On Thursday, March 1, 2012, the Second Circuit Court of Appeals affirmed in part and reversed in part a District Court decision dismissing a complaint for securities fraud filed by nine Cayman Islands hedge funds against entities and individuals involved in an alleged pump-and-dump scheme. Absolute Activist Value Master Fund Limited v. Ficeto, Docket No. 11-0221-cv, Slip. op (2d Cir. Mar. 1, 2012). The Court, reviewing the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), concluded that plaintiffs had failed to allege the existence of a domestic purchase or sale of securities, but ruled that they should be granted leave to amend their complaint to attempt to do so.

In 2009, the nine plaintiff hedge funds, who had invested in a variety of asset classes on behalf of hundreds of investors in the United States and around the world, filed a complaint against an investment manager, several executives, and a registered broker-dealer. Plaintiffs alleged that defendants engaged in a variation on a "pump-and-dump" scheme through private offerings known as private investment in public equity or "PIPE" transactions, causing the Funds to suffer losses of at least $195 million.

On December 22, 2010, the district court dismissed the complaint in its entirety, ruling, sua sponte, that it lacked subject matter jurisdiction over the case pursuant to Morrison, in which the Supreme Court held that Section 10(b) and Rule 10b-5 do not apply extraterritorially, but only apply to "transactions in securities listed on domestic exchanges and domestic transactions in other securities."

The Second Circuit noted that, "[w]hile Morrison holds that § 10(b) can be applied to domestic purchases or sales, it provides little guidance as to what constitutes a domestic purchase or sale." The Court concluded that a plaintiff must allege facts suggesting that irrevocable liability was incurred ("the point at which the parties obligated themselves to perform what they had agreed to perform [the purchase or sale of the securities] even if the formal performance of their agreement is to be after a lapse of time) in the United States or that or title was transferred within the United States. The Court rejected other theories argued by the parties to determine whether a purchase or sale was "domestic," including basing the determination on: (1) the location of the broker-dealer; (2) the fact that the securities were issued by United States companies and registered with the SEC; and (3) the identity of the buyer.

Applying this standard to the present case, the Second Circuit concluded that

[a]bsent factual allegations suggesting that the Funds became irrevocably bound within the United States or that title was transferred within the United States, including, but not limited to, facts concerning the formation of the contracts, the placement of purchase orders, the passing of title, or the exchange of money, the mere assertion that transactions "took place in the United States" is insufficient to adequately plead the existence of domestic transactions.

The Second Circuit ruled that, since the complaint was filed before the Supreme Court’s ruling in Morrison, plaintiffs would be permitted to amend their complaint. Because the District Court did not consider defendants other alternative grounds for dismissal (based on lack of personal jurisdiction, Rule 12(b)(6) and the statute of limitations), the Second Circuit did not rule on any of those arguments either. Those issues, along with the subject matter jurisdiction issue described above, were remanded to the District Court.