Lep Group PLC (Lep) is a London-based holding company with some fifty subsidiaries in thirty countries. Lep’s “ordinary shares,” the British equivalent of common stock, are registered in the United Kingdom, obligating the company to comply with United Kingdom securities laws. In 1988, to create a U.S. market for its ordinary shares, Lep deposited 12,842,850 of its approximately 136 million shares in an American depository, which in turn issued an American Depository Receipt (ADR) for each five ordinary shares of Lep deposited. Because these ADRs trade in the form of American Depository Shares (ADSs) on the National Association of Securities Dealers Automated Quotation System (NASDAQ) (http://www.nasdaq.com), Lep is subject to the reporting and disclosure requirements of United States securities law.

Itoba Limited is a wholly owned subsidiary of A.D.T. Limited (ADT). ADT is a transnational holding company based in Bermuda. Its shares are listed on the New York Stock Exchange and approximately 50 percent of its shareholders of record reside in the United States. ADT also is the corporate parent of A.D.T. Securities Systems, Inc. (http://www.adt.com), a Delaware-based firm and one of America’s largest suppliers of security and protection services.

In mulling over expansion plans for A.D.T. Securities Systems, ADT considered the possible acquisition of one of A.D.T. Securities Systems’s largest competitors in the U.S. security market, National Guardian. ADT already owned a small interest in that corporation through shares it held of Lep, the parent company of National Guardian. Because ownership of Lep would lead to control of National Guardian, ADT considered increasing its Lep holdings.

At the same time, Canadian Pacific (http://www.cpr.ca/ Internet/CPRPortal.asp) was pondering a sizable investment in Lep, so Canadian Pacific and ADT agreed to explore a joint purchase of Lep. Canadian Pacific hired S.G. Warburg), a London investment bank, to evaluate Lep’s business operations. ADT also performed an in-house valuation of Lep. In December 1989, S.G. Warburg issued an extensive report assessing Lep’s prospects. The analysis in this report was based on Lep’s U.K. annual reports; the Form 20–F that Lep filed with the U.S. Securities and Exchange Commission for the year ended December 31, 1988; Lep’s shareholder register; and broker reports. Shortly after the Warburg report was issued, Canadian Pacific abandoned the proposed joint venture. ADT’s interest, on the other hand, did not diminish. ADT continued its examination of Lep, relying heavily on the Warburg report. To supplement its research, ADT obtained from Canadian Pacific a copy of Lep’s Form 20-F for 1988.

Based on its own analyses and a review of the Warburg report, ADT decided to acquire Lep by making anonymous purchases on the market through Itoba. By November 1990, Itoba had acquired more than 37 million Lep ordinary shares for approximately $114 million, paid for by ADT. Before ADT could complete its planned acquisition, however, Lep disclosed a series of business reversals that decimated its share value; Lep’s stock price plummeted 97 percent and the value of Itoba’s holdings in Lep declined by nearly $111 million. Lep wrote off approximately $522 million from its books for the fiscal year ended December 31, 1991.

Itoba sued Lep and its officers in a U.S. district court, asserting violations of the Securities Exchange Act of 1934. According to Itoba, Lep failed to disclose material matters in statements filed with the SEC. Specifically, Itoba alleged that Lep made high-risk investments and engaged in speculative business ventures without informing the investing public. Itoba claimed that had these matters been properly disclosed, it would not have purchased Lep’s stock at artificially inflated prices. The defendants moved to dismiss Itoba’s claims for lack of subject matter jurisdiction. Does the district court have jurisdiction? Explain.