Raser Techs., Inc. v. Morgan Stanley & Co.

Decision Date13 August 2019
Docket NumberNo. 20170325,20170325
Citation449 P.3d 150
CourtUtah Supreme Court

Karra J. Porter, Kristen C. Kiburtz, Paul T. Moxley, Patrick E. Johnson, Salt Lake City, Alan M. Pollack, New York, NY, James W. Christian, Houston, TX, for appellants

James S. Jardine, Mark W. Pugsley, Robert P. Harrington, Salt Lake City, for appellees

Richard C. Pepperman II, John G. McCarthy, New York, NY, pro hac vice, for appellees Goldman Sachs & Co., LP; Goldman Sachs Execution and Clearing L.P.; Goldman Sachs International

Andrew J. Frackman, Abby F. Rudzin, Brad M. Elias, New York, NY, pro hac vice, for appellees Merrill Lynch, Pierce, Fenner & Smith Inc.; Merrill Lynch Professional Clearing Corp.; Merrill Lynch International

On Direct Appeal

Justice Pearce, opinion of the Court:


¶ 1 Raser Technologies, Inc., Kelly Trimble, Mark Sansom, Ocean Fund, LLC (Ocean Fund), Warner Investments, LLC, and Maasai, Inc. (collectively Plaintiffs) allege a complex conspiracy among Merrill Lynch, Pierce, Fenner & Smith (Merrill), Merrill Lynch Professional Clearing Corporation (Merrill Clearing), Merrill Lynch International (Merrill International), Goldman Sachs & Co., (Goldman), Goldman Sachs Execution and Clearing (Goldman Clearing), and Goldman Sachs International (Goldman International) (collectively Defendants).3

¶ 2 Plaintiffs allege that Defendants "devised and perpetrated a naked short selling stock manipulation scheme that targeted and intentionally destroyed a Utah company, Raser Technologies." The merits of this theory are not before us. Instead, we are faced with the threshold determination of whether a Utah court may assert specific personal jurisdiction over some or all of Defendants.

¶ 3 Raser was a geothermal energy company incorporated in Delaware and headquartered in Utah. Raser maintained an investment banking relationship with Merrill. In 2008, Merrill structured several transactions on behalf of Raser in a stated effort to raise capital for the company. Around this time, Merrill and Goldman sold Raser’s stock short. Some of these sales may have constituted a related, but separate, practice known as naked short selling.

¶ 4 Several years after the short sales occurred, Raser filed for bankruptcy. Plaintiffs subsequently sued Merrill, Goldman, and several related entities, for violations of the Utah Pattern of Unlawful Activity Act.4

Plaintiffs alleged that communications and securities fraud formed the pattern’s skeleton of unlawful activity.

¶ 5 Defendants moved to dismiss Plaintiffs’ complaint for lack of personal jurisdiction. In response, Plaintiffs argued that the court could assert specific jurisdiction over Defendants because of the contacts each defendant developed with Raser. Plaintiffs also argued that even if each individual defendant did not establish minimum contacts with the State of Utah, the district court could exercise personal jurisdiction because Defendants had engaged in a conspiracy to manipulate Raser’s stock price, the effects of which were felt by Utah residents. Plaintiffs alternatively argued that so long as one defendant established minimum contacts with the state, those contacts could be imputed to the other defendants under the conspiracy theory of jurisdiction. The district court disagreed with each contention and dismissed Plaintiffs’ complaint for want of personal jurisdiction.

¶ 6 The district court analyzed Plaintiffs’s claims against Defendants collectively, without analyzing the nature of each individual defendant’s contacts as they relate to each individual plaintiff’s claims. Recent United States Supreme Court jurisprudence clarifies that courts must analyze each plaintiff’s claims and the relation of those claims to the forum state, in addition to analyzing a defendant’s contacts to the forum state. Because the district court analyzed Plaintiffs’ claims and Defendants’ contacts collectively, it may have distorted its analysis.

¶ 7 After analyzing recent United States Supreme Court jurisprudence, we conclude that there is an articulation of the conspiracy theory of jurisdiction that comports with the due process principles of the Fourteenth Amendment. And we hold that the Utah Nonresident Jurisdiction Act compels us to adopt the conspiracy theory of jurisdiction.

¶ 8 We vacate and remand for the district court to reexamine the claims and contacts, and apply the jurisdictional tests we announce here.

I. Short Selling

¶ 9 A brief overview of the trading practice known as short selling helps understand Plaintiffs’ allegations.5 Short selling is best characterized as a "sell high, buy low" strategy. Alexis Brown Stokes, In Pursuit of the Naked Short , 5 N.Y.U. J. L. & BUS. 1, 3 (2009). If everything goes according to plan, an investor, suspecting that the price of a stock will decrease, borrows the stock, sells it, waits for the price to decline, purchases the stock at the lower price, returns the stock to the lender, and "pockets the difference in price as profit." Id. Typically, the investor will borrow the stock from a brokerage firm, and the borrowed stock originates from the firm’s own inventory, the margin account of other brokerage firm clients, or another lender. U.S. SEC. & EXCH. COMM’N, KEY POINTS ABOUT REGULATION SHO , https://www.sec.gov/investor/pubs/regsho.htm (last visited August 7, 2019). Short selling is a lawful trading practice in many instances. Id. But short selling is illegal when used to manipulate the price of a stock. Id.

¶ 10 In a typical transaction, the seller has a three-day settlement period to deliver the stock to the buyer. U.S. SEC. & EXCH. COMM’N, NAKED SHORT SALES , https://www.sec.gov/answers/nakedshortsale.htm (last visited August 7, 2019). In a naked short sale, the investor identifies a stock that she suspects is overvalued and likely to decrease in price, then sells shares of the stock that she does not own or has not borrowed and does not intend to own or borrow, thus creating phantom shares of the stock. Id. ; Stokes, supra ¶ 9 at 6. Because the seller does not own or possess the shares she sold, she cannot deliver the securities within the settlement period. U.S. SEC. & EXCH. COMM’N, KEY POINTS ABOUT REGULATION SHO , https://www.sec.gov/investor/pubs/regsho.htm (last visited August 7, 2019). This is known as a "failure to deliver" or "fail"—the securities equivalent of an "IOU." Stokes, supra ¶ 9 at 7; U.S. SEC. & EXCH. COMM’N, KEY POINTS ABOUT REGULATION SHO , https://www.sec.gov/investor/pubs/regsho.htm (last visited August 7, 2019).

¶ 11 The Depository Trust and Clearing Corporation (DTCC) records the fails. The DTCC is "a financial services company that clears and settles securities trades and provides custody of securities." Stokes, supra ¶ 9 at 6. The DTCC eliminates the need for exchanging paper stock certificates and provides an efficient and safe trading mechanism for buyers and sellers. Id.

¶ 12 This system allows a transaction to occur, and all monies to be paid, before delivery of the stock occurs. Id. Broker-dealers and banks credit the shares to the buyer before delivery. Id. at 7. If the seller does not deliver the shares, a fail occurs, but the buyer still possesses the purchased shares. Id. This can result in an artificial oversupply of the stock. Id. When the market is flooded with the chimerical shares, the stock price usually falls. Id. The SEC heavily regulates naked short selling, and its legality is confined to limited circumstances. U.S. SEC. & EXCH. COMM’N, KEY POINTS ABOUT REGULATION SHO , https://www.sec.gov/investor/pubs/regsho.htm (last visited August 7, 2019). Plaintiffs allege that Defendants’ trading practices ventured outside of these limited circumstances and into the realm of illegal activity.

II. Raser

¶ 13 Raser was a geothermal energy company incorporated in Delaware with its principal place of business in Salt Lake City, Utah. Raser planned to develop a new geothermal plant in Beaver County, Utah. Over 250 Raser shareholders resided in Utah, including plaintiffs Kelly Trimble and Mark Sansom.

¶ 14 Raser needed to raise capital to fund its ongoing operations and construction projects. In 2007, Raser entered into negotiations with "upper management" at Merrill to structure a series of transactions designed to raise capital. Raser’s CEO, Kraig Higginson, participated in the negotiations on behalf of the company. The negotiations involved "in excess of a dozen conferences," both in Utah and telephonically with individuals in Utah, and the exchange of multiple documents to and from the parties in Utah. At the conclusion of the negotiations, Merrill proposed a $55 million Convertible Bond Offering (CBO).

The Transaction

¶ 15 For the CBO, Merrill suggested that Higginson contact two of Raser’s shareholders, Ned Warner6 and Ty Mattingly, to release approximately three million unrestricted shares of Raser stock. Higginson explained that, at Merrill’s suggestion, the shares were to be used as "hedges" in the bond offering. After the discussion with Higginson, Warner spoke with one of Merrill’s managing directors regarding his unrestricted shares.

¶ 16 In his telephone conversation with Merrill, Warner "expressed ... [his] willingness to open an account with [Merrill] and deposit [his] 2,000,000 unrestricted shares of Raser stock." However, Warner "clearly indicated ... that [he] only would be willing to have [his] shares used by participants in the CBO, and that under no circumstances did [he] want [his] shares used by any other party who wanted to short Raser’s stock." Merrill assured Warner that the shares would only be used by participants in the CBO. In reliance on this representation, Warner signed and filed the necessary paperwork to open a Merrill account and had his stock certificates delivered to the local Merrill office in Provo, Utah. The CBO occurred in March...

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