The Massachusetts Supreme Court recently affirmed a lower court ruling that the Massachusetts Secretary of the Commonwealth (“Secretary”) had jurisdiction to impose the state’s securities regulations on a non-resident hedge fund. In its unanimous decision in Bulldog Investors General Partnership v. Secretary of the Commonwealth, SJC-10589 (July 2, 2010), the Court upheld the determination that plaintiffs Bulldog Investors General Partnership (“Bulldog”), its principal Philip Goldstein, and affiliated hedge funds (collectively, “plaintiffs”) were subject to the Secretary’s regulatory jurisdiction because plaintiffs operated a website accessible in Massachusetts and had allegedly made, via e-mail, a prohibited offer to sell unregistered securities to a potential investor in Massachusetts.
Bulldog’s Solicitations and Massachusetts’ Regulatory Action
From June 2005 to January 2007, Bulldog maintained an interactive website that provided information about investment products it offered for sale. By registering with the site, users could obtain more specific information detailing Bulldog’s various hedge funds. In November 2006, a Massachusetts resident, Brendan Hickey, registered with the Bulldog site by providing the requested personal contact information. A Bulldog employee then contacted Hickey by e-mail and provided various documents regarding the performance of Bulldog’s hedge funds, among other information.
In January 2007, the Secretary filed an administrative complaint against Bulldog and Goldstein on the ground that the e-mail communication to Hickey was an illegal offer of unregistered securities in violation of Massachusetts law. In answering the administrative complaint, Bulldog and the other plaintiffs asserted several affirmative defenses, including that the Secretary lacked jurisdiction over Bulldog because it was not present in Massachusetts and that the complaint violated their right to free speech under then First Amendment to the U.S. Constitution.
The hearing officer for the administrative proceeding concluded that plaintiffs had violated Massachusetts law. The officer ruled that the illegal offer constituted a sufficient nexus to afford the Secretary personal jurisdiction to regulate Bulldog. The hearing officer declined to rule on the First Amendment argument because Bulldog had by that time commenced an action in state Superior Court regarding its free speech claim and the hearing officer deferred to that court. A cease and desist order was issued and a $25,000 fine imposed as a sanction for the violation.
Plaintiffs then brought an action in Superior Court for judicial review of the outcome of the administrative hearing. The Superior Court agreed with the hearing officer and concluded that personal jurisdiction over plaintiffs was statutorily authorized and satisfied due process. The appeal to the Massachusetts Supreme Court followed.
The Massachusetts Supreme Court Decision
In affirming the Superior Court’s conclusion that the Secretary had personal jurisdiction over the non-resident plaintiffs, the Supreme Court held that the text and purpose of the Massachusetts Act establish that the Secretary is authorized to exercise personal jurisdiction over nonresidents in an administrative proceeding. This is because “the Secretary possesses the authority to conduct investigations inside or outside the Commonwealth to determine if a violation has occurred” because an “‘offer’ [to sell unregistered securities] includes not only offers that originate within the Commonwealth but also ones directed into the Commonwealth and received [in the Commonwealth].” Moreover, the Supreme Court held that because “any nonresident who has violated the act is deemed to have appointed the Secretary as his agent to receive process,” the Secretary must also have the power to bring a respondent before a tribunal to adjudicate whether a violation had occurred.
The Supreme Court found that due process was satisfied because “[b]y contacting Hickey [via e-mail], the plaintiffs purposefully availed themselves of the privilege of conducting business activities in Massachusetts and invoked the protection of Massachusetts law.” In short, the Court held that because plaintiffs had maintained a website accessible in Massachusetts and had sent a prohibited solicitation to a Massachusetts resident, it was reasonable for the plaintiffs to anticipate being subject to personal jurisdiction in Massachusetts.
Notably, the Court held that the presence of a disclaimer on the website asserting that the website was not an offer or solicitation, did not negate the conclusion that the e-mail communication to Hickey, which had no such disclaimer, was a prohibited offer or solicitation to sell unregistered securities. In addition, although additional steps would have been required before Hickey could actually purchase any securities from Bulldog, the Court held that the communication still constituted an offer because it was “designed to stimulate interest in purchasing Bulldog’s securities.” That was sufficient to constitute a violation.
Implications for Funds
The Bulldog decision cautions that, although a fund may not be a resident of a particular state in which it is remotely conducting business, it may still be subject to administrative enforcement proceedings in connection with its activities in that foreign state. To avoid inadvertent violations and enforcement proceedings in foreign states, funds must be familiar with the state’s relevant securities laws and regulations before commencing any business in that state, even when such business is delivered remotely from outside the state through electronic means such as websites and e-mail.