Second Circuit Interprets Transaction Prong of Morrison Test

Recently, in Absolute Activist Value Master Fund Limited v. Ficeto, Docket No. 11-0221-cv, 2012 U.S. App. LEXIS 4258 (2d Cir. Mar. 1, 2012), the Second Circuit interpreted for the first time, the second prong of the test enunciated by the Supreme Court in Morrison v. National Australia Bank, 130 S. Ct. 2689 (2010), which rejected nearly fifty years of legal precedent and limited the ability of investors to invoke the protection of the United States securities laws. In Morrison, the Supreme Court held that Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) only applies to “transactions in securities listed on domestic exchanges and domestic transactions in other securities.” 130 S. Ct. at 2884, 2886.

In Absolute Activist, the Second Circuit determined under what circumstances the purchase or sale of a security not listed on a domestic exchange should be considered “domestic.” The Court concluded that transactions involving securities that are not traded on a domestic exchange are domestic if irrevocable liability is incurred or title passes within the United States. 2012 U.S. App. LEXIS 4258, at *16.

Because the point at which the parties become irrevocably bound is used to determine the timing of a purchase and sale, the Court held that the point of irrevocable liability also can be used to determine the locus of a securities purchase or sale. Thus, in order to adequately allege the existence of a domestic transaction, it is sufficient for a plaintiff to allege facts leading to the plausible inference that the parties incurred irrevocably 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. 2012 U.S. App. LEXIS 4258, at *20-21. However, the Court did not believe this was the only way to locate a securities transaction. Because a “sale” is ordinarily defined as “[t]he transfer of property or title for a price,” the sale of securities can be understood to take place at the location in which title is transferred. 2012 U.S. App. LEXIS 4258, at *21.

The Absolute Activist court rejected several other tests proposed by the parties. Although the Court acknowledged that the location of the broker could be relevant to the extent that the broker carries out task that irrevocably bind the parties to buy or sell securities, the location of the broker alone does not necessarily demonstrate where a contract was executed. 2012 U.S. App. LEXIS 4258, at *22. The Court also rejected the test that the identity of the securities i.e. that the securities were issued by a U.S. company and registered with the SEC, should determine whether a transaction was domestic. The Second Circuit also rejected defendants’ argument that the identity of the buyer or seller should be used to determine whether a transaction is domestic.

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