On June 18, 2019, Judge Richard Berman of the United States District Court for the Southern District of New York dismissed a putative securities class action brought by a Cayman Islands branch of a Brazilian bank against a Brazilian mining company (the “Company”) and its Brazilian parent companies on behalf of investors in certain of the Company’s bonds.  Banco Safra S.A. - Cayman Islands Branch v. Samarco Mineracao S.A., et al, 1:16-cv-08800 (S.D.N.Y. June 18, 2019).  Plaintiff alleged that defendants made misrepresentations about the safety of the Company’s mining operations in the wake of an “environmental disaster” in Brazil involving the bursting of one of the Company’s dams in violation of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder.  Plaintiff also alleged violations of Section 20(a) of the Exchange Act, along with claims for common law fraud, aiding and abetting fraud, and negligent misrepresentation.  The bonds at issue were not listed on a U.S. securities exchange and had been initially offered only outside the United States, and plaintiff’s alleged purchases were largely made in the secondary market.  The Court, in dismissing the amended complaint, held that plaintiff failed to allege a U.S. domestic securities transaction as required to overcome the presumption against the extraterritorial application of the U.S. securities laws.

As the Court highlighted, the U.S. Supreme Court established in Morrison v. National Australia Bank, 561 U.S. 247 (2010), that the reach of the U.S. securities laws is presumptively limited to (1) transactions in securities listed on domestic exchanges, and (2) domestic transactions in other securities.  The bonds at issue were not listed on a domestic securities exchange, so the Court’s analysis turned on whether the second prong was met.  Under Second Circuit authority, to establish a “domestic transaction,” a plaintiff must allege “facts indicating that irrevocable liability was incurred or that title was transferred within the United States.”  Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 68 (2d Cir. 2012).  

Defendants contended in their motion to dismiss that plaintiff’s allegations of domesticity were insufficient because they failed to allege: whether irrevocable liability was incurred or titled passed in the U.S.; where the contracts were formed, title passed, or money was exchanged; or any U.S. conduct by anyone relevant to plaintiff’s claims.  In its opposition to defendants’ motion to dismiss, plaintiff argued that the complaint supports “a plausible – if not compelling – inference of domesticity” because (i) all of the counterparties to the securities transactions and/or their agents were located in the U.S., (ii) all of the alleged transactions were conducted by the plaintiff and its affiliates through the plaintiff’s accounts located in the U.S.; (iii) all of the transactions were consummated in U.S. dollars; and (iv) each secondary market transaction was reported to FINRA.  

In granting defendants’ motion to dismiss, the Court considered and rejected each of plaintiff’s purported bases of domesticity.  First, the Court held that the fact that the Company’s counterparties and/or brokers were located in the U.S. does not establish that plaintiff’s purchases and sales of the bonds were domestic transactions.  The Court cited the Second Circuit’s decision in In re Petrobras Sec., 862 F.3d 262 (2017), to support to proposition that the location or residency of the “buyer, seller, or broker will not necessarily establish the situs of [a] transaction,” and noted that plaintiff failed to demonstrate how the information it provided—the names and addresses of its counterparties or brokers—“related to the formation of contracts, the placement of purchase orders, the passing of title, or the exchange of money” within the United States.  

Second, the Court found similarly unavailing plaintiff’s allegation that the bonds were domestic transactions because they were conducted through plaintiff’s New York bank accounts, agreeing with defendants that merely passing through New York’s banking system does not establish passage of title, and further observing that otherwise “there is almost no limiting principle” given the number of wire transfers and other transactions that pass through the banking system.  

Third, the Court rejected plaintiff’s argument that because the bonds were consummated with U.S. dollars, the currency renders them domestic transactions.  The Court reasoned that the currency used does not necessarily have any bearing on whether a purchase or sale is domestic within the meaning or Morrison.  Because the securities were “dollar-denominated,” any transaction anywhere in the world involving those securities must use U.S. dollars.  That fact, however, fell short of establishing a U.S. transaction.  

Fourth, the Court dispensed with plaintiff’s argument that the transactions were domestic because they were reported as secondary-market transactions to TRACE—an automated tracking system developed by FINRA that facilitates mandatory reporting of over-the-counter secondary market transactions, including debt securities purchased or sold as part of a U.S. transaction.  Rather, the Court held that plaintiff’s reliance upon TRACE is misplaced, noting that TRACE reporting does not determine whether or where irrevocable liability was incurred or where title transferred.  Highlighting the novelty of plaintiff’s argument, the Court noted that it had not identified any case holding that reporting to TRACE is sufficient to allege that irrevocable liability was incurred or title transferred in the U.S.  Further, the Court agreed with defendants’ argument that nothing in the TRACE regulations provides that non-U.S. transactions cannot be reported, nor do they provide that plaintiff  “was precluded” from reporting its purchases and sales of the bonds to TRACE even if those purchases and sales were not domestic transactions. 

Based on its analysis of plaintiff’s allegations, the Court determined that the complaint as alleged failed to establish, as required by Morrison, that the transactions were domestic based on the purchases or sales occurring in the U.S.  The decision illustrates how courts carefully scrutinize in the context of Morrison whether a complaint’s allegations sufficiently overcome the presumption against extraterritorial application of the U.S. securities law.  Because plaintiff failed to cure these deficiencies after multiple opportunities to amend, and after having previously advised that no further amendments would be allowed, the Court granted defendants’ motion to dismiss the Exchange Act claims with prejudice.  The Court also dismissed plaintiff’s state law claims without prejudice without ruling on their merits.

Banco Safra SA - Cayman Islands Branch v. Samarco Mineracao SA et al. (SDNY)