The World in U.S. Courts: Summer 2017 - Securities Law/Commodities Exchange Act (CEA)
March.30.2017
The plaintiffs in this class action allege that the defendant Brazilian petrochemical company, Braskem, failed to disclose a bribery scheme allowing it to purchase an important raw material at below-market prices, allegedly having the effect of materially inflating the company’s reported profits. When the scheme was revealed, Braskem ADRs that were traded on the New York Stock Exchange declined 20%, allegedly resulting in injury to the plaintiff class members. They sued Braskem, two of its former officers, and a major stockholder, Odebrecht S.A., a Brazilian Company, claiming violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.
After concluding that the complaint adequately alleged certain securities law violations, the Court considered Odebrecht’s argument that it was not subject to personal jurisdiction in New York. The Court explained that specific provisions of the securities laws permitted worldwide service of process, and allowed for the assertion of jurisdiction where the defendant “does business in the forum, does an act in the forum,” or “causes an effect in the forum by an act done elsewhere.” Odebrecht’s conduct in Brazil satisfied this standard, the Court found, because it was alleged to have caused Braskem to have engaged in the scheme.
Next, the Court examined the question whether asserting jurisdiction over Odebrecht was consistent with the Due Process Clause of the US Constitution, which requires that a defendant have a “substantial connection” with the forum and that requiring it to defend itself would not violate “traditional notions of fair play and substantial justice.” As to the first part of the test, the Court stated that it was required to evaluate the defendant’s contacts with the forum “in totality, with the crucial question being whether the defendant has purposefully availed itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.” The Court noted other cases that had found a basis for personal jurisdiction where a non-US defendant had orchestrated a violation of US securities law. But while it found that Odebrecht may have been responsible for the underlying bribery scheme, the complaint did not adequately allege that Odebrecht played any role in the preparation or approval of the US securities filings that were alleged to have been false and misleading. Odebrecht had no other contacts with the US, and the Court thus found that Due Process requirements were not satisfied.