986 F.3d 161
2d Cir.2021Background
- Cavello Bay Reinsurance Ltd. (Bermuda) invested $5 million in Class A preferred shares in Spencer Capital Ltd. (Bermuda; principal place of business in New York) via a private offering. Closing and transfer of title occurred in Bermuda.
- Spencer Capital solicited the investment using a New York-originated pitch (PowerPoint) that misrepresented the incentive fee as 25% of profits above an 8% hurdle, when in fact the fee was 25% of increases in book value and was paid to Spencer Management (a Delaware entity controlled by the same owner).
- The subscription agreement was governed by New York law, contained a restriction requiring SEC registration (or an exemption) for resale, and was signed/countersigned through email exchanges between Bermuda and New York.
- Cavello Bay alleged securities fraud under §10(b)/Rule 10b-5, sought rescission under §29(b), and asserted control-person liability under §20(a) against Spencer Capital and Shubin Stein.
- The district court dismissed: (1) finding the transaction was not "domestic" under Absolute Activist, and (2) alternatively that the §10(b) claims were "so predominantly foreign" under Parkcentral. The Second Circuit affirmed on the Parkcentral ground, assuming (but not deciding) domesticity.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the transaction was "domestic" for §10(b) (Absolute Activist/irrevocable-liability test) | Agreement became binding in New York when countersigned; thus transaction is domestic | Binding obligations arose in Bermuda at closing; any NY acts were incidental | Appellate court assumed domestic for purposes of analysis but did not resolve the issue on the merits; affirmed on other ground |
| Whether the claims are impermissibly "so predominantly foreign" (Parkcentral focus inquiry) | Extensive U.S. contacts (NY POB, misstatements from NY, U.S. manager, SEC registration clause) make the claims domestic | Deal was between two Bermudan entities, shares not traded in U.S., closing in Bermuda; U.S. contacts relate to background not the purchase/sale | Claims are predominantly foreign; §10(b) does not apply; judgment affirmed |
| Whether NY choice-of-law and SEC-registration resale clause make the case domestic | NY law clause and SEC registration restriction show U.S. regulatory interest | Registration clause is a contingent, future condition on resale and does not convert the original purchase into a domestic transaction | Court held those contractual provisions insufficient to render the claims domestic |
| Whether §29(b) and §20(a) survive absent a §10(b) violation | Cavello Bay pursued these remedies tied to alleged §10(b) violations | Without a predicate §10(b) violation, derivative claims fail | Dismissed: derivative claims do not survive because the §10(b) claim fails |
Key Cases Cited
- Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) (articulates "irrevocable liability" test for domestic transaction)
- Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010) (limits §10(b) to domestic transactions and securities listed on domestic exchanges)
- Parkcentral Global HUB Ltd. v. Porsche Automobile Holdings SE, 763 F.3d 198 (2d Cir. 2014) (§10(b) does not reach claims that are "so predominantly foreign")
- RJR Nabisco, Inc. v. European Community, 136 S. Ct. 2090 (2016) (if conduct relevant to statutory focus occurred abroad, application is extraterritorial)
- Giunta v. Dingman, 893 F.3d 73 (2d Cir. 2018) (distinguishable private-investment misrepresentation case where plaintiff was a U.S. citizen)
- Prime Int'l Trading, Ltd. v. BP P.L.C., 937 F.3d 94 (2d Cir. 2019) (courts must evaluate whether domestic activity implicates the statute's focus)