Co-authored by Dean N. Razavi.

The US District Court for the Southern District of New York last week denied securities fraud claims against a Chinese law firm, Deheng Law Firm (Deheng), and a partner of that firm because of a lack of jurisdiction over the investment transaction that was at the center of the dispute. Plaintiffs were investors who had purchased shares of a Chinese company through a private placement investment in Aamaxen Transport Group (Aamaxen), a Delaware corporation. Deheng represented the investors and the Chinese company and had structured the transaction. The investors alleged that Deheng defrauded the group by falsely representing the structure and failing to reveal that a Chinese individual (and husband of a Deheng partner) had control over the invested funds, which allowed him access to later embezzle those funds.

The district court relied on the recent 2010 Supreme Court case, Morrison v. National Australia Bank, to resolve the defendants’ jurisdictional defense. Morrison had rejected the “conduct” and “effects” test previously applied to determine whether a securities transaction was subject to US securities law and instead required a court to conduct a “transactional test” that asked whether (1) the complained-of fraud was in connection with the purchase or sale of a security listed on an American stock exchange or (2) the purchase or sale occurred in the United States.

The court held that, although the securities at issue were shares in US-based Aamaxen, since plaintiffs had purchased their shares through a private placement transaction, the mere fact that shares of Aamaxen were quoted on the over-the-counter bulletin board was not sufficient to establish jurisdiction under Morrison. The court also held that the plaintiffs had failed to satisfy the alternative Morrison test because they had not alleged that the Aamaxen stock transaction occurred in the United States. The complaint failed to allege where the purchase agreement was negotiated or signed, thus the court could not determine the location of the purchase. Finally, the court rejected plaintiffs’ argument that an Aamaxen public SEC filing was sufficient contact with the US to sustain their Section 10(b) claim. Morrison, the court held, strictly prohibited extending Section 10(b) claims to cases where the US was the location of the fraud, but not the location of the transaction. The court dismissed the complaint, but without prejudice to allow plaintiffs the opportunity to cure their jurisdictional pleading deficiencies. Pope Investments II, LLC v. Deheng Law Firm, No. 10 Civ. 6608(LLS) (S.D.N.Y. Aug. 15, 2012).