Second Circuit Reverses Lower Court's Dismissal Of Securities Fraud Complaint Under Morrison

Author:Ms Veronica Callahan, John A. Freedman, Daphne Morduchowitz, Vincent A. Sama, Catherine Bandeira De Mello Schumacher and Jennifer Wieboldt
Profession:Arnold & Porter

On June 19, 2018, the Court of Appeals for the Second Circuit in Giunta v. Dingman, No. 17-1375-cv, 2018 WL 3028686 (2d Cir. Jun. 19, 2018), reversed and vacated the dismissal of Plaintiffs' securities fraud complaint concerning a Bahamian resident and his Bahamian company, Out West Hospitality Ltd. (OWH), holding that there were sufficient allegations of connections with the United States to constitute a "domestic transaction." The district court had dismissed, citing Morrison v. National Australia Bank, which held that Section 10(b) of the Securities and Exchange Act of 1934 does not apply extraterritorially.1 Since Morrison was decided, plaintiffs' lawyers have been testing the limits of what constitutes a "domestic" transaction for purposes of a federal securities fraud claim. The Second Circuit's decision in Giunta provides additional guidance to practitioners regarding what constitutes a domestic transaction under the Exchange Act and further broadens the scope of what transactions involving foreign corporations can be considered "domestic" and subject to claims under US securities laws.

Background: Giunta v. Dingman District Court Order

Plaintiffs brought a Section 10(b) action against Defendants alleging that defendant Dingman and various of his associated entities, including the holding company OWH, whose shares were listed on the exchange in the Bahamas, were liable for misrepresentations regarding the sale of securities to Plaintiffs. Plaintiffs allege that defendant Dingman made repeated misrepresentations on calls and at meetings in New York regarding the structure of OWH and its subsidiaries, Dingman's personal investments in OWH, OWH's profitability, and Plaintiffs and Dingman's positions as the only equity stakeholders in OWH. As a result of these alleged misrepresentations, plaintiff Gordon entered into an agreement whereby Gordon would receive a 50% equity stake in return for his investment (the Agreement).

The action was originally commenced by 14 American and Bahamian plaintiffs, but 11 plaintiffs dismissed their claims after Defendants filed a motion to dismiss for forum non conveniens leaving only the US citizen Plaintiffs. The district court dismissed the action, concluding that the transaction was not domestic because approval by the appropriate Bahamian authorities was required for the shares to be issued and reasoned that this approval was a condition precedent that had to be satisfied before Dingman and Gordon...

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