In its Morrison decision, the Supreme Court limited the scope of Section 10(b) claims to “transactions in securities listed on our domestic exchanges, and domestic transactions in other securities.” While determining whether a security is listed on a domestic exchange is a relatively straightforward question (although some plaintiffs have unsuccessfully attempted to complicate it), the Court offered little guidance on what constitutes a “domestic transaction.”
The Second Circuit has tried to provide some clarity. In Absolute Activist Value Master Fund Ltd. v. Ficeto, 2012 WL 661771 (2d Cir. March 1, 2012), the court evaluated “whether foreign funds’ purchases and sales of securities issued by U.S. companies brokered through a U.S. broker-dealer constitute ‘domestic transactions.'” The court concluded that there are two related tests for determining domesticity.
As a threshold matter, the court noted that the purchase or sale of a security normally takes place when the parties become bound to effectuate the transaction. The court held that the same test can be used to determine the locus of the purchase or sale. Based on this reasoning, “it is sufficient for a plaintiff to allege facts leading to the plausible inference that the parties incurred irrevocable liability within the United States: that is, 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.” Alternatively, a “sale” is defined as a transfer of title and it also is sufficient for a plaintiff to adequately allege that title was transferred within the United States.
In the instant case, the plaintiffs merely had alleged that the transactions took place within the United States. The court found that more factual allegations related to irrevocable liability and/or transfer of title were necessary and could include “facts concerning the formation of the contracts, the placement of purchase orders, the passing of title, or the exchange of money.” Because the complaint had been filed pre-Morrison, and based on the plaintiffs’ representations that they could provide such factual allegations if required, the court granted them leave to amend.
Holding: Dismissal affirmed in part and reversed in part.
Quote of note: “[R]ather than looking to the identity of the parties, the type of security at issue, or whether each individual defendant engaged in conduct within the United States, we hold that a securities transaction is domestic when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed within the United States.”