author: HUYETT, District Judge.

text:
    William A. GARDNER and Sidney L. Hofing, Plaintiffs, v. Frank SURNAMER, Bruce Rothrock and Saul Schussel, Defendants.
    Civ. A. No. 82-2723.
    United States District Court, E.D. Pennsylvania.
    April 17, 1985.

      Antoinette R. Stone, Philadelphia, Pa., for plaintiffs.
    Leon H. Kline, Philadelphia, Pa., for Rothrock.
    Alan M. Black, Allentown, Pa., for Surnamer.
    Edward C. McCardle, Allentown, Pa., for Schussel.
   MEMORANDUM AND ORDER

HUYETT, District Judge.

Presently before me are defendants’ motions for summary judgment on Count II of plaintiffs’ complaint which alleged a violation of the Securities Exchange Act of 1934 (“Act”), 15 U.S.C. § 78j(b), and the regulations promulgated thereunder, including Rules 10b-5 and 10b-6. 20 C.F.R. §§ 240.-10b-5 & 240.10b-6.

Background

On September 10, 1981 plaintiffs and defendants Rothrock and Surnamer entered into an agreement under which plaintiffs purchased a fifty-one percent stock interest in Jordan Industries, Inc. (“Jordan”), and a fifty percent interest in Central Valley Real Estate (“Central”). The combined purchase price of these securities was $525,-000, although the parties hotly contest the amounts exchanged. Eleven days later, on September 21, 1981, plaintiffs transferred some or all of this stock to Gardner Technology Associates (“GTA”), a Pennsylvania limited partnership. Once again, the parties do not agree on the terms or nature of this transfer.

After this transfer, plaintiffs allege that GTA became aware that Jordan and Central were riddled with undisclosed liabilities and that the assets of the businesses were not as represented by the defendants at the time of the initial sale to plaintiffs. The exact nature of these misrepresentations is more fully discussed in an earlier opinion in this case in which I granted defendants’ motion to dismiss plaintiffs’ civil RICO claim. Gardner v. Surnamer, 599 F.Supp. 477 (E.D.Pa.1984).

Defendants have now moved for summary judgment on the securities law count of the complaint. The basis of these motions is the argument that plaintiffs have suffered no actual damages and therefore cannot maintain a § 10(b) action. Plaintiffs deny that they have suffered no damages and assert that even if they have no cause of action in their personal capacities, they can still maintain this action as assignees of GTA.

Summary judgment may be granted when it has been established that there are no issues of material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Small v. Seldows Stationery, 617 F.2d 992 (3rd Cir.1980). The court does not decide issues of fact, but merely determines if there is an issue of fact to be tried. Ettinger v. Johnson, 556 F.2d 692 (3rd Cir.1977). The facts must be viewed in the light most favorable to the non-moving party and any reasonable doubt as to the existence of a genuine issue of fact is to be resolved against the moving parties. Continental Ins. Co. v. Bodie, 682 F.2d 436 (3rd Cir.1982). For the reasons set forth below, defendants’ motions will be denied.

Plaintiffs’ Ability to Pursue this Action on Their Own Behalf

Count II of plaintiffs’ complaint is based on § 10(b) of the Securities and Exchange Act of 1934 which states:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

Defendants argue forcefully that plaintiffs cannot maintain this action on their own behalf because they have not suffered any actual damages. The courts have universally applied the “actual damage” standard of § 28(a) of the Act to § 10(b) claims. See 15 U.S.C. § 78bb(a). Such “actual” damages are an essential element of a cause of action under § 10(b). Gould v. American-Hawaiian S.S. Co., 535 F.2d 761 (3rd Cir.1976); Rubenstein v. I.U. Inter’l Corp., 506 F.Supp. 311 (E.D.Pa.1980). Defendants argue that “actual damages” should be equated with “out of pocket” losses, and that under any formulation, plaintiffs have reaped substantial profits from their eleven day ownership of the stock in question.

In general:

Most courts have construed the term “actual damages” to preclude punitive awards and to limit compensatory damages to the plaintiff’s actual monetary loss, including consequential damages. The courts further define a monetary loss as money actually paid out by a plaintiff and not as money a plaintiff hoped to realize. As a result, the courts are in almost unanimous agreement that the out-of-pocket measure of damages which operates to make plaintiff whole, applies to Rule 10b-5 violations with only limited exceptions.

Note, Reaping the “Fruits of an Unrealized Speculation”: May a Buyer Who Profits from a Transaction also Recover Damages Under Rule 10b-5, 33 Rutgers L.Rev. 973, 975-76 (1981).

In Abrahamson v. Fleschner, 392 F.Supp. 740 (S.D.N.Y.1975), the court was faced with a situation which is somewhat similar to the one presented in the present case. That case also involved a 10b-5 action in which plaintiffs, who were limited partners, sued the partnership, its three general partners, and its accounting firm for a variety of alleged misrepresentations. Defendants moved for summary judgment arguing, inter alia, that plaintiffs had not suffered any actual damages and therefore could not state a claim under Rule 10b-5. The court accepted this argument in spite of the fact that plaintiffs represented to the court that they could have made more money than they actually did were it not for the fraud of the defendants. The court stated: “[a] close reading of the cases relied upon by plaintiffs reveals no support for their claim that they are entitled to damages in a situation where no loss has been suffered and where a substantial gain has in fact been made.” Id. at 746-47. See also Rubenstein, 506 F.Supp. at 318.

Similarly, in Beissinger v. Rockwood Computer Corp., 529 F.Supp. 770, 788-89 (E.D.Pa.1981), the court posed a hypothetical which reflects fairly closely the facts of this case. In its discussion of plaintiffs theory of damages the court stated:

Assuming that a class member purchased his Rockwell stock in mid-July, 1971, the price of those shares would have been around $5.75 per share whereas their true value was approximately $3.75 per share____ Further assuming that the price of Rockwood stock followed the general market trends and that the price — “true value” spread remained constant, if the same class member later sold his stock for approximately $3.00 per share, its true value would have been approximately $1.00 per share. Obviously, because he would have received $2.00 per share more than the stock was actually worth at the time of sale, such a class member would have recovered the “cost” of the misrepresentation to him and would therefore have suffered no damages.

Id. at 789. Stated another way, if a buyer of securities purchases securities which are inflated in price because of fraud and sells those securities later at a price which is still inflated by the same fraud, he or she has suffered no actual damages all other things being equal.

The determination of whether plaintiffs have suffered any actual damages therefore depends on an analysis of the transactions between plaintiffs and defendants and plaintiffs and GTA.

Plaintiffs paid $400,000 for the stock in Jordan and $125,000 for the interest in Central. Thus at a minimum, plaintiffs spent $525,000 for the securities at issue here. Plaintiffs claim, however, that the total purchase price was much higher. They would include two additional items in the purchase price. These are $26,000 in brokerage fees paid in connection with the sale and $33,177 paid directly to defendant Surnamer. After reviewing the voluminous materials submitted by the parties in support or opposition to these motions, I feel that there can be no dispute that neither of these two items is properly included in the calculation of the purchase price paid by plaintiffs.

With regard to the $26,000 brokerage fee, this amount was apparently paid to the broker by Jordan and not by plaintiffs. Affidavit of William Jackson ¶¶ 4 & 5. The brokerage fee was billed on an invoice made to Jordan and was paid by a Jordan check. Id. Plaintiffs claim that this fee was paid by Jordan, but that it was in reality an obligation of plaintiffs and that the $26,000 was an interest free loan from Jordan to plaintiffs. Plaintiffs further allege that some of this money has been repaid to Jordan, and that some is still owed. Plaintiffs provide no further substantiation for this claim aside from a paragraph in their response to the motions for summary judgment even though plaintiff Hofing has provided an affidavit in opposition to the motions. Under Rule 56(e), a party must respond to affidavit facts with more than a restatement of the pleadings. Plaintiffs have not provided any affidavit or other materials which would rebut the facts contained in the affidavit of the broker. I therefore find no material issue of fact with regard to the $26,000 brokerage fee, and conclude that the fee was paid by Jordan and not by plaintiffs.

At the time of purchase, plaintiffs apparently paid $33,177 directly to defendant Surnamer. This payment was essentially made to “purchase” a subordinated loan payable from Jordan to Surnamer. At the time of the original sale Surnamer agreed to assign the loan payable from Jordan to him to plaintiffs. See Defendants Surnamer and Rothrock’s motion for summary judgment, Exhibit A. This loan was not transferred from plaintiffs to GTA at the time of summary judgment. See Defendants Surnamer and Rothrock’s Motion for Summary Judgment, Exhibit B. Presumably, this obligation is still owed by Jordan to plaintiffs; plaintiffs have provided me with no material from which I could conclude otherwise. I will, however, assume for the purposes of this motion that the $33,177 was a bona fide portion of the purchase price.

The terms of the subsequent exchange of plaintiffs’ stock to GTA is equally disputed. It is clear, however, that on September 21, 1981, plaintiffs entered into an agreement with Capital Partners Management Co., Inc. (“Capital”), one of the general partners of GTA, to transfer their interest in Jordan and Central to GTA in exchange for limited partnership units in GTA. It appears that at the time of this exchange, each unit in GTA was worth $65,000 payable in two installments of $25,000 each together with the delivery of a $15,000 letter of credit in favor of GTA. Defendants Surnamer’s and Rothrock’s motion for summary judgment, Exhibit C & Exhibit D. Thus, the twelve shares would theoretically be valued at $780,000. Plaintiffs do not dispute that they received $600,000 of value in this transfer; they claim, however, to be still obligated to provide the letters of credit. Unfortunately for this argument, they have not provided these letters of credit in the almost four years since this transaction took place. As of the present time, therefore, plaintiffs have received units in GTA which would otherwise have cost them $780,000.

Even if I were to assume the figures most favorable to plaintiff, I would be forced to conclude that plaintiffs did not suffer any actual damages personally from any fraud allegedly committed by defendants. Assuming the figures most favorable to plaintiffs, they purchased the stock in Jordan and Central for approximately $585,000. They exchanged this stock for $600,000 worth of units in GTA thus realizing a profit of $15,000 in eleven days. Moreover, for the reasons stated above, I have concluded that the purchase price was substantially less than $585,000 and the value received from GTA substantially more than $600,000. Thus, there can be no dispute that plaintiffs have not sustained any actual damages as a result of any fraud in connection with the sale of the securities in question.

Plaintiffs argue however that even if they cannot maintain an action on behalf of themselves, they can maintain this action because they hold an express assignment of GTA’s action against defendants.

Plaintiffs’ Ability to Pursue This Action As Assignees of GTA

Plaintiffs argue that they can proceed in this action as assignees of GTA’s cause of action against defendants. This argument has several components. First, can plaintiffs receive a assignment of a cause of action from GTA under § 10(b) and Rule 10b-5? Second, if such an assignment is possible, has one taken place here? Third, is the assignment herein valid? Fourth, if it is valid, did GTA ever have a cause of action that it could assign? I will examine each of these issues seriatim.

Assignment of Causes of Action Under Section 10(b) and Rule 10b-5

Before I can determine whether section 10(b) rights are assignable, I must first determine whether state or federal law is to be applied to that determination. There exists little law on this point, presumably because it has been assumed that questions of standing under the federal securities law must be governed by federal law. In Lowry v. Baltimore & Ohio Railroad Company, 707 F.2d 721 (3d Cir.1983), a case also involving the assignability of § 10(b) rights, Judge Garth, in a concurring opinion, stated that “questions regarding rights under the federal securities law must be decided on the basis of federal, and not state law.” Id. at 727. I agree with Judge Garth and am satisfied that in order to best effectuate the policies behind the federal securities laws I should look to principles of federal law.

The next issue presented is whether, under federal law, § 10(b) rights are assignable. The starting (and ending) point of this analysis is the Third Circuit’s decision in Lowry. In that case, the court, sitting en banc split on this issue. Six of the eight judges did, however, hold that § 10(b) rights could be assigned. Id. at 723. Although a majority of the court agreed that such rights could be assigned, the court split over what was necessary to effectuate such an assignment. Three judges held that an assignment took place automatically on the sale of a security. See Id. at 734 (Gibbons, J., dissenting); 744 (Seitz, C.J., and Becker, J., concurring in part and dissenting). Three held that an assignment of such rights must be express. See Id. at 723 (Garth, J., and Sloviter, J., concurring in the judgment); 731 (Adams, J., concurring in the judgment). In the present case, it is clear that an express assignment took place. McDonald Affidavit, Exhibit A, Hofing Affidavit ¶¶ 2 & 3, Exhibit A. Thus, the Lowry majority would presumably find a valid assignment of GTA’s rights under § 10(b) and Rule 10b-5 to have taken place.

In the present case, plaintiffs produced the minutes of a directors meeting of Capital at which Capital, acting as GTA’s general partner, purported to assign GTA’s cause of action to plaintiffs. Gardner, as a director of Capital (and presumably as a general partner of GTA) voted to assign GTA’s rights to himself and Hofing.

Defendants have raised some weighty arguments in opposition to this theory. First, they correctly note that there is no mention of the fact that plaintiffs are suing only as assignees in the complaint. Although the complaint does speak of plaintiffs as though they were the real parties in interest in this suit, I refuse to read the rules of pleading as narrowly as defendants would suggest. What plaintiffs have asserted in this theory is really factual in nature, and it appears that defendants had notice of this theory well before the close of discovery. I agree with defendants that the mere statement of this theory in a response to motions for summary judgment without a prior mention in the complaint, standing alone, suggests that the theory is a sham. In the present case, however, there is evidence submitted by way of affidavit which substantiates plaintiffs’ claim that on December 14, 1981, GTA’s general partners decided to assign its rights in any suit arising from the sale of the securities at issue here to plaintiffs. Defendants have raised substantial question regarding the validity of this assignment through the use of the deposition testimony of Gardner. At best, however, this serves to illustrate that there exists a genuine issue of fact regarding the validity of the assignment.

I decline to decide that this assignment is invalid in the context of the present motion for summary judgment.

Defendants contend, however, that even if the assignment were made in December, 1981, it is void as against the public policy disfavoring champertous contracts.

In evaluating this argument I must adopt and apply state law. See Lowry 707 F.2d at 747 (Seitz, C.J. dissenting). The parties do not seem to dispute the applicability of Pennsylvania law to this issue.

Under Pennsylvania law, an arrangement offends the public policy against champerty and is illegal if it provides for the institution of litigation by and at the expense of a person who, but for the agreement, has no interest in it, with the understanding that his or her reward is to be a share of whatever proceeds the litigation may yield. Richette v. Pennsylvania R.R., 410 Pa. 6, 20, 187 A.2d 910 (1968), Ames v. Hillside Coal & Iron Co., 314 Pa. 267, 171 A. 610 (1934). In determining whether an agreement is champertous there are three elements which must be considered. First, the party involved must be one who has no legitimate interest in the litigation. Second, that party must expend his or her own money in prosecuting the suit, and finally, he or she must be entitled by the bargain to a share in the proceeds of the suit. Belfonte v. Miller, 212 Pa.Super. 508, 243 A.2d 150, 152 (1968).

Viewed in this light, I find one of the three necessary prongs missing in the present case: the lack of interest the party must have in the suit. Here, Mr. Gardner, the co-general partner of GTA and Mr. Hofing, a limited partner of GTA, had an interest in GTA’s profits at the time of the assignment. Moreover, Mr. Gardner has an additional interest in the claims against the defendants because he, as a general partner, is personally liable for the debts of the limited partnership. Thus, while the assignment may meet two prongs of the test, it clearly fails this first prong. Accordingly, under Pennsylvania common law, champerty is not present.

Even if, however, GTA could have assigned its cause of action under § 10(b) to plaintiffs, the question of what there was to be assigned remains. It is axiomatic that the rights of an assignee can rise no higher than those of the assignor. Himes v. Cameron County Const. Co., 497 Pa. 637, 444 A.2d 98 (1982); United States Steel Homes Credit Corp. v. South Shore Development Corp., 277 Pa.Super. 308, 419 A.2d 785 (1980). Thus, I must determine whether, on the present record, plaintiffs have demonstrated that an issue of material fact exists regarding the ability of GTA to bring the present lawsuit. If GTA had no cause of action against defendants then neither do plaintiffs as assignees of GTA.

Plaintiffs assert two independent theories regarding the ability of GTA to maintain this suit against defendants. First, they argue that plaintiffs acted in the original transaction with defendants as mere agents of GTA, their undisclosed principal. Second, they argue that GTA could maintain this suit under the securities law even if it were a genuine purchaser from plaintiffs.

Plaintiffs’ undisclosed principal argument is completely unpersuasive. They claim that at the time of the original sale of the securities from defendants to plaintiffs, they were operating as agents of GTA. I have reviewed the available record in this case carefully and can find'no substantial support for this argument. The facts on record are replete with circumstantial evidence that is inconsistent with the agency theory propounded. First, I note that as a result of the two transactions involved here, plaintiffs as individuals received large profits over a brief period. The transfer of the stock to GTA took place eleven days after the first sale to plaintiffs. Moreover, the agreement between Capital and plaintiffs is very elaborate and contains detailed warranties and other obligations that are somewhat at odds with plaintiffs’ agency theory.

The original sale on September 10, 1981 was financed by a loan from First National State Bank to plaintiffs as individuals. Defendants’ reply memorandum in support of their motion for summary judgment, Exhibit F. I also note that GTA’s initial tax returns stated that GTA did not commence business until September 30, 1981. See Verified statement of Leonard Michaels. Perhaps the most damaging bit of evidence against plaintiffs’ agency theory is contained in the deposition of plaintiff Hofing who was asked:

Q: Was this transfer of Jordan stock to Garner Technology Associates planned or contemplated by you and Mr. Gardner before you acquired the stock from Rothrock and Surnamer?

A: Not that I know of

Defendants’ reply memorandum in support of their motion for summary judgment, Exhibit I, Hofing Deposition at 39. Thus it appears that plaintiffs’ theory that they were acting as agents of an undisclosed principal is devoid of merit.

Plaintiffs also contend that they can maintain this suit even if GTA was not the real purchaser from defendants, because GTA had a cause of action independent from any which may have arisen as a result of plaintiffs’ putative agency relationship with it. In essence, plaintiffs argue that GTA had a cause of action against defendants even though it purchased the securities in question from plaintiffs.

Both § 10(b) and Rule 10b-5 require that a fraud be “in connection with the purchase or sale of” securities. There are really two elements to this requirement. The first is that plaintiff be within a class of plaintiffs who are buyers or sellers of securities. The second is that the fraud be related to purchase or sale in some way and that the damages thereby suffered were caused by the fraud. Under the facts of the present case there can be little doubt that GTA falls within the class of purchasers or sellers. The starting point for any analysis of a “purchase or sale” problem under this section is the Supreme Court’s decision in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). In Blue Chip, the Court approved the “Birnbaum Rule” which limited private damage actions under § 10(b) to actual purchasers and sellers. Defendants would apparently read this to preclude GTA from bringing this suit because it was not the purchaser of securities from defendants. I believe that this reads too much into Blue Chip, however. Blue Chip and Bimbaum both dealt with the distinction between real purchasers and sellers and potential purchasers and sellers. In limiting the class of potential plaintiffs in § 10(b) actions to actual purchasers or sellers, the court recognized that to do otherwise would make anyone a potential plaintiff. Id. at 739-40, 95 S.Ct. at 1927-28. The Court desired to prevent a wave of vexatious litigation brought by speculators and others who could allege that their decision to purchase or sell was in some way affected, to their detriment, by the defendant’s fraud. The court feared that these suits would be too easy to bring, would not be amenable to disposition before trial and would therefore result in large unwarranted settlements which would eventually harm the shareholders. Id. at 742-43, 95 S.Ct. at 1928-29. These principles really refer, not to the identity of the parties but to their nature. That is, the controlling factor under Blue Chip was not a lack of formal privity, but rather the court’s concern with the policy implications of removing the barriers against litigation by persons who did not have the “proof” of injury demonstrated by their status as a real purchaser or seller.

The “in connection with” requirements present a more difficult question. Defendants appear to argue that unless the fraud was committed by them at the time of the sale to GTA, the partnership would not have the standing to bring this suit. Basically, defendants would have me equate “in connection with” with a requirement that the plaintiff and defendant be in some form of privity (presumably privity of contract).

In the instant case, GTA is a subsequent buyer who allegedly suffered injury at the hands of defendants. Defendants and GTA are separated by a set of intervening parties: plaintiffs. The question before me is whether GTA as a subsequent, injured buyer not in privity can maintain an action against defendants. GTA and the defendants are clearly not in any kind of privity.

The parties have not provided me with any cases which involve the same type of situation as is presented in this case. Indeed, I have found no case which squarely addresses the status of a would-be plaintiff who is a subsequent buyer.

Although some early decisions in this area seem to require at least “some semblance of privity”, Joseph v. Farnsworth Radio & Television Corp., 99 F.Supp. 701, 706 (S.D.N.Y.1951), aff'd., 198 F.2d 883 (2d Cir.1952), the more recent cases take a much more relaxed view of the privity requirement. 3 A.R. Bromberg & L.D. Lowenfels, Securities Fraud & Commodities Fraud § 8.5(511), p. 207 (1984).

Perhaps the most compelling line of cases are those involving § 10(b) actions brought by open-market purchasers against issuers, insiders, or other nontrading parties. See, e.g., Fischer v. Kletz, 266 F.Supp. 180, 193 (S.D.N.Y.1967); Brennan v. Midwestern United Life Ins. Co., 259 F.Supp. 673 (N.D.Ind.1966); Drake v. Thor Power Tool Co., 282 F.Supp. 94 (N.D.Ill.1967); Miller v. Bargain City, U.S.A., Inc., 229 F.Supp. 33, 37 (E.D.Pa.1964). These cases demonstrate that there is no requirement that a plaintiff be in privity with a defendant as long as the “in connection with” requirement is met. If a plaintiff is a purchaser or seller of a security, the question is then whether the fraud committed was in connection with that purchase or sale.

In the present .case, plaintiffs allege that the fraud was committed at the time that the original sale between themselves and defendants was consummated. The fraud was not discovered, however, until the stock had passed into the hands of GTA. Although I have located no cases directly on point, I have concluded that GTA had sufficient standing to bring an action against defendants.

There are compelling policy arguments in favor of this conclusion. If a subsequent buyer could not bring suit against a fraudulent seller “once removed” for damages suffered as a result of that fraud, the remedial purposes of the act would be compromised. See Texas Continental Life Ins. Co. v. Dunne, 307 F.2d 242, 249 (6th Cir.1962). Fraudulent sellers could insulate themselves from liability by concealing a fraud and then ensuring that the purchasers transferred the securities to another party. Where, as here, a plaintiff is within the class of purchasers or sellers, the fraud was committed in connection with that sale or purchase of securities, and the plaintiff has been damaged by the fraud, a claim under § 10(b) or Rule 10b-5 has been stated.

In the instant case, I believe that defendant has failed to show that these elements are lacking as a matter of law or that there exists no genuine issue of material fact.

Based on the foregoing, I will deny defendants’ motions for summary judgment. An appropriate order follows.

      . The complaint also names Saul Schussel as a defendant and he has moved for summary judgment along with defendants Rothrock and Surnamer. Schussel provided a review of the balance sheet of Jordan Industries and other related statements before the sale of securities at issue here. Because the principal arguments in the present motions concern the actions of the other defendants, all references to defendants in this opinion will be to defendants Rothrock and Surnamer.

      . This transaction also involved other individuals. The initial agreement for the sale of the stock in Jordan and Central was between the general partners of GTA and the defendants along with Sylvan Zemel and David Chapman who owned an interest in Jordan and Central. Zemel and Chapman are not named as defendants in this suit. They also appear to be limited partners in GTA.

      . I also note that by acquiring limited partnership interests in GTA, plaintiffs became eligible to receive large tax advantages. Plaintiff Hofing had GTA tax write-offs of $283,815.00 in 1981. Defendants Surnamer and Rothrock’s motion for summary judgment, Exhibit G. Defendant Gardner filed no tax returns for either 1981 or 1982. Defendants’ Surnamer's and Rothrock’s motion for summary judgment, Gardner Deposition, Exhibit H. I need not determine whether these savings did actually accrue in light of my decision that there can be no dispute regarding the fact that plaintiffs made a profit on their sale to GTA. If they did accrue then they may be considered along with the other benefits obtained from GTA in determining the extent of plaintiffs’ actual losses, or in this case, profits. See Salcer v. Envicon Equities Corp., 744 F.2d 935 (2d Cir.1984); Austin v. Loftsgaarden, 675 F.2d 168 (8th Cir.1982).

      . It is well established under Pennsylvania law that the real party in interest in an assigned suit '■is the assignee and not the assignor in a case like this one where the assignment itself seems unequivocal. See, e.g., Ertel v. McCloskey, 167 Pa.Super. 120, 74 A.2d 652 (1950); Bush v. Eastern Uniform Co., 356 Pa. 298, 51 A.2d 731 (1947); Casey Heat Service Co. v. Klein, 55 D & C 293, 46 Lack.Jur. 257 (1945).

      . I am deeply troubled by the unexplained inconsistency between the deposition of Hofing and his January, 1985 affidavit in which he stated, "William Gardner and Hofing entered into the Agreement dated September 10, 1981 with defendants Surnamer and Rothrock for GTA, their undisclosed principal." Hofing Affidavit ¶ 4. Obviously, one cannot be an agent of an undisclosed principal unless that relationship has been created before the transaction took place. Moreover, an agency relationship of this kind cannot exist if a transfer of the stock to GTA was not contemplated before the plaintiffs actually purchased it from defendants.

      . Defendants also contend that the agency relationship asserted by plaintiffs cannot be reconciled with the creation date of GTA. The parties do not seem to dispute the fact that GTA’S certificate was not filed with the Secretary of State until December 7, 1981. The date of filing is not itself, however, dispositive of the formation date of GTA. See 59 Pa.Cons.Stat.Ann. § 512(b) (Purdon Supp.1984); see also Ruth v. Crane, 392 F.Supp. 724, 733 (E.D.Pa.1975), aff’d., 564 F.2d 90 (3rd Cir.1977). Although Ruth was decided under the old Limited Partnership Act, 59 P.S. § 1 et seq., repealed, Dec. 19, 1975, P.L. 524, No. 155 § 2, the new Act incorporates some aspects of the older act. See, 59 Pa.Cons.Stat.Ann. § 512(b).

      . Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.) cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952).

      . In Lowry, the Third Circuit held that there was no automatic assignment of a cause of action under the securities law upon the sale of the security. At first blush, this result may seem inconsistent with the result I have reached in this case. It is not. Plaintiffs in Lowry had bought the securities in question there after the fraud had become public, they therefore were not injured in the sense that they had bought with at least constructive knowledge of the fraud. 707 F.2d at 721. Although many of the plaintiffs there may have been in exactly the same relationship with the defendant issuer as GTA was with defendants herein, they lacked the injury resulting from the sale or purchase that GTA has.


source: Caselaw Access Project

author: GOETTEL, District Judge.

license: Public Domain

text:
    UNITED STATES of America, Plaintiff, v. All Monies and Other Property Contained in Any and All Accounts and Certificates in the Names of BANCO CAFETERO INTERNATIONAL, Banco Cafetero Panama, Banco Cafetero Panama 9A, Banco Cafetero Bogota, Banco Cafetero Colon, Banco Cafetero Caribe Ltd., including But Not Limited to Checking Account Nos. 8033066547, 8033269898, and 8026003335, up to the amount of $31,000,000 United States Currency and All Monies and other Property Contained in checking account no. 8033270500, up to an Unlimited Amount of United States Currency, Maintained At Various Branches of Irving Trust Company, Defendants-in-rem. UNITED STATES of America, Plaintiff, v. ACCOUNT NO. 000400054817 AT CHEMICAL BANK, Defendant-in-rem. UNITED STATES of America, Plaintiff, v. ACCOUNT NO. 000019236021 AT PHILADELPHIA INTERNATIONAL BANK, Defendant-in-rem. UNITED STATES of America, Plaintiff, v. ACCOUNT NO. 000000030465 AT MARINE MIDLAND BANK NA, Defendant-in-rem. UNITED STATES of America, Plaintiff, v. ACCOUNT NO. 000001011892 AT FIRST CHICAGO INTERNATIONAL BANKING CO., Defendant-in-rem.
    Nos. 85 Civ. 1835 (GLG) to 85 Civ. 1837 (GLG), 85 Civ. 1840 (GLG), 85 Civ. 1841 (GLG).
    United States District Court, S.D. New York.
    May 6, 1985.

      Rudolph W. Giuliani, U.S. Atty. for the S.D.N.Y., New York City, for plaintiff; Robert L. Ullmann, Cynthia Keeffe, Sp. Asst. U.S. Attys., Franklin H. Stone, Asst. U.S. Atty., New York City, of counsel.
    Kelley Drye & Warren, New York City, for claimants; Scott G. Campbell, Arnold S. Klein, Tomas T. Szoboszlai, New York City, of counsel.
   OPINION

GOETTEL, District Judge.

This action arises out of the government’s attempt to prevent laundering of money from illegal narcotics transactions. On March 8, 1985, the United States filed eight complaints in forfeiture against moneys located in various bank accounts in New York City. The government then applied for and obtained warrants for arrest of the defendants-in-rem, which were served upon the custodial banks.

The defendants-in-rem are, mostly, moneys and other property in the accounts of Banco Cafetero International, Banco Cafetero Panama, Banco Cafetero Bogota, and Banco Cafetero Colon (collectively referred to as the “expropriated banks”), maintained at Irving Trust Company, Chemical Bank, First Chicago International Banking Co., Marine Midland Bank NA, and Philadelphia International Bank. On March 13, 1985, by an order to show cause, the expropriated banks moved to vacate the warrants of arrest pursuant to Rule 12 of the Admiralty and Maritime Claims Rules of the United States District Courts for the Southern and Eastern Districts of New York. Rule 12 provides that,

[wjhere property is arrested or attached, any person claiming an interest in the property arrested or attached, may upon a showing of any improper practice or a manifest want of equity on the part of the plaintiff be entitled to an order requiring the plaintiff to show cause why the arrest or attachment should not be vacated or other relief granted consistent with these rules or the Supplemental Rules.

Rule 12. For the following reasons, we deny the expropriated banks’ motion to vacate the warrants at this time.

BACKGROUND

In their papers, the parties set forth the “facts” outlining the events and transactions at issue. In order to understand the events leading up to the instant controversy, we will set forth the claims, recognizing that many of the “facts” are in dispute, or, at least, are not conceded to be true.

On January 30, 1984, officers of the Burbank, California, Police Department discovered approximately $690,000 in United States currency in small denominations in the apartment of Franciso Arredando and Magley Belasic. They also discovered a bag containing torn-up cashier’s check receipts totalling approximately $1,100,000 in United States currency. It was suspected that the inhabitants of the apartment were part of a large illegal narcotics money-laundering scheme. Therefore, federal agents commenced an investigation.

The investigation revealed that all of the checks were for amounts less than $10,000 and were purchased at various banks with cash, largely, if not entirely, in small bills. The investigation further revealed that these cashier checks had been deposited to an account in the name of the First Interamericas Bank of Panama, S.A. (“FIB”), maintained at the Continental National Bank of Miami, Florida (“CNB”). Handwriting analysis revealed that many of the endorsements on the checks were made by the same individual, even though the signatures were in different names.

Surveillance of CNB during March and April 1984, disclosed significant daily cash or cashier’s check deposits into FIB’s account. These were delivered by carriers unable to identify the individuals responsible for the deposits. From November 1984 to December 1984, $4,000,000 was deposited into FIB’s account. An FIB account representative appeared at the time of the arrival to verify the count for deposit.

CNB advised federal agents that money had been removed from the FIB account either by cash withdrawals by authorized FIB representatives, all of whom were Colombian or Panamanian, or by wire transfers to banks in New York City. Most of the wire transfers went to Irving Trust Company, into the account of Banco Cafetero Panama, Account Number 803-3270-500 (the “500 account”). From March 1983 to the present, CNB records revealed that approximately $27 million had been wire transferred from the FIB account to the 500 account. This account, however, also received funds of other customers of Banco Cafetero Panama.

Investigations by federal agents also revealed that FIB moneys have continued to flow out of FIB’s account at CNB and into accounts in New York. At least $1,200,000 was deposited into the 500 account at Irving Trust between February 1, 1985, and March 1, 1985.

An examination of the documents received by federal agents as of March 8, 1985, revealed that certain funds in the 500 account, attributable to FIB, were transferred to other Banco Cafetero Panama accounts maintained at Marine Midland, Chemical Bank, Philadelphia International Bank of New York, and First Chicago International Banking Co., and into accounts of Banco Cafetero Colon and Banco Cafetero International maintained at Irving Trust. In addition, numerous transfers occurred back and forth between Banco Cafetero Panamas’s various accounts and the accounts of Banco Cafetero Bogota, Banco Cafetero Colon, and Banco Cafetero International.

In or about March 1984, federal agents also learned through a review of CTR (IRS Form 4789) reports that large cash transactions were being deposited into an FIB account at Tower Bank in Hialeh Gardens, Florida (“Tower”). From March 1983 to the present, Irving Trust Company records show that approximately $4 million has been wire transferred from the FIB account at Tower to a Banco Cafetero account in New York.

The FIB headquarters in Panama is a small residential house with bars on the windows and a small sign. Its president, Gilbert Rodriguez, was indicted in Los Angeles in August 1982, for violation of the federal narcotics laws. He has also been indicted in the Eastern District of New York for violating narcotics laws. Based on these indictments, he was arrested in Madrid, Spain, and is currently facing extradition to the United States. FIB was recently nationalized by the Government of Panama, allegedly due to its well-known connection with narcotics operations.

Banco Cafetero Bogota is a banking corporation organized and existing under the laws of the Republic of Colombia with its head office in Bogota. It is the largest state-owned bank in Bogota, Colombia. The account it maintains with Irving Trust Company in New York is a demand or checking account. Banco Cafetero Panama is a banking corporation formed under the laws of Panama and is a wholly-owned subsidiary of Banco Cafetero Bogota. The accounts that it maintains at the various banks are demand accounts. Banco Cafetero Colon is a branch bank of Banco Cafetero Panama in Colon, Panama, and it maintains a demand account at Irving Trust. Banco Cafetero International is an Edge Act bank organized under the laws of the United States. Its main office is located in New York and it too is a wholly-owned subsidiary of Banco Cafetero Bogota. Likewise, its account at Irving Trust is a demand account.

On March 8, 1985, the government filed eight complaints in forfeiture against the eight bank accounts, alleging that the defendants-in-rem are subject to forfeiture pursuant to 21 U.S.C. § 881 because they were furnished or intended to be furnished in exchange for a controlled substance in violation of Title 21 of the United States Code, constitute proceeds traceable to an exchange of a controlled substance in violation of Title 21, and/or were used to facilitate a violation of Title 21.

The government obtained warrants for the arrest of the defendants-in-rem seeking to seize all of the moneys and property in the accounts. They subsequently amended the warrants so that they seized only moneys in the accounts attributable to FIB.

The exact amount of moneys presently under seizure is unclear. According to the most recent papers submitted by the government, the following amounts are presently under arrest: $2,000,000 in Ban-co Cafetero Panama’s account at Irving Trust; $2,552,000 in Banco Cafetero Panama’s account at Marine Midland; $299,-729.68 in Banco Cafetero Panama’s account at First Chicago; $54,585 in Banco Cafetero Panama’s account at Chemical Bank; and $323,000 in Banco Cafetero Colon’s account at Irving Trust. Two other restrained accounts have a negative balance: Banco Cafetero Panama’s account at Philadelphia National Bank and Banco Cafetero International’s account at Irving Trust. The last account, Banco Cafetero Bogota’s account at Irving Trust, was unrestrained upon the government’s consent.

DISCUSSION

The expropriated banks set forth several arguments to vacate the warrants of arrest. These arguments fall into four main categories: the inadequacy of the complaints; the failure to seize a forfeitable res; the failure to show probable cause; and the unconstitutional application of the seizure procedures. Although we will deal with each argument one at a time, we note that many of the issues are interrelated.

Section 881 of Title 21, which provides for the forfeiture of property connected to illicit drug traffic, states in relevant part as follows:

(a) The following shall be subject to forfeiture to the United States and no property right shall exist in them:
>(t sjc $ sj< }¡c }|C
(6) All moneys, negotiable instruments, securities, or other things of value furnished or intended to be furnished by any person in exchange for a controlled substance in violation of this sub-chapter, all proceeds traceable to such an exchange, and all moneys, negotiable instruments, and securities used or intended to be used to facilitate any violation of this subchapter, except that no property shall be forfeited under this paragraph, to the extent of the interest of an owner, by reason of any act or omission established by that owner to have been committed or omitted without the knowledge or consent of that owner.
(b) Any property subject to forfeiture to the United States under this subchapter may be seized by the Attorney General upon process issued pursuant to the Supplemental Rules for Certain Admiralty and Maritime Claims by any district court of the United States having jurisdiction over the property____ .

21 U.S.C. § 881 (1982).

A. The Complaints

The expropriated banks argue that the government’s action in this matter violated the applicable Supplemental Rules for Certain Admiralty and Maritime Claims (the “Admiralty Rules”) because the complaints failed to comply with these Rules. The Admiralty Rules provide as follows: “In actions in rem the complaint shall be verified on oath or solemn affirmation. It shall describe with reasonable particularity the property that is the subject of the action and state that it is within the district or will be during the pendency of the action.” Rule C(2). Also, “the complaint shall state the circumstances from which the claim arises with such particularity that the defendant or claimant will be able, without moving for a more definite statement, to commence an investigation of the facts and to frame a responsive pleading.” Rule E(2)(a).

1. Rule C(2) and Verification

The expropriated banks first contend that the complaints have not been properly verified because the complaints are not made upon personal knowledge but rather upon unstated information and belief. Moreover, contend the banks, the purported verification is signed by someone other than the person signing the complaint and it too rests upon unstated information and belief.

Rule C is silent as to the form of verification required. “In the absence of anything to the contrary in the local rules of the District within which the Complaint is filed, compliance with the verification procedures of the forum state should be sufficient.” 7A J. Moore & A. Pelaez, Moore’s Federal Practice ¶ C.08 at 662 (2d ed. 1983) (footnote omitted). We find that the complaints have been properly verified.

Verification will be sufficient “if the affiant states that he knows or ‘verily believes the facts stated in the pleading to be true.’ ” 2A J. Moore & J. Lucas, Moore’s Federal Practice ¶ 11.05 at 11-24 (2d ed. 1985) (footnote omitted). “[T]he sole purpose [of verification] is to cause an authorized official of the government to satisfy himself that the averments in the complaint are true, based either upon hismwn knowledge or upon information and belief.” 7A J. Moore & A. Pelaez, Moore’s Federal Practice ¶ B.09 at B-402 (2d ed. 1983).

[W]hile it is not required that the verifying plaintiff have detailed personal knowledge of the transactions or events that give rise to the suit ..., it is essential that “some person, party, attorney, advisor, or otherwise has responsibly investigated the allegations at the behest of the named plaintiff, who then stands behind the merits of the complaint.” Rogosin v. Steadman, 65 F.R.D. 365, 367 (S.D.N.Y.1974).

Brown v. Hart, Schaffner & Marx, 96 F.R.D. 64, 67 (N.D.Ill.1982).

The complaints in these actions are signed by an Assistant United States Attorney based upon his information and belief. The complaints contain a verification by a Special Agent of the United States Department of Treasury, U.S. Customs Service, based upon both personal knowledge and information and belief. This satisfies the purpose and design of verification of pleadings — to insure that an individual has responsibly investigated the allegations and found them to have substance.

2. Rule C(2) and Particularity

The expropriated banks next contend that the complaints fail to describe with reasonable particularity the property that is subject to the alleged forfeitures. The purpose of the particularity requirement is to enable the marshal to arrest the res described or, if it is intangible property, to enable the clerk to issue a summons directing those in control of the property to show cause why it should not be paid into court. 7A J. Moore & A. Pelaez, Moore’s Federal Practice ¶ C.09 at 663 (2d ed. 1983). The complaints and the amended warrants for arrest fulfill this purpose.

The defendants-in-rem are adequately described. The complaints describe the defendants-in-rem as bank accounts of the named expropriated banks maintained at the named custodial banks. In most instances, the number of the bank account is set forth. The warrants for arrest track the language of the complaints describing the defendants-in-rem and further limit the seized res to include only the moneys that belong to or are connected with FIB. These descriptions are sufficient. Moreover, in such a situation, any insufficiency is not grounds to vacate the warrants for arrest. Cf. id. (“[T]he admiralty has never displayed a tendency to defeat claims as a result of technical niceties, and coalesence of admiralty and civil procedures was surely not intended to alter that practice.”) (footnote omitted).

3. Rule E and Circumstances

Lastly, the expropriated banks argue that the complaints fail to state adequately the circumstances from which the claims arise. The government argues that all of the facts supporting its grounds for probable cause for seizure need not be set forth on the face of the complaint.

The purpose of Rule E is to provide those with an interest in the res and those named as defendants in the suit with specific information about the cause of action. Id. at ¶ E.03, E-102. Although the liberal pleading requirements apply to actions in rem, the complaint must apprise the defendant or those with an interest in the res of the basis of the complaint. Id. at E-103 to 104. The pleading of a legal conclusion without any facts upon which the conclusion is based will not suffice. Id. at E-104.

In the instant case, the complaints simply allege that the defendants-in-rem are subject to forfeiture pursuant to 21 U.S.C. § 881 because those money were

furnished or intended to be furnished in exchange for a controlled substance in violation of Title 21, United States Code, constitute[ ] proceeds traceable to an exchange of a controlled substance in violation of Title 21, United States Code, and/or [were] used to facilitate a violation of Title 21, United States Code.

Complaints ¶ 4. Alone, these allegations do not satisfy Rule E’s requirement. However, the expropriated banks have been apprised of the basis of the complaints through other means — discussions with Assistant United States attorneys, a flowchart of the tainted moneys’ stream, and an affidavit of a Special Agent of the United States Customs Service used to support similar warrants of arrest seizing moneys maintained by FIB at CNB and Tower. Moreover, “it should go without saying that failure to abide with the pleading requirements should constitute a defect that can be freely remedied by amendment, and that the amended pleading should relate back to the date of the original filing so that it is not necessary to release property previously arrested or attached.” 7A J. Moore & A. Pelaez, Moore’s Federal Practice ¶ E.03 at E-106 (2d ed. 1983). Therefore, although the complaints are inadequate and should be amended, such defects cannot be a basis to vacate the warrants of arrest.

B. Forfeitable Res

The expropriated banks argue that the seized accounts do not contain a forfeitable res because the sums seized by the government are not “proceeds” traceable to an illicit exchange within the meaning of 21 U.S.C. § 881. They contend that the only purpose of the funds wired from FIB’s account at CNB to Banco Cafetero Panama’s account at Irving Trust was to cover overdrafts, pursuant to the clearing agreement between FIB and Banco Cafetero Panama. These funds are then pooled with all the other funds from other sources credited to Banco Cafetero Panama’s account and subsequently are disbursed. Accordingly, argue the expropriated banks, there is no way to trace the funds wired by CNB on account of FIB once they are credited to Banco Cafetero Panama’s account. If we were to accept this argument, we would create a loophole by which to launder illegal moneys.

In support of their argument, the expropriated banks cite Miller v. Wells Fargo Bank International Corp., 540 F.2d 548 (2d Cir.1976), in which the Second Circuit stated that

[mjoney deposited in a general account at a bank does not remain the property of the depositer. Upon deposit of funds at a bank, the money deposited becomes the property of the depositary bank; the property of the depositor is the indebtedness of the bank to it, a mere chose in action.

Id. at 560. This case, however, does not stand for the proposition that the government cannot trace and seize the proceeds of narcotics transactions now in the form of account credits.

The expropriated banks acknowledge that, when drug traffickers have deposited sums with a bank, the traffickers arguably create a forfeitable chose in action. They contend that “[t]he only res even arguably traceable to the purportedly illicit F.I.B. transactions would be the choses in action which came into existence in favor of F.I.B. upon the consummation of the transfers.” Claimants’ Reply Memorandum of Law in Support of Motion to Vacate Warrants for Arrest in Rem at 7. However, argue the banks, these choses in action are in the possession of FIB, and are not contained in the seized accounts. The government states, in a letter dated March 21, 1985, that it seeks forfeiture of the defendants-in-rem because “there is probable cause to believe that the accounts contain monies traceable to narcotics transaction. In this regard, the United States stands in the shoes of FIB and is entitled to any credit which FIB may have against Banco Cafetero funds.” The expropriated banks argue that the warrants for arrest do not seek to seize such credits. Rather, contend the banks, the government has seized the expropriated banks’ property, their choses in action against their own banks such as Irving Trust Company. Moreover, they point out that their accounts contain the funds of other customers besides FIB.

However, even if we were to accept their argument, the expropriated banks have not explained why the accounts cannot be seized if Banco Cafetero Panama was a knowing participant. In a declaration, a Special Agent of the United States Customs Service declared that he has “been informed that the United States has in its possession information establishing probable cause to believe that Banco Cafetero Panama was a knowing recipient of the proceeds of narcotics transactions. Most of this information is not yet public and I am informed that the revelation of this information at this time will jeopardize ongoing United States law enforcement operations.” Declaration of Douglas Loo, II 2. The expropriated banks do not directly contradict this declaration except to argue that they

did not obtain the funds seized in these accounts in exchange for a controlled substance and they are not and could not be claimed to have used those funds to facilitate any illicit transactions. When they do business with their customers, such as Chemical Bank and Citibank, they are not purchasing controlled substances. They are conducting legitimate bank business.

Claimants’ Reply Memorandum of Law in Support of Motion to Vacate Warrants for Arrest in Rem at 8. They also argue that the property of the banks is not the proceeds of alleged illicit transactions, citing to an affidavit of the Executive Vice President of Banco Cafetero Panama, wherein he explains the workings of the expropriated banks’ accounts. See Order to Show Cause, Arango Affidavit ¶¶ 8-12. The government, however, seems to take the position that the relationship between Ban-co Cafetero Panama and its customer, FIB, also involved illegitimate transactions on both sides. The government asserts not only that the accounts contain moneys that are proceeds traceable to narcotics transactions but also that the restrained moneys and accounts were used to facilitate narcotics trafficking and the laundering of narcotics proceeds. The government asserts that it has probable cause to believe that the restrained accounts contain moneys forfeitable under each of these theories.

If Banco Cafetero Panama was a knowing participant in the laundering of narcotics proceeds, the government can seize these accounts as traceable proceeds and perhaps under the other theories. The legislative history of section 881(a)(6) would support such a seizure:

Due to the penal nature of forfeiture statutes, it is the intent of these provisions that property would be forfeited only if there is a substantial connection between the property and the underlying criminal activity which the statute seeks to prevent. Specifically, the Senate amendment provides for the forfeiture of property exchanged or intended to be exchanged in an illegal drug transaction. In addition it provides for forfeiture of property which is the proceeds of an illegal drug transaction only if there is a traceable connection between such property and the illegal exchange of controlled substances. Thus if such proceeds were, for example, commingled with other assets, involved in intervening legitimate transactions, or otherwise changed in form: they would still be subject to forfeiture, but only to the extent that it could be shown that a traceable connection to an illegal transaction in controlled substances existed. Similarly, any moneys, negotiable instruments, or securities that were used or intended to be used to facilitate any violation of the Controlled Substances Act would be forfeitable only if they had some substantial connection to or were instrumental in, the commission of the underlying criminal activity which the statute seeks to prevent.

124 Cong.Ree. S17647 (daily ed. Oct. 7, 1978) (Joint Explanatory Statement of Titles II and III, reprinted in 1978 U.S.Code Cong. & Ad.News 9496, 9518, 9522-23) (emphasis added). The government has seized a forfeitable res.

However, the warrants attempt to attach after-acquired property (“new moneys”). Rule C of the Admiralty Rules is silent as to the propriety of arresting after-acquired property. Recently, the Second Circuit “read these rules not as prohibiting attachment of after-acquired property but as demonstrating only that attachment is impossible unless the person or institution possessing the property is contacted at some point.” Reibor International Ltd. v. Cargo Carriers (KACZ-CO.) Ltd., 759 F.2d 262, 265 (2d Cir.1985). It then held invalid a garnishment served before the garnishee came into possession of the property to be garnished. Likewise, we find the arrest of new moneys by the warrants invalid. Therefore, the seizures are ineffective to the extent they attempt to arrest new moneys.

C. Probable Cause

The expropriated banks argue that they are entitled to an order vacating the warrants for arrest because the government has not met its statutory burden of establishing probable cause. They contend that before the government can institute a forfeiture action it must show probable cause, which, they argue, it clearly has not done. The government argues that it need not show probable cause at this time; instead, the showing of probable cause for forfeiture is an issue reserved for trial and tested as of that time. In any event, contends the government, it has provided this Court and the expropriated banks with overwhelming evidence that the seized accounts received substantial sums of money, directly traceable to a narcotics operation in Colombia and, therefore, the seizures were proper.

The burden of proof in a forfeiture action is set forth in 19 U.S.C. § 1615, as incorporated by 21 U.S.C. § 881(d):

In all suits or actions ... brought for the forfeiture of any vessel, vehicle, merchandise, or baggage seized under the provisions of any law relating to the collection of duties on imports or tonnage, where the property is claimed by any person, the burden of proof shall lie upon such claimant ...: Provided, that probable cause shall be first shown for the institution of such suit or action, to be judged of by the court____

19 U.S.C. § 1615 (1982). Thus, “once the government has met its burden of showing probable cause to institute the forfeiture action, the burden then shifts to the claimant to show by a preponderance of the evidence that the property was not subject to forfeiture.” United States v. Twenty-Two Thousand, Two Hundred Eighty Seven Dollars ($22,287.00), United States Currency, 709 F.2d 442, 446 (6th Cir.1983).

The government must show probable cause for belief that the seized property was used in violation of the narcotics laws, i.e., was furnished in exchange for drugs, was proceeds traceable to such an exchange, and/or was used to facilitate a drug transaction. Id. at 446-47. If the government succeeds in showing probable cause to institute the forfeiture proceeding, the burden shifts to the claimant to show by a preponderance of the evidence that the property was not furnished in exchange for a controlled substance, was not proceeds traceable to such an exchange, and/or was not used to facilitate a drug transaction. See United States v. $93,685.61 in U.S. Currency, 730 F.2d 571, 572 (9th Cir.), cert. denied, — U.S. -, 105 S.Ct. 119, 83 L.Ed.2d 61 (1984); United States v. Eighty Three Thousand Three Hundred Twenty Dollars ($83,320) in United States Currency and Forty Dollars ($40) in Canadian Currency, 682 F.2d 573, 577 (6th Cir.1982); United States v. Three Hundred Sixty Four Thousand Nine Hundred Sixty Dollars ($364,960.00) in United States Currency, 661 F.2d 319, 325 (5th Cir.1981).

The probable cause which the government must show is: “a reasonable ground for belief of guilt, supported by less than prima facie proof but more than mere suspicion.” United States v. One 1978 Chevrolet Impala, 614 F.2d 983, 984 (5th Cir.1980); United States v. One 1975 Mercedes 280S, 590 F.2d 196 (6th Cir.1978). In making its probable cause showing, however, the government must also establish a nexus “ ‘between the property to be forfeited and the criminal activity defined by the statute;’ i.e., the exchange of a controlled substance.” United States v. $364,960.00 in U.S. Currency, 661 F.2d 319, 323 (5th Cir.1981).

The government need not establish probable cause when it commences a forfeiture action and obtains the warrants for arrest. Rule C(3) of the Admiralty Rules outlines the process for seizure as follows: “Upon the filing of the complaint the clerk shall forthwith issue a warrant for the arrest of the vessel or other property that is the subject of the action and deliver it to the marshal for service.” Thus, the rules contemplate that the clerk shall issue the warrants for arrest and the court shall determine whether the government had probable cause. Logic, therefore, dictates that probable cause need not be shown when the government obtains the warrants for arrest. Ultimately, the government must show that it had probable cause at the time of commencement of the actions. It need not establish this, however, until the forfeiture trial.

The expropriated banks also contend that the government has failed to show the requisite knowledge of the expropriated banks. They argue that the government seized the accounts without probable cause to believe that the acts or omissions which would bring these accounts within section 881(a)(6) were committed or omitted with the knowledge or consent of the owners of the accounts. Moreover, contend the banks, none of the expropriated banks had any knowledge of or gave consent to improper acts or omissions. As noted earlier, the government takes the position that Banco Cafetero Panama was a knowing participant in the alleged laundering scheme. These issues, however, are also ones reserved for the forfeiture trial.

The expropriated banks argue that they have suffered irreparable harm and will continue to suffer irreparable injury if the warrants for arrest are not vacated. They contend that (1) the government’s seizure has damaged their reputation both within the United States and internationally, (2) customers may cease doing business with the banks because of the government’s seizure, and (3) they may be unable to honor commercial commitments to customers other than FIB by virtue of the seizures and, therefore, they will be liable for millions of dollars of claims. The government contends that any injury the expropriated banks will suffer in the absence of preliminary relief is economic injury, compensable in monetary damages. The government argues that this is not a reason to vacate the warrants. We agree that this reason alone is not grounds to vacate the warrants; however, it is a reason for the Court to hold a prompt hearing to determine whether the government and/or the expropriated banks have met their respective burdens. See Castleberry v. Alcohol, Tobacco and Firearms Division of the Treasury Department of the United States, 530 F.2d 672, 675 n. 5 (5th Cir.1976).

The government argues that the Court can rely on the declarations and affidavits submitted by the government for its determination that the government had probable cause. The expropriated banks contend that the government’s affidavits are insufficient because they are based upon information and belief, merely reveal a difference of opinion, and fail to set forth concrete facts. The banks contend that their affidavits set forth the nature of FIB’s relationship with Banco Cafetero Panama which demonstrates the legality of the transactions and moneys. They argue that the government has not contradicted these affidavits except with suspicions and speculations, which are inadequate to overcome the banks’ presentation. We find both parties’ affidavits insufficient to determine the issues at bar. For example, peppered throughout the government’s papers are assertions that not all of the information in the government’s possession relating to the events and transactions at issue has been set forth. Without this information, the Court cannot determine many of the issues, such as the basis for the government’s belief that Banco Cafetero Panama was a knowing participant. Just as the government’s papers are lacking in information, so too are the expropriated banks’ papers. For example, they do not address the government’s assertion that Banco Cafetero Panama was a knowing participant. Although the banks explain some of the legal transactions between FIB and Banco Cafetero Panama, they do not claim that these are the only transactions between them. Therefore, the Court cannot make any final determination on the present papers. We cannot have a trial on the ultimate merits by affidavits alone. Cf. In re Behrens, 39 F.2d 561, 563 (2d Cir.1930) (In a summary proceeding for return of seized property, the court found “the undesirability of deciding the merits upon affidavits is peculiarly present because the affidavits are insufficient to let us know [certain details].”). See generally 6 (Part 2) J. Moore & J. Wicker, Moore’s Federal Practice ¶ 56.22 (2d ed. 1982) (discussing the form of affidavits).

D. Constitutional Contentions

The expropriated banks contend that the government’s seizures of the accounts violate the fifth amendment of the United States Constitution. They argue that Rule C of the Admiralty Rules is unconstitutional as applied because it fails to comply with the minimal standards of procedural due process: there was no review by any judicial official of the facts underlying the claim; no proper governmental interest has been advanced; and the government’s information appeared to be at least ten months old. The most egregious prejudice, argue the banks, is the government’s failure to provide them with a prompt post-seizure hearing. We do not find the seizures unconstitutional as applied.

Rule C has been in force for many years without a court declaring it unconstitutional per se. Although there have been some, but not a majority, of district courts that have found the Rule unconstitutional as applied, no circuit court has found Rule C unconstitutional as applied in circumstances like the ease at bar.

Moreover, Rule 12 of the Admiralty and Maritime Claims Rules of the United States District Courts for the Southern and Eastern Districts of New York provides for a hearing at which the claimants can contest various procedures, and the expropriated banks took advantage of this rule. On Friday, March 8, 1985, the accounts were seized, and on Wednesday, March 13, 1985, the expropriated banks moved for an order that the government show cause why the warrants should not be vacated. A hearing was held on Friday, March 15, 1985. At that time, the expropriated banks contested several aspects of this action, as discussed in this opinion. A decision took some time to be rendered, primarily due to the many subsequent papers submitted by both parties and the shifting issues. The Court has determined that an additional hearing must be held. Any unconstitutional infirmities have been alleviated by the availability of a hearing under Rule 12 and by the' subsequent hearing to be conducted.

CONCLUSION

At this time, we are compelled to deny the expropriated banks’ motion to vacate the warrants except to the extent that the warrants are ineffective as to after-acquired property. We do see a need to have a prompt hearing on the merits. Therefore, such a hearing will be held as soon as the Court’s calendar permits and the parties are ready. Meanwhile, the parties are to conduct discovery on an expedited basis and we expect the government, as it has represented to the Court, to release any moneys and accounts that it subsequently finds not to be attributable to FIB.

SO ORDERED.

      . Throughout the opinion, we will refer to the amended warrants as the warrants and, where necessary, we will distinguish between the original and amended warrants.

      . Numerous statutes of the United States provide for the forfeiture of property used in violation of federal law in a maritime proceeding in rem or in a proceeding analogous thereto. And, the United States Code further provides in a catch-all provision [28 U.S.C. § 2461(b) ] that:
      "Unless otherwise provided by Act of Congress, whenever a forfeiture of property is prescribed as a penalty for violation of an Act of Congress and the seizure takes place on the high seas or on navigable waters within the admiralty and maritime jurisdiction of the United States, such forfeiture may be enforced by libel in admiralty but in cases of seizures on land the forfeiture may be enforced by a proceeding by libel which shall conform as near as may be to proceedings in admiralty."
      In practical effect, that means that forfeitures in the federal courts within- the admiralty jurisdiction and those outside that jurisdiction may be handled the same procedurally, except that the claimants of property seized on land may be entitled to a jury trial. Many land seizures, even though in rem, have long been deemed common law actions that carry with them a constitutional right of jury trial. Notwithstanding that one vital difference, both the now superseded Supreme Court Admiralty Rules and the presently applicable Supplemental Rules of Civil Procedure governing Admiralty and Maritime Claims contain provisions governing these actions.
      7A J. Moore & A. Pelaez, Moore's Federal Practice ¶ C.11 at 669 (2d ed. 1983) (footnotes omitted).

      . The government does not contend, nor could it possibly contend, that the complaints need not be verified.
      It has been held under the rescinded [Supreme Court] Admiralty Rules that [the verification] requirement does not apply to an in rem action commenced by the United States. However, the authority for that conclusion is somewhat suspect, and the plain language of ... Rule [C] makes mention of no such exception. Because of the onerous economic impact arrest ... can have, and because verification poses no appreciable barrier to the performance of governmental functions, it is not believed that the authority dispensing with the government's need to obtain verification should be followed today.
      7A J. Moore & A. Pelaez, Moore’s Federal Practice ¶ C.08 at 661 (2d ed. 1983) (footnote omitted).

      . According to a standard treatise, the following form of verification is sufficient:
      State of ...................) ss.:
      County of .................)
      Robert A. Johnson, being duly sworn, deposes and says that he resides at............; that he is the plaintiff herein; and that he has read the foregoing complaint and knows the contents thereof and that the same are true of his own knowledge except as to the matters therein stated to be alleged on information and belief, and as to those matters he believes them to be true.
      2A J. Moore & J. Lucas, Moore's Federal Practice ¶ 11.05 at 11-24 n. 1 (2d ed. 1985).

      '. "[A] Complaint in rem that does not contain a verification can be amended to cure that defect.” 7A J. Moore & A. Pelaez, Moore’s Federal Practice ¶ C.08 at 662 (2d ed. 1983).

      . As discussed, the warrants originally sought to seize all the moneys in the accounts. The government subsequently amended the warrants such that they sought to seize only the moneys traceable or attributable to FIB. The complaints still seek forfeiture of everything in the accounts. Obviously, these need to be amended; but this is not grounds to vacate the warrants.

      . Admittedly, there may be some difficulty in determining whether money belongs to, or is connected with, FIB, but this is not a reason to vacate the warrants. Some of the custodial banks seem to be having problems. In fact, Marine Midland has moved to amend or vacate the warrants on the grounds that it cannot determine what money is connected to FIB. We must deny this motion for the reasons stated. However, the government should provide further guidelines to the custodial banks.

      . The expropriated banks contend that this flowchart contains information that is at least ten months old. Subsequent affidavits, however, contain more recent information.

      . The government can levy upon and seize an intangible res such as account credits. Money laundering is an attempt to conceal the true source, amounts, and cash nature of funds derived from narcotics transactions. Sometimes, the moneys may be transformed into other forms. These forms may be seized by the government under 21 U.S.C. § 881 as traceable proceeds. Even if the new form is an intangible res, such as account credits, the government may seize it. Money is legal tender; it is the promise of the Federal Reserve to pay the face amount of the bill. Otherwise, green money is just paper. It is as intangible as account credits. Just as the government can seize the green papers we call "cash,” it can seize account credits.

      . The expropriated banks do contend that the declaration of the Special Agent is conclusory and not sufficient to overcome their affidavits. The cases cited by the banks involve affidavits insufficient to defeat motions for summary judgment. Such a motion is not before us.

      . If Banco Cafetero Panama was a knowing participant, the link to seize the other Banco Cafetero accounts is stronger. We reserve this issue for the subsequent hearing.

      . The expropriated banks also argue that there is no justification for seizing any money that came into the accounts between March 8, when the initial warrants were served, and March 18 and 19, when the amended warrants were served. Although the Court tends to agree, the government has not directly addressed this issue. Until we know the amount of new moneys seized and the government’s reason for seizing them, the Court reserves this issue for the subsequent hearing.
      There appears to be an additional problem with the warrants: they are not all limited to a specific amount, i.e., the traceable proceeds. It is possible that the government believes that there is no limit because the moneys and accounts were allegedly used to facilitate drug transactions and money-laundering. In any event, the government initially sought to seize $31 million ($27 million from FIB’s account at CNB and $4 million from FIB’s account at Tower), and the amount of money seized in all the accounts is less than this total.

      . The provisions of law relating to the seizure, summary and judicial forfeiture, and condemnation of property for violation of the customs laws ... shall apply to seizures and forfeitures incurred, or alleged to have been incurred, under any of the provisions of this subchapter, insofar as applicable and not inconsistent with the provisions hereof....
      21 U.S.C.A. § 881(d) (West Supp.1985).

      . Section 881(a)(6) provides that “no property shall be forfeited under this paragraph, to the extent of the interest of an owner, by reason of any act or omission established by that owner to have been committed or omitted without the knowledge or consent of that owner.” 21 U.S.C. § 881(a)(6) (1982).

      . The expropriated banks also argue that the government’s seizure constitutes an unreasonable seizure of property in violation of the fourth amendment. This is merely a reargument, in constitutional terms, of the probable cause argument discussed above. We find their . argument unpersuasive.

      . See, e.g., Alyeska Pipeline Service Co. v. Bay Ridge, 509 F.Supp. 1115 (D.Alaska 1981), appeal dismissed, 703 F.2d 381 (1983), cert. denied, - U.S. -, 104 S.Ct. 3526, 82 L.Ed.2d 852 (1984). This in rem action to recover the cleanup costs of an oil spill involved the arrest of the offending vessel pursuant to Rule C by the private party who cleaned the spill. The court found the application of Rule C unconstitutional because only private interests were involved, a clerk issued the warrant of arrest without judicial participation, and there was no opportunity for a prompt post-seizure hearing. However, the court acknowledged that when local court rules add the steps demanded by the due process requirement, e.g., post-seizure hearing, Rule C is constitutional.
      In the case at bar, the opportunity for a post-seizure hearing could be, and in fact was, obtained. Moreover, a public interest is involved. The government has a substantial interest in controlling and curbing violations of narcotics laws. See United States v. One 1971 BMW 4-Door Sedan, 652 F.2d 817, 821 (9th Cir.1981).

      . In Lee v. Thornton, 538 F.2d 27 (2d Cir.1976), the Second Circuit found unconstitutional the administrative procedures of detaining automobiles at border crossings. These procedures are conducted pursuant to various statutes, including 21 U.S.C. § 881. The court discussed the ability of the vehicle owner to initiate forfeiture proceedings to contest liability, but found that remedy impracticable under the circumstances. Weighing the need of a vehicle owner to be free from unreasonable detention against the inconvenience to the government of providing a prompt determination of the legality of the detention, the court held that a hearing on probable cause should be available within 72 hours. We are not confronted with similar considerations here except to the extent that funds of other clients may be frozen, which is a different concern considered elsewhere.

      . The Judicial Conference Advisory Committee on the Federal Rules of Civil Procedure has proposed certain amendments to the Federal Rules of Civil Procedure. One proposal would amend Rule C to make available a prompt post-seizure hearing designed to satisfy the constitutional requirements of due process. It would guarantee a prompt hearing at which time the claimant can attack the complaint, the arrest, or any alleged deficiency in the proceedings up to that point. This proposed rule is based on Local Rule 12 of the Southern District of New York.