Raser Technologies, Inc., by and through Houston Phoenix Group, LLC as its Attorney in Fact,  Appellants,
Morgan Stanley & Company, LLC,  Appellees.
District, Salt Lake The Honorable Judge Todd M. Shaughnessy
J. Porter, Kristen C. Kiburtz, Paul T. Moxley, Patrick E.
Johnson, Salt Lake City, Alan M. Pollack, New York, NY, James
W. Christian, Houston, TX, for appellants James S. Jardine,
Mark W. Pugsley, Robert P. Harrington, Salt Lake City, for
Richard C. Pepperman II, John G. McCarthy, New York, NY, pro
hac vice, for appellees Goldman Sachs & Co., LP; Goldman
Sachs Execution and Clearing L.P.; Goldman Sachs
J. Frackman, Abby F. Rudzin, Brad M. Elias, New York, NY, pro
hac vice, for appellees Merrill Lynch, Pierce, Fenner &
Smith Inc.; Merrill Lynch Professional Clearing Corp.;
Merrill Lynch International
Justice Pearce authored the opinion of the Court in which
Chief Justice Durrant, Associate Chief Justice Lee, Justice
Himonas, and Justice Petersen joined.
1 Raser Technologies, Inc., Kelly Trimble, Mark Sansom, Ocean
Fund, LLC (Ocean Fund), Warner Investments, LLC, and Maasai,
Inc. (collectively Plaintiffs) allege a complex conspiracy
among Merrill Lynch, Pierce, Fenner & Smith (Merrill),
Merrill Lynch Professional Clearing Corporation (Merrill
Clearing), Merrill Lynch International (Merrill
International), Goldman Sachs & Co., (Goldman), Goldman
Sachs Execution and Clearing (Goldman Clearing), and Goldman
Sachs International (Goldman International) (collectively
2 Plaintiffs allege that Defendants "devised and
perpetrated a naked short selling stock manipulation scheme
that targeted and intentionally destroyed a Utah company,
Raser Technologies." The merits of this theory are not
before us. Instead, we are faced with the threshold
determination of whether a Utah court may assert specific
personal jurisdiction over some or all of Defendants.
3 Raser was a geothermal energy company incorporated in
Delaware and headquartered in Utah. Raser maintained an
investment banking relationship with Merrill. In 2008,
Merrill structured several transactions on behalf of Raser in
a stated effort to raise capital for the company. Around this
time, Merrill and Goldman sold Raser's stock short. Some
of these sales may have constituted a related, but separate,
practice known as naked short selling.
4 Several years after the short sales occurred, Raser filed
for bankruptcy. Plaintiffs subsequently sued Merrill,
Goldman, and several related entities, for violations of the
Utah Pattern of Unlawful Activity Act. Plaintiffs alleged
that communications and securities fraud formed the
pattern's skeleton of unlawful activity.
5 Defendants moved to dismiss Plaintiffs' complaint for
lack of personal jurisdiction. In response, Plaintiffs argued
that the court could assert specific jurisdiction over
Defendants because of the contacts each defendant developed
with Raser. Plaintiffs also argued that even if each
individual defendant did not establish minimum contacts with
the State of Utah, the district court could exercise personal
jurisdiction because Defendants had engaged in a conspiracy
to manipulate Raser's stock price, the effects of which
were felt by Utah residents. Plaintiffs alternatively argued
that so long as one defendant established minimum contacts
with the state, those contacts could be imputed to the other
defendants under the conspiracy theory of jurisdiction. The
district court disagreed with each contention and dismissed
Plaintiffs' complaint for want of personal jurisdiction.
6 The district court analyzed Plaintiffs's claims against
Defendants collectively, without analyzing the nature of each
individual defendant's contacts as they relate to each
individual plaintiff's claims. Recent United States
Supreme Court jurisprudence clarifies that courts must
analyze each plaintiff's claims and the relation of those
claims to the forum state, in addition to analyzing a
defendant's contacts to the forum state. Because the
district court analyzed Plaintiffs' claims and
Defendants' contacts collectively, it may have distorted
7 After analyzing recent United States Supreme Court
jurisprudence, we conclude that there is an articulation of
the conspiracy theory of jurisdiction that comports with the
due process principles of the Fourteenth Amendment. And we
hold that the Utah Nonresident Jurisdiction Act compels us to
adopt the conspiracy theory of jurisdiction.
8 We vacate and remand for the district court to reexamine
the claims and contacts, and apply the jurisdictional tests
we announce here.
9 A brief overview of the trading practice known as short
selling helps understand Plaintiffs'
allegations. Short selling is best characterized as
a "sell high, buy low" strategy. Alexis Brown
Stokes, In Pursuit of the Naked Short, 5 N.Y.U. J.
L. & Bus. 1, 3 (2009). If everything goes according to
plan, an investor, suspecting that the price of a stock will
decrease, borrows the stock, sells it, waits for the price to
decline, purchases the stock at the lower price, returns the
stock to the lender, and "pockets the difference in
price as profit." Id. Typically, the investor
will borrow the stock from a brokerage firm, and the borrowed
stock originates from the firm's own inventory, the
margin account of other brokerage firm clients, or another
lender. U.S. Sec. & Exch. Comm'n, Key Points About
Regulation SHO, https://www.sec.gov/investor/pubs/regsho.htm
(last visited August 7, 2019). Short selling is a lawful
trading practice in many instances. Id. But short
selling is illegal when used to manipulate the price of a
10 In a typical transaction, the seller has a three-day
settlement period to deliver the stock to the buyer. U.S.
Sec. & Exch. Comm'n, Naked Short Sales,
https://www.sec.gov/answers/ nakedshortsale.htm (last visited
August 7, 2019). In a naked short sale, the investor
identifies a stock that she suspects is overvalued and likely
to decrease in price, then sells shares of the stock that she
does not own or has not borrowed and does not intend to own
or borrow, thus creating phantom shares of the stock.
Id.; Stokes, supra ¶ 9 at 6. Because
the seller does not own or possess the shares she sold, she
cannot deliver the securities within the settlement period.
U.S. Sec. & Exch. Comm'n, Key Points About Regulation
SHO, https://www.sec.gov/investor/pubs/regsho.htm (last
visited August 7, 2019). This is known as a "failure to
deliver" or "fail"-the securities equivalent
of an "IOU." Stokes, supra ¶ 9 at 7;
U.S. Sec. & Exch. Comm'n, Key Points About Regulation
SHO, https://www.sec.gov/investor/pubs/regsho.htm (last
visited August 7, 2019).
11 The Depository Trust and Clearing Corporation (DTCC)
records the fails. The DTCC is "a financial services
company that clears and settles securities trades and
provides custody of securities." Stokes, supra
¶ 9 at 6. The DTCC eliminates the need for exchanging
paper stock certificates and provides an efficient and safe
trading mechanism for buyers and sellers. Id.
12 This system allows a transaction to occur, and all monies
to be paid, before delivery of the stock occurs. Id.
Broker-dealers and banks credit the shares to the buyer
before delivery. Id. at 7. If the seller does not
deliver the shares, a fail occurs, but the buyer still
possesses the purchased shares. Id. This can result
in an artificial oversupply of the stock. Id. When
the market is flooded with the chimerical shares, the stock
price usually falls. Id. The SEC heavily regulates
naked short selling, and its legality is confined to limited
circumstances. U.S. Sec. & Exch. Comm'n, Key Points
About Regulation SHO, https://www.sec.gov/investor/pubs/
regsho.htm (last visited August 7, 2019). Plaintiffs allege
that Defendants' trading practices ventured outside of
these limited circumstances and into the realm of illegal
13 Raser was a geothermal energy company incorporated in
Delaware with its principal place of business in Salt Lake
City, Utah. Raser planned to develop a new geothermal plant
in Beaver County, Utah. Over 250 Raser shareholders resided
in Utah, including plaintiffs Kelly Trimble and Mark Sansom.
14 Raser needed to raise capital to fund its ongoing
operations and construction projects. In 2007, Raser entered
into negotiations with "upper management" at
Merrill to structure a series of transactions designed to
raise capital. Raser's CEO, Kraig Higginson, participated
in the negotiations on behalf of the company. The
negotiations involved "in excess of a dozen
conferences," both in Utah and telephonically with
individuals in Utah, and the exchange of multiple documents
to and from the parties in Utah. At the conclusion of the
negotiations, Merrill proposed a $55 million Convertible Bond
15 For the CBO, Merrill suggested that Higginson contact two
of Raser's shareholders, Ned Warner and Ty Mattingly, to
release approximately three million unrestricted shares of
Raser stock. Higginson explained that, at Merrill's
suggestion, the shares were to be used as "hedges"
in the bond offering. After the discussion with Higginson,
Warner spoke with one of Merrill's managing directors
regarding his unrestricted shares.
16 In his telephone conversation with Merrill, Warner
"expressed . . . [his] willingness to open an account
with [Merrill] and deposit [his] 2, 000, 000 unrestricted
shares of Raser stock." However, Warner "clearly
indicated . . . that [he] only would be willing to have [his]
shares used by participants in the CBO, and that under no
circumstances did [he] want [his] shares used by any other
party who wanted to short Raser's stock." Merrill
assured Warner that the shares would only be used by
participants in the CBO. In reliance on this representation,
Warner signed and filed the necessary paperwork to open a
Merrill account and had his stock certificates delivered to
the local Merrill office in Provo, Utah. The CBO occurred in
17 Prior to and concurrent with the CBO, Merrill and several
other entities shorted Raser stock. Plaintiffs allege that
some of the short selling constituted naked short selling,
evidenced by the number of fails recorded for various Merrill
entities. In 2007, Merrill Clearing was the largest failing
broker of Raser. Over the course of 181 days in 2007, Merrill
Clearing "consistently held between 75- 99% of all Fails
of Raser stock." During this time, Merrill Clearing
"selectively transferred primarily long
positions of its customers to Merrill Lynch
while allowing the failed positions . . . to increase."
And by "selectively transferring long positions,
[Merrill Clearing] increased the number of shares it could
lend to short sellers."
18 In addition to the short and alleged naked short selling
that occurred around the time of the CBO, Merrill, Merrill
International, Goldman, and Goldman International moved Raser
stock between and among themselves. Around the time of the
CBO, Merrill transferred restricted shares of Raser stock to
Merrill International. Merrill International then sent the
shares back to Merrill as free trading shares.
19 Approximately ten to fifteen trades occurred between
Goldman Clearing, Merrill Clearing, Merrill, and an
independent clearing corporation, Newedge LLC. In these
transactions, the shares would pass through Newedge before
being transferred to either Goldman Clearing, Merrill
Clearing, or Merrill. Roughly one million shares moved
between companies between January 2008 and August 2008.
20 Some of the trades took a circuitous path. For example,
450, 000 shares moved from Goldman Clearing to Newedge to
Merrill Clearing and then to Merrill. Merrill then loaned the
shares back to Goldman as part of a loan of 700, 000 total
shares. These trades formed the basis of Plaintiffs'
claims against Defendants.
21 Plaintiffs sued Morgan Stanley & Co, LLC,
Merrill, Merrill Clearing, Merrill International, Goldman,
Goldman Clearing, and Goldman International.
Plaintiffs alleged that Defendants violated the Utah Pattern
of Unlawful Activity Act, and as a result, "the value of
Raser stock was diluted, and the company and its shareholders
were damaged." Plaintiffs averred that instances of
communications fraud and violations of the Utah Uniform
Securities Act constituted the predicate acts that formed the
pattern of unlawful activity. Plaintiffs also alleged that
Defendants' "unlawful conduct occurred within . . .
their pervasive and long-standing pattern of naked short
selling." Plaintiffs asserted in their complaint that
"[p]ersonal jurisdiction [over] Defendants is proper in
Utah" because "[e]ach Defendant has continuous and
systematic business contacts with Utah."
22 Defendants moved to dismiss Plaintiffs' claims,
arguing that the court lacked personal jurisdiction.
Plaintiffs opposed the motion, contending that they had made
a prima facie showing of specific jurisdiction. Plaintiffs
asserted that they had sufficiently alleged the elements of
the effects test as articulated in ClearOne, Inc. v.
Revolabs, Inc., 2016 UT 16, 369 P.3d 1269:
"Defendants are alleged to have (1) committed
intentional acts (stock manipulation and fraud); (2)
expressly aimed at Utah (Raser); (3) causing harm, the brunt
of which is suffered-and which the defendant knows is likely
to be suffered-in Utah."
23 Plaintiffs argued that they satisfied the requirement in
ClearOne that the "effect in the forum state
must be more than an effect on a plaintiff in the forum
state" by asserting that "[m]ore than 250 Utah
shareholders had millions of dollars in equity
destroyed," "[m]ore than 40 Utah residents lost
their jobs," "[a]t least 499 Utah creditors lost
money from Raser's bankruptcy," and that the State
of Utah, dozens of Utah companies, and Beaver County lost
millions of dollars. Plaintiffs also argued that the district
court could exercise jurisdiction over Defendants with no
direct contacts in Utah because, under a conspiracy theory of
jurisdiction, "[t]he actions of each member of the
conspiracy in furtherance of Defendants' naked short
selling scheme [would be] considered in weighing personal
24 The district court granted Defendants' motion. The
district court first addressed the claims against Merrill.
The court noted that Merrill "was an investment banker
for Raser, and, in that capacity, had numerous meetings,
telephone calls and other contacts with Raser in Utah."
Based on that, the court concluded that "if Raser was
asserting claims against Merrill . . . that arose out of or
related to that investment banking relationship, this court
would have personal jurisdiction over Merrill."
25 The district court continued, "Raser, however is not
asserting any claims against Merrill . . . arising from their
investment banking relationship or these contacts; in fact,
Raser is not asserting any claim against Merrill . . . at
all." And with regards to the other Plaintiffs'
claims against Merrill, the court noted that "while it
is not disputed that Merrill . . . has offices, employees,
and business operations in Utah, plaintiffs do not claim that
the court can exercise general personal jurisdiction over
26 The district court noted that Merrill "had stock loan
agreements with Raser shareholders, one of which is Plaintiff
Ocean Fund, LLC, and plaintiffs contend that [Merrill]
breached those agreements by using borrowed Raser shares to
support short sales rather than hedging." The court
concluded that "[i]f Ocean Fund were asserting a claim
for breach of those agreements, or any claim that could
fairly be said to arise out of a breach of those agreements,
the court would have personal jurisdiction over Merrill . . .
to entertain a claim by Ocean Fund." But because Ocean
Fund did not plead a breach of contract claim, the district
court found that it could not exercise specific personal
jurisdiction over Merrill. The court also concluded that
Plaintiffs' claim based on the Utah Pattern of Unlawful
Activity Act "is considerably more involved and, by
necessity, requires participation by other defendants over
whom the court cannot exercise personal jurisdiction."
27 The district court then noted that Plaintiffs sought to
impute Merrill's contacts with Utah and Raser to the
other Defendants through the conspiracy theory of
jurisdiction. The district court refused to recognize the
conspiracy theory of jurisdiction, noting that this court
previously declined to do so in Pohl, Inc. of America v.
Webelhuth, 2008 UT 89, 201 P.3d 944. The district court
concluded that "[a]s a result, [Merrill's] contacts
with Raser and with Utah, standing alone, cannot provide the
minimum contacts necessary to establish personal jurisdiction
over [Merrill's] co-defendants." And "[b]y the
same token, those contacts, standing alone, cannot be relied
upon by plaintiffs other than Raser to establish
specific personal jurisdiction over Merrill."
28 The district court noted that "[w]ith respect to all
of the defendants other than Merrill . . ., and with respect
to Merrill . . . and all plaintiffs other than Raser . . .,
plaintiffs do not identify any contact between these parties
that occurred in Utah." "The closest plaintiffs
come to alleging contact by these defendants with Utah is the
allegation that the defendants improperly used, relied upon,
laundered or otherwise mishandled Raser stock from a public
offering 'originating in Utah.'" The court
knocked down this assertion because while Raser was
headquartered in Utah, Raser was a Delaware corporation and
under Delaware statute its stock was located in Delaware, and
that stock traded in New York. Because Plaintiffs did not
provide the district court with any authority
"suggesting that the location of a company's
headquarters determines where stock or a stock offering
'originates, '" the court found this assertion
29 The district court noted that "plaintiffs do not
allege that any of the wrongful acts by the defendants
occurred in Utah," and that "[p]laintiffs instead
rely on extraterritorial conduct by the defendants that
purportedly was directed at and caused harm here." The
court concluded that, "even accepting as true all of
plaintiffs' allegations regarding defendants'
conduct, and even assuming the defendants knew the harm would
be suffered in Utah and would be substantial, plaintiffs have
not shown that defendants' conduct was expressly aimed at
Utah." "The conduct," the court continued,
"was aimed at manipulating the price of Raser's
stock, which is legally sited in Delaware and trades in New
York. To the extent defendants' conduct could be said to
be connected to Utah, that would be true only because Raser
chose to locate its headquarters here."
30 The court ultimately concluded that "aside from
having caused harm here, to Raser, its resident shareholders,
and perhaps others, plaintiffs have not identified conduct
directed at the state. For that reason, the court lacks
specific personal jurisdiction over all defendants."
31 Plaintiffs appealed. After hearing oral argument, we
requested supplemental briefing on the effects test and ...