865 F. Supp. 2d 451
S.D.N.Y.2012Background
- Plaintiffs invested in Optimal U.S., which fully allocated assets to Madoff/BMIS.
- Plaintiffs allege failures of due diligence, ignored red flags, and misstatements/omissions in sale of Optimal U.S. shares.
- May 2, 2011: court granted part of defendants' motion to dismiss for improper forum, lack of standing, and some failure-to-state-claims grounds.
- After discovery, plaintiffs withdrew United States-location allegations for purchases/sales; they now argue Exchange Act reaches claims via ‘in connection with’ NYSE trades or via economic reality.
- Court concludes federal securities claims fail under extraterritoriality framework and Morrison, dismissing Counts XII, XIII, and XV; remaining state-law claims survive.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Extraterritorial reach of the Exchange Act under Morrison | Plaintiffs contend Exchange Act reaches claims via domestic transaction or economic reality. | Defendants argue claims fail Morrison’s domestic-transaction test and cannot be extended extraterritorially. | Exchange Act claims dismissed; Morrison presumption upheld. |
| "In connection with" the purchase/sale of an American-listed security | Purchase of Optimal U.S. was ‘in connection with’ NYSE trades under Morrison. | Broad ‘in connection with’ reading ignores extraterritorial presumption; not satisfied here. | Plaintiffs' ‘in connection with’ theory fails; not sufficiently connected to NYSE trades. |
| Economic reality test viability | Economic reality ties investors to U.S. securities and thus to Exchange Act. | Test is improper here; would improperly extend extraterritorial reach in reverse. | Economic reality test does not sustain federal claims here; still fails Morrison framework. |
| Scope of extraterritoriality following Absolute Activist | Absolute Activist supports broader extraterritorial reach for foreign-referencing instruments. | Presumption against extraterritoriality remains; SLUSA-like reasoning does not override Morrison. | Presumption against extraterritoriality controls; claims must be dismissed. |
Key Cases Cited
- Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (U.S. 2010) (presumption against extraterritorial application of the Exchange Act; domestic transaction requirement)
- Absolute Activist Value Master Fund, Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) (clarified Morrison’s domestic-transaction test for ‘in the United States’ purchases/sales)
- Merrill Lynch & Co. v. Dabit, 547 U.S. 71 (U.S. 2006) (broad interpretation of ‘in connection with’ in §10(b) context)
- Elliott Associates v. Porsche Automobil Holding, N/A (N/A) (mentioned as related to economic reality approach; not necessarily controlling here)