The World in U.S. Courts: Spring 2013 - Securities | March.15.2013
In the first decisions of their kind, two different federal judges held that the limits on the extraterritorial application of U.S. law apply to claims under the Commodity Exchange Act (“CEA”), which prohibits fraud in connection with the trading of commodity futures. The court further extended the “transactional” test to CEA claims, whereby the location of the transaction at issue is determined by where title was transferred or irrevocable liability was incurred.
These cases were brought by Russian citizens against a group of related domestic and foreign companies operating programs that invest in U.S. and foreign stocks, commodities, and real estate. The plaintiffs alleged that the parent company which administered the investments was located in New York, that some of the investments were in New York real estate, and that the owner of the corporate entities attended some meetings in New York.
The court observes that a claim under Section 10(b) of the Securities Exchange Act must involve either (1) the purchase and sale of a security listed on a domestic exchange or (2) if the security is not listed on a domestic exchange, then the domestic purchase and sale of that security, i.e. a domestic transaction. To determine the locus of the transaction under the latter category, courts follow the so-called “transaction” test, under which the location of the transaction is where the title is transferred or the parties incurred irrevocable liability.
Turning to the cases before them, both courts held that the CEA likewise does not apply extraterritorially. The courts further held that the transaction test enunciated above applied in the CEA context as well. Applying this test, both courts concluded that the plaintiffs had not sufficiently alleged a domestic transaction and dismissed the CEA claim.
In Starshinova, the court found the plaintiffs’ allegations insufficient because they failed to plead facts to support the inference that the investment agreements were approved and accepted in the U.S.
In Loginovskaya, the court also found the plaintiff’s allegations fell short because the underlying investment contract at issue was negotiated and entered into in Russia, and the meeting of the minds took place in Russia. The court held that the U.S. status of some of the corporate entities or their investments did not alter the non-domestic nature of the relevant transaction.