Atlantica Holdings, Inc. v. Sovereign Wealth Fund Samruk-Kazyna JSC

813 F.3d 98

ATLANTICA HOLDINGS, INC., Allan Kiblisky, Jacques Gliksberg, Baltica Investment Holding, Inc., Blu Funds, Inc., Anthony Kiblisky, Plaintiffs–Appellees,

v.SOVEREIGN WEALTH FUND SAMRUK–KAZYNA JSC, a/k/a National Welfare Fund Samruk–Kazyna, Defendant–Appellant.

No. 14–917–cv.

United States Court of Appeals, Second Circuit.

Argued: April 24, 2015.

Decided: Feb. 3, 2016.

Joseph D. Pizzurro (Jonathan J. Walsh, Kevin A. Meehan, on the brief), Curtis, Mallet–Prevost, Colt & Mosle LLP, New York, NY, for Defendant–Appellant.

Brett D. Jaffe (Jennifer S. Kozar, James S. D'Ambra, Jr., on the brief), Alston & Bird LLP, New York, NY, for Plaintiffs–Appellees.

Before: WESLEY, LIVINGSTON, and CHIN, Circuit Judges.

DEBRA ANN LIVINGSTON, Circuit Judge:

This interlocutory appeal presents a question of first impression: whether the Foreign Sovereign Immunities Act of 1976 ("FSIA"), Pub. L. No. 94–583, 90 Stat. 2891, immunizes an instrumentality of a foreign sovereign against claims that it violated federal securities laws by making misrepresentations outside the United States concerning the value of securities purchased by investors within the United States. Plaintiffs–Appellees Atlantica Holdings, Inc. ("Atlantica"); Baltica Investment Holding, Inc. ("Baltica"); Blu Funds, Inc. ("Blu Funds"); Allan and Anthony Kiblisky (the "Kibliskys"); and Jacques Gliksberg ("Gliksberg") (collectively, "Plaintiffs") brought this action in the United States District Court for the Southern District of New York, alleging that Defendant–Appellant Sovereign Wealth Fund Samruk–Kazyna JSC ("SK Fund"), a sovereign wealth fund of the Republic of Kazakhstan, misrepresented the value of certain notes (the "Subordinated Notes") issued by non-party BTA Bank JSC ("BTA Bank"), a Kazakhstani corporation majority-owned by SK Fund, in connection with a 2010 restructuring of BTA Bank's debt. Plaintiffs seek to hold SK Fund liable for these misrepresentations under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), Pub. L. No. 73–291, 48 Stat. 881 (codified in relevant part at 15 U.S.C. §§ 78j(b), 78t(a) ).

The district court (Jesse M. Furman, Judge ) held that the FSIA furnished both subject-matter jurisdiction over Plaintiffs' claims and personal jurisdiction over SK Fund, and therefore denied SK Fund's motion to dismiss. We agree with the district court that SK Fund is not immune from suit under the FSIA because Plaintiffs' claims are "based upon ... an act outside the territory of the United States" that "cause[d] a direct effect in the United States." 28 U.S.C. § 1605(a)(2). We further decline to exercise appellate jurisdiction to consider SK Fund's argument that the district court could not exercise personal jurisdiction over it consistent with due process. Accordingly, we affirm the appealed-from order in part and dismiss the balance of SK Fund's appeal.

BACKGROUND ¹

SK Fund, a joint-stock company wholly owned by the government of the Republic of Kazakhstan, is the majority owner of BTA Bank, a Kazakhstani corporation. In February 2009, SK Fund acquired 75.1% of BTA Bank's common stock by making a $1.5 billion investment in the bank. Shortly thereafter, in April 2009, BTA Bank announced that it had ceased principal payments on all of its outstanding financial obligations. Atlantica and Baltica, each a Panamanian investment fund, were creditors of BTA Bank, having purchased certain of its outstanding debt securities. These securities could only be held in accounts maintained in specific clearing systems, access to which is generally limited to large financial institutions ("Direct Participants"). However, Direct Participants could hold BTA Bank securities for either their own account or their customers' benefit. Atlantica and Baltica were customers of UBS Financial Services ("UBS"), a large financial institution that was evidently a Direct Participant.

After ceasing to make principal payments on its outstanding securities, BTA Bank undertook a restructuring of its capital structure in 2010 (the "2010 Restructuring"). In connection with the 2010 Restructuring, BTA Bank issued a 600–plus–page information memorandum (the "Information Memorandum") that incorporated by reference a deed of undertaking executed by SK Fund (the "Deed of Undertaking"). The Information Memorandum was made available to BTA Bank's existing creditors on its website. An individual seeking to access the document was required to certify that he or she (1) was located outside the United States and was not a resident of the United States, i.e., not a "U.S. person"; or (2) was an "accredited investor," as defined in Rule 501(a) of SEC Regulation D, 17 C.F.R. § 230.501(a), or a "qualified institutional buyer" ("QIB"), as defined in SEC Rule 144A, 17 C.F.R. § 230.144A. J.A. 161. According to Plaintiffs, SK Fund's "dominance of and control over BTA Bank, ... and the inclusion in the Information Memorandum of certain statements from S–K Fund by reference establish that S–K Fund was involved in the production of the Information Memorandum and was aware of its contents." J.A. 47.

The Information Memorandum described the terms of the 2010 Restructuring. SK Fund would receive additional equity in BTA Bank, becoming an 80% owner. Preexisting holders of BTA Bank's debt would receive, in exchange for their old securities, new ones, including the Subordinated Notes. Like BTA Bank's old securities, the new ones issued in connection with the 2010 Restructuring could be held only by Direct Participants. Again, however, Direct Participants could hold the new securities either for their own accounts or for their customers' benefit. The new securities were subject to transfer restrictions. In particular, because they would not be registered under United States securities laws, they could be transferred only to non-U.S. persons or QIBs in transactions exempt from this country's registration requirements. See 1 Louis Loss et al., Fundamentals of Securities Regulation 582–83 (6th ed. 2011). Interests in the new securities could be transferred on the books of a Direct Participant, but such transfers were subject to the same restrictions.

As required for the 2010 Restructuring to become effective, it was initially approved by BTA Bank's creditors in May 2010 and then by a court in Kazakhstan in July 2010. As creditors, Atlantica and Baltica committed to participate in the 2010 Restructuring—i.e., to accept Subordinated Notes in exchange for their existing securities—by communicating with their broker in the Miami office of UBS. Atlantica and Baltica later acquired additional Subordinated Notes on the secondary market between September 2010 and October 2012, and the other Plaintiffs, who had not previously been creditors of BTA Bank, acquired Subordinated Notes on the secondary market as well: Blu Funds made its investment in April 2012, the Kibliskys made theirs in January 2011, and Gliksberg made several purchases between September 2010 and May 2011. Blu Funds, like Atlantica and Baltica, is a Panamanian investment fund; the Kibliskys live in Miami, and Gliksberg lives in Highland Park, Illinois.

Plaintiffs' secondary-market purchases were all made through UBS's Miami office, which sent Plaintiffs' orders to its broker-dealer in New York using funds from Plaintiffs' UBS accounts. The orders were filled, and the transactions completed, in New York. Plaintiffs allege that BTA Bank and SK Fund marketed the Subordinated Notes "extensively in the United States, and directed that marketing to U.S. investors," J.A. 44; in particular, the complaint avers that SK Fund sent representatives to the United States, in the district court's words, "to meet with investors and to assure them of the health of BTA Bank's balance sheet." Atlantica Holdings, Inc. v. Sovereign Wealth Fund Samruk–Kazyna JSC, 2 F.Supp.3d 550, 554 (S.D.N.Y.2014). These efforts were successful, according to Plaintiffs: a BTA Bank PowerPoint presentation from January 2012 indicates that United States investors held 17% of the Subordinated Notes.

Plaintiffs claim to have made their investments in the Subordinated Notes in reliance on a number of misrepresentations contained in the Information Memorandum and made subsequently by SK Fund and BTA Bank. Principally, the Information Memorandum—including the portion describing the obligations undertaken by SK Fund in the Deed of Undertaking—stated that BTA Bank would not pay SK Fund any dividends on its equity holdings until the bank's newly issued securities, including the Subordinated Notes, were paid in full. This representation, in addition to other financial disclosures in the Information Memorandum, was allegedly false in light of a complex, undisclosed series of transactions between BTA Bank and SK Fund (the "Negative Carry Swap") pursuant to which BTA Bank paid interest on SK Fund deposits at a rate significantly higher than BTA Bank was earning on bonds it had purchased from SK Fund. According to Plaintiffs, the Negative Carry Swap resulted in SK Fund's effectively "siphon[ing] hundreds of millions of dollars from BTA Bank at the expense of other creditors." J.A. 20–21.

The Negative Carry Swap began to come to light in May 2011, when BTA Bank issued an investor presentation disclosing that it was paying more on its liabilities than it was taking in on its assets, and when the investment bank J.P. Morgan published a research report disclosing additional details of BTA Bank's asset-liability yield mismatch. As a result of these disclosures, the value of the Subordinated Notes decreased to less than 40% of face value by June 2011, and then to less than 10% of face value by January 2012.

Between July 2011 and December 2011, following the initial round of disclosures regarding the Negative Carry Swap, high-ranking SK Fund officers made a number of public statements to American press outlets, including Bloomberg, seeking to "prop up" the value of BTA Bank's securities by assuring...