672 F.3d 143
2d Cir.2012Background
- Nine Cayman Islands hedge funds engaged Absolute Capital Management Holdings Limited as investment manager during 2004–2009, paying management and performance fees.
- Defendants included ACM executives and Hunter World Markets, Inc., a broker-dealer, alleged to have orchestrated a pump-and-dump scheme involving U.S. Penny Stocks.
- Funds allegedly purchased billions of shares directly from U.S. Penny Stock Companies via PIPE offerings, with defendants acting as placement agents and earning fees.
- After initial purchases, defendants allegedly inflated prices via trading among the Funds to create false liquidity, enabling further sales at premium prices.
- The scheme allegedly raised hundreds of millions in fees while causing substantial losses to the Funds, totaling over $195 million.
- The district court dismissed the complaint after Morrison, and the Funds appealed, seeking to determine whether alleged transactions were 'domestic' under Morrison.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| What constitutes a domestic transaction under Morrison? | Funds contend transactions can be domestic even if not on a domestic exchange. | Defendants argue Morrison requires irrevocable liability or title transfer within the U.S. to be domestic. | Domestic transactions require irrevocable liability incurred or title transferred in the United States. |
| Do the complaint's allegations adequately plead a domestic transaction? | Allegations show U.S. marketing and access to U.S. investors, suggesting domestically occurring transactions. | Lack of specific facts showing where irrevocable liability or title transfer occurred. | Complaint fails to plead domestic transactions; leave to amend appropriate. |
| Should the Funds be allowed to amend their complaint? | Additional transactional documents and records could show U.S. venue of the consummation. | Amendment could be futile if facts cannot show domestic transactions. | Leave to amend should be granted; district court should permit amended pleading with new facts. |
Key Cases Cited
- Morrison v. Nat'l Australia Bank Ltd., 130 S. Ct. 2869 (U.S. 2010) (replaces conduct/effects with transactional test for domestic transactions)
- Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876 (2d Cir. 1972) (irrevocable liability as the timing of a purchase/sale)
- SEC v. Nat'l Sec., Inc., 393 U.S. 453 (U.S. 1969) (definitions of 'buy' and 'sale' include contracts to purchase/sell)
- Quail Cruises Ship Mgmt. Ltd. v. Agencia de Viagens CVC Tur Limitada, 645 F.3d 1307 (11th Cir. 2011) (title transfer location can establish domestication of a sale)