The World in U.S. Courts: Fall 2017 - Securities Law/Commodities Exchange Act (CEA) | July.06.2017
The plaintiffs in this purported class action claimed to have been defrauded in connection with the purchase of American Depository Shares and debt securities of Petrobras, the Brazilian oil and gas producer suffering through exposure of its participation in a massive global bribery scheme. This appeal considered the correctness of the district court’s order certifying classes, in part based on the definition of transactions that were considered “domestic” and therefore within the scope of the securities laws. During the course of its opinion, the Court of Appeals addressed a number of unsettled questions regarding the extraterritorial application of the securities laws.
The Supreme Court’s 2010 Morrsion decision and later cases have established that the anti-fraud provisions of the securities laws have only US domestic application. Claims may only thus be brought with respect to (i) securities bought and sold on a US exchange and (ii) other securities where either title transferred, or “irrevocable liability” for a transaction accrued, in the US Peterobas ADSs were traded on the New York Stock exchange, and the Court of Appeals easily concluded that they were properly within the case. But debt securities were not. As to these, the Court of Appeals identified many potential facts that might be relevant to the question whether they were bought or sold in a “domestic” transaction: “The location or residency of the buyer, seller, or broker will not necessarily establish the situs of the transaction. Rather, plaintiffs demonstrate the location where irrevocable liability was incurred or legal title transferred by producing evidence including, but not limited to, facts concerning the formation of the contracts, the placement of purchase orders, or the exchange of money.” The potentially relevant facts could vary considerably from plaintiff to plaintiff, given that the purported class included “foreign and domestic entities that purchased securities from other foreign and domestic entities, possibly through foreign and domestic intermediaries, using different methods, under different circumstances, and reflected in different types of records (assuming any records of the purchases exist at all).”
The district court, by contrast, had certified a class that broadly included all purchasers of the securities at issue, without regard for the factual circumstances that would reveal whether the transactions were US “domestic.” The Court of Appeals thus vacated that ruling and returned the case for further fact-finding and consideration.