Securities Law - State Jurisdiction Issue

STATE SECURITIES LAW - JURISDICTION

Bulldog Investors and its principal, operating a group of hedge funds, by offering an unregistered security through Bulldog’s website and an email to a Massachusetts resident violated the Massachusetts Uniform Securities Act. Bulldog and its principal officer Goldstein denied violating the Act and asserted that its actions were protected under the First Amendment and that personal jurisdiction was lacking. The Administrative Hearing Officer stated that he lacked authority to consider the constitutional question. Bulldog then proceeded to court to enjoin the Secretary of State’s enforcement action. In the meantime, the Hearing Officer continued the administrative proceeding and found that Bulldog and Goldstein made an offer of an unregistered security that was not exempt. The hearing officer’s finding consisted of a cease and desist order and a $25,000 fine.

Plaintiffs’ in the Superior Court, Bulldog Investors General Partnership, et al v. Secretary of the Commonwealth Of Massachusetts, SJC 10589 (07/02/2010) asserted that the Secretary of State lacked personal jurisdiction and filed a motion for judgment on the pleading. The Court concluded that personal jurisdiction was appropriate and denied Plaintiffs’ motion.

The Bulldog Firm appealed and contended that the maintenance of a website and the sending of this email to a Massachusetts resident was not sufficient contact with the Commonwealth to create personal jurisdiction. The Court agreed with the Secretary Of State that the Massachusetts Uniform Securities Act authorized the Secretary Of State to exercise personal jurisdiction over non-residents in an administrative proceeding. According to the Court, the purpose of the Act, was to protect Massachusetts residents from offers of unregistered securities directed at them from other jurisdictions, and that the Secretary Of State’s authority to conduct investigations outside the Commonwealth would be meaningless if it did not have the authorization to subject non-residents to enforcement proceedings. Plaintiffs’ rights to due process were not violated according to the Court because Plaintiffs availed themselves of the privilege of conducting business activities in Massachusetts and came within the reach of its laws.

The Appellate Court declined to consider the First Amendment argument because the issue had not been raised on appeal. The Court reaffirmed that Plaintiffs’ email message to a Massachusetts resident offering a non-exempt unregistered security was a violation of the Massachusetts Uniform Securities Act.

Bulldog, by sending one email, voluntarily subjected itself to the Massachusetts Uniform Securities Act.

This case is significant because it illustrates how a company can become subject to a state securities law.

Look for an appeal by Bulldog to the United States Supreme Court. Bulldog would argue that there were insufficient contacts to allow Massachusetts to assert jurisdiction over it.

Edward X. Clinton, Sr.

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Securities Law - Noncompetitive Trading

NON-COMPETITIVE TRADING

The United States District Court for the Northern District of Illinois froze the assets on records of a man who claims to be a Russia national after the Commodity Futures Trading Corporation (“CFTC”) charged him with trades on the Chicago Mercantile Exchange (“Exchange”) which were not competitive (CFTC v. Yunuso, N.D. Ill., 10-3619, Judge Bucklo). According to the CFTC, Yunuso controlled two firms: Open E Cry, LLC and Velocity Futures, LLC to enter a buy or sell contract for one of his accounts and then within seconds enter an opposite or equal quantity buy or sell contract for the other account. Because the commodities were thinly traded his orders were marketed against each other. Then Yunuso would enter orders to offset the initial position and complete an equal but opposite round turn trade for each account. His trading according to the Exchange resulted in more than $7.8 million in lawsuits and an approximate $7.2 million profit in the Velocity Futures, LLC account. At the end of the trading session, Yunuso had a debit balance of about $8,000 with Open E Cry, LLC and thus no money to cover the losses.

According to CFTC, Yunuso by consistently executing trades between the Open E Cry account and the Velocity account during periods of low volume, Yunuso in effect entered into transactions without intent to take a genuine bona fide position in the market.

The CFTC is seeking restitution, fines, a trading registration ban and a permanent injunction against Yunuso and his entities.

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Securities Law - Illinois Securities Law Statute of Limitations

This case is interesting because the plaintiffs abandoned claims under the Illinois Securities Law - to avoid a dismissal on the ground that the action was time-barred.

Plaintiffs in the case captioned Carpenter, et al. v. Exelon Enterprises Company, LLC, and Exelon Corporation, Appeal No. 1-09-1222 (4th Circuit), sued Exelon claiming that Exelon abused its position as majority shareholder of InfraSource in such a way that the rights of the minority shareholders were violated and not represented fairly in a merger and sale transactions.

Exelon filed a motion to dismiss on the grounds that it was barred by the three-year Illinois Statute Of Limitations. The trial court denied Exelon’s motion to dismiss determining that the Illinois Securities Law limitation period was inapplicable and plaintiffs’ suit was therefore timely filed within the residual five-year limitation period found in § 13-205 of the Code Of Civil Procedure. However, the trial court stayed the proceedings and certified the issue of the appropriate statute of limitations for an interlocutory appeal.

Exelon filed a motion to dismiss on the grounds that the Statute Of Limitations under the Illinois Securities Law of three years was applicable and the case should be dismissed. The Plaintiffs did not respond to the motion choosing to voluntarily dismiss their initial complaint and they refiled an amended complaint. In the amended complaint, the plaintiffs abandoned their Illinois Securities Law claims and proceeded under Delaware law instead.

The amended complaint contained additional allegations of the conduct of Exelon and contained an explicit statement that it purported to be brought under Delaware law and did not allege that defendants’ conduct constituted a violation of the Illinois Securities Law. Plaintiffs sought damages in excess of $11,000,000. Exelon again filed a motion to dismiss complaining, notwithstanding the changes in the amended complaint, that the manner for which relief was sought was still provided under the Illinois Securities Law and it was therefore barred by the three-year statute of limitations. The trial court disagreed and found that the suit was properly filed within the five-year limitation of § 13-305 of the Code. The trial court entered an order denying Exelon’s Motion To Dismiss but stayed further proceedings and certified the following question for interlocutory appeal, as the trial court found this issue involving the question of law upon which substantial ground for difference of opinion existed:
“Whether plaintiffs’ claim that Exelon Enterprises Company, LLC, as majority shareholder of InfraSource, Inc., breached its fiduciary duties in connection with InfraSource, Inc.’s 2003 merger transaction is governed by the three year statute of limitations contained in the Illinois Securities Law of 1953, 815 ILCS 5/13(d).”

The trial court granted Exelon’s petition for leave to appeal the interlocutory order of the trial court denying the motion to dismiss.

The trial court made reference to of § 13 of the Illinois Securities Law which delineates the private and other civil remedies available for violations of the Law. It pointed out that of § 13(A) provides that every sale in violation of the provisions of the Act is voidable at the election of the purchaser and that § 13(B) and § 13(C) outline various notice and mitigation requirements that a purchaser must fulfill before electing the option of rescission. Subsection 13(D) provides a three-year statute of limitation.

Exelon cited various federal cases which held that the Illinois three-year statute of limitation provided a bar to certain claims for relief. On the other hand, Plaintiff states that the claim is one of minority shareholder oppression and not covered by the Illinois Securities Law or the statute of limitations.

The Defendant, Exelon, argued that of § 13(F) and of § 13(G) provides injunctive relief as well as a right of rescission to “any party in interest”. The Court while acknowledging a contrary holding by a federal court in Klein v. George G. Kerasotes Corp., 500 F.3d 669 (7th Cir. 2007) held that plaintiffs were not barred by the three-year statute of limitations.

The Appellate Court held that the three-year limitation contained in of § 13 applies to relief under § 13 for which relief is granted by § 13. Section 13 provides only for (1) a retroactive right of rescission to purchase under subsection 13(A) and (2) a prospective remedy to the Illinois Secretary Of State and “any party in interest” under of § 13(F) and of § 13(G). Section 13 does not concern retroactive common law damage claims for breach of fiduciary duty both by sellers of securities in general or minority shareholders in particular. For the three year limitation contained in § 13(D) does not apply does not apply to claims of the plaintiffs against Exelon. Therefore the certified question is answered in the negative. Such being the case, the five-year of limitations applies and the case is timely.

Abandoning a claim for relief under the Illinois Securities Law was successful.

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