On June 21, 2012, the Southern District of New York denied ICP Asset Management LLC’s motion for summary judgment in an SEC action alleging that the New York-based investment advisory firm had defrauded investors in several foreign investment vehicles it managed, including four Cayman Islandsbased collateralized debt obligations (the “Triaxx CDOs”). SEC v. ICP Asset Mgmt., LLC, 2012 WL 2359830 (S.D.N.Y. June 21, 2012) (Kaplan, J.) (ICP). Relying on the Second Circuit’s recent decision in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) (Katzmann, J.) (Absolute Activist II), the ICP court found that there was sufficient evidence to permit the inference that the transactions at issue were “domestic transactions in other securities” within the meaning of the Supreme Court’s ruling in Morrison v. National Australia Bank, 130 S. Ct. 2869, 2884 (2010).4
On June 21, 2010, the SEC brought suit against ICP Asset Management LLC and its president, as well as two related entities (collectively, the “ICP Defendants”) alleging, inter alia, that the ICP Defendants had “engaged in a range of improper transactions that defrauded the Triaxx CDOs of tens of millions of dollars and placed them at risk of substantial additional losses in the future.” Complaint and Jury Demand at 2. “Starting in 2007, as the mortgage markets increasingly deteriorated,” the ICP Defendants allegedly “repeatedly caused the Triaxx CDOs, their advisory clients, to overpay for bonds—often in order to protect another ICP client from realizing losses or to make money for ICP.” Id. The SEC asserted claims under Section 10(b) of the Exchange Act, Section 17(a) of the Securities Act, and the Investment Advisers Act of 1940.5
On November 9, 2011, the ICP Defendants moved for summary judgment on Morrison grounds, arguing that “the Supreme Court made clear … that foreign transactions are beyond the scope of the federal securities laws, even if a significant portion of the allegedly fraudulent conduct takes place in the United States.” ICP Defendants’ Memorandum of Law in Support of Motion for Partial Summary Judgment at 1 (“Summary Judgment Motion”). The ICP Defendants emphasized that “[n]one of the relevant investment funds issued securities that were listed on a domestic exchange; nor were any of their securities ‘purchased’ or ‘sold’ in the United States.” Id.
In support of these arguments, the ICP Defendants pointed to Absolute Activist Value Master Fund Ltd. v. Homm, 2010 WL 5415885 (S.D.N.Y. Dec. 22, 2010) (Daniels, J.) (Absolute Activist I), among other authorities. The ICP Defendants claimed that the Absolute Activist I court had “examined nearly identical transactions by and between foreign funds” and “determined that they did not constitute domestic transactions under Morrison.” Summary Judgment Motion at 14. In Absolute Activist I, “hedge funds registered in the Cayman Islands, which invested on behalf of foreign and American investors, sued their foreign investment manager, a foreign seller, and a United States-based broker for arranging allegedly fraudulent purchases of penny stocks issued by United States companies registered with the SEC.” Id. The Absolute Activist I court dismissed with prejudice the hedge fund plaintiffs’ complaint, finding that the “plain language of the ‘transaction test’ established in Morrison precludes this action from moving forward.” Absolute Activist I, 2010 WL 5415885, at *5.6
On March 1, 2012—several months after the ICP Defendants moved for summary judgment— the Second Circuit issued its decision in Absolute Activist II “interpret[ing] Morrison’s second prong and determin[ing] under what circumstances the purchase or sale of a security that is not listed on a domestic exchange should be considered ‘domestic’ within the meaning of Morrison.” Absolute Activist II, 677 F.3d at 66–67. The Second Circuit held that “to sufficiently allege the existence of a ‘domestic transaction in other securities,’ plaintiffs must allege facts indicating that irrevocable liability was incurred or that title was transferred within the United States.” Id. at 62. While the Second Circuit affirmed the dismissal of the hedge funds’ complaint in Absolute Activist I, the court “conclude[d] that the plaintiffs should be given leave to amend the complaint to assert additional facts suggesting that the transactions at issue were domestic.” Id.7
The Court Relies on Absolute Activist II to Deny the ICP Defendants’ Motion for Summary Judgment as to the SEC’s Claims under Section 10(b) and Section 17(a)
The Southern District of New York found that the ICP Defendants’ motion for summary judgment “implicate[d] the issue of when ‘transactions in other securities’ are domestic” under Morrison. ICP, 2012 WL 2359830 at *2. The ICP Defendants’ principal argument was that “[t]he Morrison transactional test is not satisfied by the conduct of entities in the United States facilitating private transactions between foreign funds.” Summary Judgment Motion at 14. The court noted that in making this argument, the ICP Defendants relied on Absolute Activist I, which the Second Circuit in Absolute Activist II had since reversed in part.
Without discussing the SEC’s allegations against the ICP Defendants, the Southern District of New York held simply that “[t]he evidence before this [c]ourt is sufficient to at least permit the inference that the trades complained of were domestic transactions with the meaning of Absolute Activist [II].” ICP, 2012 WL 2359830, at *2. “Accordingly,” the court determined that the ICP Defendants’ motion “must be denied” as to the SEC’s claims brought under Section 10(b). Id.
With respect to the SEC’s Section 17(a) claim, the court explained that “[t]he elements of a claim under Section 17(a) of the Securities Act are essentially the same as those under Section 10(b) of the Exchange Act.” Id. “Many courts—including the Second Circuit— analyze claims under both statutes together.” Id.
The ICP court observed that “[s]ince Morrison, three courts in this district have applied its holding to claims under the Securities Act.” Id. (citing In re Vivendi Universal, S.A., Sec. Litig., 2012 WL 280252, at *5 (S.D.N.Y. Jan. 27, 2012); SEC v. Goldman Sachs & Co., 790 F. Supp. 2d 147, 164 (S.D.N.Y. 2011); In re Royal Bank of Scot. Grp. PLC Sec. Litig., 765 F. Supp. 2d 327, 338 & n.11 (S.D.N.Y. 2011)). The ICP court “join[ed] this nascent consensus and conclude[d] that the Morrison analysis for the Securities Act claim is identical [to] that applicable to claims under the Exchange Act.” Id. The court therefore denied the ICP Defendants’ motion for summary judgment as to the Section 17(a) claim.
The Court Denies the ICP Defendants’ Motion for Summary Judgment as to the SEC’s Advisers Act Claims
The ICP Defendants argued that “‘Morrison bars the [SEC’s] Advisers Act claims because the statute does not ‘regulate the activity of investment advisers with respect to foreign clients engaged in foreign transactions.’” Id. at 2 (quoting Summary Judgment Motion at 28).
In SEC v. Gruss, 2012 WL 1659142 (S.D.N.Y. May 9, 2012) (Sweet, J.), the defendant similarly argued that “under Morrison, claims predicated on fraud must only be directed at domestic clients because the focus of the [Advisers Act] is not upon the place where the fraud allegedly originated but upon the location of the client.” Id. at *6. Rejecting this contention, the Gruss court “concluded that the ‘text and regulatory structure [demonstrate that] the focus of the [Advisers Act] is clearly on the investment adviser and its actions’—not the location of the client.” ICP, 2012 WL 2359830, at *3 (quoting Gruss, 2012 WL 1659142, at *9).
The ICP court agreed with the Gruss court’s analysis, and held that evidence that the ICP Defendants’ “clients were foreign entities [did] not entitle them to summary judgment dismissing the Advisers Act claims.” Id. “Indeed, the evidence before the [c]ourt is sufficient to at least permit the inference that the conduct complained of was domestic and violated the Advisers Act.”