## Facts

- Kauthar SDN BHD, a Malaysian corporation, invested approximately $38 million in Rimsat, Ltd., a Nevis corporation operating primarily from Fort Wayne, Indiana, to provide satellite communications services in the Pacific Rim.
- Rimsat’s business plan involved acquiring Russian satellites and using leased geosynchronous orbital slots associated with a Tongan satellite communications entity.
- Kauthar alleged that individual and corporate defendants, acting largely from the United States, fraudulently induced its investment through misrepresentations and omissions.
- The complaint alleged that defendants devised the plan in the United States, compiled supporting materials in the United States, transmitted materials to Kauthar using U.S. mails and wires, and received investment payments in the United States.
- Kauthar wired funds in installments to an account for Rimsat; shortly thereafter, Rimsat entered bankruptcy in January 1995, substantially eliminating Kauthar’s investment.
- Kauthar asserted federal securities antifraud claims, civil RICO claims under 18 U.S.C. § 1962(a)–(d), and related state-law claims.

## Issues

1. Whether U.S. securities antifraud provisions can apply to a predominantly foreign investment transaction when substantial, scheme-implementing conduct occurred in the United States and allegedly caused the plaintiff’s loss.
2. Whether the alleged U.S.-based acts were more than merely preparatory and were essential and material to the success of the alleged fraud.
3. Whether the complaint adequately stated civil RICO claims, including sufficiently pleaded predicate acts and a pattern of racketeering activity.

## Decision

- The Seventh Circuit affirmed the district court’s dismissal of the federal securities claims, dismissal of the civil RICO claims, and entry of summary judgment on the remaining claims.
- On extraterritoriality doctrine, the court stated that U.S. securities laws may reach predominantly foreign transactions when domestic conduct is an essential and material part of the fraudulent scheme and directly causes the loss.
- The court explained that preventing the United States from being used as a base of operations for defrauding foreign investors is a central justification for applying the conduct test.
- The court agreed that mere domestic contacts are insufficient; the domestic acts must be substantial and directly connected to the alleged injury.
- The court left intact the dismissal of the RICO counts for failure to satisfy core pleading and substantive requirements (including predicate acts and pattern).

## Legal Principles

- U.S. securities antifraud provisions may apply extraterritorially under the conduct test when substantial conduct in the United States is essential to the alleged fraud, material to its success, and directly causative of the claimed loss.
- Domestic conduct that is merely preparatory or tangential to a foreign securities transaction does not justify applying U.S. securities law.
- A policy aim of the conduct test is to prevent the United States from serving as an operational center for securities fraud directed at foreign purchasers and sellers.
- Civil RICO claims require adequately pleaded predicate acts and a pattern of racketeering activity, along with other statutory elements; conclusory allegations are insufficient.

## Conclusion

The Seventh Circuit held that extraterritorial application of U.S. securities antifraud law depends on whether substantial U.S. conduct was essential and material to the alleged fraud and directly caused the loss, but it affirmed judgment for defendants because Kauthar’s federal and related claims were properly dismissed or resolved against it.


Kauthar SDN BHD v. Sternberg, 149 F.3d 659 (7th Cir. 1998)