1996 WL 33418795 (9th Cir.)

For opinion see 135 F.3d 1289, 121 F.3d 565

United States Court of Appeals, Ninth Circuit.

Alan RICHARDS, et al., Plaintiffs-Appellants, v.

LLOYD'S OF LONDON, et al., Defendants-Appellees.

John NORTON, et al., Plaintiffs-Appellants, v.

LLOYD'S OF LONDON, et al., Defendants-Appellees.

Nos. 95-55747, 95-56467.

May, 1996.

On Appeal from the United States District Court for the Southern District of California

Brief of the Securities and Exchange Commission, Amicus Curiae

Of Counsel, Paul Gonson, Solicitor.

Richard H. Walker, General Counsel.

Jacob H. Stillman, Associate General Counsel.

Eric Summergrad, Principal Assistant General Counsel.

John W. Avery, Attorney Fellow.

Securities and Exchange Commission, Washington, D.C. 20549.

TABLE OF CONTENTS

TABLE OF AUTHORITIES ... ii

STATEMENT OF THE ISSUE PRESENTED ... 1

INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION AND SUMMARY OF ITS POSITION ... 2

STATEMENT OF THE CASE ... 6

A. The Allegations and Factual Background ... 6

B. The District Court's Decision ... 8

ARGUMENT ... 11

THE LLOYD'S FORUM SELECTION AND CHOICE OF LAW CLAUSES ARE VOID AND UNENFORCEABLE SINCE THEY OPERATE TO DEPRIVE THE PLAINTIFFS OF SUBSTANTIVE RIGHTS UNDER THE FEDERAL SECURITIES LAWS WHICH CANNOT BE WAIVED ... 11

A. The Choice of Forum and Choice of Law Clauses Violate the Antiwaiver Provisions Because Taken Together They Preclude Relief Under the Federal Securities Laws ... 11

B. The Supreme Court Cases Relied on by the District Court Upheld Only Choice of Forum Clauses, But Indicated That Clauses Depriving Persons of United States Statutory Rights Would Not be Upheld ... 13

C. Even if Public Policy Would Allow Waiving the Protection of United States Securities Laws Where Equivalent Rights and Remedies Are Available Under Foreigh Law, Those Protections are Not Present Here ... 20

1. English Law Does Not Provide Comparable Rights and Remedies to those Available Under United States Law ... 20

2. The Courts Cannot Supplant United States Securities Laws on the View that Foreign Law, While Less Protective of Investors, is Nonetheless "Sufficient." ... 23

D. The District Court Drew Improper Inferences From the Fact that the Commission Has Not Brought Enforcement Action Against Lloyd's ... 24

CONCLUSION ... 27

TABLE OF AUTHORITIES

CASES

AVC Nederland B.V. v. Atrium Investment Partnership, 740 F.2d 148 (2d Cir. 1984) ... 19

Allied Artists Pictures Corp. v. Giroux, 312 F. Supp. 450 (S.D.N.Y. 1970) ... 12

Andrews v. Blue, 489 F.2d 367 (10th Cir. 1973) ... 12

Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985) ... 26

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) ... 27

Bonny v. Society of Lloyd's, 3 F.3d 156 (7th Cir.), cert. denied, 114 S. Ct. 1059 (1994) ... 4, 10, 14 passim

The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) ... 13, 15

Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991) ... 14

J.I. Case Co. v. Borak, 377 U.S. 426 (1964) ... 27

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) ... 14, 16, 19

Riley v. Kingsley Underwriting Agencies, Ltd., 969 F.2d 953 (10th Cir.), cert. denied, 113 S. Ct. 658 (1992) ... 4, 14, 16 passim

Roby v. Corporation of Lloyd's, 996 F.2d 1353 (2d Cir.), cert. denied, 114 S. Ct. 384 (1993) ... 4, 9, 14 passim

Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989) ... 13

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) ... 14, 17, 19 passim

Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987) ... 12, 13, 17 passim

Special Transportation Services, Inc. v. Balto, 325 F. Supp. 1185 (D. Minn. 1971) ... 12

Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 115 S. Ct. 2322 (1995) ... 18, 19

STATUTES AND RULES

Securities Act of 1933, 15 U.S.C. §§ 77a et seq.

Section 5, 15 U.S.C. 77e ... 6

Section 12(1), 15 U.S.C. 77(1) ... 6, 20, 22 passim

Section 12(2), 15 U.S.C. 77(2) ... 6, 20, 21 passim

Section 14, 15 U.S.C. 77p ... 2

Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et seq.

Section 10(b), 15 U.S.C. 78j(b) ... 6, 21

Section 16(b), 15 U.S.C. 78p(b) ... 12

Section 29, 15 U.S.C. 78cc ... 19

Section 29(a), 15 U.S.C. 78cc(a) ... 2

Rule under the Securities Exchange Act of 1934

Rule 10b-5, 17 C.F.R. 240.10b-5 ... 6, 21

Carriage of Goods by Sea Act (COGSA), 46 U.S.C. § 1300 et seq.

Section 1303(8), 46 U.S.C. 1303(8) ... 18

STATEMENT OF THE ISSUE PRESENTED

Defendant Lloyd's of London, an English company, is alleged to have violated registration and antifraud provisions of the federal securities laws in soliciting the plaintiff investors in the United States to buy its securities. Notwithstanding antiwaiver provisions of the securities laws that render void any agreement to waive compliance with those laws, the district court dismissed the plaintiffs' federal securities law case on the basis of choice of forum and choice of law provisions in their purchase contracts that, taken together, would require litigation in an English forum under English law and would preclude recovery under the securities laws. The question presented is:

Whether, when a foreign company has committed violations of the federal securities laws in the United States in selling its securities to American investors, the antiwaiver provisions prohibit a United States court from giving effect to contractual provisions that would preclude the purchasers from obtaining relief under the securities laws in any forum.

INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION AND SUMMARY OF ITS POSITION

The Securities and Exchange Commission is the agency principally responsible for the administration and enforcement of the federal securities laws. This case involves the application of provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 that render void any purported waiver of a person's obligation to comply with those laws. These antiwaiver provisions state:

Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this title or of the rules and regulations of the Commission shall be void. [FN1]

FN1. The quoted language is from Section 14 of the Securities Act, 15 U.S.C. 77n. The parallel provision in Section 29(a) of the Exchange Act, 15 U.S.C. 78cc(a), is identical in all respects material to this case. The only differences are that the Exchange Act provision (1) is not limited to persons "acquiring any security"; and (2) uses the words "or of any rule or regulation thereunder, or of any rule of an exchange required thereby", instead of the words "or of the rules and regulations of the Commission."

These provisions are essential to the enforcement of the securities laws in that they prevent persons from avoiding their obligations under those laws through the simple expedient of requiring investors to waive their rights under those laws as a condition to engaging in securities transactions.

In this case, the district court upheld the validity of forum selection and choice of law provisions entered into between the plaintiffs and Lloyd's [FN2] that, taken together, required the plaintiffs, who were solicited in the United States to purchase securities from Lloyd's, to bring any action against Lloyd's in the courts of England under English law. The district court upheld these clauses even though it is virtually certain, and other courts have recognized, that the English courts will not entertain the plaintiffs' claims under the federal securities laws. Thus, the district court's decision effectively nullifies. the antiwaiver provisons.

FN2. Both Lloyd's of London, an unincorporated association, and the Corporation of Lloyd's, aka the Society of Lloyd's, aka the Society and Council of Lloyd's, have been named as defendants. Together they are referred to herein as "Lloyd's."

The far-reaching effect of the district court's holding is apparent in light of the fact that it must be assumed, for purposes of resolving the issue here, that the defendants committed the alleged securities law violations. Under the district court's holding, the purchasers would have no remedy under the federal securities laws to compensate them for their losses even if the defendants conceded the violations.

The district court's decision follows the approach taken in earlier decisions in which the Courts of Appeals for the Second, Seventh and Tenth Circuits upheld substantially identical clauses in agreements entered into between Lloyd's and United States investors. [FN3] In upholding the contractual choice provisions, the district court and the three courts of appeals primarily relied upon several Supreme Court cases upholding the validity of forum selection clauses that required litigation or arbitration in foreign forums. None of those Supreme Court cases, however, involved choice of law clauses which, if enforced, would deprive the plaintiffs of substantive statutory rights provided in American law. In fact, the Supreme Court made clear in those cases, and in others involving forum selection clauses, that it will not uphold choice clauses that result in plaintiffs being deprived of substantive rights. Nothing in those cases allows a United States court to ignore an unambiguous Congressional directive that United States law be available to United States investors.

FN3. Roby v. Corporation of Lloyd's, 996 F.2d 1353 (2d Cir.), cert. denied, 114 S. Ct. 385 (1993); Bonny v. Society of Lloyd's, 3 F.3d 156 (7th Cir. 1993), cert. denied, 114 S. Ct. 1057 (1994); and Riley v. Kingsley Underwriting Agencies, Ltd., 969 F.2d 953 (10th Cir.), cert. denied, 506 U.S. 1021 (1992) (the "Lloyd's cases").

The district court in this case, and the courts of appeals in the earlier Lloyd's cases, appear to recognize that if these plaintiffs are precluded from pursuing their claims under the federal securities laws, they will only have rights under English law that are more restrictive. The courts nonetheless concluded that the rights available to plaintiffs under English law would be sufficient to meet what they saw as the objectives of United States securities laws. But Congress has made a legislative determination of the obligations and rights that are necessary to protect investors in the United States, and has expressly directed that those protections cannot be waived. The courts cannot substitute their policy views of what laws are sufficient to protect United States investors for the choice made by Congress.

The Commission is submitting this brief solely to address the legal issue of the applicability of the antiwaiver provisions, and takes no position on any other issue, including whether the defendants violated the registration and antifraud provisions of the securities laws.

The issue addressed is an important one to the enforcement of the federal securities laws. The district court's decision, if upheld, would allow foreign promoters of securities undertaking large scale selling efforts in the United States to avoid private liability under the securities laws simply by requiring the American investors to agree to resolve disputes in a foreign jurisdiction under foreign law, even if the remedies available under the foreign law were far less effective than those available under United States law. Such a holding would seriously impair the ability of defrauded investors to obtain compensation for their losses, and would hamper the deterrent function of the federal securities laws by discouraging private actions. The Commission strongly urges this Court to reverse the district court's erroneous dismissal of this action.

STATEMENT OF THE CASE

A. The Allegations and Factual Background

This is an appeal from the dismissal of an action brought against Lloyd's under the federal securities laws by over 600 residents of the United States. The case arises out of the plaintiffs' investment in the Lloyd's insurance enterprise. The plaintiffs allege that Lloyd's violated the registration requirements of section 5 of the Securities Act, 15 U.S.C. 77e, which is actionable under Section 12(1) of that Act, 15 U.S.C. 771(1) (ER 4:47). [FN4] They also seek recovery under the antifraud provisions of Section 12(2) of the Securities Act, 15 U.S.C. 771(2), Section 10(b) of the Exchange Act, 15 U.S.C. 78j(b), and Commission Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5 (ER 4:47-48). The allegations of fraud include the failure of Lloyd's to disclose the high risks associated with asbestos and other liabilities that had been assumed without adequate reserves by the syndicates in which the United States investors were encouraged to invest (ER 4:91).

FN4. "ER --:--" refers to the docket number followed by the page number of the Excerpts of Record.

As noted in the district court's opinion (ER 102:5-8), Lloyd's differs from a typical United States insurance company in that it does not underwrite insurance, but is composed of individual members, referred to as "Names," who underwrite insurance pursuant to rules and procedures established by Lloyd's. Each Name must determine the amount of insurance underwriting he wishes to undertake each year, based on the amount of premiums that can be accepted on his behalf. A Name must then put up funds at Lloyd's, typically a letter of credit, to support the chosen level of underwriting. Although a Name limits his risk in the sense of limiting the amount of premiums which can be received during the year, the Name's actual liability is effectively unlimited and may well exceed the amount of the letter of credit.

Individual Names group together annually to form syndicates which act as joint ventures for the Names for the year. This generally enables the Names to spread the risk of any particular underwriting among the various members of the syndicate, each of whom is individually responsible for his or her share of the risk. Each syndicate is managed by a Managing Agent who employs brokers on behalf of the syndicate. The Names are represented by Members' Agents who invite individuals to become Names and who advise their Names on syndicate selection each year.

In order to become a Name an individual must be interviewed by a committee in London. Although each of the United States Names travelled to London before becoming a Name, the solicitation of Americans to become Names and the alleged misrepresentations concerning the asbestos and other liabilities took place in the United States (ER 4:40-47).

Each Name was required to enter into a General Undertaking with Lloyd's and a Members' Agent's Agreement with his or her Members' Agent which contained choice of law clauses providing that the rights and obligations of the parties would be governed by English law and choice of forum clauses providing that the courts of England (or, in the case of the Members' Agent's Agreement, English arbitrators) would have exclusive jurisdiction to resolve any dispute (ER 102:6-7). [FN5]

FN5. The General Undertaking with Lloyd's (ER 102:7 n.11) provides that:

The rights and obligations of the parties arising out of or relating to the Member's membership of, and/or underwriting of insurance business at, Lloyd's and any other matter referred to in this Undertaking shall be governed by and construed in accordance with the laws of England.

* * *

Each party hereto irrevocably agrees that the courts of England shall have exclusive jurisdiction to settle any dispute and/or controversy of whatsoever nature arising out of or relating to the Member's membership of, and/or underwriting of insurance business at, Lloyd's and that accordingly any suit, action or proceeding * * * arising out of or relating to such matters shall be brought in such courts * * *.

B. The District Court's Decision

The district court granted the defendants' motion to dismiss. The court held that "[f]orum-selection clauses are presumptively valid," and "[t]he presumption of validity may be overcome only by a clear or strong showing that the clause is 'unreasonable' under the circumstances" (ER 102:11-12). The court adopted the Second Circuit's statement in Roby that forum selection and choice of law clauses can only be overcome

(1) if their incorporation into the agreement was the result of fraud or overreaching, ... (2) if the complaining party "will for all practical purposes be deprived of his day in court," due to grave inconvenience or unfairness of the selected forum, (3) if the fundamental unfairness of the chosen law may deprive the plaintiff of a remedy, or (4) if the clauses contravene a strong public policy of the forum state.

ER 102:12, quoting Roby, 996 F.2d at 1363 (internal citations omitted).

The court concluded that none of these tests had been satisfied. It held that there was no overreaching, that plaintiffs had failed to show fraud in the inducement of the agreement, or that the agreement was a contract of adhesion.

Finally, the court considered whether the choice clauses "operate as [a] prospective waiver of their rights under the United States securities laws and thus violate a strong public policy" (ER 102:22). The court looked to the Roby court's holding that it would only find a violation of public policy if the "Names were able to show that available remedies in England are insufficient to deter British issuers from exploiting American investors through fraud, misrepresentation or inadequate disclosure * * * ." Roby, 996 F.2d at 1365.

The court held that it would not independently address the issue regarding the adequacy of the remedies available in England. The circuit courts, particularly the Second Circuit, that have addressed this issue have adequately resolved it. The Court has reviewed the experts' declarations regarding the remedies available under English law and finds nothing therein that compels departure from the well-reasoned decisions of the Roby and Bonny courts.

ER 102:24. The court relied on Roby and the Seventh Circuit's decision in Bonny to conclude that: "While the remedies available in England may not be the preferred remedies of plaintiffs, that is not a sufficient basis upon which to invalidate the choice clauses." ER 102:24.

The court recognized "that the SEC has never affirmatively exempted Lloyd's from registration, issued it an official 'no action' letter regarding its practices, or made any other affirmative public determinations regarding the applicability of federal securities laws to Lloyd's." ER 102:23. But it went on to conclude that "none of plaintiffs' documents negate the fact that the SEC has never publicly taken any action to enforce federal securities laws against Lloyd's, despite the fact that the SEC has at various times and by various persons been apprised of Lloyd's practices and of some of the allegations against Lloyd's." ER 102:23. The court held that "the SEC's inaction undercuts or dilutes the strength of the policy argument that" only United States law can provide sufficient deterrence (ER 102:24).

ARGUMENT

THE LLOYD'S FORUM SELECTION AND CHOICE OF LAW CLAUSES ARE VOID AND

UNENFORCEABLE SINCE THEY OPERATE TO DEPRIVE THE PLAINTIFFS OF SUBSTANTIVE

RIGHTS UNDER THE FEDERAL SECURITIES LAWS WHICH CANNOT BE WAIVED.

In upholding the choice of forum and choice of law clauses, the district court failed to give effect to the antiwaiver provisions in the Securities Act and Securities Exchange Act. Although the Supreme Court has held in recent cases that investors can agree to litigate their securities claims in forums other than United States courts, it has stated that securities purchasers cannot waive their substantive rights. Yet that is precisely what has occurred here.

A. The Choice of Forum and Choice of Law Clauses Violate the Antiwaiver Provisions Because, Taken Together, They Preclude Relief Under the Federal Securities Laws.

At issue here is the effect of two contractual provisions operating in tandem. The first -- the choice of forum provision -- requires the investors here to litigate claims against Lloyd's in English courts. The second -- the choice of law provision -- provides that any dispute arising out of the agreement "shall be governed by and construed in accordance with the laws of England."

The effect of these provisions, taken together, is to preclude investors from obtaining relief under the United States federal securities laws. English conflict of law principles apparently preclude enforcement by an English court of the securities laws where the parties have agreed to the application of English law. The court in Roby noted: "According to the undisputed testimony of a British attorney, neither an English court nor an English arbitrator would apply the United States securities laws, because English conflict of law rules do not permit recognition of foreign tort or statutory law." 996 F.2d at 1362. The Rokison Declaration in this case [FN6] makes it clear that it is "very unlikely" that English courts would find the English choice of law clause "avoidable"; that even if it were avoidable it seems "highly likely" that English courts would nevertheless apply English law; and that in applying English law, the English courts will not apply United States legislation, i.e., the securities laws. Rokison Declaration (ER 72:11-13).

FN6. Declaration of Kenneth Stuart Rokison in Opposition to Motion to Dismiss (ER 72) ("Rokison Declaration").

The fact that the investors agreed to these provisions is irrelevant, since the very objective of the antiwaiver provisions is to invalidate such agreements. As the Supreme Court held in Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 230 (1987), "[t]he voluntariness of the agreement is irrelevant to this inquiry: if a stipulation waives compliance with a statutory duty, it is void under [the antiwaiver provisions], whether voluntary or not." [FN7]

FN7. See, e.g., Special Transportation Services, Inc. v. Balto, 325 F. Supp. 1185 (D. Minn. 1971) (refusing to enforce contractual provision limiting buyer's remedies for misstatements by seller of securities); Allied Artists Pictures Corp. v. Giroux, 312 F. Supp. 450 (S.D.N.Y. 1970) (holding invalid corporation's agreement to forgo recovery of short-swing profits under Section 16(b) of the Exchange Act). Cf. Andrews v. Blue, 489 F.2d 367, 375 (10th Cir. 1973) (plaintiff cannot be estopped from bringing antifraud claims by contractual provisions).

The fact that the Supreme Court has held that certain choice of forum clauses, standing alone, may not violate the antiwaiver provisions, is likewise not dispositive. In upholding those agreements, the Court was careful to emphasize that the plaintiffs' federal securities law claims could be pursued in the selected forum, and that the choice of forum clause thus did not "weaken [the] ability [of investors] to recover under the [securities laws]" nor deprive investors of an "adequate means of enforcing [those] provisions." McMahon, 482 U.S. at 229-30 (United States arbitral forum). Accordingly, those agreements did not "effect[] an impermissible waiver of the substantive protections" of those laws. Id. at 229. See Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 481-482 (1989)(United States arbitral forum).

In this case, in contrast, the requirement that investors litigate in England, coupled with the requirement that they do so under English law, not only "weakens" the investors' ability to recover, but in fact precludes any possibility of recovery under the federal securities laws. These clauses are directly contrary to express statutory prohibitions in the antiwaiver provisions and should be held void.

B. The Supreme Court Cases Relied on by the District Court Upheld Only Choice of Forum Clauses, But Indicated That Clauses Depriving Persons of United States Statutory Rights Would Not be Upheld.

In upholding the choice of forum and choice of law clauses, the district court and other courts have relied on three Supreme Court cases in which the Court upheld international choice of forum provisions. See The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972).("[I]n the light of present-day commercial realities and expanding international trade we conclude that the forum clause should control absent a strong showing that it should be set aside."); Scherk v. Alberto-Culver Co., 417 U.S. 506, 519-20 (1974) ("[W]e hold that the agreement of the parties in this case to arbitrate any dispute arising out of their international commercial transaction is to be respected and enforced * * *"); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631 (1985) ("The Bremen and Scherk establish a strong presumption in favor of enforcement of freely negotiated contractual choice-of-forum provisions."). See also Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991) (domestic choice of forum provision). [FN8]

FN8. Although the district court (ER 102:12 n.17) concluded that the plaintiffs' "relationship with Lloyd's is most definitely international in character," see also Riley, 969 F.2d at 957; Roby, 996 F.2d at 1364; Bonny, 3 F.3d at 159 n.9, the concerns which those courts have viewed as underlying the Supreme Court international choice of forum cases -- that "[f]orum selection and choice of law clauses eliminate uncertainty in international commerce and insure that the parties are not unexpectedly subjected to hostile forums and laws," Roby, 996 F.2d at 1363 -- are not present here. The Lloyd's defendants can hardly claim surprise that they would be subject to United States law when they came to the United States seeking investment by Americans. There can be no dispute, for example, that they could be subject to law enforcement action by the Commission based on the same conduct alleged in this private action.

Specifically, the courts have looked to the Supreme Court's statement in The Bremen that "[a] contractual choice-of-forum clause should be held unenforceable if enforcement would contravene a strong public policy of the forum in which suit is brought." 407 U.S. at 15. They have then looked to whether the Lloyd's clauses would contravene what they term the public policy "incorporated into" the antiwaiver provisions. Concluding that the English courts will provide "sufficient", albeit more restrictive, remedies to investors, the courts have held that United States public policy is not contravened by the choice of forum and choice of law clauses.

The antiwaiver provisions, however, are not simply an expression of public policy that favors United States securities laws unless other comparable laws are available. Rather, they are an express and unequivocal directive that the rights and obligations under the securities laws cannot be waived. This determination has been made by Congress, and the courts are not free to substitute their own public policy determinations.

Nothing in the Supreme Court cases on which the district court and other courts rely allows a United States court to ignore an unambiguous Congressional directive that United States law be available to United States investors. To the contrary, in each of those cases it was assumed for purposes of decision that United States statutory remedies would be available. In fact, the Supreme Court has stated that as a matter of public policy, wholly apart from any statutory antiwaiver provision, it would not uphold clauses that deprived persons of United States statutory remedies.

Although the courts of appeals in the earlier Lloyd's cases have characterized the Supreme Court cases as applying to both forum selection and choice of law clauses, [FN9] those cases in fact only involved choice of forum clauses. See The ?? 407 U.S. at 15 (upholding provision in a maritime towage contract that all disputes arising out of performance of the contract would be heard in London); Scherk, 417 U.S. at 519-20 (upholding requirement that United States company submit its United States securities law claims to arbitration in a foreign forum); Mitsubishi, 473 U.S. at 640 (compelled arbitration of United States antitrust claims in Japanese forum).

FN9. See Riley, 969 F.2d at 957 ("When an agreement is truly international, * * * the Supreme Court has quite clearly held that the parties' choice of law and forum selection provisions will be given effect."); Roby, 996 F.2d at 1362 ("The Supreme Court certainly has indicated that forum selection and choice of law clauses are presumptively valid where the underlying transaction is fundamentally international in character."); and Bonny, 3 F.3d at 160 ("The Supreme Court has construed [an exception to the presumptive validity of a forum selection clause] narrowly: forum selection and choice of law clauses are 'unreasonable' [only if various factors are met]"). (Emphasis added.)

In none of the cases was it understood that the foreign tribunal would fail to apply United States law. To the contrary, in Mitsubishi the Court held that a United States court may not compel arbitration if persuaded that a plaintiff would not be able "effectively [to] vindicate its statutory cause of action in the [foreign] arbitral forum." Mitsubishi, 473 U.S. at 637. In Mitsubishi, the Court stressed that the record established that the foreign forum would entertain the plaintiff's United States antitrust claims: "counsel for [the foreign litigant] conceded that American law applied to the antitrust claims and represented that the claims had been submitted to the arbitration panel in Japan on that basis." Id. at 637 n.19.

Likewise, in Scherk, the Court specifically noted that the case did not present a situation where an arbitration agreement designating "arbitration in a certain place might also be viewed as implicitly selecting the law of that place to apply to that transaction," since the parties' agreement specified that it would be construed in accordance with Illinois law. See 417 U.S. at 519 n.13. [FN10] As the Court later explained in McMahon, in upholding comparable domestic arbitration agreements:

FN10. In responding to the argument of the dissent that the Court's decision would "leave American investors at the mercy of multinational corporations," the Court explicitly stated that its decision had "no bearing on the scope of the substantive provisions of the federal securities laws for the simple reason that the question is not presented in this case." Scherk, 417 U.S. at 518 n.12.

The decision in Scherk thus turned on the Court's judgment that under the circumstances of that case, arbitration was an adequate substitute for adjudication as a means of enforcing the parties' statutory rights. Scherk supports our understanding that Wilko [v. Swan, 346 U.S. 427 (1953)] must be read as barring waiver of a judicial forum only where arbitration is inadequate to protect the substantive rights at issue.

McMahon, 482 U.S. at 229.

The Supreme Court has, in short, made clear that an agreement to adjudicate a matter in a foreign forum will not be given effect where it will result in plaintiffs forgoing their rights under United States law. This appears to be true even where there is no statutory antiwaiver provision, see Mitsubishi, 473 U.S. at 637, but certainly is the case where Congress has expressly forbidden the waiver of the protections of United States law.

The Court recently reiterated its commitment to preventing prospective waivers of statutory rights in Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 115 S. Ct. 2322 (1995), a case involving a foreign arbitration clause in a bill of lading. Under the Carriage of Goods by Sea Act (COGSA), 46 U.S.C. § 1300 et seq., any clause in a bill of lading "lessening [a carrier's] liability" is void. [FN11] The plaintiff (an insurer that had paid claims arising from the damage to goods during shipment by the defendant carrier) argued that there was no guarantee that the foreign arbitrators would apply COGSA and that the carrier's liability to the cargo owner might be reduced.

FN11. Section 3(8) of COGSA, 46 U.S.C. § 1303(8), provides:

Any clause, covenant, or agreement in a contract of carriage relieving the carrier or the ship from liability for loss or damage to or in connection with the goods, arising from negligence, fault, or failure in the duties or obligations provided in this section, or lessening such liability otherwise than as provided in this chapter, shall be null and void and of no effect.

The Supreme Court noted that it had not been established what law the foreign arbitrators would apply, and that the district court had retained jurisdiction and would have an opportunity at a later stage to ensure that the plaintiff's legitimate interest in the enforcement of COGSA had been addressed. Id. at 2329-30. Quoting Mitsubishi, the Court held:

Were there no subsequent opportunity for review and were we persuaded that "the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party's right to pursue statutory remedies * * * , we would have little hesitation in condemning the agreement as against public policy."

Vimar, 115 S.Ct. at 2330 (quoting 473 U.S. at 637 n.19).

The waiver of rights threatened in Vimar is precisely what will occur here if the choice clauses are upheld. This Court should not hesitate, therefore, to condemn the Lloyd's choice of forum and choice of law clauses. [FN12]

FN12. In AVC Nederland B.V. v. Atrium Investment Partnership, 740 F.2d 148 (2d Cir. 1984), the court incorrectly read Scherk to require upholding an agreement to litigate securities claims in the Netherlands and to apply the law of the Netherlands. The court held that "Scherk read into § 29 of the Securities Exchange Act an exception sufficient to validate arbitration agreements and, by implication, forum-selection and choice-of-law clauses, where the foreign elements of a transaction that comes within the Act are sufficiently meaningful." Id. at 160. To the extent such a reading of Scherk would require a plaintiff to forgo substantive rights under the federal securities laws, it appears to conflict with the Supreme Court's later reading of Scherk in McMahon, and its decisions in Mitsubishi and Vimar. Moreover, the "sufficiently meaningful" foreign elements present in AVC Nederland B.V. were far greater than those here. As the court explained, the case involved a "dispute among three Dutch businessmen arising out of negotiations initiated and concluded in their own country." Id. at 156.

C. Even if Public Policy Would Allow Waiving the Protection of United States Securities Laws Where Equivalent Rights and Remedies Are Available Under Foreign Law, Those Protections Are Not Present Here.

1. English Law Does Not Provide Comparable Rights and Remedies to Those Available Under United States Law.

Even if this Court were to conclude that United States law need not be available so long as comparable remedies are available under English law, the English law remedies available to the plaintiffs in this case are not nearly as favorable as their remedies under the federal securities laws.

English substantive law differs from the federal securities laws in a number of significant respects. See generally the Rokison Declaration (ER 72). For example, there is no cause of action under the laws of England for the securities registration violations in the United States. Thus, the effect of the choice of law provision is to forfeit the plaintiffs' express rights to recover for registration violations under Section 12(1) of the Securities Act. See Bonny, 3 F.3d at 162.

As to Section 12(2) -- which makes persons who sell a security liable for untrue statements, negligent or intentional, made in connection with the sale -- the plaintiffs' remedies would be severely compromised. Although English common law, as well as England's Misrepresentations Act, 1967, makes actionable certain types of misrepresentations, including negligent misrepresentations, the protections afforded are not adequate to provide the plaintiffs with remedies equivalent to what they enjoy under United States law. Specifically, Section 14 of the Lloyd's Act, 1982, immunizes Lloyd's from any claims under the Misrepresentations Act, absent a showing of bad faith. [FN13] Thus, there is no possibility that the plaintiffs could pursue the claims they have alleged against Lloyd's for negligent misrepresentation, such as are available to them under Section 12(2) of the Securities Act.

FN13. Section 14 provides that Lloyd's shall not be liable for damages for negligence or other tort, breach of duty or otherwise, in respect of any exercise of or omission to exercise any power, duty or function conferred or imposed by Lloyd's Acts 1871 to 1982 * * *

(a) in so far as the underwriting business of any member of the Society or the costs of his membership or the business of any person as a Lloyd's broker or underwriting agent may be affected;

* * *

unless the act or omission complained of --

(i) was done or omitted to be done in bad faith.

See also Rokison Declaration (ER 72:3-4).

Even as to plaintiffs' Section 10(b) and Rule 10b-5 claims, English law is not substantially equivalent. Although the U.K's Financial Services Act, 1986, provides private remedies for fraud in connection with securities transactions, Lloyd's enjoys immunity from such liability. [FN14] In addition, unlike the securities laws, English law does not recognize controlling person liability. See Rokison Declaration (ER 72:23-24).

FN14. Section 42 of the Financial Services Act exempts "[t]he Society of Lloyd's and persons permitted by the Council of Lloyd's to act as underwriting agents at Lloyd's" from liability under the Act. See Rokison Declaration (ER 72:4-6).

That the remedies available under English law are not as favorable as those available under the federal securities laws has been recognized by each of the courts of appeals in the earlier Lloyd's cases: Roby, 996 F.2d at 1366 ("we do not doubt that the United States securities laws would provide the [plaintiffs] with a greater variety of defendants and a greater chance of success due to lighter scienter and causation requirements"); Bonny, 3 F.3d at 162 ("It is true that enforcement of the [choice] clauses will deprive plaintiffs of their specific rights under § 12(1) and § 12(2) of the Securities Act of 1933"); and Riley, 969 F.2d at 958 ("The fact that an international transaction may be subject to laws and remedies different or less favorable than those of the United States is not a valid basis to deny enforcement [of the choice clauses]").

2. The Courts Cannot Supplant United States Securities Laws on the View that Foreign Law, While Less Protective of Investors, is Nonetheless "Sufficient."

Rather than looking to whether protections comparable to those under United States securities laws are available under English law, the courts upholding the choice clauses essentially have tried to discern whether English law is "good enough." In Roby, the Second Circuit stated:

We believe that if the Roby Names were able to show that available remedies in England are insufficient to deter British issuers from exploiting American investors through fraud, misrepresentation or inadequate disclosure, we would not hesitate to condemn the choice of law, forum selection and arbitration clauses as against public policy.

Roby, 996 F.2d at 1365. After examining various remedies available under English law, the court determined that English law was adequate to deter deception of American investors and to induce disclosure of material information. The district court in this case accepted the Roby court's conclusion.

The courts upholding the Lloyd's agreements have in essence supplanted their policy views of what laws are sufficient to protect United States investors for the determination made by Congress. In so doing they have overlooked important aspects of the federal securities laws. The district court, like the Roby court, erred in giving insufficient weight to the compensatory function of private actions under the securities laws. The court in Roby characterized the purpose of private actions under the securities laws as existing "not because Congress had an overwhelming desire to shift losses after the fact, but rather because private actions provide a potent means of deterring the exploitation of American investors." Roby, 996 F.2d at 1364. The court proceeded to examine the deterrent effect of English law, generally ignoring remedies under the securities laws directed at compensating injured investors -- remedies that would be lost if English law were to be applied. Similarly, the court in Bonny looked to "policies of insuring full and fair disclosure by issuers and deterring the exploitation of United States investors," finding that the available remedies under English would "suffice to deter deception," even though recognizing that the plaintiffs would be deprived of "their specific rights under § 12(1) and § 12(2) of the Securities Act of 1933." Bonny, 3 F.3d at 161-62. This reasoning was expressly adopted by the district court in this case.

Private actions do, of course, serve a useful and necessary function in policing the securities markets, but they also serve as an important means of providing recompense to investors who have been harmed by wrongdoers. The decision below, like the other decisions upholding the clauses, largely eviscerates that latter function of the federal securities laws.

D. The District Court Drew Improper Inferences From the Fact that the Commission Has Not Brought Enforcement Action Against Lloyd's.

Relying in large part on the findings of the Roby court, the district court improperly drew an inference from the fact that the Commission has not brought enforcement action against Lloyd's. The court noted that the Second Circuit stated in Roby:

We believe that [the public] policy concern is somewhat diluted because the SEC consistently has exempted Lloyd's from the registration requirements of the securities laws. Apparently the SEC has decided that the Lloyd's' means test meets the requirements of Regulation D [for exemption from registration]. We are extremely reluctant to dispute the SEC's apparent judgment that the Roby Names are sophisticated enough that they do not need the disclosure protections of the securities laws.

ER 102:23 (quoting Roby, 996 F.2d at 1365-66). These statements by the Roby court were the subject of a letter to counsel for the plaintiffs in this case from the then General Counsel of the Commission, in which he explained that the Commission had not exempted Lloyd's from the registration requirements of the securities laws, and that the Commission's staff had advised Lloyd's that registration would be necessary unless an exemption was available (ER 83:Exhibit 1). He advised that neither the Commission nor the staff had determined that the Lloyd's' means test met the requirements of Regulation D.

The district court reviewed this evidence, and agreed that the Commission had not exempted Lloyd's, but still found significance in the SEC's inaction:

However, none of plaintiffs' documents negates the fact that the SEC has never publicly taken any action to enforce federal securities laws against Lloyd's, despite the fact that the SEC has at various times and by various persons been apprised of Lloyd's practices and of some of the allegations against Lloyd's. While the inferences drawn by the Roby court from the SEC's inaction may appear somewhat overstated, the Court does not find plaintiffs' evidence sufficient to controvert the conclusion of the Second Circuit that the SEC's inaction undercuts or dilutes the strength of the policy argument that insufficient deterrence exists for Lloyd's with respect to adequate disclosure under English law.

ER 102:23-24. [FN15]

FN15. The district court misstated the Commission's position in its finding that:

At the time the General Undertaking was presented to Names for signature and still today, the Securities and Exchange Commission ("SEC") does not require Lloyd's to comply with United States securities laws.

ER 102:15. In fact, the Commission has never exempted Lloyd's from the requirements of the securities laws, nor did it have the statutory authority to do so. The Commission, moreover, does not have to "require" someone to comply with the law; the requirements of the law are, like most laws, self-effecting.

That statement is inexplicable. This case was dismissed not on the merits but on the basis of choice of forum and choice of law clauses. Yet the district court seems to have concluded that the plaintiffs' ability to sue in the United States is of little policy concern because the case is of little merit. The merit of the case (a matter on which we express no view) is irrelevant at this stage. It must be assumed, in the current procedural posture, that the allegations in the complaint of violations are true and can be proved. The question is whether, assuming there has been a violation of the federal securities laws, the plaintiffs can avail themselves of their rights under those laws. Obviously, should it be demonstrated at some point that the plaintiffs' case has no merit, the case can be disposed of on the merits at that time.

Moreover, it is wrong to conclude that because the Commission has not brought action against Lloyd's, a private suit has little merit. The Commission cannot possibly pursue all allegations of wrongdoing, and the Supreme Court repeatedly has recognized that private actions serve as a "necessary supplement" to the Commission's own enforcement activities. ?? Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 310 (1985); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730 (1975); J.I. Case Co. v. Borak, 377 U.S. 426, 432 (1964). For a court to conclude that private litigants may not sue unless the Commission has done so first is wholly unwarranted.

CONCLUSION

For the foregoing reasons, the judgment of the district court should be reversed.