Testing the Limits of Morrison

Veronica E. Callahan and Vincent A. Sama are partners and Jennifer Wieboldt is an associate at Arnold & Porter Kaye Scholer LLP. This post is based on an Arnold & Porter memorandum by Ms. Callahan, Mr. Sama, Ms. Wieboldt, John A. Freedman, Daphne Morduchowitz, Catherine B. Schumacher.

On June 19, 2018, the Court of Appeals for the Second Circuit in Giunta v. Dingman, No. 17-1375-cv, 2018 WL 3028686 (2d Cir. Jun. 19, 2018), reversed and vacated the dismissal of Plaintiffs’ securities fraud complaint concerning a Bahamian resident and his Bahamian company, Out West Hospitality Ltd. (OWH), holding that there were sufficient allegations of connections with the United States to constitute a “domestic transaction.” The district court had dismissed, citing Morrison v. National Australia Bank, which held that Section 10(b) of the Securities and Exchange Act of 1934 does not apply extraterritorially. [1] Since Morrison was decided, plaintiffs’ lawyers have been testing the limits of what constitutes a “domestic” transaction for purposes of a federal securities fraud claim. The Second Circuit’s decision in Giunta provides additional guidance to practitioners regarding what constitutes a domestic transaction under the Exchange Act and further broadens the scope of what transactions involving foreign corporations can be considered “domestic” and subject to claims under US securities laws.

Background: Giunta v. Dingman District Court Order

Plaintiffs brought a Section 10(b) action against Defendants alleging that defendant Dingman and various of his associated entities, including the holding company OWH, whose shares were listed on the exchange in the Bahamas, were liable for misrepresentations regarding the sale of securities to Plaintiffs. Plaintiffs allege that defendant Dingman made repeated misrepresentations on calls and at meetings in New York regarding the structure of OWH and its subsidiaries, Dingman’s personal investments in OWH, OWH’s profitability, and Plaintiffs and Dingman’s positions as the only equity stakeholders in OWH. As a result of these alleged misrepresentations, plaintiff Gordon entered into an agreement whereby Gordon would receive a 50% equity stake in return for his investment (the Agreement).

The action was originally commenced by 14 American and Bahamian plaintiffs, but 11 plaintiffs dismissed their claims after Defendants filed a motion to dismiss for forum non conveniens leaving only the US citizen Plaintiffs. The district court dismissed the action, concluding that the transaction was not domestic because approval by the appropriate Bahamian authorities was required for the shares to be issued and reasoned that this approval was a condition precedent that had to be satisfied before Dingman and Gordon became irrevocably bound to effect the purchase and sale of the securities. [2]

Giunta v. Dingman Second Circuit Holding

The Second Circuit reviewed the district court’s decision de novo analyzing Morrison and its progeny.

Under Morrison, Section 10(b) applies only to “transactions listed on domestic exchanges and domestic transactions in other securities.” [3] In its decision, the Supreme Court did not provide guidance on what constitutes “domestic transactions in other securities.” In a subsequent March 1, 2012 ruling, Absolute Activist Value Master Fund Limited v. Ficeto, the Second Circuit provided some guidance. [4] It held that, in order to sufficiently allege a “domestic transaction in other securities” when seeking relief under the securities laws, plaintiffs must assert that “(1) irrevocable liability is incurred in the United States, or (2) title passes within the United States.” [5] The Second Circuit qualified the scope of its decision in Absolute Activist in Parkcentral Global HUB Ltd v. Porsche Automobile Holdings SE. [6] The Parkcentral court held that while the presence of a “domestic transaction” is a necessary element of a Section 10(b) claim, it is not necessarily sufficient and, in certain cases, the facts may be so predominantly foreign as to render the application of Section 10(b) impermissible extraterritorial. [7] The Second Circuit did not offer a test to determine when a case is predominantly foreign but directed courts to carefully examine the facts of each particular case. [8]

The Second Circuit noted that because OWH’s shares were not listed on a domestic exchange, under Absolute Activist, Gordon had to sufficiently allege that he, as the purchaser, or Dingman, as the seller, incurred irrevocable liability within the United States to pay for or deliver the security. [9] Irrevocable liability for Section 10(b) purposes attaches “when the parties become bound to effectuate the transaction,” that is, when “the Parties obligated themselves to perform what they had agreed to perform even if the formal performance of their agreement is to be after a lapse of time.” [10] Applying this standard, the Second Circuit concluded that “(1) the Agreement was a contract, and thus Gordon and Dingman became obligated to take, pay for, and deliver a security when they were in the United States; and (2) this liability was irrevocable when they formed the Agreement, even though their obligations were subject to a condition subsequent.” [11]

The Second Circuit held that the district court erred when it found that the liability under the Agreement was revocable because the Bahamian authorities could refuse to approve the issuance of the shares and, in that case, Dingman would be required to return all funds paid by Gordon. [12] The Court relied on its recent decision in Choi v. Tower Research Capital LLC, 890 F.3d 60 (2d Cir. 2018), which rejected the contention that the existence of a condition subsequent that a foreign exchange approve the issuance of the shares did not mean that the parties had not incurred irrevocable liability in the United States or that either party was free to revoke its offer or acceptance. [13] The Court concluded based on this analysis that the parties incurred irrevocable liability in the United States and Plaintiffs plausibly alleged a domestic transaction.

In analyzing whether the transaction was predominantly foreign, the Second Circuit noted that although Dingman was a resident of the Bahamas and OWH and the other entities were incorporated in the Bahamas, the Agreement was entered into in New York, the alleged misrepresentations occurred in New York, and Dingman and Gordon were both US citizens. [14] The Second Circuit therefore rejected the argument that the Agreement was so predominantly foreign as to be impermissibly extraterritorial and concluded that Plaintiffs had not failed to plead a viable claim under Section 10(b).


Although Morrison was decided close to a decade ago, its bounds are still being defined by the lower courts. The Second Circuit’s decision in Giunta v. Dingman¬†illustrates that while the courts are attempting to clarify what is a “domestic transaction” under Morrison, the decision will often be fact specific and, thus, less easy to predict. Importantly, Giunta v. Dingman further demonstrates that the issuance of shares on a foreign exchange that must authorize a transaction or the fact that defendants reside or are incorporated in another country may not be sufficient facts on their own for a court to find that the sale of a security is outside the purview of Section 10(b).


1561 U.S. 247 (2010). For more information on Morrison, please see Arnold & Porter’s Advisories, The Second Circuit Clarifies the US Supreme Court’s Ruling on the Extraterritorial Reach of US Securities Laws (March 9, 2012); Second Circuit Addresses Whether Cross-Border Swaps Fall Within The Territorial Jurisdiction of Federal Securities Laws (Sept. 3, 2014).(go back)

2Giunta, 2018 WL 3028686, at *3.(go back)

3561 U.S. at 267.(go back)

4677 F.3d 60 (2d Cir. 2012).(go back)

5Id. at 62.(go back)

6763 F.3d 198 (2d Cir. 2014).(go back)

7Id. at 215.(go back)

8Id. at 217.(go back)

9Giunta, 2018 WL 3028686, at *4. (go back)

10Id. (quoting Absolute Activist, 677 F.3d at 67-68 (internal citations omitted)).(go back)

11Id.(go back)

12Id. at *5.(go back)

13Id.(go back)

14Id. at *6.(go back)

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