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POPE INVESTMENTS II, LLC v. DEHENG LAW FIRM
United States District Court, S.D. New York.
August 15, 2012.
[W]e think that the focus of the Exchange Act is not upon the place where the deception originated, but upon 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 securities exchange or any security not so registered." 15 U.S.C. § 78j(b). Those purchase-and-sale transactions are the objects of the statute's solicitude. It is those transactions that the statute seeks to "regulate"; it is parties or prospective parties to those transactions that the statute seeks to "protec[t]." And it is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies. Id. at 2884 (internal citations omitted). In this passage, the Court makes clear that § 10(b) applies only to "purchase-and-sale transactions" that are executed "in the United States" and not to all securities that happen to be cross-listed on an American exchange. Indeed, it is "the primacy of the domestic exchange" to the Exchange Act as a whole that provides the context for the Court's analysis. Id. In re UBS Sec. Litig., No. 07 Civ. 11225 (RJS), 2011 U.S. Dist. LEXIS 106274, at * 14-15 (S.D.N.Y. Sept, 13, 2011) (brackets and emphasis in UBS); see In re Alstom SA Sec. Litig., 741 F.Supp.2d 469, 473 (S.D.N.Y. 2010) ("That the transactions themselves must occur on a domestic exchange to trigger application of § 10(b) reflects the most natural and elementary reading of Morrison."). Thus, the AAXT Investors' purchase of AAXT shares by a private placement is not a domestic transaction unless the sales transaction took place in the United States. In UBS and Alstom, the plaintiffs purchased stock in foreign companies that cross-listed their shares on the New York Stock Exchange and foreign exchanges. Here, AAXT is a Delaware corporation which lists its shares only on the OTCBB. That distinction, however, does not compel a different result. As UBS and Alstom hold, Morrison's focus is on the transaction's location, not the parties' citizenship. See, e.g., Alstom, 741 F. Supp. 2d at 472-73 ("the Court was concerned with the territorial location where the purchase or sale was executed and the securities exchange laws that governed the transaction"). Under Morrison, the Court must look to where the securities transaction occurred to determine whether section 10(b) applies. Therefore, plaintiffs do not plead a domestic securities transaction by alleging that AAXT lists its shares on the domestic OTCBB. 2.The Court must then determine whether plaintiffs have pled facts sufficient to create a plausible inference that the securities transaction occurred 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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