Absolute Activist Value Master Fund Ltd. v. Ficeto
677 F.3d 60, 2012 WL 1232700 (2012)
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Rule of Law:
For securities not traded on a domestic exchange, a transaction is considered 'domestic' and subject to Section 10(b) of the Securities Exchange Act only if irrevocable liability to take or deliver a security is incurred within the United States, or if title to the security is transferred within the United States.
Facts:
- Nine Cayman Islands hedge funds (the 'Funds') retained Absolute Capital Management Holdings Limited ('ACM') to act as their investment manager.
- Florian Homm, ACM’s Chief Investment Officer, held power of attorney to invest on the Funds' behalf.
- Homm, along with Todd Ficeto and his California-based, SEC-registered broker-dealer firm, Hunter World Markets, Inc. ('Hunter'), allegedly orchestrated a 'pump-and-dump' scheme.
- The scheme involved causing the Funds to buy billions of shares in thinly capitalized U.S. companies ('U.S. Penny Stocks') through private offerings.
- The defendants artificially inflated the prices of these stocks by executing trades between the various Funds through Hunter, creating the appearance of high trading volume.
- After the prices were inflated, the defendants sold their own holdings in these same stocks, which they had acquired for little to no cost, to the Funds at the inflated prices.
- The scheme resulted in the defendants reaping enormous profits while causing the Funds to suffer losses of at least $195 million.
- Other defendants, including Sean Ewing and Ullrich Angersbach of ACM, allegedly furthered the scheme by marketing the Funds to investors, including in the United States, and misrepresenting the Funds' investments.
Procedural Posture:
- The Funds filed a complaint in the United States District Court for the Southern District of New York, asserting claims under § 10(b) of the Securities Exchange Act and common law.
- Certain defendants moved to dismiss the complaint for failure to state a claim and lack of personal jurisdiction.
- After oral argument on the motions, the U.S. Supreme Court issued its decision in Morrison v. National Australia Bank Ltd.
- Acting sua sponte (on its own initiative), the district court dismissed the Funds' complaint in its entirety, ruling that under Morrison it lacked subject matter jurisdiction over the case.
- The Funds, as appellants, appealed the dismissal to the U.S. Court of Appeals for the Second Circuit.
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Issue:
For securities not listed on a domestic exchange, does a purchase or sale constitute a 'domestic transaction' subject to Section 10(b) of the Securities Exchange Act where the parties do not allege facts showing that they incurred irrevocable liability or that title passed within the United States?
Opinions:
Majority - Katzmann, J.
No. For a securities transaction not listed on a domestic exchange to be considered 'domestic' under Section 10(b), plaintiffs must allege facts showing that irrevocable liability was incurred or title was transferred within the United States. Following the Supreme Court's decision in Morrison, which established a transactional test and rejected the prior 'conduct and effects' test, the focus is solely on the location of the securities transaction. The court rejected alternative tests based on the location of the broker, the nationality of the security's issuer, or the residency of the parties involved. Instead, drawing from contract law, the court determined that a purchase or sale occurs where the parties become irrevocably bound to the transaction or where title passes. Because the Funds’ complaint made only conclusory allegations that the transactions occurred in the United States without pleading specific facts to support this, it failed to state a claim. However, given the significant change in law since the complaint was filed, the court granted the Funds leave to amend their complaint to add such factual allegations.
Analysis:
This decision is one of the first and most influential Circuit Court opinions to interpret the second prong of the Supreme Court's 'transactional test' from Morrison. It establishes a clear, bright-line rule for what constitutes a 'domestic transaction,' shifting the focus from where fraudulent conduct occurred to where the legal formalities of the transaction were completed. This holding significantly narrows the extraterritorial reach of U.S. securities fraud laws for transactions not on a domestic exchange. It creates a higher, more specific pleading standard, requiring plaintiffs in future international securities fraud cases to pinpoint the precise location of contract formation or title transfer to survive a motion to dismiss.
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