This is an appeal by plaintiffs-appellants Ryan Giunta and Erik H. Gordon from a judgment of the district court dismissing this action against defendants-appellees James T. Dingman, BahaMex Ltd., Out West Hospitality Ltd., Island Smoke House Ltd., the Traveller's Restaurant Ltd., and 25 North Ltd., for lack of subject matter jurisdiction. The district court concluded that plaintiffs had not sufficiently alleged a "domestic transaction" under section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"). As that was the only federal claim and diversity jurisdiction was lacking, the district court dismissed the case. For the reasons set forth below, we vacate the judgment of dismissal and remand for further proceedings.
BACKGROUND
A. The Facts
For purposes of this appeal, the facts alleged in plaintiffs' first complaint and proposed second amended complaint (the "SAC") are assumed to be true.
Gordon met defendant-appellee Dingman through Giunta, their mutual friend, in or around late 2011.
From around November 1 to November 22, 2013, Gordon and Dingman met regularly for lunch in Manhattan and had several phone calls initiated by Dingman that Gordon took in Manhattan. They also met at least once at Dingman's family home in Manhattan. These New York meetings and the telephone conversations which Gordon took in New York are collectively referred to in the SAC and in this opinion as the "November 2013 Communications." Dingman made various material misrepresentations to Gordon during the November 2013
Dingman made the following misrepresentations during the November 2013 Communications: (i) OWH was the parent company and 100% owner of Traveller's and other purported subsidiaries; (ii) Dingman would issue shares of OWH to Gordon worth up to 50% of OWH's equity; (iii) Dingman had personally invested more than $600,000 in OWH; (iv) OWH and its purported subsidiaries were profitable; and (v) Gordon, Giunta, and Dingman were the only equity stakeholders in OWH.
Pursuant to the Agreement, on November 22, 2013, Gordon wired $100,000 from his personal bank account in New York to an account identified by Dingman. In an acknowledgment letter on OWH letterhead, Dingman stated: "This letter is to acknowledge the receipt of 3 wires in the total amount $100,000.00 USD made out to Traveller's Restaurant. [OWH] intends to use the funds to purchase material and general operations. The investment will represent a 10 percent stake in the holding company of Out west Hospitallity [sic]. We appreciate your support and investment in the holding company." App. 254.
On December 17, 2013, Gordon wired another $150,000 from his personal bank account in New York to Dingman. Dingman sent Gordon a nearly identical acknowledgment letter on OWH letterhead that stated that the wire was "made out to Traveller's Restaurant," the funds were to be used for certain operations, and the "[t]he investment will represent a 10 percent stake in the holding company of Out west Hospitallity [sic]." App. 256. It further noted that on "January 15th the company [OWH] will issue shares that will represent a total investment of 250,000 USD." App. 256.
From around January 2014 through April 2014, Dingman and Gordon continued to meet regularly for lunch in Manhattan where Dingman repeated the misrepresentations from the November 2013 Communications. Dingman also made similar misrepresentations in emails, e.g. , in a March 27, 2014 email from Dingman to Gordon where Dingman confirmed that "Erik and I have partnered up in The Bahamas in a fifty/fifty partnership." App. 258.
On March 7, 2014, at a lunch in California, Dingman asked Gordon to wire $18,000 to him as a personal loan. Gordon did so from his New York bank account. Dingman never repaid the loan, and told Gordon that the money would count toward Gordon's equity. On or around March 12, 2014, Gordon wired an additional $75,000 as an investment in OWH to Dingman, again from his bank account in New York.
Gordon repeatedly requested financial records for OWH throughout early 2014, but never received them. On September 9, 2014, Dingman sent a joint letter to all OWH investors informing them that all businesses had been closed. The letter also stated that Dingman was doing a capital
B. The Proceedings Below
This action was originally commenced by fourteen American and Bahamian plaintiffs. Shortly after defendants filed a motion to dismiss for forum non conveniens , eleven plaintiffs voluntarily dismissed their claims, leaving only the two current American plaintiffs, Gordon and Giunta, and a company allegedly owned by Giunta.
After the other plaintiffs dismissed their claims, the court directed Gordon and Giunta to file an opposition to the motion to dismiss along with a proposed amended pleading. Gordon and Giunta submitted the SAC, which asserted subject matter jurisdiction on the basis of diversity of citizenship and federal question jurisdiction arising from Gordon's section 10(b) claim-the only remaining claim asserted under federal law.
At a February 16, 2017 hearing on the motion to dismiss, the district court directed the parties to file submissions addressing whether Gordon's section 10(b) claim was a cognizable "domestic" securities claim under Morrison v. National Australia Bank Ltd .,
After considering the parties' submissions and the allegations set forth in the SAC, on March 29, 2017, the district court dismissed the case for lack of subject matter jurisdiction. The court concluded that diversity jurisdiction was lacking, and that Gordon had not sufficiently alleged a "domestic transaction," as required for a cognizable federal securities claim. Applying Rule 12(b)(6) standards to the sufficiency of the federal securities claim, the district court determined that the transaction was not domestic because Bahamian approval was required for shares to be issued to Gordon.
DISCUSSION
I. Domestic Transaction
A. Applicable Law
We review de novo a district court's dismissal of a complaint under
Section 10(b) of the Exchange Act makes it unlawful "[t]o use or employ, in connection with the purchase or sale of any security ..., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b).
In Morrison , the Supreme Court held that section 10(b) does not apply extraterritorially but only to "transactions in securities listed on domestic exchanges[ ] and domestic transactions in other securities ."
With respect to the first category-whether irrevocable liability is incurred in the United States-we explained that "it is sufficient for a plaintiff to allege facts leading to the plausible inference that ... the purchaser incurred irrevocable liability within the United States to take and pay for a security, or that the seller incurred irrevocable liability within the United States to deliver a security."
To determine whether irrevocable liability was incurred within the United States, courts look to the terms, timing, and place of the parties' contracting and liabilities thereunder. See Absolute Activist ,
B. Application
As OWH's shares were not listed on a domestic exchange, Gordon had to sufficiently allege that the Agreement involved a "domestic transaction," meaning that Gordon (the purchaser) incurred irrevocable liability within the United States
The SAC alleges that Dingman and Gordon agreed "that Gordon would invest capital in OWH and/or its subsidiaries in exchange for a fifty percent equity stake in OWH." App. 269; see Express Indus. & Terminal Corp. v.N.Y. State Dep't of Transp. ,
The district court assumed that the Agreement was a binding contract but nonetheless concluded that both parties' liabilities were "revocable" because, had the Bahamian authorities refused to approve the issuance of shares, Dingman "was bound to return to Gordon all funds paid by Gordon." Sp. App. 22-23. We disagree with the district court, however, and hold that irrevocable liability was incurred when the parties entered into the Agreement.
In this Court's recent decision in Choi v. Tower Research Capital LLC ,
As in Choi, the fact that the parties' obligations were ultimately subject to a condition subsequent does not mean that either party was effectively "free to revoke its ... acceptance," or change its mind until the approval of the shares abroad.
A number of district courts within this Circuit have similarly found that, under Absolute Activist , irrevocable liability may be incurred despite the existence of conditions necessary to closing the transaction abroad, including foreign approval. See, e.g. , Liberty Media Corp. v. Vivendi Universal SA ,
As in Atlantica , whether the circumstances allowing Gordon to "revoke" his purchase would come to pass was an outcome entirely out of Gordon's control and depended solely on subsequent actions taken by the Bahamian authorities. See Atlantica Holdings,
On the facts alleged in the SAC, the Agreement was entered into in New York, and irrevocable liability was incurred in the United States. Accordingly, we conclude
II. Predominately Foreign
A. Applicable Law
In Parkcentral Global HUB Ltd. v. Porsche Automobile Holdings SE , we qualified the scope of the Absolute Activist decision.
In Parkcentral , we cautioned that this Court "do[es] not purport to proffer a test that will reliably determine when a particular invocation of § 10(b) will be deemed appropriately domestic or impermissibly extraterritorial."
B. Application
Dingman argues that even assuming the Agreement was a "domestic transaction," it cannot serve as the basis of a section 10(b) claim because Gordon's claims are so predominantly foreign as to render them "impermissibly extraterritorial."
We disagree. Parkcentral involved securities-based swap agreements and the foreign company defendant was not a party to the agreements. The swaps were pegged to the price of shares traded only on European exchanges. The allegedly fraudulent conduct involved statements made primarily in Germany with respect to stock in a German company, and such misconduct was already the basis of several foreign investigations and enforcement actions. Accordingly, we found that the application of section 10(b) to the Parkcentral defendants "so obviously implicate[d] the incompatibility of U.S. and foreign laws" that Congress could not have intended it in "a manner consistent with the presumption against extraterritoriality." Id .
The facts in this case, however, do not present nearly the same level of foreign entanglement as presented in Parkcentral . Defendants point to the following: Dingman is a permanent resident of the Bahamas; the venture involved development and operation of restaurants, bars, and hotels in the Bahamas; the entities were incorporated in the Bahamas by a Bahamian lawyer; witnesses and the books and records are in the Bahamas; and "a United States court cannot direct Dingman or Out West to issue shares to Gordon in contravention of Bahamian regulations." Def.-Appellee's Br. at 26-28.
We are not persuaded that the foreign components present in this dispute render the claims impermissibly extraterritorial. As discussed above, the SAC alleges substantial domestic contacts. The Agreement was entered into in New York; Dingman continued to press Gordon for further investments in New York; Dingman and Gordon were both U.S. citizens; the wire transfers originated from New York; and the confirmation letters were sent to New York. The only foreign component present in the formation of the Agreement was the
CONCLUSION
For the foregoing reasons, the judgment of the district court is VACATED and the case is REMANDED for further proceedings.
Notes
The district court treated the SAC as the "operative complaint." Sp. App. 4.
Giunta is also a named plaintiff-appellant. His claims, however, do not involve the question presented on appeal as to whether there is a cognizable Exchange Act claim.
The equity breakdown was going to be 45% for Gordon, 45% for Dingman, and 10% for Giunta for services rendered ("sweat equity").
Although not alleged in the SAC, as Gordon explained in an affidavit, he received and read the letter in Manhattan.
This letter also was received and read by Gordon in Manhattan.
Part III of Chapter 360 of the Bahamas Exchange Control Regulations provides that issuance of shares in a Bahamian company to a non-resident foreign national requires the approval of both the Bahamian Investments Board and the Central Bank of the Bahamas before shares may be issued.
The district court pointed out that the SAC alleged that "Dingman stated to Gordon that his shares would be registered with the appropriate Bahamian authorities." SAC ¶ 24.
We note the district court erred in concluding that the court lacked subject matter jurisdiction. See Morrison ,
Dingman counters that the Agreement was not a binding contract because the Agreement specified that he would refund Gordon's investment if they could not agree to "a written document memorializing the terms of Gordon's investment." App. 269. He contends that this illustrates that the parties did "not intend to be bound until their agreement [was] reduced to writing," and thus, the Agreement was not binding. Chatterjee Fund Mgmt. , L.P. v. Dimensional Media Assocs. ,