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POPE INVESTMENTS II, LLC v. DEHENG LAW FIRM
United States District Court, S.D. New York.
August 15, 2012.
"When reviewing a motion to dismiss, a court must accept as true all of the factual allegations set out in plaintiff's complaint, draw inferences from those allegations in the light most favorable to plaintiff, and construe the complaint liberally." Rescuecom Corp. v. Google Inc., 562 P.3d 123, 127 (2d Cir. 2009) (internal quotation marks omitted). "To survive a motion to dismiss, 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, 678 (2009), quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). The Securities Fraud ClaimsDeheng argues that plaintiffs do not state a claim upon which relief can be granted for securities fraud, because their allegations are "based in their entirety on alleged fraudulent conduct outside the United States and, for that reason," section 10(b) does not apply. Deheng's Br. 4, citing Morrison, 130 S. Ct. at 2888. Plaintiffs counter that Morrison is inapposite, since "the fraud at issue in this case originated when defendant Deheng, through its agent Helen Lv, convinced plaintiffs (American investors) to invest in an American company, AAXT, whose stock is listed on the domestic OTC Bulletin Board," and since "the fraud was perpetrated in part by way of documents filed pursuant to the Securities and Exchange Act of 1934 and Rule 14F-1." Pis.' Opp'n Br. 3. A.Before the Supreme Court's decision in Morrison, courts in this Circuit employed the "conduct" and "effects" tests to determine whether a plaintiff could properly bring a section 10(b) claim based on an extraterritorial securities transaction. Those tests "looked at two factors: (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." SEC v. Berger, 322 F.3d 187, 192 (2d Cir. 2003), overruled by Morrison, 130 S, Ct. 2869. In Morrison, the Supreme Court noted 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.'" 130 S. Ct. at 2877, quoting EEOC v. Arabian Am. Oil Co. (Aramco), 499 U.S. 244, 248 (1991). Finding no basis in the Exchange Act for the application of section 10(b) to foreign transactions, the Court rejected the "conduct" and "effects" tests, and instead adopted a "transactional test". Morrison, 130 S. Ct. at 2886. Thus, "Section 10 (b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States." Id. at 2888.2
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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