The Second Circuit Court of Appeals issued a decision last week that confirms that there are still situations where primarily foreign securities fraud disputes may be litigated as class actions in the United States courts. The decision explores the contours of the US Supreme Court’s holding in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) that § 10(b) of the Securities Exchange Act of 1934 does not have an extraterritorial reach. Here’s a link to the opinion, courtesy of the New York Law Journal: Absolute Activist Value Master Fund Ltd. v. Ficeto, No. 11-0221-cv (2d Cir., March 1, 2012).
Morrison recognized two situations in which a securities fraud claim would be sufficiently domestic in nature to be governed by § 10(b) and SEC Rule 10b-5. The first, not at issue in Absolute Activist, is where the security is traded on a US exchange. Absolute Activist addresses the second situation, which involves “domestic transactions in other securities.” The Second Circuit’s test for whether transactions are domestic is whether “irrevocable liability is incurred or title passes within the United States.” In simpler terms, if the parties become bound to effectuate the transaction in the United States, the transaction is a domestic one, but the transaction could also be domestic if title to the securities passes within in the United States, even if the parties became bound elsewhere. In reaching this conclusion, the panel rejected several other tests proposed by the parties, including tests proposed by the plaintiff that would have looked to the location of the broker-dealer or to whether the security was issued by a US company or was registered with the SEC, and tests proposed by defendants that would look to the place of residence of both the buyer and seller in the transaction or to whether a given defendant committed some affirmative act within the United States.
Unfortunately, given the fact-intensive nature of the test articulated by the Second Circuit panel, the decision leaves open the question of what specific facts might be sufficient to establish that irrevocable liability was incurred or title transferred within the United States. The panel held that the facts in the complaint were not sufficient to meet either requirement, but remanded with instructions to allow leave to amend. However, the opinion does offer some insight into what might be sufficient. In concluding that leave to amend would not be futile, the court held pointed to representations made by counsel at oral argument that there existed “trading records, private placement offering memoranda, and other documents indicating that the purchases became irrevocable upon payment and that payment was made through Hunter in the United States.”