is served on the BIS, which is neither a corporation organized under Swiss law nor a citizen of Switzerland. Indeed, as a general matter, service by mail on the BIS appears less intrusive both to its special legal status in Switzerland and to Switzerland’s own sovereignty than service in hand by a Swiss official.
C. If Required, Any Defects in Service on Messrs. Summers or Greenspan Are Correctable.
In compliance with LR 7.1(a)(2), the plaintiff by letter dated March 5, 2001, advised the Assistant U.S. Attorney as follows:
Because the complaint contains a request for injunctive relief running against the Secretary of the Treasury, Mr. Summers was named in his official capacity. I did not mean by this to exclude his individual liability, but rather to indicated that he was being sued both individually and in his official capacity: individually on account of his role in the damages suffered by me with respect to my BIS shares; and in his official capacity to enjoin him and his successors, “acting through the Exchange Stabilization Fund or otherwise, from intervening in the gold market, directly or indirectly, for the purpose of affecting or with intent to affect gold prices” (request (1)).
I now recognize that my manner of serving Mr. Summers may have inadvertently caused some confusion on this point since I did not, as I probably should have, request a return receipt for my service on him by certified mail. As I read the new Rule 4(i)(2), service on a U.S. official sued in an individual capacity, whether or not sued also in an official capacity, must be made under Rule 4(e). In this case, Rule 4(e)(1) permitted service on Mr. Summers under the Massachusetts long arm statute, which allows for service by mail in substantially the same manner as new Rule 4(i)(1) requires for service on U.S. officials sued only in an official capacity. However, the Massachusetts statute does require a return receipt which Rule 4(i)(1) does not. Accordingly, Mr. Summers may have a technically correct argument that personal service on him was defective. If he has been prejudiced or misled by the manner of original service, as an alternative to serving him again, I am willing to assent to whatever additional time he requires to respond in his personal capacity.
In subsequent exchanges, the DOJ indicated that it did not represent Mr. Summers individually, and that it would not assist the plaintiff to effect further service on him as an individual to correct any defects of the original service in this regard. The problem of locating Mr. Summers, as well as any possible problems with respect to personal jurisdiction or venue in Massachusetts, have now been effectively solved by his appointment as the next president of Harvard University. However, notwithstanding that the DOJ does not represent Mr. Summers individually, it has argued extensively that even if Mr. Summers were served correctly in his individual capacity, the complaint against him individually would have to be dismissed. Accordingly, to avoid any possibility of unnecessary inconvenience or embarrassment to Mr. Summers, the plaintiff has deferred further efforts to serve him personally until after hearing and determination of the motions to dismiss.
Belatedly and without prior notice to the plaintiff, Mr. Greenspan also raised lack of a return receipt as a defense to suit in his individual capacity. If required, he too can be served again. Because most top government officials prefer to keep their home addresses confidential, a policy of pressing plaintiffs to serve them at home rather than through their offices appears of dubious wisdom, especially in the Internet age.
D. The Corporate Shield Defenses of the Bullion Banks Are without Merit, as are Other Fact Specific Defenses of Citicorp and Deutsche Bank.
Deutsche Bank is an alien corporation subject to U.S. jurisdiction. Under 28 U.S.C. s. 1391(d), it may be sued on claims arising under federal law in any judicial district. Brunswick Corp. v. Suzuki Motor Co., Ltd., 575 F.Supp. 1412, 1425 (E.D.Wis. 1983). It may also be sued in the district where the “property that is the subject of the action is situated.” 28 U.S.C. s. 1391(b)(2). Here the property affected by the alleged price fixing — plaintiff’s FCX gold preferred and BIS shares — is, or was at the time of injury, located in Massachusetts.
Under 15 U.S.C. s. 22, a private antitrust plaintiff may also bring suit in any district where the defendant “may be found or transacts business.” As an integral part of its own worldwide financial operations, Deutsche Bank operates several Massachusetts subsidiaries, including Deutsche Bank Securities and Deutsche Banc Alex. Brown, using the Alex. Brown name for marketing purposes in areas like Boston where its 200 year history carries significant cachet (P.A. 35-37). Whether a foreign corporation “transacts business” by exercising control or influence over major decisions of its subsidiary requires detailed factual examination, but rests ultimately on “practical and commercial criteria.” Grappone, Inc. v. Subaru of America, Inc., 403 F.Supp. 123, 130-131 (D.N.H. 1975) (Bownes, J.).
The allegations against Citigroup revolve around three key points on which it declined to do any preliminary discovery (P.A. Ex. X): (1) the almost 50% increase in Citibank’s gold derivatives from June 30 to September 30, 1999 (C. 57-58); (2) the fact that this increase took place amidst desperate efforts by the Fed and Bank of England “to quell the gold price, manage it” during the sharp rally following the Washington Agreement (C. 55); and (3) the presence since mid-1999 of former U.S. treasury secretary Robert Rubin in the management of Citigroup, Citibank’s parent. While in office, Mr. Rubin was responsible for the ESF’s participation in the gold price fixing scheme (C. 62-66), likely including the recently discovered gold swaps (P.A. 31-33). It is reasonable to infer that Citibank was brought into the gold price fixing scheme in September 1999 at the request of Mr. Greenspan and through the intercession of Mr. Rubin.
More generally, all the bullion bank defendants raise corporate shield defenses, complaining that the plaintiff sued the parent company when one or another wholly-owned subsidiary carries on its gold or gold derivatives business. The bullion bank defendants are all global financial powerhouses that must manage risk on a consolidated and global basis, as Deutsche Bank does (P.A. 37). The enormous size and risk of their gold derivatives positions compels the conclusion that in each case top management of the parent company must have approved if not ordered them.
For the forgoing reasons, the motions to dismiss, the alternative motion to stay for arbitration, and the motions to substitute should be denied.
By the plaintiff,
/s/ Reginald H. Howe
Reginald H. Howe, Pro Se
Patriots’ Day, 2001
Request for Oral Argument
The plaintiff requests oral argument on the matters raised in the foregoing opposition, believing that such argument may assist the court in this factually complex case raising legal and constitutional issuers of great importance.
Certificate of Service
I, Reginald H. Howe, hereby certify that on April 19, 2001, a true copy of the foregoing document was served by hand on counsel of record for each party.
___________________ Reginald H. Howe