Litigation: Off-market securities likely no more domestic than their name suggests

2nd Circuit interprets ambiguity in Supreme Court securities transaction case

In Morrison v. National Australia Bank Ltd., the Supreme Court held that Section 10(b)’s fraud prohibition only applies to “transactions in securities listed on domestic exchanges and domestic transactions in other securities.” In the 22 months since the high court decided Morrison, its jurisdictional bar has been broadly extended beyond the case’s narrow, “f-cubed” factual context: foreign plaintiffs suing foreign defendants in connection with securities traded on foreign exchanges. Morrison’s progeny have confirmed that suits against foreign companies involving transactions in securities listed on domestic exchanges will largely be nonstarters.

As for the off-market transactions prong of Morrison, it has remained an open question as to when the purchase or sale of a security that is not listed on a domestic exchange can be considered sufficiently domestic under Morrison. The 2nd Circuit addressed this ambiguity for the first time on March 1 in Absolute Activist Value Master Fund Ltd. v. Ficeto, announcing a standard for “domestic transactions in other securities” that combined the tests the 11th Circuit and the Southern District of New York (SDNY) previously proposed. Per Ficeto, in order to establish the existence of a “domestic transaction in other securities,” a plaintiff “must allege facts suggesting that either irrevocable liability was incurred or title transferred within the United States.” Due to the large volume of cases brought by plaintiffs alleging that U.S. securities laws should apply to nonmarket transactions, the case’s impact could be potentially vast.

Next, the 2nd Circuit recognized the differing analytical path the 11th Circuit took in Quail Cruises Ship Mgmt. Ltd. v. Agencia de Viagens CVC Tur Limitada, in which it held that an allegation that title to the shares was transferred within the U.S. was sufficient to survive a Morrison-based motion to dismiss. Thus, the 2nd Circuit adopted a two-part test: “to sufficiently allege a domestic securities transaction in securities not listed on a domestic exchange,” a plaintiff “must allege facts suggesting that irrevocable liability was incurred or title was transferred within the United States.”

Applying the test, the court concluded that plaintiffs had not sufficiently alleged domestic transactions because the complaint’s sole allegation that affirmatively stated transactions transpired in the U.S. was conclusory. Quoting Morrison, the court emphasized that “the focus of the Exchange Act is…upon purchases and sales of securities in the United States,” rather than the locus of wrongdoing. Nonetheless, the court granted the plaintiffs leave to amend because they had filed their complaint well in advance of Morrison, and seemed to have drafted it with the now-defunct “conduct and effects” test in mind.

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Matthew Ingber

Matthew Ingber is a litigation partner at Mayer Brown.

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