The Second Circuit reemphasized that conclusory allegations that a transaction took place in the United States will not pass muster under Morrison.

On March 4, 2021, the Second Circuit issued a Summary Order affirming the dismissal of securities fraud claims in Banco Safra, S.A.—Cayman Islands Branch v. Samarco Mineração S.A., No. 19-3976. The court concluded that the plaintiff failed to adequately plead that its purchases of debt securities issued by a Brazilian mining company constituted "domestic transactions" under the U.S. Supreme Court's decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), and the Second Circuit's prior decision in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012).

In reaching that conclusion, the Second Circuit: (i) rejected the plaintiff's argument that using U.S. dollars or New York bank accounts to purchase the bonds was sufficient to establish a "domestic transaction"; (ii) determined that providing generic U.S. addresses for the sellers (or their agents) was insufficient to demonstrate that they acted (or incurred irrevocable liability for the transactions) in the United States; and (iii) concluded that the fact that the plaintiff's purchases were reported to FINRA's "TRACE" system did not establish that the transactions were "domestic" under Morrison.

What Is the Significance?

The Second Circuit's decision in Banco Safra is significant because it reemphasizes that detailed factual allegations regarding contract formation are necessary to satisfy Morrison's "domestic transactions" test. Conclusory allegations regarding the physical location of the transaction parties (or their agents), the currency or bank accounts used in the transaction, or the reporting of the transaction to a self-regulatory organization in the United States are insufficient.

The decision also is significant when viewed in the context of the Second Circuit's other recent decision on extraterritoriality in Cavello Bay Reinsurance, Ltd. v. Stein, 2020 U.S. App. LEXIS 41100 (2d Cir. Jan. 25, 2021). In that case, the Second Circuit assumed that the transactions at issue were "domestic transactions" under Morrison, but nonetheless affirmed the dismissal of the plaintiff's complaint because it determined that the plaintiff's securities fraud claims were "predominantly foreign."

Taken together, Banco Safra and Cavello Bay demonstrate that for non-U.S. listed securities, there are numerous hurdles that a plaintiff must overcome to successfully plead a domestic application of the U.S. federal securities laws in the Second Circuit.