(CN) - A U.S. appeals court ruled that nine Cayman Islands hedge funds failed to show evidence that trades tied to a fraudulent multimillion scheme were made domestically, but left the door open for the funds to amend their complaint to include facts that support their claims.
The hedge funds' 61-page federal complaint alleged that principals of its investment manager Absolute Capital Management Holdings (ACM), including directors Florian Homm, Sean Ewing and Ullrich Angersbach, engaged in a pump and dump scheme which cost the funds more than $195 million in losses. Other named defendants were ACM employees Colin and Craig Heatherington - also principals of CIC Global Capital - securities agent Todd Ficeto, who along with Homm is co-owner of broker-dealer, Hunter World Markets Inc.
According to the funds, the defendants charged millions in fees and commissions on the funds' purchases of shares in U.S. penny stock companies.
The court's 20-page opinion states: "After inflating the prices of the U.S. penny stocks, Homm, Ficeto, Hunter, Colin Heatherington, Craig Heatherington, and CIC profited by causing the funds to purchase from them U.S. penny stocks that they owned and had acquired for pennies (or less). Angersbach, through a corporate entity he controlled, collected proceeds of at least $8.8 million through sales of his ACM holdings, and Ewing, through a corporate entity he controlled, collected proceeds of $55.3 million. Both Angersbach and Ewing obtained further proceeds by redeeming their holdings in the funds at a profit. While the defendants reaped enormous profits, the funds allegedly suffered losses in the amount of $195,916,216."
While finding that Judge George Daniels of the New York's Southern district court had improperly dismissed the case for subject matter jurisdiction, the 2nd Circuit panel agreed that the funds did not "sufficiently allege the existence of domestic securities transactions," under federal securities laws.
Judge Robert Katzmann noted that the complaint cited "only a few allegations that mention or even hint at the location of the securities transactions at issue in this case."
"Absent factual allegations suggesting that the funds became irrevocably bound within the United States or that title was transferred within the United States, including, but not limited to, facts concerning the formation of the contracts, the placement of purchase orders, the passing of title, or the exchange of money, the mere assertion that transactions 'took place in the United States' is insufficient to adequately plead the existence of domestic transactions," Katzmann wrote.
The funds claimed the investors had subscribed to funds when they wired money to a New York bank, and also alleged that its claims were supported because Ficeto was California resident, and Hunter World Markets is based in Beverly Hills. But Katzmann found that none of the claims demonstrated that the transactions occurred in the U.S.
"Finally, while the complaint alleges that the U.S. penny stocks were issued by United States companies and were registered with the SEC, these facts do not demonstrate that the purchases and sales were 'made in the United States,'" the judge wrote. "Accordingly, we conclude that the complaint fails to state claims under § 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder because it does not adequately allege the existence of domestic securities transactions."
Katzmann, however, found that the funds should be allowed to "assert additional facts."
"Specifically, we hold that to sufficiently allege the existence of a 'domestic transaction in other securities,' plaintiffs must allege facts indicating that irrevocable liability was incurred or that title was transferred within the United States. Because there has been significant ambiguity as to what constitutes a 'domestic transaction in other securities,' the plaintiffs should have the opportunity to assert additional facts leading to the plausible inference that either irrevocable liability was incurred or that title passed in the United States," the opinion states.