MANHATTAN (CN) - Cayman Island hedge funds can amend claims that U.S. investors defrauded them of $195 million in a classic "pump and dump" scheme, the 2nd Circuit ruled.
The Absolute Activist Value Master Fund and eight other hedge funds filed suit in 2009 over its dealings with Hunter World Markets on the behalf of hundreds of investors worldwide and in the United States.
Hunter, a Securities Exchange Commission-registered Hunter is based in California and has offices in Beverly Hills. Co-owners Todd Ficeto and Florian Homm were also named as defendants.
The complaint alleges that the defendants induced the hedge funds to buy U.S. penny stocks and that the defendants then artificially inflated the stock prices by repeatedly trading the stocks, often between the Cayman Island funds, generating substantial commissions for themselves and unlocking more stocks.
Once they "had manipulated the prices of the U.S. penny stocks to the desired levels," they dumped "the shares they had obtained fraudulently to the funds at inflated prices," causing a $195.9 million loss to the funds, according to the court's summary of the complaint.
U.S. District Judge George Daniels had dismissed with prejudice, however, for lack of subject-matter jurisdiction.
Daniels had said the hedge funds could not establish a domestic securities transaction as required by the Securities Exchange Act. In 2010, the Supreme Court ruled in Morrison v. National Australia Bank that a plaintiff must prove that "irrevocable liability was incurred or title transferred within the United States" to establish federal jurisdiction.
In deciding to revive the case, the federal appeals court said the hedge funds "cannot be faulted for their failure to allege facts" to meet post-Morrison doctrine.
"We hold that transactions involving securities that are not traded on a domestic exchange are domestic if irrevocable liability is incurred or title passes within the United States," Judge Robert Katzmann wrote for the three-judge panel.
Since the hedge funds allege fraudulent activities in the United States, involving funds were marketed in the United States and U.S. investors injured by the activity, "the plaintiffs should be given leave to amend the complaint so they can assert additional facts to suggest that irrevocable liability was incurred or title passed in the United States and thus that the securities transactions at issue took place in the United States," according to the 20-page decision.
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