By Rodney F. Tonkovic, J.D.
A Second Circuit panel has affirmed the dismissal of a fraud complaint against a Brazilian mining company for failing to show a domestic transaction. In this case involving two entities located outside of the U.S., the purchaser asserted that the bonds were purchased in secondary aftermarket transactions from counterparties and broker-dealers located in the U.S. The panel affirmed the district court's dismissal of the complaint with prejudice on the ground that it failed to plead a domestic transaction under the Exchange Act. The ruling is by summary order and is without precedential effect (Banco Safra S.A.-Cayman Islands Branch v. Samarco Mineracao S.A., March 4, 2021, per curiam).
Between 2013 and 2015, plaintiff Banco Safra, the Cayman Islands branch of a Brazilian bank, purchased $135,102,000 in debt securities issued by Samarco Mineracao S.A., a Brazilian mining company. In 2015, a dam designed to hold back waste materials from Samarco's mining operations collapsed, resulting in many deaths and injuries as well as property damage and impacts to the environment. The value of the debt securities held by Banco Safra subsequently plummeted.
Dismissed in district court. Banco Safra claimed that Samarco misled investors about the safety and other aspects of its mining operations. According to the complaint, the bonds at issue were purchased in secondary aftermarket transactions from counterparties and broker-dealers located in the United States. The district court dismissed the second amended complaint with prejudice, finding that it failed to adequately plead a domestic transaction under Morrison and Absolute Activist. The court explained that the bonds were never listed on a U.S. exchange and were principally offered and sold outside the U.S., so there were no factors showing that irrevocable liability was incurred or that title passed within the U.S. as required to show a domestic transaction.
Panel affirms. On appeal, Banco Safra made three sets of allegations that it said satisfied Morrison's domestic transaction requirement. First, Banco Safra alleged that the bonds were purchased from counterparties or broker-dealers located in the U.S. This was not sufficient to show a domestic transaction, the panel said, because the allegations did not say whether the counterparties or broker-dealers acted as principals buying for their own accounts or as agents facilitating the sales. Also, while Banco Safra listed U.S. addresses for the broker-dealers, this did not adequately show that liability was incurred in the U.S. because it did not show where the individuals actually involved in the transactions were located at the time.
Next, the complaint alleged that all of the transactions were consummated with U.S. dollars through Banco Safra's bank accounts located in New York. The court made short work of this argument, noting that U.S. dollars can be exchanged abroad, so this was inadequate to show that either party incurred liability in the U.S. The direction to transfer the money using New York bank accounts was also insufficient to show a domestic transaction.
Finally, Banco Safra alleged that its aftermarket transactions were reported to FINRA's TRACE system, arguing that only U.S. transactions are reported to TRACE. The panel disagreed with the suggestion that TRACE uses a standard for establishing a domestic transaction that passes muster under the Second Circuit's holding in Absolute Activist. The TRACE reporting requirements do not appear to compel FINRA members to consider where irrevocable liability was incurred or where title passed when reporting a transaction, the panel said.
The case is No. 19-3976-cv.