Securities Law/Commodities Exchange Act (CEA) - The World in U.S. Courts: Summer 2019


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Factual Allegations Insufficient to Establish US Transaction in Securities Fraud Suit by Cayman Islands Bank Against Brazilian Entity Relating to Debt Securities Sold Outside the US

Banco Safra S.A. – Cayman Islands Branch v. Samarco Mineração S.A., US District Court for the Southern District of New York, June 18, 2019

Plaintiff is the Cayman Islands branch of a Brazilian Bank that purchased debt securities of a Brazilian mining company that ultimately suffered an environmental disaster in Brazil. Bringing the case as a purported class action, the bank alleged that the mining company failed to disclose relevant environmental risks and as a result violated US securities laws as well as New York law. The securities in question had originally been issued outside the US but the bank (and the purported class members) allegedly purchased them in US transactions on a secondary market.

The Court observed that a claim under the anti-fraud provisions of the Securities Exchange Act of 1934 required the presence of a US “domestic transaction”—meaning that the security was listed on a US exchange or title passed or “irrevocable liability” for the transaction arose in the US. It found that standard not met here. While the bank provided names and US addresses for its “counterparties” for its transactions, the Court found that information alone insufficient to explain where the transactions actually took place. Missing were “facts related to the formation of contracts, the placement of purchase orders, the passing of title, or the exchange of money.” The Court likewise found the bank’s allegations that its transactions were “conducted … through” accounts in New York, occurred in US dollars, and were reported to the TRACE over-the-counter securities market system insufficient to provide information about the transactions themselves. Finding no US domestic transaction, the Court dismissed the Complaint.

Non-US Individual Defendants’ Alleged Participation in US Securities Fraud Scheme Supports Assertion of Personal Jurisdiction

In re Longfin Corp. Securities Class Action Litigation, US District Court for the Southern District of New York, April 11, 2019

This purported class action was brought against Longfin and various of its executives and other individuals alleging fraud in connection with the sale of Longfin stock. As relevant here, two non-US individual defendants moved to dismiss the complaint against them on grounds that the Court could not exert personal jurisdiction over them.

The Court observed that personal jurisdiction over a nonresident defendant may be found if two requirements are satisfied: that (i) the defendant “has purposefully directed its activities at the forum and the litigation arises out of or relates to those activities,” and (ii) a “compelling case” cannot be made that asserting jurisdiction would be unreasonable under the circumstances of the particular case. Because the relevant securities laws allow worldwide service of process and jurisdiction extends to the full reach of the Due Process Clause of the Fifth Amendment to the US Constitution, the Court observed that the test requires consideration of the defendant’s contacts with the US as a whole, not just with the forum State.

The Court concluded that the complaint sufficiently alleged the requisite “minimum contacts” with the US. Both defendants allegedly were associated with Longfin or a related entity, received U.S. Longfin shares as part of a market manipulation scheme, and profited “handsomely” from the subsequent sale of some of these shares. “Their knowing participation in a securities fraud in the United States justifies the exercise of jurisdiction over them.” The Court reached this decision despite arguments that the two did not reside, own property, or do business in the US; even that they did not “regularly” travel to the US. The Court found the assertion of jurisdiction to be “reasonable” because the two defendants allegedly participated in a “securities fraud in connection with an alleged New York issuer and through trading on a New York-based exchange.”

Libor Rate Manipulation by French Citizen Living in France Was US “Domestic” Conduct Under the Commodities Exchange Act Because the Rates Were Transmitted into US and Used in US Financial Transactions

United States v. Sindzingre, US District Court for the Eastern District of New York, May 29, 2019

The defendant, Muriel Bescond, is a French citizen working and residing in France. She was a senior manager at a French bank and responsible for the bank’s submissions in connection with setting of the LIBOR benchmark interest rate. Banks submit rates in part through US data centers and they are used in LIBOR-based commodities traded within the US.

The US Government brought criminal charges against Bescond under the Commodity Exchange Act (CEA) arising from her alleged manipulation of LIBOR submissions to her employer’s advantage. Bescond remained in France but, through US counsel, asked the Court to dismiss her case by arguing in part that: 1) the CEA did not apply to her extraterritorial conduct; and 2) there was an insufficient “nexus” between her conduct and the US, making her prosecution unconstitutional.

As a threshold matter, the Court held that Bescond was a “fugitive”—a term applied in this case to a person outside the US who refused to return to the country to fight criminal allegations, and whose country of residence (like France here) would not extradite her. The Court, reluctant to permit her to challenge an indictment while refusing to appear to defend herself, declined formally to consider the merits of her arguments because it would be prejudicial to the Government and in defiance of the judicial process.

But the Court denied Bescond’s motions to dismiss the case in an “alternative” ruling. Following the analysis for determining the extraterritorial effect of a US statute, it first examined the CEA’s “focus”—here, on protecting interstate transactions of commodities. Seen through this “focus,” the conduct alleged in the indictment was best characterized as domestic, as it involved the manipulation of the prices of US transactions “regardless of the location from which the defendant causes a false report to be transmitted in or into the United States.” The Court likened the conduct to hackers breaking into US computers. Because the false LIBOR rates were transmitted into the US and impacted commodities transactions, the act of submitting the false LIBOR rates was domestic conduct. Likewise, constitutional requirements were satisfied without requiring an additional “nexus” between the conduct alleged and the US. The Court further found that Bescond’s prosecution satisfied the Constitution’s requirement of fundamental fairness because it was reasonable to infer that she knew her conduct would have an impact within the US.

No Personal Jurisdiction Over Australian Bank and Company when Only US Contacts were CTFC Registration and Globally Accessible Website

Waraich v. National Australia Bank LTD, US District Court for the Southern District of Texas, May 30, 2019

The Plaintiff, Sean Waraich, is a US resident. The relevant defendants, International Capital Markets (ICM) and the National Australia Bank (NAB), are Australian. Waraich alleged that he lost $120,000 in foreign-exchange market investments via ICM’s website. He sued, claiming that ICM and NAB violated the Commodities Exchange Act (CEA) through their failure to comply with US Commodities Futures Trading Commission (CFTC) regulations. Among other issues, the Court evaluated whether there was personal jurisdiction over the defendants.

Waraich asked the Court to review a CFTC Judgement Officer’s prior ruling that there was no personal jurisdiction over NAB. His only new argument was that NAB’s registration with the CFTC provided the Court with “general” jurisdiction—i.e., jurisdiction for all claims whether or not related to NAB’s contacts with Texas. The Court concluded that NAB’s registration with the CFTC did not render it “essentially at home” in the US, which is the test for general personal jurisdiction. The Court also noted that NAB had no contacts in the US so as to support “specific” personal jurisdiction, and so did not set aside the CFTC ruling.

The Court also considered whether it had personal jurisdiction over ICM. Waraich said it did because of ICM’s commercial website, which he accessed in the US and thus, in his view, established the requisite minimum contact. The Court responded that personal jurisdiction could potentially arise from a website if it could be deemed to be purposefully targeting US residents or purposefully benefiting from the privileges of doing business in the US. But sales generated by US residents also had to be significant to support jurisdiction. Here, the Court noted that ICM had no US offices or sales agents, did not solicit business targeting US customers, and Waraich identified no US customers beyond himself who had accessed the website. The fact that Waraich used ICM’s globally accessible website from within the US did not mean that ICM purposefully targeted US residents or benefited from doing business there.

In addition, the Court stated that the CEA could only have extraterritorial effect when the connection to, or effect on, US commerce was significant, or when activities violated rules or regulations designed to prevent circumventing the act. The Court concluded, however, that Waraich alleged no plausible violation of the CEA, let alone a significant impact on US commerce or circumvention of the act.

With no personal jurisdiction, and no plausible CEA claim, the Court denied all Waraich’s motions.

[Editor’s note; The Waraich case is also addressed in the Personal Jurisdiction/Forum non Conveniens section of this report.]

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