## Facts

- Nine Cayman Islands hedge funds managed by an investment manager alleged they were used as vehicles in a penny-stock manipulation scheme.
- The funds claimed officers and related broker-dealers caused them to purchase billions of shares of U.S.-based penny-stock issuers.
- The alleged scheme involved acquiring large positions cheaply, inducing fund purchases, artificially inflating prices, and profiting from the funds’ purchases.
- The funds asserted federal securities fraud claims under Exchange Act § 10(b) and SEC Rule 10b-5.
- The transactions at issue were not alleged to have occurred on a U.S. exchange; the funds emphasized U.S. issuers and use of a U.S. broker-dealer.
- The district court dismissed the complaint with prejudice for failure to allege “domestic transactions” as required after Morrison.

## Issues

1. For securities not listed on a U.S. exchange, what facts determine whether a transaction is a “domestic transaction in other securities” under Morrison?
2. Did the complaint adequately plead that the funds’ purchases and sales were domestic transactions where § 10(b) applies?

## Decision

- The court held that, for non-exchange-listed securities, a transaction is domestic if the parties incurred irrevocable liability within the United States or if title passed within the United States.
- The court agreed the complaint failed to plead sufficient facts showing where irrevocable liability was incurred or where title transferred.
- The court affirmed dismissal for failure to state a claim under the domestic-transaction requirement.
- The court reversed the “with prejudice” aspect of the dismissal and remanded to permit amendment given uncertainty following Morrison.

## Legal Principles

- Exchange Act § 10(b) applies only to (1) transactions in securities listed on domestic exchanges and (2) domestic transactions in other securities.
- For “other securities,” plaintiffs must allege facts supporting a plausible inference that:
  - irrevocable liability to buy or sell was incurred in the United States, or
  - title to the securities was transferred in the United States.
- Allegations that issuers are U.S.-based or that a U.S. broker-dealer was used, without more, do not establish a domestic transaction.
- Adequate pleading generally requires transaction-level facts bearing on where binding commitments were made or where title passed (e.g., where orders were accepted or obligations became fixed).

## Conclusion

The court clarified that Morrison’s second category turns on where irrevocable liability is incurred or where title transfers, not merely on U.S. connections such as issuer location or a U.S. broker; because the complaint lacked those transaction-location facts, dismissal was warranted but amendment was required.


Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012)