Fed. Sec. L. Rep. P 96,442united States of America, Plaintiff-appellee, v. Larry N. Cook, Defendant-appellant, 573 F.2d 281 (5th Cir. 1978)

After a plea of guilty, the appellant, Larry N. Cook, was convicted of fraud in the offer of sale of securities in violation of 15 U.S.C. §§ 77q(a), 77x, and 18 U.S.C. § 2, and of mail fraud in violation of 18 U.S.C. §§ 1341, 2. The trial judge sentenced Cook to five years' imprisonment for each offense.¹  On this appeal, Cook challenges only the jurisdiction of the trial court to impose a sentence for the securities count. Cook argues that the trial court lacked jurisdiction over the securities count because the alleged fraud was committed solely upon foreign investors and the fraud had no impact upon either the domestic markets or domestic investors.² 

The indictment charged that Cook and his codefendants, while operating out of Dallas, Texas, defrauded European investors by operating a Ponzi scheme.³  The heart of the scheme was the offer and sale of fractional undivided working interests in oil and gas wells located in the United States.

Cook and his codefendants would place false and misleading advertisements in various European newspapers and periodicals. The advertisements would extol the virtues of investments in American oil and would falsely promise high monetary gain. Specifically, in other sales material, Cook and his codefendants, promised a 39.8% Annual return on Ohio oil wells, 47% Return on Texas wells, 56% Return on West Virginia wells, and a 39% Return on Kentucky wells. These returns were supposedly based upon the production figures for operating American oil wells, however, the production figures were grossly misstated and the actual returns, if any, were far from the promised figure.

Once an European investor decided to purchase an interest in the American oil wells, a contract was signed in Europe by the investor and a confederate of Cook. The contract would be returned to Dallas and the agreement was recorded in the United States.

As in a classic Ponzi scheme, payments based on the false production figures were actually made to some initial investors. These payments, which were financed from capital generated by subsequent investors, also served to attract new investors. Cook and his confederates also developed investor interest by having potential investors travel to the United States and inspect various Texas oil wells.

In December 1976, the Ponzi scheme fell through and Cook's guilty plea and this appeal followed.

On this appeal, Cook contends that the district court lacked jurisdiction over the subject matter under the securities acts because the victims of his fraud were foreign investors and Congress did not intend to protect foreign investors.

This court is aware of the legal developments involving international fraud and the puzzling questions posed by some transactions with only a marginal United States nexus. See Des Brisay v. The Goldfield Corp., 549 F.2d 133 (9 Cir. 1977); Securities and Exchange Commission v. Kasser, 548 F.2d 109 (3 Cir. 1977), cert. denied sub nom. Churchill Forest Industries (Manitoba) Ltd. v. SEC, 431 U.S. 938, 97 S. Ct. 2649, 53 L. Ed. 2d 255 (1977); Straub v. Vaisman & Co., 540 F.2d 591 (3 Cir. 1976); Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2 Cir. 1975), cert. denied, 423 U.S. 1018, 96 S. Ct. 453, 46 L. Ed. 2d 389 (1975); IIT v. Vencapp, Ltd., 519 F.2d 1001 (2 Cir. 1975); Travis v. Anthes Imperial Ltd., 473 F.2d 515 (8 Cir. 1973); Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326 (2 Cir. 1972); Schoenbaum v. Firstbrook, 405 F.2d 200 (2 Cir.), rev'd on rehearing on other grounds, 405 F.2d 215 (2 Cir. 1968, en banc), cert. denied, 395 U.S. 906, 89 S. Ct. 1747, 23 L. Ed. 2d 219 (1969); Recaman v. Barish, 408 F. Supp. 1189 (E.D. Pa. 1975); F.O.F. Proprietory Funds Ltd. v. Arthur Young & Co., 400 F. Supp. 1219 (S.D.N.Y. 1975); Garner v. Pearson, 374 F. Supp. 591 (M.D. Fla .1974); Selas of America (Nederland) N. V. v. Selas Corp. of America, 365 F. Supp. 1382 (E.D. Pa. 1973); United States v. Clark, 359 F. Supp. 131 (S.D.N.Y. 1973); Finch v. Marathon Securities Corp., 316 F. Supp. 1345 (S.D.N.Y. 1970); Kook v. Crang, 182 F. Supp. 388 (S.D.N.Y. 1960); Sinva, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 F.R.D. 385 (S.D.N.Y. 1969); Note, American Adjudication of Transnational Securities Fraud, 89 Harv. L. Rev. 553 (1976). Fortunately, we may leave for another day an attempt to formulate the outer perimeter of American jurisdiction. The present scheme is so far within the jurisdiction of the American courts as to give us little pause.

Cook operated out of Dallas, Texas, his actions there were hardly preparatory as some cases describe. See Bersch, supra at 992; IIT, supra at 1018. The investors invested in American securities obviously Congress intended jurisdiction over American securities regardless to whom the securities are sold. The money from the scheme was repatriated. And some investors were actually defrauded, in part, in the United States.⁴  Indeed, it appears to us that if there are any unimportant factors in the scheme it is the fact that the investors are European and the contracts were physically executed in Europe.

It is an absurd notion that Congress intended activity in the United States involving American securities to be exempt from the fraud provisions of the securities acts simply because the victims are not American citizens. Obviously, Cook and his confederates were capitalizing on the well-known American expertise in oil and gas production. Moreover, the European investors undoubtedly thought they could expect honest treatment from American entrepreneurs. That Congress would allow America to be a haven for swindlers and confidence men when the victims are European while expecting the highest level of business practice when the investors are American is "simply unimaginable". IIT, supra at 1016. As Judge Friendly said for the Second Circuit in IIT, supra at 1017:

We do not think Congress intended to allow the United States to be used as a base for manufacturing fraudulent security devices for export, even when these are peddled only to foreigners. This country would surely look askance if one of our neighbors stood by silently and permitted misrepresented securities to be poured into the United States.⁵ 

AFFIRMED.