On July 2, 2010, the Massachusetts Supreme Judicial Court made an important ruling about the scope of personal jurisdiction under the administrative provisions of the Massachusetts Uniform Securities Act (the “Act”). Specifically, the Court ruled that an out-of state hedge fund and certain of its employees were subject to the administrative jurisdiction of the Secretary of the Commonwealth when, in response to a request for information from a Massachusetts resident who had registered on the fund’s website, they sent him a single e-mail with marketing materials about their unregistered fund. The Court further held that such materials constituted a solicitation of an offer to purchase the securities and that the fund and the employees had violated the Act because the securities were not registered in Massachusetts.1
Bulldog Investors General Partnership (“Bulldog”), an out-of-state hedge fund, operated an interactive website that provided information about investment products it offered for sale. In order for individuals to access certain parts of the website or obtain more specific information about Bulldog’s hedge funds, they had to register with Bulldog.
In November of 2006, Brendan Hickey, a Massachusetts resident registered with the website by providing Bulldog with his name, address, telephone number, and e-mail address. A Bulldog employee responded to Hickey’s registration with an e-mail message that attached documents containing information regarding the performance and strategies of the hedge funds as well as background information about the partners of the hedge fund. The employee also invited Hickey to contact him by telephone to discuss Bulldog’s funds in greater detail.
On Jan. 31, 2007, the Secretary filed an administrative complaint against the plaintiffs alleging that Bulldog’s website and e-mail contact with Hickey constituted an offer of securities that were neither registered nor exempt from registration, in violation of the Act. See G.L. c. 110A, § 301.2 On a motion for summary decision, the hearing officer determined that the plaintiffs were subject to personal jurisdiction in the Commonwealth and that they had violated the Act by offering a security for sale in the Commonwealth that was not registered and not subject to exemption. The acting director of the securities division adopted the hearing officer’s recommendations and findings and imposed a cease and desist order and a fine of $25,000 on the plaintiffs.
The plaintiffs appealed the decision to the Superior Court. Plaintiffs argued that their contact with the Massachusetts resident was insufficient to permit the Secretary to exercise personal jurisdiction over them; that the Act does not authorize the Secretary to subject nonresidents to administrative enforcement actions; and that the communications did not constitute an offer within the meaning of the Act.3 The Superior Court held that the Act authorized the Secretary to exercise personal jurisdiction over the parties outside of Massachusetts, that such jurisdiction in this case did not offend due process, and that the plaintiffs had violated the Act. The Plaintiffs appealed, and the Supreme Judicial Court transferred the case on its own motion and affirmed the decision of the Superior Court.
The Court held that the Act authorizes the Secretary to exercise personal jurisdiction over nonresidents in administrative proceedings and that exercising such jurisdiction did not offend notions of due process. The Court noted that the Act expressly provides the Secretary with the authority to conduct investigations inside or outside the Commonwealth to determine if a violation has occurred and this was sufficient statutory authority to exercise jurisdiction over nonresidents.4 By contacting a Massachusetts resident through its website and e-mail, the Court found, Bulldog purposefully availed itself of the “privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.”5 In addition, by contacting Hickey with a solicitation to purchase, which was unlawful under the Act, it was reasonable for the plaintiffs to anticipate being held responsible in Massachusetts. Furthermore, by soliciting their hedge funds to Hickey, the Court noted that the plaintiffs sought to derive commercial benefit from the interaction with Hickey and therefore it would be unfair “to escape having to account in [Massachusetts] for consequences that arise proximately from such activities.”6
Solicitation of an Offer
The Court noted that the Act defines an “offer” to include the “solicitation of an offer” and observed that the e-mail message and its attachments sent to Hickey were designed to stimulate an interest in Bulldog’s funds and thus constituted a solicitation of an offer to buy unregistered securities.7 Moreover, in rejecting the plaintiffs’ assertion that their e-mail communication cannot constitute an offer because Hickey would have to take additional steps before being permitted to purchase Bulldog’s securities, the Court held that under the Act the term “offer” is not limited to its common law definition and as such there is no requirement that the plaintiffs’ communication be such that Hickey’s assent would have concluded a bargain.
Even though Bulldog’s website contained disclaimers stating that the website did not constitute a solicitation and that the website could not be used for the purpose of an offer or solicitation, the Court stated that the disclaimer is only one factor in determining whether the plaintiffs’ communication with Hickey was an offer or a solicitation.8 The Court also noted that the materials sent to Hickey did not contain the disclaimer that was posted on the website. For these reasons, the Court found that Bulldog’s e-mail communication and the attachments constituted a solicitation of an offer, and therefore an “offer,” within the meaning of the Act.
Significance of Ruling
The Court’s decision affirms the authority of the Secretary to investigate and initiate administrative proceedings against nonresidents for the dissemination to Massachusetts residents of marketing materials related to unregistered securities offerings, even where the activity involves a single e-mail in reply to a request for information on fund offerings. The decision also makes clear that activity or information that is designed to stimulate an interest in an investment may constitute a solicitation of an offer under the Act.
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This article was originally published by Bingham McCutchen LLP.