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POPE INVESTMENTS II, LLC v. DEHENG LAW FIRM
United States District Court, S.D. New York.
August 15, 2012.
Plaintiffs alternatively contend that the transaction was domestic because AAXT filed a Rule 14F-1 statement with the SEC to notify it of a change in a majority of its directors, and that "the fraud was perpetrated in part by way of" that filing. Pis.' Opp'n Br. 3. Implicit in that argument is the notion that because section 10(b) proscribes "any manipulative or deceptive device or contrivance," applying it to punish fraud that occurred in the United States is not an extraterritorial application. However, the Supreme Court addressed that issue in Morrison and held that it is not the location of the fraud but the location of the securities transaction that defines whether section 10(b) applies: Petitioners argue that the conclusion that § 10(b) does not apply extraterritorially does not resolve the case. They contend that they seek no more than domestic application anyway, since Florida is where HomeSide and its senior executives engaged in the deceptive conduct of manipulating HomeSide's financial models; their complaint also alleged that Race and Hughes made misleading public statements there. This is less an answer to the presumption against extraterritorial application than it is an assertion a quite valid assertion — that the presumption here (as often) is not self-evidently dispositive, but its application requires further analysis. For it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States. But 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. In Aramco, for example, the Title VII plaintiff had been hired in Houston, and was an American citizen. See 499 U.S., at 247. The Court concluded, however, that neither that territorial event nor the relationship was the "focus" of congressional concern, id., at 255, but rather domestic employment. See also Foley Bros., 336 U.S., at 283, 285-86. Applying the same mode of analysis here, we think that the focus of the Exchange Act is not upon the place where the deception originated, but upon the purchases and sales of securities in the United States. Section 10(b) does not punish deceptive conduct, but only deceptive conduct "in connection with the purchase or sale of any security registered on a national security exchange or any security not so registered." 15 U.S.C. § 78j(b). ... 130 S. Ct. at 2883-84 (emphasis in original) (parallel citations omitted). It is therefore "only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies." Id. at 2884. Despite the deceptive conduct in the United States, the Morrison Court concluded: "This case involves no securities listed on a domestic exchange, and all aspects of the purchases complained of by those petitioners who still have live claims occurred outside the United States. Petitioners have therefore failed to state a claim on which relief can be granted." Id. at 2888. Therefore, plaintiffs' argument that section 10(b) applies here because the underlying fraud originated in the United States asks the court to use the now-defunct "conduct" test, and thus fails in light of Morrison. Cf. Cornwell v. Credit Suisse Grp., 729 F.Supp.2d 620, 624 (S.D.N.Y. 2010) ("to carve out of the new rule a purchase or sale of securities on a foreign exchange because some acts that ultimately result in the execution of the transaction abroad take place in the United States amounts to nothing more than the reinstatement of the conduct test"). Plaintiffs plead no allegations regarding the transfer of title of AAXT's shares, and thus they do not create a plausible inference that title was transferred in the United States.
1. Section 10(b) makes unlawful, "in connection with the purchase or sale of any security," the use of "any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission [i.e., the Securities and Exchange Commission] may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). Under Rule 10b5, 17 C.F.R. § 240.10b-5,
It shall be unlawful for any person, directly or indirectly, by the use of any mans 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 an untrue statement of material fact or 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 as a fraud or deceit upon any person, in connection with the purchase or sale of a security.
2. Rule 10b-5 "was promulgated under § 10(b), and `does not extend beyond conduct encompassed by § 10(b)'s prohibition.' United States v. O'Hagan, 521 U.S. 642, 651 (1997). Therefore if § 10(b) is not extraterritorial, neither is Rule 10b-5." Morrison, 130 S. Ct. at 2881. Thus, the discussion of plaintiffs' section 10(b) claims in this Opinion and Order applies equally to their claims under Rule 10b-5.
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