Memorandum and Order
This сase involves civil allegations of securities fraud in the wake of
Morrison v. National Australia Bank Ltd.,
— U.S. -,
BACKGROUND
The SEC filed its original complaint against Goldman Sachs & Co. (“Goldman”) and Tourre in April 2010. (Dkt. 1.) In July 2010, Goldman, without admitting or *150 denying liability, settled for $550 million. (Dkt. 25.) Tourre subsequently moved for judgment on the pleadings on the basis the complaint failed to state a claim because it did not allege a securities transaction took place in the United States. (Dkt. 30.) Tourre’s argument was based on Morrison. (Dkt. 31.) Because the complaint was filed before Morrison was decided, the Court granted the SEC’s request for leave to file an amended complaint. (Dkt. 42.)
The SEC filed its Amended Complaint on November 22, 2010. (Dkt. 44.) It alleges the following:
A. Origins of ABACUS
In early 2007, U.S.-based Goldman structured and marketed a synthetic collateralized debt obligation (“CDO”), ABACUS 2007-AC1 (“ABACUS”), that was tied to the performance of subprime residential mortgage-backed securities (“RMBS”). 2 (Am. Compl. ¶¶ 1, 9.) At the time, Tourre, who was the Goldman employee principally responsible for the structuring and marketing of ABACUS, worked as a Vice President in the structured product correlation trading desk at Goldman’s headquarters in New York City. (Id. ¶ 10.)
In 2006, Paulson & Co. Inc. (“Paulson”), a hedge fund located in New York City, developed an investment strategy based on the view that certain mid-and-subprime RMBSs, rated “Triple B” by Moody’s, would experience credit events. 3 (Id. ¶¶ 12-13.) Examples of credit events include failure to pay, restructuring, and bankruptcy. After analyzing various Triple B-rated RMBSs, Paulson asked Goldman to help it buy protection, through the use of CDSs, on RMBSs it believed would experience credit events. (Id. ¶ 16.) The SEC claims Paulson and Goldman discussed creating a CDO that would allow Paulson to participate in selecting a portfolio of reference obligations and then to short the portfolio by entering into a CDS with Goldman to buy protection on specific layers of the synthetic CDO’s capital structure. (Id. ¶ 17.)
Goldman and Tourre knew, according to the SEC, that it would be hard to market and sell the liabilities of a synthetic CDO if they disclosed that a short investor (i.e., Paulson) played a significant role in selecting the portfolio. (Id. ¶ 20.) But Goldman and Tourre also knew, the SEC alleges, that identifying an experienced and independent third-party collateral manager as having selected the portfolio would facilitate placement of the CDO liabilities. (Id.) The task of placing CDO liabilities was complicated by the fact that the market for CDOs backed by subprime RMBSs was beginning to show signs of distress — a fact, the SEC claims, Tourre and Goldman were aware of. 4 (Id.) Accordingly, in or *151 about January 2007, Goldman allegedly approached ACA Management LLC (“ACA”) and proposed it serve as the “Portfolio Selection Agent” for a CDO transaction sponsored by Paulson. (Id. ¶ 23.)
On January 8, Tourre attended a meeting with representatives from Paulson and ACA at Paulson’s New York City office to discuss the proposed transaction. (Id. ¶ 27.) The SEC claims that over the next two months, through a series of emails and meetings, Paulson and ACA agreed, with the help of Goldman and Tourre, on a reference portfolio of 90 RMBSs for ABACUS. (Id. ¶¶ 28-36.) Throughout this time, ACA was in the dark, the SEC alleges, about Paulson’s intention to short the portfolio that it helped select by entering into a CDS with Goldman to buy protection on specific layers of the synthetic CDO’s capital structure. (Id. ¶ 33.) According to the SEC, Goldman and Tourre misled ACA into believing Paulson was investing in the equity of ABACUS and thus shared a long interest with CDO investors. (Id. ¶ 45.)
On January 10, Tourre emailed ACA a “Transaction Summary” that described Paulson as the “Transaction Sponsor.” (Id. ¶ 48.) The email also referenced a “Contemplated Capital Structure” with a “[0]%-[9]%: pre-committed first loss” as part of the deal structure. (Id.) The description of this tranche at the bottom of the capital structure was consistent with the description of an equity tranche, according to the SEC, which ACA reasonably believed to be the case. (Id.)
On January 12, Tourre spoke by telephone with ACA about the proposed transaction. (Id. ¶ 49.) The SEC makes no allegation regarding what was said during this conversation. Following the conversation, however, on January 14, ACA sent an email to a Goldman sales representative that raised questions about the proposed transaction and Paulson’s equity interest. The email stated, in part, “the structure looks difficult from a debt investor perspective. I can understand Paulson’s equity perspective but for us to put our name on something, we have to be sure it enhances our reputation.” (Id.) Although Tourre was not one of the original recipients of the email, the SEC claims a Goldman sales representative forwarded it to Tourre on January 16. (Id. ¶ 50.) As of that date, the SEC alleges, Tourre knew or was reckless in not knowing ACA had been misled into believing Paulson intended to invest in the equity of ABACUS. (Id. ¶ 51.)
On February 12, ACA’s Commitments Committee approved ACA’s participation as Portfolio Selection Agent in ABACUS. (Id. ¶ 52.) According to the SEC, had ACA known Paulson was taking a short position, it is unlikely it would have served as the Portfolio Selection Agent. (Id. ¶ 46.) ACA and Paulson ultimately agreed upon the reference portfolio of 90 RMBSs for ABACUS on or about February 26. (Id. ¶ 36.)
In addition to misleading ACA about Paulson’s equity interest, the SEC alleges Goldman’s marketing materials for ABACUS were false and misleading because they failed to make any mention of Paul-son’s role in selecting the reference portfolio. (Id. ¶ 37.) The SEC points to, among other things, a term sheet and flip book Goldman finalized for ABACUS on or about February 26. (Id. ¶¶ 38-39.) Both indicate ACA selected the reference portfolio of RMBSs with no mention of Paul- *152 son. (Id. ¶¶ 38-39.) Tourre, according to the SEC, had primary responsibility for preparing the term sheet and flip book. (Id. ¶ 40.)
The SEC alleges additionally that Goldman finalized an offering memorandum for ABACUS on approximately April 26, portions of which Tourre also allegedly reviewed. (Id. ¶¶ 42-^13.) Like the term sheet and flip book, the offering memorandum represented that ACA selected the RMBS reference portfolio and failed to mention Paulson. (Id. ¶ 42.) Although none of the ABACUS marketing materials referenced Paulson, Goldman’s internal communications clearly acknowledged Paulson, its economic interests, and its role in the transaction, according to the SEC. 5 (Id. ¶ 44.)
B. ABACUS Investors
1. IKB
The SEC allеges that in late 2006, IKB, a German commercial bank, informed Goldman and Tourre it was no longer comfortable investing in the liabilities of CDOs that did not utilize a collateral manager— i.e., an independent third-party with knowledge and expertise in analyzing RMBS CDOs backed by U.S. mid-andsubprime mortgages. (Id. ¶¶ 53-54.) Goldman and Tourre knew, the SEC claims, IKB would likely accept ACA as a collateral manager. (Id. ¶ 54.)
Between February and April 2007, Goldman allegedly sent IKB copies of the ABACUS term sheet, flip book, and offering memorandum. (Id. ¶¶ 56-60.) Because these materials referenced ACA but not Paulson, the SEC alleges these representations and omissions were materially false and misleading. (Id.) The SEC also claims neither Goldman nor Tourre informed IKB, independent of the marketing materials, about Paulson’s role in selecting the reference portfolio and its adverse economic interests. (Id.)
In addition to the marketing materials, the SEC alleges Tourre communicated directly with IKB. (Id. ¶¶ 59-60.) On March 6, for example, Tourre sent an email to IKB stating, among other things, “This is a portfolio selected by ACA.” (Id. ¶ 59.) In internal Goldmаn communications, however, Tourre subsequently described the portfolio as being “selected by ACA/Paul-son.” (Id.) Later, on March 19, an IKB representative sent an email to Tourre and others, asking, “what [is] your plan for the ACA deal[?]” (Id.) On March 27, after IKB indicated it intended to recommend purchase of ABACUS notes, Tourre sent an email to IKB promising to send updated documents and stating, “thanks for getting your approval so quickly on this.” 6 (Id.)
*153 Tourre continued communicating directly with IKB into April, according to the SEC. (Id. ¶ 60.) On April 2, the SEC claims Tourre sent an email to IKB attaching black-lined and clean copies of the ABACUS offering circular. (Id.) Three days later, Tourre sent a follow-up email to IKB, stating, “as discussed please let me know if you have any issue with the preliminary offering circular, we can discuss on Monday or Tuesday of next week.” (Id.)
ABACUS closed on or about April 26. (Id. ¶ 61.) IKB bought $50 million worth of Class A-l notes and $100 million worth of Class A-2 notes, both at face value. (Id.) According to the ABACUS offering memorandum, the notes would be “ready for delivery in book-entry form only in New York” and were offered by Goldman “in the United States.” (Id. ¶ 62.) The offering memоrandum also stated U.S.based Goldman was “offering” and “selling” the notes. (Id.) The closing occurred at One Battery Park Plaza in New York. (Id.) Goldman purchased the notes initially, receiving them through the book-entry facilities of the Depository Trust Company (“DTC”) in New York City, and then delivered the notes through the book-entry facilities of DTC to a New York-based bank for further delivery. (Id.) At the closing, Goldman allegedly delivered $150 million, representing the purchase price of the notes, by federal funds wire transfer to LaSalle Bank National Association, which is headquartered in Chicago, as trustee for ABACUS. (Id. ¶ 63.) The SEC does not allege that IKB, ABN, or ACA was present for or otherwise involved with the closing.
Within months of the closing, the ABACUS notes IKB purchased were worthless. (Id. ¶ 65.) IKB allegedly lost almost all of its $150 million investment. (Id.) The SEC claims most of this money ultimately went to Paulson by virtue of a CDS a Paulson affiliate entered into with a Goldman affiliate. (Id.) Pursuant to the CDS, Paulson purchased protection on the layers of ABACUS’S capital structure that corresponded with the Class A-l and A-2 notes. (Id.) IKB would not have invested in ABACUS, the SEC claims, if it knew Paulson played a significant role in selecting the рortfolio while taking a short position against ABACUS. (Id. ¶ 64.)
In addition to the CDS Goldman offered and sold to Paulson, the SEC alleges Goldman marketed securities or security-based swap agreements relating to ABACUS to other investors through Goldman’s structured product syndicate desk in New York. (Id. ¶ 66.) The desk, among other things, emailed a new issue announcement of the transaction to a number of institutional investors, inviting them to contact any one of seven Goldman sales representatives in New York, according to the SEC. (Id.)
2. ACA Capital and ABN AMRO
On or about April 26, the SEC alleges, ACA Capital Holdings, Inc. (“ACA Capital”), ACA’s U.S.-based parent company, purchased $42 million worth of ABACUS Class A-2 notes at face value. (Id. ¶ 71.) Goldman offered and sold the ABACUS notes ACA Capital purchased, according to the SEC, and Tourre played a principal role in the offer and sale of these securities. (Id.) Within months, the SEC claims, the notes were worthless. (Id.)
Later, on or about May 31, ACA Capital, the SEC alleges, sold protection on or “wrapped” a $909 million super senior *154 tranche of ABACUS. 7 (Id. ¶ 61.) At approximately the same time, according to the SEC, a Paulson affiliate entered into a CDS with а Goldman affiliate. (Id.) Pursuant to this CDS, Paulson allegedly purchased protection on the super senior tranche of ABACUS. (Id.) The SEC claims these CDSs were security-based swap agreements offered and sold by Goldman and that Tourre played a principal role in the offer and sale of these CDSs. (Id.)
ACA Capital, like ACA, was unaware Paulson was taking a short position on ABACUS, according to the SEC. (Id. ¶ 68.) The SEC alleges it is unlikely ACA Capital would have written protection on the super senior tranche if it knew Paulson was taking a short position. (Id.)
The super senior transaction with ACA Capital was intermediated by ABN AMRO Bank N.V. (“ABN”), a European bank. (Id. ¶ 69.) In other words, through a series of CDSs between ABN and a Goldman affiliate and between ABN and ACA Capital, ABN assumed the credit risk associated with the $909 million super senior portion of ABACUS’S capital structure in the situation ACA Capital became unable to pay. (Id.) The SEC claims the CDSs ABN and ACA Capital entered into were security-based swap agreements offered and sold by Goldman. (Id.) In addition to an email by Tourre soliciting ABN’s participation in a “super seniоr swap trade ... selected by ACA[,]” Goldman also sent the ABACUS term sheet, flip book, and offering memorandum to ABN. (Id. ¶¶ 69-70.) As explained above, the SEC alleges these marketing materials were materially false and misleading because they mentioned ACA without referencing Paulson and its adverse economic interests. (Id. ¶ 70.)
C. Counts
Based on the allegations described above, the Amended Complaint charges Tourre with three counts of civil securities fraud. The first count alleges Tourre violated Section 17(a) of the Securities Act by: (1) knowingly, recklessly, or negligently misrepresenting, in the marketing, offering, and sale of ABACUS securities and security-based swap agreements (including through the term sheet, flip book, and offering memorandum), that ACA selected the reference portfolio without disclosing Paulson’s significant involvement in the selection process; and (2) knowingly, recklessly, or negligently misleading ACA into believing Paulson was investing in the equity of ABACUS, when, in fact, it was taking a short position. (Id. ¶¶ 74-77.) The second count alleges Tourre violated Section 10(b) and Rule 10b-5 of the Exchange Act by: (1) knowingly or recklessly misrеpresenting, in connection with the purchase and sale of ABACUS securities and security-based swap agreements (including through the term sheet, flip book, and offering memorandum), that ACA selected the reference portfolio without disclosing Paulson’s significant role in the selection process; and (2) knowingly or recklessly misleading ACA into believing Paulson was investing in the equity of ABACUS without disclosing it was actually taking a short position. (Id. ¶¶ 78-81.) The last count alleges Tourre aided and abetted Goldman’s violations of Section 10(b) and Rule 10b-5 based on the allegations described in the second count. (Id. ¶¶ 82-83.)
LEGAL STANDARD
Rule 12(b)(6) of the Federal Rules of Civil Procedure provides for dismissal of a
*155
complaint that fails to state a claim upon which relief may be granted. “In ruling on a motion to dismiss for failure to state a claim upon which relief may be granted, the court is required to accept the material facts alleged in the complaint as true.... ”
Frasier v. Gen. Elec. Co.,
“While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiffs obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.”
Bell Atl. Corp. v. Twombly,
Securities fraud claims are subject to the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) requires a party to “state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” Fed.R.Civ.P. 9(b). Although intent may be alleged generally, a plaintiff must still “allege facts that give rise to a strong inference of fraudulent intent.”
Acito v. IMCERA Group, Inc.,
DISCUSSION
I. Exchange Act Counts
Section 10(b) of the Exchange Act makes it unlawful:
for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange ... [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement^] any manipulative or deceptive device or contrivance....
15 U.S.C. § 78j(b). Rule 10b-5, which was promulgated under Section 10(b), makes it unlawful:
for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit *156 upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
Beginning in the late 1960s, the Second Circuit embarked on a path that extended Section 10(b)’s reach beyond domestic securities transactions.
See Schoenbaum v. Firstbrook,
Morrison
repudiated the “conduct” and “effects” tests. In addition to being “complex in formulation and unpredictable in application!],]” the “conduct” and “effects” tests — and a host of others they spawned — lacked, the Supreme Court explained, “a textual or even extratextual basis.”
Morrison,
For all of these reasons, the Supreme Court held Section 10(b) of the Exchange Act does not apply extraterritorially. 8 Instead, it applies only to “transactions in securities listed on domestic exchanges)]] and domestic transactions in other securities.” Id. at 2884. Explaining that some activities or contacts in the United States would not be sufficient to satisfy its new “transactional test,” the Supreme Court noted that while “it is a rare case ... that lacks all contact with the territory of the United Statesf,] the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.” Id. (emphasis in original). The focus of the Exchange Act, the Supreme Court added, “is not upon the place where the deception originated, but upon рurchases and sales of securities in the United States.” Id.
In adopting “a clear ... transactional test” — namely, “whether the purchase or sale is made in the United States, or involves a security listed on a domestic exchange” — the Supreme Court rejected a test proposed by the Solicitor General: *157 “[A] transnational securities fraud violates [§ ]10(b) when the fraud involves significant conduct in the United States that is material to the fraud’s success.” Id. at 2886 (alteration in original). One of the arguments the Solicitor General pressed in support of this test was the fact that the SEC “adopted an interpretation similar to the ‘significant and material conduct’ test, and that [the Supreme Court] should defer to that.” Id. at 2887. Because the SEC’s interpretation “relied on cases” that “ignored or discarded the presumption against extraterritoriality” and that the Supreme Court rejected, the Supreme Court found it owed the SEC’s interpretation “no deference.” Id. at 2887-88.
Although firm in its holding, the securities at issue in Morrison were traded only on foreign exchanges. Id. at 2875. As a result, Morrison was largely silent regarding how lower courts should determine whether a “purchase or sale is made in the United States.” Id. at 2886. Here, because the SEC has not alleged any ABACUS securities were traded on a domestic exchange, the issue before the Court, with respect to the Section 10(b) and Rule 10b-5 claims, is whether the SEC adequately alleges facts that demonstrate that any of the ABACUS securities transactions constitute a “purchase or sale ... made in the United States.” Id.
With little guidance in Morrison regarding how lower courts should determine whether a “purchase or sale is made in the United States!,]” id., the Court begins by looking at the statutory definitions of “purchase” and “sale.” The Exchange Act defines a “purchase” to “include any contract to buy, purchase, or otherwise acquire.” 15 U.S.C. § 78c(a)(13). A sale is defined to “include any contract to sell or otherwise dispose of.” 9 Id. § 78c(a)(14).
In
Plumbers’ Union Local No. 12 Pension Fund v. Swiss Reinsurance Company,
a
post-Morrison
Section 10(b) case, Judge Koeltl explained that “purchase,” for purposes of the Exchange Act, has been interpreted “to make an individual a ‘purchaser’ when he or she ‘incurred an
irrevocable
liability to take and pay for the stock.’ ”
Here, the SEC alleges solely that there was a “sale” without discussing the “purchase” component of the alleged transactions. At oral argument, the SEC was unable to provide any basis for separating or distinguishing the “sale” from the “purchase” of any of the transactions alleged in the Amended Complaint. Without deciding whether a “sale” can be separated or distinguished from any “purchase” at issue here, the principal concept the Court takes from
Plumbers’ Union
is the notion of “ ‘irrevocable liability!,]’ ”
1. IKB
The SEC alleges three sets of ABACUS securities transactions. The first involves two note purchases by IKB. 10 (Am. Compl. ¶¶ 53-66.) The SEC dеscribes several instances of U.S.-based conduct by Tourre that allegedly establish that the IKB note purchases were domestic transactions. The SEC refers, for example, to false and misleading ABACUS marketing materials that were transmitted to IKB that, the SEC claims, Tourre had primary responsibility for preparing and/or reviewing. (Id. ¶¶ 56-58.) The SEC also cites a series of email communications from Tourre (and others at Goldman) to IKB, encouraging them to purchase ABACUS securities. (Id. ¶¶ 59-60.) Some of the emails reference direct conversations between Tourre and IKB. (Id. ¶¶ 58, 60.)
The shortcoming of all of this U.S.-based conduct is precisely that — it is just conduct.
Morrison
was clear that domestic conduct is not the test for determining Section 10(b) liability.
Tacitly conceding that none of the U.S.based conduct it describes alleges that any party incurred “ ‘irrevocable liability’ ” in the United States,
see Plumbers’ Union,
Nowhere in
Naftalin
does the Supreme Court state that the location of a transaction can be determined by looking at “the entire selling process.” And, even if it did, this certainly is not the test after
Morrison. Morrison
was clear that Section 10(b) “punishes not all acts оf deception” (i.e., the selling process), “but only such acts ‘in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered.’ ”
To the extent the SEC alleges and relies upon the ABACUS closing (Am. Compl. ¶¶ 61-63), the SEC conceded, at oral argument, that the closing, by itself, is not sufficient to make the IKB note purchases domestic transactions for purposes of
Morrison.
(Mot. to Dismiss Hr’g Tr. 28-29.) Indeed, under
Morrison’s
“transactional test,” the closing, absent “a purchase or
*159
sale ... made in the United States,”
In view of the fact that none of the conduct or activities alleged by the SEC, including the closing, constitute facts that demonstrate where any party to the IKB note purchases incurred “ ‘irrevocable liability!,]’ ”
Plumbers’ Union,
Although the SEC bears the burden of alleging the IKB note purchases were domestic transactions, in an effort to show the IKB note purchases were foreign transactions, Tourre, for his part, cites the trade confirmations for both IKB note purchases.
11
(See
Chepiga Decl. Exs. G, H.) In both confirmations, Goldman Sachs International, located in London, was listed as the seller and Loreley Financing (Jersey), IKB’s affiliate based on the island of Jersey, a British Crown Dependency, was listed as the purchaser.
(See id.)
At oral argument, Tourre’s counsel represented that the trade confirmation “is generated at the moment the trade happens.” (Mot. to Dismiss Hr’g Tr. 7:19-20, Feb. 14, 2011.) In response, at oral argument, the SEC argued that U.S. companies should not be allowed to skirt U.S. federal securities laws by using foreign affiliates to complete securities transactions.
(Id.
at 20-21.) Justice Stevens voiced similar concerns in a concurring opinion in
Morrison.
12
The Court need not address the SEC’s argument in view of the SEC’s failure to allege that
any
party to the IKB note purchases incurred “ ‘irrevocable liability’ ” in the United States.
See Plumbers’ Union,
*160 For the reasons provided above, the SEC fails to state a claim that Tourre violated Section 10(b) and Rule 10b-5 with respect to the alleged IKB securities transactions. Accordingly, the second and third counts are DISMISSED as to IKB.
2. ABN
The second alleged ABACUS securities transaction involves ABN. (Am. Compl. ¶¶ 69-70.) According to the SEC, through a series of CDSs between ABN and a Goldman affiliate and between ABN and ACA Capital, ABN assumed the credit risk associated with the super senior tranche of ABACUS in the situation ACA Capital became unable to pay. (Id. ¶ 69.) The SEC alleges the CDSs ABN and ACA Capital entered into were sold by Goldman. (Id.)
Although he has no burden, Tourre argues the ABN CDS transaction was a foreign transaction for purposes of Morrison. Tourre claims that ABN, acting through its London branch, entered into an English-law governed swap with U.K.-based Goldman Sachs International on May 81, 2007. 14 (See Chepiga Decl. Exs. I, J.) The swap, according to Tourre, was executed pursuant to a Master Agreement entered into in 1996 by ABN and Goldman Sachs International. 15 (See Chepiga Decl. Exs. K, L.)
In addition to alleging Tourre directly and indirectly marketed ABACUS to ABN (Am. Compl. ¶¶ 69-70), 16 the SEC argued, at oral argument, that “it’s clear[] Goldman Sachs International was acting as Goldman Sachs & Co.’s agent.” (Mot. to Dismiss Hr’g Tr. 23:14-15, Feb. 14, 2011.) Goldman’s “use ... of an offshore affiliated agent to effectuate the transaction does not[J” the SEC added, “diminish the role of Goldman Sachs in controlling the offer and sale of the swap.” (Id. 23:23-24:1.)
The SEC fails to allege the ABN CDS transaction constitutes a “domestic transaction” under
Morrison
for the same reasons as the IKB note purchases. Absent a “purchase or sale ... made in the United States,”
Morrison,
For the reasons provided above, the second and third counts are DISMISSED as to ABN.
3. ACA Capital
a. Background
The last set of alleged ABACUS securities transactions involve the security-based swap agreement ACA Capital entered into that was sold by Goldman and the $42 million worth of ABACUS Class A-2 notes ACA Capital purchased from Goldman. (Am. Compl. ¶¶ 67, 71.) According to the SEC, Goldman and Tourre misled ACA and ACA Capital into believing Paulson was a long equity investor, when, in reality, Paulson was a short investor. (Mot. to Dismiss Hr’g Tr. 36:18-20.)
Tourre caused this misunderstanding, the SEC alleges, by, among other things, emailing a “Transaction Summary” to ACA on January 10, suggesting Paulson was pre-committed to ABACUS’S equity tranche. (Am. Compl. ¶48.) The SEC claims Tourre contributed further to this misunderstanding during a January 12 call with ACA. (Id. ¶ 49.) The SEC identifies no statement Tourre made during the call, but cites an ACA email that was forwarded to Tourre on January 16, with the subject line, “Call with Fabrice [Tourre] on Friday,” stating that ACA “understood] Paul-son’s equity perspective.” (Id.) As of that date, the SEC alleges, Tourre knew or was reckless in not knowing ACA had been misled into believing Paulson was a long equity investor. (Id. ¶ 50.)
The SEC further alleges that through “continuing communications with Tourre and others at” Goldman, ACA believed, throughout the transaction, that Paulson would be an equity investor. (Id. ¶¶ 49-52, 67-68, 71.) The only direct “continuing communication” the SEC alleges Tourre had with ACA, however, was a February 2 meeting with Paulson and ACA at ACA’s New York office. (Id. ¶ 33.) The SEC claims Tourre sent an email to another Goldman employee during the February 2 meeting, stating, “I am at this aca paulson meeting, this is surreal[,]” but doеs not allege Tourre said or did anything at the meeting itself that contributed to ACA’s misunderstanding. (Id.) ACA’s Commitments Committee approved ACA’s participation in ABACUS as the Portfolio Selection Agent on February 12. (Id. ¶ 52.)
The SEC’s allegations regarding ACA do not pick up again until two and a half months later, on April 26, when ACA Capital purchased the ABACUS Class A-2 notes. Despite previously representing to ACA that Paulson would take a long equity stake, the SEC alleges neither Goldman nor Tourre informed ACA Capital that Paulson was taking a short position with respect to ABACUS. 17 (Id. ¶¶ 45-48, 51, 68.) ACA Capital allegedly purchased $42 million worth of ABACUS Class A-2 notes on April 26. (Id. ¶ 71.) Later, on May 31, ACA Capital entered into a security-based swap agreement sold by Goldman, pursuant to which ACA Capital assumed the *162 credit risk associated with ABACUS’S $909 million super senior tranche. (Id. ¶ 67.) If ACA Capital knew Paulson was taking a short position, the SEC claims, it is unlikely it would have written protection on the super senior tranche. (Id. ¶ 68.)
b. Analysis
In order for the SEC to state a claim under Section 10(b) and Rule 10b-5, it must allege Tourre: “(1) made a material misrepresentation or a material omissiоn as to which he had a duty to speak, or used a fraudulent device; (2) with scienter; (3) in connection with the
purchase or sale
of securities.”
18
See, e.g., S.E.C. v. Tecumseh Holdings Corp.,
No. 03 Civ. 5490(SAS),
The SEC adequately pleads all of the elements of a Section 10(b) and Rule 10b-5 violation with respect to the ACA transactions. Tourre’s January 10 email to ACA, which included a “Transaction Summary” describing Paulson as the “Transaction Sponsor” with a pre-committed position to ABACUS’S equity tranche, sufficiently alleges a material misrepresentation regarding Paulson’s investment interest.
See, e.g., Tecumseh Holdings Corp.,
After Tourre misrepresented Paulson’s investment interest, he had a duty, the SEC claims, to disclose Paulson’s short position. Tourre argues, in response, that neither he nor Goldman had any legal duty to disclose Paulson’s short interest to ACA. In support of this argument, Tourre quotes the following sentence from
Plumbers’ Union:
“An omission is actionable under federal securities laws ‘only when the [defendant] is subject to a duty to disclose the omitted facts.’ ”
Here, having allegedly affirmatively represented Paulson had a particular investment interest in ABACUS — that it was long — in order “ ‘to be both accurate and complete^]’ ”
see id.
(citation omitted), Goldman and Tourre had a duty to disclose Paulson had a different investment interest — that it was short.
See Caiola v. Citibank, N.A., New York,
With respect to the second and third elements of a Section 10(b) and Rule 10b-5 violatiоn, the Court finds the SEC adequately alleges Tourre made the material misrepresentations and omissions discussed above with scienter and in connection with the purchase or sale of a security-
For the reasons provided above, the SEC sufficiently alleges Tourre violated Section 10(b) and Rule 10b-5 with respect to the ACA Capital securities transactions. Accordingly, Tourre’s Motion to Dismiss as to the ACA Capital securities transactions in the second and third counts is DENIED.
II. Securities Act Count
The SEC’s first count is that Tourre violated Section 17(a)(1), (2), and (3) of the Securities Act. (Am. Compl. ¶¶ 14-77.) Section 17(a) of the Securities Act makes it:
unlawful for any person in the offer or sale of any securities or any security-based swap agreement ... by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
15 U.S.C. § 77q(a).
The SEC alleges Tourre knowingly, recklessly, or negligently misrepresented (to IKB, ABN, and other institutional investors) in the marketing, offering, and sale of ABACUS, that the reference portfolio was selected by ACA without disclosing Paulson’s involvement. (Am. Compl. ¶ 77.) The SEC also alleges Tourre violated Section 17(a) by knowingly, recklessly or negligently misleading ACA into believing Paulson invested in ABACUS’S equity, implicitly indicating Paulson’s interests were closely aligned with ACA’s, when, in reality, Paulson’s interests conflicted sharply with ACA’s. (Id.)
1. IKB and ABN
Tourre argues the SEC’s first count, with respect to IKB and ABN, should be dismissed because
Morrison
applies to Section 17(a). In a footnote in his motion to dismiss, he claims that the Secu
*164
rities Act, like the Exchange Act, contains no indication of any extraterritorial application and that the anti-fraud provisions of the Securities Act have no greater geographical reach than those of the Exchange Act. Although
Morrison
did not involve or consider Section 17(a) of the Securities Act, and although neither party cites any cases that apply
Morrison
to Section 17(a),
19
the Court agrees that
Morrison
applies to Section 17(a) of the Securities Act. At least one post
-Morrison
court in this district has held the Securities Act does not apply to “sales that occur outside the United States.”
20
See In re Royal Bank of Scotland Grp. PLC Sec. Litig.,
To the extent Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act both apply to “sales,” after
Morrison,
the Court agrees that Section 17(a) of the Securities Act does not apply to “sales that occur outside the United States.”
21
See In re Royal Bank of Scotland Grp. PLC Sec. Litig.,
The Court’s analysis as to IKB and ABN is not complete, however, as Section 17(a), unlike Section 10(b), applies not only to the “sale” but also to the
“offer ... of
any securities or any security-based swap agreement.” 15 U.S.C. § 77q(a) (emphasis added). Because Section 17(a) applies to “offer[s] or sale[s,]”
id.
§ 77q(a), “actual sales [are] not essential” for a Section 17(a) claim.
See S.E.C. v. Am. Commodity Exch., Inc.,
In another footnote in his motion to dismiss, Tourre argues that the SEC’s allegation that Goldman offered ABACUS securities to IKB from the United States is irrelevant because IKB is based in Germany. In effect, Tourre’s argument is that an *165 “offer,” еven if made in the United States, is not domestic if it is made to a foreign party. 22 Nothing in the definition of “offer,” however, indicates that the focus of that term, for purposes of Section 17(a) liability, is on the recipient. To the contrary, the Securities Act defines an “offer” to “include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.” 15 U.S.C. § 77b(a)(3). This definition leaves no doubt that the focus of “offer,” under the Securities Act, is on the person or entity “attempting] or offering] to dispose of’ or “soliciting] ... an offer to buy” securities or security-based swaps. Id.
In order for an “offer” to be domestic, a person or entity must (1) “attempt or offer[,]” in the United States, “to dispose of’ securities or security-based swaps or (2) “solicit[,]” in the United States, “an offer to buy” securities or security-based swaps.
See Morrison,
2. ACA Capital
With respect to ACA Capital, the Court finds the SEC sufficiently alleges Goldman and Tourre — “in the offer” and “sale” of ABACUS securities and security-based swaps — knowingly, recklessly, or negligently misled ACA Capital into believing Paulson was a long investor, when it was really a short investor. See 15 U.S.C. § 77q(a). Tourre does not argue that Morrison bars the Section 17(a) “offer” and “sale” claims as to ACA Capital.
3. Other Institutional Investors
Lastly, with respect to the SEC’s allegation regarding other institutional investors, in a letter dated February 15, 2011, the SEC provided the Court with two emails, both dated February 27, 2007, Goldman allegedly sent to potential investors regarding ABACUS.
See In re
*166
Citigroup, Inc.,
The Court finds that by virtue of alleging Tourre was principally responsible for ABACUS and its marketing materials (Am. Compl. ¶ 4), the SEC sufficiently alleges Tourre violated Section 17(a) when Goldman’s structured product syndicate desk invited institutional investors to contact Goldman’s sales representatives in New York regarding ABACUS
(id.
¶ 66).
See Tambone,
CONCLUSION
For the reasons provided above, Defendant Fabrice Tourre’s Motion to Dismiss the Amended Complaint is DENIED as to the Section 17(a) Securities Act allegations pertaining to “offers” to IKB and ABN (first count), GRANTED as to the Section 17(a) allegations pertaining to “sales” to IKB and ABN (first count), DENIED as to the Section 17(a) allegations pertaining to “offers” and “sales” to ACA Capital (first count), DENIED as to the Section 17(a) allegations pertaining to “offers” to other institutional investors (first count), GRANTED with respect to the Sеction 10(b) and Rule 10b-5 Exchange Act allegations pertaining to IKB and ABN (second and third counts), and DENIED as to the Section 10(b) and Rule 10b-5 allegations pertaining to ACA Capital (second and third counts).
SO ORDERED.
Notes
. The Court heard oral argument on Tourre's motion on February 14, 2011.
. CDOs are debt securities collateralized by debt obligations, including RMBSs. (Am. Compl. ¶ 14.) These securities are packaged and generally held by a special purpose vehicle that issues notes entitling their holders to payments derived from the underlying assets. (Id.) In a synthetic CDO, the special purpose vehicle does not own a portfolio of fixed income assets, but enters into credit default swaps ("CDS”) that reference the performance of a portfolio. (Id.)
A CDS is an over-the-counter derivative contract under which a protection buyer makes periodic premium payments and the protection seller makes a contingent payment if a reference obligation experiences a credit event. (Id. ¶ 12.)
. The Triple B tranche is the lowest investment grade RMBS and, after equity, is thе first part of the capital structure to experience losses associated with a deterioration of the underlying mortgage loan portfolio. (Am. Compl. ¶ 13.)
. The SEC points to an email Tourre sent a friend on January 23, 2007, stating, among other things, “More and more leverage in the system, The whole building is about to col *151 lapse anytime now.” (Am. Compl. ¶ 19.) The SEC also cites a February 11 email to Tourre from the head of Goldman's structured product correlation trading desk, stating, in part, “the cdo biz is dead we don’t have a lot of time left.” (Id.)
. The SEC cites, as an example, a March 12 memorandum by Goldman's Mortgage Capital Committee stating, “Goldman is effectively working an order for Paulson to buy protection on specific layers of the” ABACUS capital structure. (Am. Compl. ¶ 44.)
. After oral argument, Tourre provided the Court with a copy of this complete email chain. (Tourre Letter, Feb. 15, 2011, Ex. B.) While the SEC correctly quotes Tourre's response, it omits an earlier email in the chain by Jdrg Zimmermann, the Head of Correlation Products and Senior Vice President for IKB Credit Asset Mаnagement GmbH.
See In re Citigroup, Inc.,
No. 08 Civ. 3095(LTS),
. In other words, ACA Capital assumed the credit risk associated with that portion of the capital structure via a CDS in exchange for premium yearly payments. (Am. Compl. ¶ 67.)
. Since Rule 10b-5 extends no further than Section 10(b), the Supreme Court also held, "if § 10(b) is not extraterritorial, neither is Rule 10b-5.”
Morrison,
.
In SEC v. National Securities, Inc.,
the Supreme Court quipped, “[t]he relevant definitional sections of the [Exchange] Act are for thе most part unhelpful; they only declare generally that the terms ‘purchase’ and 'sale' shall include contracts to purchase or sell.”
. As explained above, the SEC alleges IKB purchased $50 million of Class A-l ABACUS notes and $100 million of Class A-2 ABACUS notes. (Am. Compl. ¶¶ 53, 61.)
. Although the trade confirmations were not attached to the Amended Complaint, the Court considers these documents because they were " 'possessed by [and] known to the plaintiff' " and because the SEC relied upon them " 'in bringing the suit.’ "
See In re Citigroup, Inc.,
. Justice Stevens provided the following example:
Imagine, for example, an American investor who buys shares in a company listed only on an. overseas exchange. That company has a major American subsidiary with executives based in New York City; and it was in New York City that executives masterminded and implemented a massive deception which artificially inflated the stock price — and which will, upon its disclosure, cause the price to plummet. Or, imagine that those same executives go knocking on doors in Manhattan and convince an unsophisticated retiree, on the basis of material misrepresentations, to invest her life savings in the company’s doomed securities. Both of these investors would, under the Court’s new test, be barred from seeking relief under § 10(b).
Morrison,
. Both parties also discuss, at length, the implications of Regulation S, 17 C.F.R. §§ 230.901-230.905, for this case. Regulation S, however, by its own terms, "relate[s] solely to the application of Section 5 of the Securities Act ... and not to antifraud or *160 other provisions of the federal securities laws.” 17 C.F.R. § 230, Reg. S (Preliminary Note ¶ 1). In view of the fact that this case involves claims under Section 10(b) and Rule 10b-5 of the Exchange Act and Section 17(a) of the Securities Act, Regulation S does not apply to this case.
. The CDS confirmation states the transaction is between "Goldman Sachs International” and "ABN AMRO BANK NV LONDON BRANCH.” (Chepiga Decl. Ex. I (emphasis in original).)
. Although none of these documents, nor the ones referenced in the prior sentence, were attached to the Amended Complaint, the Court considers them because they were " 'possessed by [and] known to the plaintiff’ ” and because the SEC relied upon them " 'in bringing the suit.’ ”
See In re Citigroup, Inc.,
. All of the marketing examples the SEC provides in the Amended Complaint were made via email. (Am. Compl. ¶¶ 69-70.) Unlike some of the IKB solicitation emails, none of the ABN solicitation emails reference any direct conversations between Tourre and ABN. (Id.)
. The SEC never expressly alleges that Goldman or Tourre represented to ACA Capital that Paulson was a long equity investor. Instead, the SEC extends all of the alleged misrepresentations Goldman and Tourre made to ACA about Paulson being a long investor as though they were made — or at least apply with equal force — to ACA Capital. (See Am. Compl. ¶ 68.) Tourre does not take issue with this aspect of the SEC's allegations.
. In contrast to the IKB note purchases and the ABN CDS transaction, Tourre does not argue — at least at this stage — the ACA Capital ABACUS securities purchase and swap agreement are not domestic securities transactions under Morrison. In a footnote, however, Tourre states he reserves the right to demonstrate that ACA Capital’s investment fails to meet Morrison’s "transactional test.”
. The Court is, independently, unaware of any such cases.
.
In re Royal Bank of Scotland Grp. PLC Sec. Litig.
applied
Morrison
to Sections 11, 12, and 15 of the Securities Act, but' not to Section 17(a) because Section 17(a) was not at issue.
. To be sure, the definition of "sale” under the Securities Act is virtually identical to the definition of "sale” under the Exchange Act. Compare 15 U.S.C. § 77b(a)(3) (defining "sale” to "include every contract of sale or disposition of a security or interest in a security, for value”), with 15 U.S.C. § 78c(a)(14) (defining "sale” to "include any contract to sell or otherwise dispose of”).
. To the extent Tourre argues the “offer'' to IKB cannot be considered “domestic'' because the “offer” was made pursuant to Regulation S,
see
Chepiga Decl. Ex. A (ABACUS Offering Circular, dated April 26, 2007, which, although not attached to the Amended Complaint, the Court considers because the Offering Circular was " 'possessed by [and] known to the plaintiff " and because the SEC relied upon it " 'in bringing the suit[,]' "
see In re Citigroup, Inc.,
. These emails included ABACUS marketing materials. (Am. Compl. ¶¶ 56-60, 69-70.)