Source: https://casetext.com/case/absolute-activist-value-master-fund-ltd-v-ficeto
Timestamp: 2019-09-18 11:47:17
Document Index: 171155441

Matched Legal Cases: ['§ 10', '§ 78', '§ 10', '§ 240', '§ 10', '§ 10', '§ 10', '§ 10', '§ 10', '§ 10', '§ 10', '§ 10', '§ 78', '§ 78', '§ 2', '§ 10', '§ 10']

Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 | Casetext
Absolute Activist Value Master Fund Ltd. v. Ficeto
677 F.3d 60 (2d Cir. 2012)
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Absolute Activist Value Master Fund Ltd.v.Ficeto
United States Court of Appeals, Second Circuit.Apr 13, 2012
Linda Imes (David Spears, Christopher W. Dysard, Michelle Skinner, on the brief), Spears & Imes LLP, New York, N.Y., for Plaintiffs–Appellants. Thomas V. Reichert, Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg, P.C., Los Angeles, Cal., for Defendants–Appellees Colin Heatherington, Todd M. Ficeto, Hunter World Markets, Inc.
Linda Imes (David Spears, Christopher W. Dysard, Michelle Skinner, on the brief), Spears & Imes LLP, New York, N.Y., for Plaintiffs–Appellants. Thomas V. Reichert, Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg, P.C., Los Angeles, Cal., for Defendants–Appellees Colin Heatherington, Todd M. Ficeto, Hunter World Markets, Inc. Robert D. Owen (Peter Ligh, on the brief), Sutherland Asbill & Brennan LLP, New York, N.Y., for Defendant–Appellee Ullrich Angersbach.Robert J. Anello (Judith L. Mogul, Eli J. Mark, on the brief), Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., New York, N.Y., for Defendant–Appellee Sean Ewing.Gregory J. Wallance (Angela R. Vicari, on the brief), Kaye Scholer LLP, New York. N.Y., for Defendant–Appellee Craig Heatherington.
Before: NEWMAN, WINTER, and KATZMANN, Circuit Judges.
This case requires us to determine whether foreign funds' purchases and sales of securities issued by U.S. companies brokered through a U.S. broker-dealer constitute “domestic transactions” pursuant to Morrison v. National Australia Bank Ltd., ––– U.S. ––––, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010) ( “ Morrison ”), which held that § 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) only applies to “transactions in securities listed on domestic exchanges[ ] and domestic transactions in other securities.” Id. at 2884 (emphasis added).
At all relevant times, defendant Florian Homm was the Chief Investment Officer of ACM, and defendants Sean Ewing and Ullrich Angersbach were the Chairman/Chief Executive Officer and Head of Investor Relations and Marketing, respectively, of ACM. Homm had powers of attorney to invest on the Funds' behalf. Defendants (and brothers) Colin and Craig Heatherington were ACM employees who were principals of defendant CIC Global Capital Ltd. (“CIC”). Defendant-appellee Todd Ficeto, a resident of California and registered securities agent in California, Florida, Illinois, Massachusetts, New Jersey, New York, Texas, and Washington, was the President, Director, and along with Homm, a co-owner of defendant-appellee Hunter World Markets, Inc. (“Hunter”), the SEC-registered broker-dealer incorporated and based in California with offices in Beverly Hills.
The complaint alleges that on or about September 18, 2007, Homm abruptly resigned from ACM “and went into hiding.” Am. Compl. ¶ 9. Neither Homm nor defendant CIC has appeared in this action.
The complaint alleges that the defendants benefited substantially as a result of the fraudulent scheme and at the expense of the Funds. Homm, Ficeto, and Hunter charged millions in fees and commissions on the Funds' loans to, subscriptions in, and other purchases of shares in the U.S. Penny Stock Companies. After inflating the prices of the U.S. Penny Stocks, Homm, Ficeto, Hunter, Colin Heatherington, Craig Heatherington, and CIC profited by causing the Funds to purchase from them U.S. Penny Stocks that they owned and had acquired for pennies (or less). Angersbach, through a corporate entity he controlled, collected proceeds of at least $8.8 million through sales of his ACM holdings, and Ewing, through a corporate entity he controlled, collected proceeds of $55.3 million. Both Angersbach and Ewing obtained further proceeds by redeeming their holdings in the Funds at a profit. While the defendants reaped enormous profits, the Funds allegedly suffered losses in the amount of $195,916,216. B. Procedural History
We review de novo a district court's dismissal pursuant to Fed.R.Civ.P. 12(b)(1) or Fed.R.Civ.P. 12(b)(6), “accepting all factual allegations in the complaint as true.” Ford v. D.C. 37 Union Local 1549, 579 F.3d 187, 188 (2d Cir.2009) (per curiam) (reciting standard of review for Rule 12(b)(1) motion); Flagler v. Trainor, 663 F.3d 543, 546 n. 2 (2d Cir.2011) (reciting standard of review for Rule 12(b)(6) motion). “To survive a motion to dismiss [pursuant to Rule 12(b)(6) ], a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (internal quotation marks omitted).
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). Rule 10b–5, which was promulgated under § 10(b), provides:
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b–5.
In determining whether § 10(b) and Rule 10b–5 could apply extraterritorially, this Court had previously applied the so-called conduct and effects test, which focused on: “(1) whether the wrongful conduct occurred in the United States, and (2) whether the wrongful conduct had a substantial effect in the United States or upon United States citizens.” See SEC v. Berger, 322 F.3d 187, 192–93 (2d Cir.2003). However, in Morrison, the Supreme Court rejected the conduct and effects test and held that § 10(b) and Rule 10b–5 do not apply extraterritorially, but only apply to “transactions in securities listed on domestic exchanges[ ] and domestic transactions in other securities.” 130 S.Ct. at 2884. A. The Morrison Decision
Turning to the merits, the Supreme Court, noting the “longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States,” id. at 2877 (internal quotation marks omitted), held that § 10(b) of the Exchange Act does not apply extraterritorially, id. at 2883. In so holding, the Supreme Court eschewed the Second Circuit's conduct and effects test in favor of a “transactional test,” which provides that § 10(b) only applies to “transactions in securities listed on domestic exchanges[ ] and domestic transactions in other securities.” Id. at 2884, 2886. “With regard to securities not registered on domestic exchanges, the exclusive focus [is] on domestic purchases and sales....” Id. at 2885.
Because Rule 10b–5 “was promulgated under § 10(b) and does not extend beyond conduct encompassed by § 10(b)'s prohibition,” Rule 10b–5 similarly cannot be applied extraterritorially. Morrison, 130 S.Ct. at 2881 (internal quotation marks omitted).
The case at hand does not concern the first prong of Morrison—whether a transaction involves a security listed on a domestic exchange. Rather, we must interpret Morrison 's second prong and determine under what circumstances the purchase or sale of a security that is not listed on a domestic exchange should be considered “domestic” within the meaning of Morrison. See Plumbers' Union Local No. 12 Pension Fund v. Swiss Reins. Co., 753 F.Supp.2d 166, 176 (S.D.N.Y.2010) (“[W]hile Morrison held that a domestic purchase or sale is necessary (and, as far as that opinion reveals, sufficient) for section 10(b) to apply to a security that is not traded on a domestic securities exchange, it did not have occasion to discuss what it means for a purchase or sale to be ‘made in the United States.’ ”). For the reasons that we elaborate below, we hold that transactions involving securities that are not traded on a domestic exchange are domestic if irrevocable liability is incurred or title passes within the United States. B. Subject Matter Jurisdiction
On appeal, the Funds argue that their complaint sufficiently pleads the existence of domestic securities transactions within the second prong of Morrison and thus do not address whether their allegations satisfy the first prong of Morrison. It is worth noting, however, that in another proceeding, which was brought by the Securities and Exchange Commission (“SEC”) against Ficeto, Homm, Colin Heatherington, and Hunter and involves many of the same allegations in the Funds' complaint, the SEC has successfully argued that the first prong of Morrison is satisfied because the case involves securities traded on the over-the-counter securities market, not securities sold on foreign exchanges. See SEC v. Ficeto, ––– F.Supp.2d ––––, ––––, No. 11 Civ. 1637(GHK), 2011 WL 7445580, at *9 (C.D.Cal. Dec. 20, 2011) (holding that Morrison “did not purport to overturn the universally accepted principle that § 10(b) applies with equal force to market manipulation on national exchanges and the domestic over-the-counter market”). We take no position on this issue.
While Morrison holds that § 10(b) can be applied to domestic purchases or sales, it provides little guidance as to what constitutes a domestic purchase or sale. To determine the meaning of a domestic purchase or sale, we first consider how these terms are defined in the Exchange Act. “The terms ‘buy’ and ‘purchase’ each include any contract to buy, purchase, or otherwise acquire.” 15 U.S.C. § 78c(a)(13). Similarly, “[t]he terms ‘sale’ and ‘sell’ each include any contract to sell or otherwise dispose of.” Id. § 78c(a)(14). While the Supreme Court has previously noted that these definitions “are for the most part unhelpful” because “they only declare generally that the terms ‘purchase’ and ‘sale’ shall include contracts to purchase or sell,” see SEC v. Nat'l Sec., Inc., 393 U.S. 453, 466, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969), these definitions nonetheless suggest that the act of purchasing or selling securities is the act of entering into a binding contract to purchase or sell securities. Put another way, these definitions suggest that the “purchase” and “sale” take place when the parties become bound to effectuate the transaction.
However, we do not believe this is the only way to locate a securities transaction. After all, a “sale” is ordinarily defined as “[t]he transfer of property or title for a price.” Black's Law Dictionary 1454 (9th ed. 2009); see also U.C.C. § 2–106(1) (“A ‘sale’ consists in the passing of title from the seller to the buyer for a price.”). Thus, a sale of securities can be understood to take place at the location in which title is transferred. Indeed, the Eleventh Circuit has held that, in order to survive a motion to dismiss premised on Morrison, it is sufficient for the plaintiff to allege that title to the shares was transferred within the United States. See Quail Cruises Ship Mgmt. Ltd. v. Agencia de Viagens CVC Tur Limitada, 645 F.3d 1307, 1310–11 (11th Cir.2011) (“Given that the Supreme Court in Morrison deliberately established a bright-line test based exclusively on the location of the purchase or sale of the security, we cannot say at this stage in the proceedings that the alleged transfer of title to the shares in the United States lies beyond § 10(b)'s territorial reach.”). Accordingly, to sufficiently allege a domestic securities transaction in securities not listed on a domestic exchange, we hold that a plaintiff must allege facts suggesting that irrevocable liability was incurred or title was transferred within the United States.
We now turn briefly to the reasons we reject other potential tests proposed by the parties. Plaintiffs suggest that the location of the broker-dealer should be used to locate securities transactions. While we agree that the location of the broker could be relevant to the extent that the broker carries out tasks that irrevocably bind the parties to buy or sell securities, the location of the broker alone does not necessarily demonstrate where a contract was executed. Next, plaintiffs assert that the identity of the securities should be used to determine whether a securities transaction is domestic and that where, as in this case, the securities are issued by United States companies and are registered with the SEC, the transactions are domestic within the meaning of Morrison. However, the plaintiffs' argument is belied by the wording of the test announced in Morrison. The second prong of that test refers to “domestic transactions in other securities,” Morrison, 130 S.Ct. at 2884, not “transactions in domestic securities” or “transactions in securities that are registered with the SEC.” Thus, we cannot conclude that the identity of the security necessarily has any bearing on whether a purchase or sale is domestic within the meaning of Morrison.
Of course, pursuant to the first prong of Morrison, § 10(b) does apply to transactions in securities that are listed on a domestic exchange. Morrison, 130 S.Ct. at 2884.
Defendants Ficeto, Hunter, and Colin Heatherington argue that the identity of the buyer or seller should be used to determine whether a transaction is domestic. Where the buyer and seller are both foreign entities, these defendants argue that a transaction cannot be considered domestic. Under this test, the second type of transaction at issue in this case—the transactions between and among the Funds themselves—would not be domestic. While it may be more likely for domestic transactions to involve parties residing in the United States, “[a] purchaser's citizenship or residency does not affect where a transaction occurs; a foreign resident can make a purchase within the United States, and a United States resident can make a purchase outside the United States.” Plumbers' Union, 753 F.Supp.2d at 178.
While arguing in their reply brief that the identity of the buyer or seller is irrelevant under Morrison, the plaintiffs suggest in their opening brief that because the sellers of the U.S. Penny Stocks were United States companies, the Funds' initial purchases of the U.S. Penny Stocks were domestic purchases.
In the sixty-one page complaint, there are only a few allegations that mention or even hint at the location of the securities transactions at issue in this case. The sole allegation that affirmatively states that the transactions took place in the United States only does so in conclusory fashion: “The fraudulent transactions that Defendants carried out through Hunter took place in the United States.” Am. Compl. ¶ 21(i). Absent factual allegations suggesting that the Funds became irrevocably bound within the United States or that title was transferred within the United States, including, but not limited to, facts concerning the formation of the contracts, the placement of purchase orders, the passing of title, or the exchange of money, the mere assertion that transactions “took place in the United States” is insufficient to adequately plead the existence of domestic transactions. The complaint alleges that investors subscribed to the Funds by wiring money to a bank located in New York. However, this allegation, even if true, is inapposite as the case before us was brought by the Funds themselves and is based on the Funds' purchases and sales of U.S. Penny Stocks rather than individual investors' subscriptions to the Funds. Similarly, allegations that the Funds were heavily marketed in the United States and that United States investors were harmed by the defendants' actions, while potentially satisfying the now-defunct conduct and effects test, see Morrison, 547 F.3d at 171, do not satisfy the transactional test announced in Morrison.
In this case, we conclude that the Funds should be given leave to amend their complaint. We first observe that the Funds' complaint was filed before the Supreme Court issued its decision in Morrison and before this Court provided guidance about how to adequately plead a domestic purchase or sale. It appears as though the complaint was drafted to satisfy the conduct and effects test, which was in operation when the complaint was filed. After all, the complaint alleges, among other things, that Ficeto and Hunter carried out their fraudulent activities in the United States, that the defendants marketed the Funds in the United States, and that United States investors were injured by the fraud. Given that the Funds understandably drafted their complaint in accordance with pre- Morrison doctrine, they cannot be faulted for their failure to allege facts suggesting that irrevocable liability was incurred within the United States.
Of course, notwithstanding the change in doctrine, it would not be appropriate to grant leave to amend if doing so would be futile. In this case, however, we cannot conclude that amendment would be futile given the Funds' representations made both in their briefs and at oral argument that additional facts could be alleged to show that the transactions were domestic. For example, in their reply brief, the Funds represent that the underlying transactional documents, which are not currently part of the record in this case, demonstrate that the transactions occurred in the United States. Moreover, during oral argument, the Funds claimed to possess trading records, private placement offering memoranda, and other documents indicating that the purchases became irrevocable upon payment and that payment was made through Hunter in the United States. Given these representations, we direct the district court to grant the plaintiffs leave to amend their complaint in order to plead additional factual allegations to support their claim that the transactions took place in the United States. D. Alternate Grounds for Dismissal
Certain of the defendants-appellees contend that the dismissal of the complaint can be affirmed on various alternate grounds, including (1) that the statute of limitations has elapsed, (2) lack of personal jurisdiction, and (3) failure to state a claim upon which relief can be granted. Because the district court did not consider these arguments in the first instance, we remand to the district court to determine whether dismissal is appropriate on any of these alternate grounds. Baker v. Dorfman, 239 F.3d 415, 420 (2d Cir.2000) (“[A] federal appellate court does not consider an issue not passed upon below.”) (internal quotation marks omitted). On remand, following the filing of the Funds' amended complaint, the district court may consider whether dismissal is appropriate on these grounds or any other ground raised by the defendants in response to the amended complaint.