Global Fraud On The Market

The jurisdictional issues surrounding “foreign cubed” cases – i.e., an action brought against a foreign issuer, on behalf of a class that includes not only investors who purchased the securities in question on a U.S. securities exchange, but also foreign investors who purchased the securities on a foreign securities exchange – continue to be a hot topic. In In re Astrazeneca Sec. Lit., 2008 WL 2332325 (S.D.N.Y. June 3, 2008), the court addressed a proposed class in which 90% of the members were foreigners who purchased on foreign exchanges.

Under the conduct test for subject matter jurisdiction, the plaintiffs needed to adequately allege that (a) the defendants’ conduct in the U.S. was more than merely preparatory to the fraud, and (b) the defendants’ actions in the U.S. “directly caused losses to foreign investors abroad.” Although the court held that the plaintiffs adequately alleged “several of the fraudulent misrepresentations took place in the United States,” the court was unwilling to apply a global fraud on the market presumption and find that the foreign purchasers relied on the U.S.-based conduct when deciding to acquire the stock. Accordingly, the court dismissed the action as to foreign purchasers on foreign exchanges.

Holding: Motion to dismiss granted (both on jurisdictional and, more generally, pleading grounds).

Quote of note: “The Securities Exchange Act does not address the question of extraterritorial reach. The Second Circuit has not yet given guidance on whether the fraud-on-the-market theory should apply to foreign countries. In the absence of clear authority in favor of a global fraud-on-the-market theory, this Court declines to adopt such a theory.”

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