OPINION AND ORDER
The present case is brought on behalf of Plaintiffs Atlántica Holdings, Inc. (“Atlán-tica”), Báltica Investment Holding, Inc. (“Báltica”), and Blu Funds, Inc. (“Blu”), all Panamanian corporations, and Allan Kiblisky, Anthony Kiblisky, and Jacques Gliksberg, all United States citizens. Defendant Sovereign Wealth Fund Samruk-Kazyna (“S-K Fund”) is a sovereign wealth fund owned and operated by the Republic of Kazakhstan and the majority shareholder of nonparty BTA Bank JSC (“BTA Bank”), one of the largest banks in Kazakhstan. Plaintiffs, purchasers of sub-ordináted debt securities issued by BTA Bank as part of a restructuring plan, allege securities fraud in violation of Sections 10(b) and 20(a) of the Securities Ex
S-K Fund now moves to dismiss pursuant to (1) Federal Rule of Civil Procedure 12(b)(1), on the ground that the Court lacks subject-matter jurisdiction; (2) Federal Rule of Civil Procedure 12(b)(2), on the ground that the Court lacks personal jurisdiction over S-K Fund; (8) Federal Rule of Civil Procedure 12(b)(6), on the ground that the Amended Complaint fails to state a claim; and (4) Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. §§ 78u-4(b)(l)-(b)(3)(A), on the ground that Plaintiffs fail to plead fraud with particularity. S-K Fund also moves to dismiss Plaintiffs’ control-person claims for failure to state a claim. For the reasons discussed below, Defendant’s motion is GRANTED in part and DENIED in part.
BACKGROUND
The following facts, which are taken from the Amended Complaint and documents it references, are construed in the light most favorable to Plaintiffs. See, e.g., Aurecchione v. Schoolman Transp. Sys., Inc.,
S-K Fund is a sovereign wealth fund owned and operated by the Republic of Kazakhstan. (Am. Compl. ¶ 14). S-K Fund controls more than 500 companies in a diverse range of areas, including banking, oil and gas, mining, chemicals, transport, communications, and electricity. (Id.). On February 3, 2009, S-K Fund invested 212 billion Kazakhstani Tenge, or approximately $1.5 billion, in BTA Bank. (Am. Compl. ¶ 26). In exchange, S-K Fund took a 75.1% stake in BTA Bank and gained a seat on BTA Bank’s Management Board. (Am. Compl. ¶ 26). Thereafter and at all times relevant to this case, S-K Fund controlled BTA Bank and directed its affairs. (Am. Compl. ¶¶ 66-67; see also Decl. Francis Fitzherb er t-B roekholes (Docket No. 18) (“F-B Deck”), Ex. A (“Informational Mem.”), at 120).
In April 2009, BTA Bank announced that it had ceased payment of principal on its outstanding financial obligations. (Am. Compl. ¶27). In the aftermath of that announcement, and at S-K Fund’s direction, BTA Bank began planning to restructure its debt; those efforts culminated in 2010 (the “2010 Restructuring”), when BTA Bank issued subordinated debt securities (the “Notes”). (Am. Compl. ¶¶28, 32). In connection with the 2010 Restructuring, BTA distributed an “Information Memorandum” — a document 669 pages in length, not including exhibits— detailing the proposed restructuring, the terms of the Notes, and the financial prospects of BTA Bank going forward. (Am. Compl. ¶ 29). The Information Memorandum was sent to all BTA Bank creditors— a group that included Atlántica and Bálti-ca, but no other Plaintiffs. (Am. Compl. ¶¶ 29, 33-34). Although Defendant contends that the Information Memorandum was “available” only to those investors who affirmed that they were either (1) both outside the United States and were not United States residents or (2) United States persons permitted by the terms of the Notes to purchase them (see Mem. Law Supp. Def.’s Mot. To Dismiss Am. Compl. (“Def.’s Mem.”) (Docket No. 17) 5-6; accord Information Mem. i-ii), the document is (and was) available on the Internet. (F-B Deck ¶ 10; Pis.’ Mem. Law Opp’n Def.’s Mot. To Dismiss Am. Compl. (“Pis.’ Mem.”) (Docket No. 21) 7
By its terms, the 2010 Restructuring was not legally effective until approved by several classes of BTA Bank’s creditors as well as a specialized financial court sitting in Almaty, Kazakhstan. (F-B Decl. ¶¶ 16-20). The creditors, including Atlántica and Baltica, approved the restructuring on May 28, 2010. (Am. Compl. ¶ 30). Thereafter, BTA Bank issued Notes to United States persons as an exempt offering, which meant that purchases of the Notes by United States persons were limited to certain “qualified buyers,” as defined by Securities and Exchange Commission Rule 144A, as well as certain high net-worth individuals. (Am. Compl. ¶¶ 32, 34).
These overseas connections notwithstanding, eighty percent of all securities issued pursuant to the 2010 Restructuring — a set that included but was not limited to the Notes at issue in this case — were denominated in United States dollars. (Am. Compl. ¶ 32). Additionally, the Information Memorandum provided that principal and interest payments on the Notes would be made to the payee’s bank in New York City. (Am. Compl. ¶ 19). Moreover, as a practical matter, it was relatively straightforward for United States investors to obtain the Notes. For example, any Direct Purchaser — such as UBS, Plaintiffs’ agent — could transfer beneficial ownership of any Note held on its books from one of its customers to another. Perhaps as a result of those facts, twenty-five percent of the Notes issued during the 2010 Restructuring were purchased by investors in the United States. (Am. Compl. ¶ 32).
Separate and apart from these connections to the United States, Plaintiffs generally allege that Defendant marketed the Notes extensively in the United States. (Am. Compl. ¶¶ 19-20). In particular,
Plaintiffs purchased or otherwise obtained the Notes between 2010 and 2012. (Am. Compl. ¶¶ 7-12, 24; id. Ex. A). As noted, Atlántica and Baltica — the only Plaintiffs who were creditors of BTA Bank in 2010 — participated in the 2010 Restructuring by exchanging their existing BTA Bank-issued debt for the Notes. (Am. Compl. ¶ 33). The rest of the Plaintiffs, along with Atlántica and Baltica, acquired Notes after the 2010 Restructuring through purchases on the secondary market. (Am. Compl. ¶ 34). For example, Atlántica and Baltica simply placed an order in Florida with UBS, which in turn transmitted the order to its broker-dealer in New York, which sent client funds to its back office (the location of which is not referenced in the Amended Complaint), where the order was filled and the Notes were transferred. (Am. Compl. ¶¶ 7-8). Notably, Plaintiffs acquired the Notes even though they were either not qualified buyers or were United States persons— that is, even though they were not within the universe of investors eligible to buy the Notes pursuant to the terms of the Information Memorandum.
Despite the Information Memorandum’s rosy projections, BTA Bank’s financial position continued to deteriorate after the 2010 Restructuring. (See Am. Compl. ¶¶ 35-50). Meanwhile, Defendant— through its officers and agents — and BTA Bank made various public statements, which Plaintiffs allege were false and misleading. (See Am. Compl. ¶¶ 51-56). In January 2012, BTA Bank again defaulted on its debt obligations, prompting another round of restructuring (the “2012 Restructuring”). (Am. Compl. ¶ 57). According to Plaintiffs, Defendant and BTA Bank made additional false and misleading statements after this default. In July 2012, BTA Bank filed a bankruptcy petition, pursuant to Chapter 15 of the Bankruptcy Code, in the United States Bankruptcy Court for the Southern District of New York. (Docket No. 1, No. 12-13081 jmp, Bankr. S.D.N.Y.).
In their Amended Complaint, Plaintiffs claim that several categories of Defendant’s statements were false or misleading. First, Plaintiffs contend that the Information Memorandum contained false or misleading statements regarding both (1) BTA Bank’s general financial outlook (Am. Compl. ¶¶ 35-37) and (2) what Plaintiffs call the “Negative Carry Swap,” a series of
LEGAL STANDARDS
Citing the Foreign Sovereign Immunities Act (“FSIA”), Title 28, United States Code, Section 1605, Defendant moves first to dismiss for lack of subject-matter jurisdiction. In considering such a motion, a court “must look at the substance of the allegations to determine whether one of the exceptions to the FSIA’s general exclusion of jurisdiction over foreign sovereigns applies.” Robinson v. Gov’t of Malaysia,
By contrast, “[i]n reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept the factual allegations set forth in the complaint as true and draw all reasonable inferences in favor of the plaintiff.” Cohen v. Avanade, Inc.,
Finally, because they allege securities fraud, Plaintiffs must also satisfy the heightened pleading requirements of both Rule 9(b), which requires that the circumstances constituting fraud be “state[d] with particularity,” Fed.R.Civ.P. 9(b), and the PSLRA, which requires that scienter— that is, a defendant’s “intention to deceive,
DISCUSSION
Defendant moves to dismiss on the grounds that (1) the Court lacks subject-matter jurisdiction under the FSIA; (2) the Court lacks personal jurisdiction over S-K Fund; (3) the Amended Complaint fails to allege a domestic transaction, reasonable reliance, or loss causation; and (4) Plaintiffs fail to plead fraud with the requisite degree of particularity. Defendant also moves to dismiss Plaintiffs’ control-person claim. The Court will discuss each issue in turn.
A. Sovereign Immunity
It is well established that “[t]he FSIA is the sole source for subject matter jurisdiction over any action against a foreign state.” Kensington Int’l Ltd. v. Itoua,
Here, Plaintiffs rely on the “commercial activities” exception set forth in Section 1605(a), which provides in relevant part that a foreign state is not immune from jurisdiction in any case
in which the action is based [1] upon a commercial activity carried on in the United States by the foreign state; or [2] upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or [3] upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.
28 U.S.C. § 1605(a). “Commercial activity,” for purposes of the statute, is defined “as ‘either a regular course of commercial conduct or a particular commercial transaction or act.’ ” Human Rights in China v. Bank of China, No. 02 Civ. 4361(NRB),
In this case, Plaintiffs seek to rely on the first and third clauses of the commercial-activity exception. (Pl.’s Mem. 18-27). The first clause applies “if the plaintiffs action is ‘based upon a commercial activity carried on in the United States by the foreign state.’ ” Kensington Int’l,
For both the first and third clauses of the commercial-activity exception to apply, the plaintiffs suit must also be “based upon” the defendant’s act or activity. See id. at 155-56 (discussing the “based upon” element of each clause and holding that the phrase should be given the same meaning for each clause). In Transatlantic, the Second Circuit explained that,
[a]t a minimum, that language implies a causal relationship. Thus, at the least, the “act that caused a direct effect in the United States” (“the Act”) must be a “but for” cause of the judgments that are the ground of this suit. That is, it must be true that without the Act, there would be no judgments on which to sue. But this is not enough .... “[B]ased upon” requires a degree of closeness between the acts giving rise to the cause of action and those needed to establish jurisdiction that is considerably greater than common law causation requirements.
Applying those standards here, the Court concludes that Plaintiffs’ suit is based upon an act or acts outside the United States in connection with commercial activity of S-K Fund elsewhere, with direct effects inside the United States— thereby satisfying the third clause of the commercial-activity exception. As an initial matter, there is no dispute that the nature of the activity engaged in by Defendant was “commercial,” as opposed to sovereign, in nature. {See Pis.’ Mem. 17 (noting this fact)). In addition, Plaintiffs’
In any event, even if the direct-effects exception did not apply, the Court concludes that Defendant’s alleged conduct ■within the United States would be sufficient to create jurisdiction under the first prong of the commercial-activity exception. See Kensington Int’l,
B. Applicability of Section 10(b)
Next, Defendant argues that Plaintiffs fail to state a claim upon which relief can be granted because, even accepting their factual allegations as true, they do not identify a securities transaction that occurred in the United States. (Def.’s Mem. 26-32). In particular, Defendant relies on Morrison v. National Australia Bank Ltd.,
Although the Morrison Court provided little guidance on what constitutes a domestic purchase or sale, the Second Circuit addressed that issue directly in Absolute Activist Value Master Fund Ltd. v. Ficeto,
Notably, in the Amended Complaint, Plaintiffs hew closely to the language of Absolute Activist. For example, with respect to all purchases of the Notes, Plaintiffs allege that they “incurred irrevocable liability to pay for the securities in
irrevocable provided, however, that in the event that [BTA Bank], in its sole discretion, amends, terminates or withdraws the [2010] Restructuring Plan ... in a manner that is materially adverse to affected [holders of Euronotes] in the opinion of [BNY Corporate Trustee Services Limited], [holders of Euronotes] shall be permitted ... to revoke any Electronic Instruction Forms ... for a period of two business days.
(Information Mem. 91-92).
Those allegations are sufficient to survive Defendant’s motion to dismiss. Admittedly, with respect to Plaintiffs’ purchases on the secondary market, the allegations are somewhat thin, but they qualify as more than a “mere assertion that transactions ‘took place in the United States,’ ” Absolute Activist,
The Court disagrees for two reasons. First, in interpreting the standards enunciated in Absolute Activist, district courts have held that the existence of conditions precedent to the closing of a deal do not render the transaction non-domestic. See, e.g., Arco Capital Corp. Ltd. v. Deutsche Bank AG,
C. Reliance
Next, Defendant moves to dismiss on the ground that Plaintiffs have failed to adequately plead reliance, as required. See, e.g., Starr ex rel. Estate of Sampson v. Georgeson S’holder, Inc.,
Similarly unavailing are Defendant’s other arguments concerning the statements or omissions in the Information Memorandum: that Plaintiffs could not reasonably rely on them both because they were contradicted by a report from J.P. Morgan and because the Memorandum expressly warned parties not to rely on it for purposes other than the 2010 Restructuring. (Defs Mem. 33 & n. 12; see also Am. Compl. ¶¶ 48-50). With respect to the first argument, Defendant cannot rely on others to clarify its own alleged misrepresentations unless Plaintiffs’ failure to act on the third party’s disclosures rose to the level of “recklessness.” In re Merrill Lynch Auction Rate Sec. Litig.,
Defendant’s remaining challenges — to the reasonableness of Plaintiffs’ reliance on its statements from 2011 and its statements regarding the Recovery Units — are without merit to the extent they concern Atlántica and Blu Funds. Defendant argues that Atlantica’s and Blu’s alleged reliance on the 2011 statements was unreasonable because they did not purchase more Notes in the window between the 2011 statements and the 2012 Restructuring and that neither Atlántica nor Blu reviewed the presentations containing the allegedly misleading statements about the Recovery Units. (Def.’s Mem. 36-37). But both arguments are contrary to allegations in the Amended Complaint, which the Court must credit for purposes of this motion. (Am. Compl. ¶¶ 52, 76). Defendant’s arguments with respect to Baltica and the individual Plaintiffs, on the other hand, have more merit, as “[o]nly Atlántica and Blu Funds purchased [the Notes] after these alleged misstatements.” (Def.’s Mem. 36; see Am. Compl. ¶ 52, Ex. A). To the extent the Amended Complaint can be read to state claims arising out of statements in 2011 or later on behalf of Baltica and the individual Plaintiffs, therefore, such claims are dismissed.
Defendant’s remaining arguments can be disposed of quickly. First, Defendant contends that Plaintiffs have not adequately pleaded loss causation because they have not alleged facts sufficient to show that “it was the defendant’s alleged fraud and not other market factors that caused the plaintiffs loss.” (Def.’s Mem. 38). But Plaintiffs have alleged that disclosure of each of the purportedly false or misleading statements was followed by a decrease in the price of the Notes. (See Am. Compl. ¶¶ 50, 65). Such allegations are sufficient at this stage of the litigation. See, e.g., In re Take-Two Interactive Sec. Litig.,
Second, Defendant argues that Plaintiffs have failed to plead scienter with particularity, as required by the PSLRA. (Def.’s Mem. 39-42). That argument, however, is premised on the same assumption that underlay Defendant’s contentions with respect to rebanee: that the Information Memorandum disclosed the fraudulent or misleading facts. Further, a plaintiff may satisfy the PSLRA’s requirements by pleading “motive and opportunity to commit fraud.” Novak v. Kasaks,
Finally, Defendant argues that it should not be held liable as a “control person” of BTA Bank both because such claims are “wholly derivative” of Plaintiffs 10(b) allegations and because Plaintiffs have not sufficiently alleged that Defendant culpably participated in the alleged fraud. (Def.’s Mem. 42-43). The former argument is without merit in light of this Court’s decision not to dismiss the 10(b) claims. See In re WorldCom, Inc. Sec. Litig.,
CONCLUSION
For the foregoing reasons, Defendant’s motion to dismiss is DENIED in part and GRANTED in part. Specifically, the motion is DENIED except insofar as the Amended Complaint states claims arising out of statements in 2011 or later on behalf of Báltica and the individual Plaintiffs.
SO ORDERED.
Notes
. Defendant urges this Court to take note of the byzantine manner in which this exchange occurred: BTA Bank’s old debt (“Euronotes”) was held only by "Direct Participants” to the Euroclear Bank SA/NV or Clearstream Banking SA clearinghouses, both of which are located in Europe. (F-B Decl. ¶¶ 21-22). As Defendant would have it, when the Euronotes were exchanged for the Notes after the consummation of the 2010 Restructuring, it was the Direct Participants, not individual investors, who received the newly issued Notes. (F-B Decl. ¶21). But by Defendant’s own admission, “Direct Participants held interests in the [Notes] either for their own accounts or for the benefit of their customers." (Id. (emphasis added); Def.'s Mem. 7). As beneficial owners, Atlántica and Baltica — not UBS Financial Services ("UBS”), their agent and a Direct Participant — exercised their option to convert their Euronotes into Notes. (Am. Compl. ¶¶ 7-8; accord Information Mem. 91). Thus, there is neither a legal nor an economic reason to treat the Direct Participants as the exclusive owners of the Notes at the time of the 2010 Restructuring.
. Defendant originally asserted that it “does not have any offices or subsidiaries in the United States” (Def.’s Mem. 23) (an assertion that differs from saying that it has no subsidiaries that have engaged in marketing securities inside the United States), but that assertion has been withdrawn — apparently to avoid discovery of certain "accounting records” (Stipulation 2).
. In light of BTA Bank’s bankruptcy filing, it was not named as a Defendant in this case. On July 17, 2013, however, the bankruptcy stay was lifted (Docket No. 25, No. 12-13081 jmp, Bankr. S.D.N.Y.), and on August 16, 2013, Plaintiffs filed a separate suit against the bank. (Docket No. 1, 13 Civ. 5790).
. Defendant argues that many of the foregoing are “acts” rather than "direct effects,” and thus irrelevant to the jurisdictional inquiry. (Def.'s Mem. 16-23). Even assuming Defendant’s characterizations are accurate, its argument is unavailing. The Court, mindful that Defendant bears the ultimate burden on this motion, has no difficulty discerning the effects Plaintiffs implicitly allege from their detailed and direct allegations of Defendant’s acts.
. The FSIA provides that district courts have personal jurisdiction over any "foreign state” whenever one of the Section 1605(a) exceptions applies. 28 U.S.C. § 1330(b); see also Cargill Int’l S.A. v. M/T Pavel Dybenko,
. Relying on S.E.C. v. Tourre, No. 10 Civ. 3229(KBF),