On 19 June 2018, the Second Circuit Court of Appeals (which hears appeals from Connecticut, New York and Vermont) held in Giunta v. Dingman that allegations that parties had reached an agreement within the United States for the sale of foreign securities established a "domestic transaction" sufficient to bring related fraud claims within the scope of the U.S. securities laws under Morrison v. National Australia Bank Ltd.
The plaintiff alleged that, while the parties were in New York, he conducted meetings and phone calls with the defendant (the operator of restaurant companies in the Bahamas) regarding an investment in a holding company that owned a restaurant in the Bahamas. The plaintiff further alleged that the defendant made a number of misrepresentations, including that the holding company owned 100 percent of the restaurant, that the plaintiff would receive a 50 percent equity stake in the holding company, that the defendant had personally invested more than $600,000, that the holding company was profitable, and that the holding company would have only three shareholders. Although the investment agreement was never reduced to writing, the plaintiff allegedly wired more than $300,000 to the defendant. Eventually, the defendant allegedly sent a letter to investors stating that the restaurant had closed, and revealing to the plaintiff for the first time that there were additional investors, and that the defendant was not a 50 percent owner.
Construing the requirement in Morrison that Section 10(b) claims apply only to transactions listed on domestic exchanges and "domestic transactions in other securities," the district court concluded that, because Bahamian law required approval by the Bahamian Investments Board and the Central Bank of the Bahamas before shares could be issued to a foreign investor, the investment was not consummated in the United States and did not constitute a "domestic transaction." The plaintiff therefore was not "irrevocably bound" to his investment through a U.S. transaction.
The Second Circuit reversed and relied on its earlier decision in Choi v. Tower Research Capital LLC, where it held that if trades were "matched" with counterparties in the United States but "cleared and settled" in Korea the following day, irrevocable liability attached in the United States and established a domestic transaction under Morrison. In the new case, the Second Circuit found that the oral investment agreement was a domestic transaction because, like in Choi, the parties agreed to be obligated to each other in the United States even if those obligations were still subject to a condition subsequent.
The court also rejected the defendant's argument that, even if the agreement were a domestic transaction, the claims were so predominantly foreign as to render them "impermissibly extraterritorial" under the Second Circuit's prior decision in Parkcentral Global HUB Ltd. v. Porsche Automobile Holdings SE. Distinguishing Parkcentral, which involved conduct primarily in Germany that was already the basis of foreign investigations and enforcement actions, the Second Circuit held that the circumstances cited by the defendant—the defendant's permanent residence in the Bahamas, the Bahamian focus of the business venture, the incorporation of the entities in the Bahamas, the presence of witnesses, books and records in the Bahamas, and the potential applicability of Bahamian regulations—did not render the claims impermissibly extraterritorial. Thus, based on the plaintiff's allegations that the agreement between the parties in the United States was a contract, the court held that Section 10(b) would apply.
As reflected in this decision, the Second Circuit continues to elaborate on the contours of extraterritoriality for Section 10(b) claims. Here the Court held that, where parties reach an agreement for the sale of securities within the United States, the transaction will be considered a "domestic transaction" for purposes of the U.S. securities laws, with any additional considerations of foreign government involvement to be considered on a case-by-case basis.
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