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Raser Technologies, Inc. v. Morgan Stanley & Co., LLC

Supreme Court of Utah

August 13, 2019

Raser Technologies, Inc., by and through Houston Phoenix Group, LLC as its Attorney in Fact, [1] Appellants,
Morgan Stanley & Company, LLC, [2] Appellees.

         On Direct Appeal

          Third District, Salt Lake The Honorable Judge Todd M. Shaughnessy No. 150906718

          Karra 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 appellees

          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 International

          Andrew 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 Defendants).[3]

         ¶ 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.[4] 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 its analysis.

         ¶ 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.


         I. Short Selling

         ¶ 9 A brief overview of the trading practice known as short selling helps understand Plaintiffs' allegations.[5] 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, (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 stock. Id.

         ¶ 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, 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, (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, (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, 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 activity.

         II. Raser

         ¶ 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 Offering (CBO).

         The Transaction

         ¶ 15 For the CBO, Merrill suggested that Higginson contact two of Raser's shareholders, Ned Warner[6] 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 March 2008.

         The Shorts

         ¶ 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[7] 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."

         The Trades

         ¶ 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.[8]

         ¶ 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.

         The Litigation

         ¶ 21 Plaintiffs sued Morgan Stanley & Co, LLC, [9] Merrill, Merrill Clearing, Merrill International, Goldman, Goldman Clearing, and Goldman International.[10] 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 jurisdiction."

         ¶ 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 it."

         ¶ 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 meritless.

         ¶ 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 ...

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