Second Circuit Underscores That Contractual Obligations Reached In The United States Can Establish That A Transaction Is “Domestic” Under The Securities Exchange Act Of 1934
06/26/2018On Tuesday, June 19, 2018, the United States Court of Appeals for the Second Circuit held that allegations that parties had reached an agreement within the United States for the sale of foreign securities established a “domestic transaction” sufficient to bring related fraud claims within the scope of U.S. securities laws under Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010). See Giunta v. Dingman, No. 17-1375 (2d Cir. June 19, 2018).
Plaintiff alleged that he conducted meetings and phone calls with defendant (the operator of restaurant companies in the Bahamas) regarding an investment in a holding company that owned a restaurant located in the Bahamas, while the parties were in New York. Slip op. at 4. Plaintiff further alleged that defendant made a number of misrepresentations, including that the holding company owned 100% of the restaurant, that plaintiff would receive a 50% equity stake in the holding company, that defendant had personally invested more than $600,000, that the holding company was profitable, and that the holding company would have only three equity stakeholders. Id. at 4-5. While the investment agreement was never reduced to writing, plaintiff allegedly wired more than $300,000 to defendant. Id. at 5-6. Eventually, defendant allegedly sent a letter to investors stating that the restaurant had closed, and revealing to plaintiff for the first time that there were additional investors, and that defendant was not a 50% owner. Id. at 6-7.
Construing the requirement in Morrison that Section 10(b) claims only apply to transactions listed on domestic exchanges and “domestic transactions in other securities,” the district court concluded that, because Bahamian law required approval by the Bahamian Investments Board and the Central Bank of the Bahamas before shares could be issued to a foreign investor, the investment did not constitute a “domestic transaction.” Therefore, plaintiff was not “irrevocably bound” to his investment through a United States transaction. Id. at 8.
The Second Circuit reversed, citing its earlier decision in Choi v. Tower Research Capital LLC, 890 F.3d 60 (2d Cir. 2018). In Choi, as discussed in our prior post, see Shearman & Sterling LLP, Second Circuit Finds Commodity Exchange Act Claims Based On Korea Exchange Futures Contracts Adequately Pleaded Under Morrison’s “Domestic Transactions” Test, Need-to-Know Litigation Weekly, May 15, 2018, the Second Circuit had found that, where trades were “matched” with counterparties in the United States but “cleared and settled” in Korea the following day, irrevocable liability attached in the United States and established a domestic transaction under Morrison. In the case at bar, the Second Circuit found that the oral investment agreement was a domestic transaction because, like Choi, the parties agreed to be obligated to each other in the United States even if those obligations were still subject to a condition subsequent.
The Second Circuit also rejected defendant’s argument that, even if the agreement were a domestic transaction, the claims were so predominantly foreign as to render them “impermissibly extraterritorial” under the Second Circuit’s prior decision in Parkcentral Global HUB Ltd. v. Porsche Automobile Holdings SE, 763 F.3d 198 (2d Cir. 2014). Id. at 16. Distinguishing Parkcentral—which involved conduct primarily in Germany that was already the basis of foreign investigations and enforcement actions—the Second Circuit held that the facts that defendant was a permanent resident of the Bahamas, the venture involved developing businesses in the Bahamas, the entities were incorporated in the Bahamas, witnesses, books, and records were in the Bahamas, and shares were issued subject to Bahamian regulations did not render the claims impermissibly extraterritorial. Id. at 19. Thus, based on plaintiff’s allegations that the agreement reached between the parties in the United States was a contract, the Court held that Section 10(b) would apply.
As reflected in this decision, the Second Circuit continues to elaborate on the contours of extraterritoriality for Section 10(b) claims, holding here that where parties reach an agreement for the sale of securities within the United States, the transaction will be considered a “domestic transaction” for the purposes of the U.S. securities laws, with any additional considerations of foreign government involvement to be considered on a case-by-case basis.CATEGORY: Exchange Act