Absolute Activist Value Master Fund Ltd. v. Ficeto

• Decision Date: 13 April 2012
• Docket Number: Docket No. 11–0221–cv.
• Citation: 677 F.3d 60
• Parties: ABSOLUTE ACTIVIST VALUE MASTER FUND LIMITED, Absolute East West Fund Limited, Absolute East West Master Fund Limited, Absolute European Catalyst Fund Limited, Absolute Germany Fund Limited, Absolute India Fund Limited, Absolute Octane Fund Limited, Absolute Octane Master Fund Limited, Absolute Return Europe Fund Limited, Plaintiffs–Appellants, v. Todd M. FICETO, Individually and as a Guardian for Natalia C. Ficeto and Hunter M. Ficeto, Hunter World Markets, Inc., Florian Homm, Colin Heatherington, Craig Heatherington, CIC Global Capital Ltd., Sean Ewing, Ullrich Angersbach, John Does, 1 to 3, Jane Does, 1 to 3, Doe, Entities 1 to 3, Defendants–Appellees.
• Court: U.S. Court of Appeals — Second Circuit

677 F.3d 60

ABSOLUTE ACTIVIST VALUE MASTER FUND LIMITED, Absolute East West Fund Limited, Absolute East West Master Fund Limited, Absolute European Catalyst Fund Limited, Absolute Germany Fund Limited, Absolute India Fund Limited, Absolute Octane Fund Limited, Absolute Octane Master Fund Limited, Absolute Return Europe Fund Limited, Plaintiffs–Appellants,

v.Todd M. FICETO, Individually and as a Guardian for Natalia C. Ficeto and Hunter M. Ficeto, Hunter World Markets, Inc., Florian Homm, Colin Heatherington, Craig Heatherington, CIC Global Capital Ltd., Sean Ewing, Ullrich Angersbach, John Does, 1 to 3, Jane Does, 1 to 3, Doe, Entities 1 to 3, Defendants–Appellees.

Docket No. 11–0221–cv.

United States Court of Appeals, Second Circuit.

Argued: Nov. 21, 2011.Decided: March 1, 2012.Amended: April 13, 2012.

Linda Imes (David Spears, Christopher W. Dysard, Michelle Skinner, on the brief), Spears & Imes LLP, New York, N.Y., for Plaintiffs–Appellants.

Thomas V. Reichert, Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg, P.C., Los Angeles, Cal., for Defendants–Appellees Colin Heatherington, Todd M. Ficeto, Hunter World Markets, Inc.

Robert D. Owen (Peter Ligh, on the brief), Sutherland Asbill & Brennan LLP, New York, N.Y., for Defendant–Appellee Ullrich Angersbach.Robert J. Anello (Judith L. Mogul, Eli J. Mark, on the brief), Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., New York, N.Y., for Defendant–Appellee Sean Ewing.Gregory J. Wallance (Angela R. Vicari, on the brief), Kaye Scholer LLP, New York. N.Y., for Defendant–Appellee Craig Heatherington.

Before: NEWMAN, WINTER, and KATZMANN, Circuit Judges.

KATZMANN, Circuit Judge:

This case requires us to determine whether foreign funds' purchases and sales of securities issued by U.S. companies brokered through a U.S. broker-dealer constitute “domestic transactions” pursuant to Morrison v. National Australia Bank Ltd., ––– U.S. ––––, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010) ( “ Morrison ”), which held that § 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.” Id. at 2884 (emphasis added).

Plaintiffs-appellants, nine Cayman Islands hedge funds (the “Funds”), appeal from a judgment of the United States District Court for the Southern District of New York (Daniels, J.) dismissing the complaint with prejudice. For the reasons set forth below, while we conclude that the complaint does not sufficiently allege the existence of domestic securities transactions, we conclude that the plaintiffs should be given leave to amend the complaint to assert additional facts suggesting that the transactions at issue were domestic. Specifically, we hold that to sufficiently allege the existence of a “domestic transaction in other securities,” plaintiffs must allege facts indicating that irrevocable liability was incurred or that title was transferred within the United States. Because there has been significant ambiguity as to what constitutes a “domestic transaction in other securities,” the plaintiffs should have the opportunity to assert additional facts leading to the plausible inference that either irrevocable liability was incurred or that title passed in the United States. Accordingly, we affirm the judgment of the district court in part, reverse the judgment of the district court in part, and remand the case for further proceedings consistent with this Opinion.

BACKGROUND

A. The Complaint

The following facts are drawn from the allegations in the Funds' Amended Complaint filed on November 19, 2009 (the “complaint”).

Plaintiffs-appellants are nine Cayman Islands hedge funds that invested in a variety of asset classes on behalf of hundreds of investors around the world, including many investors in the United States. Each of the Funds engaged Absolute Capital Management Holdings Limited (“ACM”) from at least the middle of 2004 to act as its investment manager. ACM typically charged each Fund a monthly management fee of 2% per annum based on the particular Fund's net asset value (“NAV”) and a monthly performance fee of 20% of the increase in value of the Fund's NAV.

At all relevant times, defendant Florian Homm was the Chief Investment Officer of ACM, and defendants Sean Ewing and Ullrich Angersbach were the Chairman/Chief Executive Officer and Head of Investor Relations and Marketing, respectively, of ACM. Homm had powers of attorney to invest on the Funds' behalf. Defendants (and brothers) Colin and Craig Heatherington were ACM employees who were principals of defendant CIC Global Capital Ltd. (“CIC”). ¹ Defendant-appellee Todd Ficeto, a resident of California and registered securities agent in California, Florida, Illinois, Massachusetts, New Jersey, New York, Texas, and Washington, was the President, Director, and along with Homm, a co-owner of defendant-appellee Hunter World Markets, Inc. (“Hunter”), the SEC-registered broker-dealer incorporated and based in California with offices in Beverly Hills.

The complaint alleges that the defendants engaged in a variation on the classic “pump-and-dump” scheme, causing the Funds to suffer losses of at least $195 million through cycles of fraudulent trading of securities. Defendants' fraud allegedly operated as follows: defendants Homm, Ficeto, Hunter, and Colin Heatherington (collectively, the “Trading Defendants”) first caused the Funds to purchase billions of shares of thinly capitalized U.S.-based companies (the “U.S. Penny Stock Companies”) directly from those companies. All of these companies were incorporated in the United States and their shares (the “U.S. Penny Stocks”) were quoted on the Over–the–Counter Bulletin Board or by Pink OTC Markets, Inc.

Over approximately three years, the Trading Defendants allegedly caused the Funds to purchase the U.S. Penny Stocks directly from those companies in subscriptions pursuant to private offerings known as private investment in public equity (“PIPE”) transactions. Acting in their capacity as “placement agents,” Homm, Ficeto, and Hunter arranged the financing for these transactions and received placement fees in return. At or around the time of these purchases, the U.S. Penny Stock Companies registered their shares with the SEC.

At the time of each of these initial purchases by the Funds, the Trading Defendants either (1) already held in their own names, or otherwise controlled, substantial amounts of shares and/or warrants of the U.S. Penny Stock Companies, or (2) received shares and/or warrants from the U.S. Penny Stock Companies for little to no money in exchange for causing the Funds to purchase shares from those Companies. After causing the Funds to purchase the U.S. Penny Stocks directly from the U.S. issuers, the Trading Defendants then artificially inflated the prices of those stocks by trading and re-trading the U.S. Penny Stocks, often between and among the Funds, each time trading the stock at a higher price to create the illusion of trading volume. For example, on April 30, 2007, the Trading Defendants allegedly inflated the price of shares of ProElite, Inc. by causing one of the Funds, Absolute Return Europe Fund Limited, to sell 100 shares of ProElite, Inc. at $12 per share—6000 times its valuation just six months earlier. Moreover, this fraudulent trading was typically conducted through Hunter in its function as a broker-dealer.

According to the complaint, the purpose of these fraudulent trades was twofold: (1) to generate substantial commissions for Homm, Hunter, and Ficeto, and (2) to artificially inflate the stock price to the point at which the Trading Defendants (together with Craig Heatherington) were free to sell previously locked-up shares and exercise warrants to obtain additional shares, which they then sold to the Funds for a windfall, having obtained the shares or warrants for nothing or almost nothing. Once defendants had manipulated the prices of the U.S. Penny Stocks to the desired levels, the Trading Defendants, Craig Heatherington, and CIC sold the shares they had obtained fraudulently to the Funds at inflated prices.

In addition, Ficeto allegedly created a fraudulent vehicle called The Hunter Fund Ltd., the only investors in which were certain of the Funds. The Hunter Fund invested the Funds' money in some of the U.S. Penny Stock Companies. The Funds derived no benefit from the funneling of their money through The Hunter Fund prior to being invested in the U.S. Penny Stocks. Homm and Ficeto merely used The Hunter Fund to earn additional fees and to make loans to the U.S. Penny Stock Companies.

While the Trading Defendants caused the Funds' money to be invested in the U.S. Penny Stocks, other defendants allegedly raised money from investors in furtherance of the fraudulent scheme. As Head of Investor Relations and Marketing at ACM, defendant Angersbach was responsible for courting investors around the globe, including many in the United States. With knowledge of the fraudulent scheme, Angersbach allegedly encouraged further subscription in the Funds, marketing them heavily in the United States and elsewhere. Similarly, with knowledge of the fraudulent scheme, defendant Ewing allegedly traveled to the United States to meet with investors and potential investors in the Funds and to reassure those investors who were concerned about Homm's disciplinary history. Ewing also allegedly facilitated the fraud by misrepresenting the composition of the Funds' investment to investors.

The complaint alleges that the defendants benefited substantially as a result of the fraudulent scheme and at the expense of the Funds. Homm, Ficeto, and Hunter charged millions in fees and commissions on the Funds' loans to, subscriptions in, and other purchases of shares in the U.S. Penny Stock Companies. After inflating the prices of the U.S. Penny Stocks, Homm, Ficeto, Hunter, Colin Heatherington, Craig Heatherington,...