The World in U.S. Courts: Summer 2013 - Securities Law Enforcement | June.06.2013
A district court in New York held that an international purchaser of securities sufficiently pleaded a Section 10(b) claim by alleging that it delivered the purchase price for the securities to the securities’ trustee in the United States.
Plaintiff Arco Capital Corporations Ltd. (“Arco”), a Caymanian company based in Puerto Rico, filed an action against defendant Deutsche Bank AG, setting forth two causes of actions for securities fraud under Section 10(b) of the Securities and Exchange Act of 1934 and 10(b)-5 and common law breach of contract. Arco’s claims related to Deutsche Bank’s offer and sale of notes tied to a portfolio containing transactions originated by Deutsche Bank and effected through a Caymanian collateralized loan obligation. Arco purchased several of the offered Notes through its agent Gramercy Emerging Market Funds (“Gramercy”), which transferred the Notes to Arco in a pass-through transaction. In connection with the purchase of the notes, Gramercy executed Note Subscription Agreements with the transaction’s Issuer, which were agreed to and accepted in the Cayman Islands. Deutsche Bank moved to dismiss Arco’s complaint, claiming that Arco could not raise a Section 10(b) claim because, among other things, it did not purchase the Notes on a U.S.-based exchange or in a U.S.-based transaction.
The Court held that a transaction is U.S.-based if title is passed or irrevocable liability is incurred in the United States. In support of its complaint, Arco contended that the subject transaction was U.S.-based because, among other things, Deutsche Bank controlled and managed the transaction from New York and the relevant agreements are governed by New York law. The Court found that Arco’s allegations were sufficient to show that Arco’s purchase of the securities was a U.S.-based transaction. It further found that parties incur irrevocable liability in the United States when a purchaser takes and pays for the security in the United States or when the seller agrees to deliver a security in the United States. Thus, it held that Arco sufficiently pled that irrevocable liability was incurred in the United States when Arco alleged that, per the applicable Note Subscription Agreements, Arco was to deliver the securities’ purchase price to the Issuer in New York.