The World in U.S. Courts: Fall 2014 - Securities Law | August.15.2014
Plaintiff hedge funds sued the German auto manufacturer, Porsche, and Porsche executives, claiming fraud in connection with the plaintiffs' purchases of financial instruments called "securities-based swap agreements," which in this case were private contracts tied inversely to the stock price of another German company, Volkswagen AG. In 2008, Porsche had acquired a significant interest in Volkswagen and, according to the complaint, the defendants falsely stated publicly that they did not intend to acquire a controlling interest when they actually—and eventually--did. The plaintiffs claimed that they were misled by these allegedly false representations to acquire the securities-based swap agreements, which declined in value when Porsche acquired control of Volkswagen.
The Court of Appeals in New York considered whether the complaint sought an impermissible extraterritorial application of Section 10(b) of the 1934 Securities Exchange Act, which generally prohibits fraud in connection with the purchase or sale of any security. The Second Circuit had previously ruled that Section 10(b) could only be applied to securities traded on U.S. exchanges or where "irrevocable liability" for a transaction had been incurred, or title transferred, in the U.S.
The plaintiffs argued that, in varying ways, they entered into the swap agreements in the U.S. and thus that the second branch of the test was satisfied. The underlying Volkswagen stock, however, was not traded in the U.S. And while the complaints alleged that some of the fraudulent statements were made in or directed to U.S. recipients, the Court of Appeals concluded that the allegedly deceptive conduct occurred "primarily" in Germany.
The Court of Appeals held that it was a "necessary" but not "sufficient" basis for jurisdiction that that the swap agreements had been allegedly entered into in New York, and that additional contacts with the U.S., necessary to support jurisdiction, were absent. Thus, the Court observed that the Volkswagen stock on whose price the swaps were based was not traded in the U.S., and that the actions giving rise to the claim were "so predominantly German," and in fact had been investigated by German authorities. The Court did not believe it consistent with Congress' intent in enacting the U.S. securities laws that a private agreement between parties, not involving the purchase and sale of the underlying security, could result in participants in the German market for German securities to be required to litigate their conduct under U.S. law. The Court emphasized, however, that it was not laying down a "bright-line" test, and that future cases involving derivatives contracts would have to be decided with close attention paid to their facts.