In the area of international litigation, the District Court decision in Elliott Associates, et al. v. Porsche Automobil Holding SE, et al., 10 Civ. 0532 (HB) (S.D.N.Y. 30 Dec. 2010), represents a noteworthy extension of the holding of Morrison v. Australia National Bank, 130 S.Ct. 2869 (2010), which we have written about here and here. Morrison held that the federal securities antifraud provision (Section 10(b) and Rule 10b-5) did not extend to F-cubed cases: i.e., cases where non-U.S. (“foreign”) plaintiffs sue foreign defendants for misconduct in connection with securities traded on foreign exchanges (hence “foreign”, or “F-” cubed”).
Porsche involved as plaintiffs a group of global hedge funds, short sellers who entered into swap agreements that were priced based on shares of Volkswagen (VW) stock. VW stock did not trade on a U.S. exchange. Allegedly through fraud, Porsche bought up a controlling position in VW. When that was announced, the price of VW stock dramatically increased, causing significant losses to the short-selling plaintiffs (the value of a short depends on the price of the referenced security going down).
On the basis of Morrision, the District Court dismissed the claims for U.S. securities fraud. Many of the swap agreements themselves contained express choice of law and choice of forum provisions designating New York law and a New York forum. However, as the District Court found, “neither Complaint appends a copy of any swap agreement, and none of the Plaintiffs spell out the identity of a counterparty”.
In the absence of either New York law or forum governing, the District Court applied Morrison’s requirement that U.S. jurisdiction depended on whether the case involved “transactions in securities on domestic exchanges, [or] domestic transactions in other securities”. Swaps are not traded on exchanges, and the District Court found that these swaps were not “domestic transactions in other securities” even though the plaintiffs signed confirmations for the securities-based swap agreements in New York. The Court discussed the “economic reality” of the swap transaction, characterizing it as the functional equivalent of trading the underlying shares on a German exchange.
The District Court noted that other decisions had rejected jurisdiction in the U.S. where the only contact was an investor’s placement of a buy order in the U.S., and the court found no meaningful distinction between a buy order and “one party’s execution in the U.S. of a swap agreement that references foreign securities”. Yet even though the District Court examined the issue in detail and concluded that swaps were subject to the antifraud provisions of U.S. securities laws, and even though neither the statute nor the cases require a U.S. security for a swap to come under the aegis of U.S. law, the District Court did not explain what meaning might be given to the Supreme Court’s phrase “domestic transaction in other securities” if entering into the securities agreement in the U.S. did not fit the bill.
The District Court also described the Supreme Court’s “intention” in Morrison as one seeking to “curtail the extraterritorial application of Section 10(b)”. The District Court does not quote anything in the Supreme Court’s decision to demonstrate that “intent”.
The District Court noted the “ongoing investigations by German securities regulators into Porsche’s accumulation of VW shares”, and the German Consulate in New York apparently asked the District Court to consider dismissing the cases on forum non conveniens grounds. The District Court declined to do so, without ruling on the merits of such a motion.