No Bright Line

In its Morrison decision, the U.S. Supreme Court addressed the extraterritorial application of Section 10(b) and held that the statute only applies to “transactions in securities listed on our domestic exchanges, and domestic transactions in other securities.” While this formulation clearly excludes foreign transactions, does it conversely mean that any “domestic transaction” in a foreign security can be subject to potential Section 10(b) liability?

The Second Circuit had the opportunity to address this question in a case involving an unusual fact pattern. In Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE, 2014 WL 3973877 (2d Cir. August 15, 2014) , the plaintiffs had entered into “securities based-swap agreements pegged to the price of VW [Volkswagen] shares, which trade on European stock exchanges, to bet that VW stock would decline in value.” The plaintiffs alleged that VW “made various fraudulent statements and took various manipulative actions to deny and conceal Porsche’s intention to take over VW.” When it became public that Porsche would take over VW, “the price of VW shares rose dramatically, causing the plaintiffs to suffer large losses.”

While the Second Circuit assumed, for purposes of its decision, that the swap agreements were “executed and performed in the United States,” it found that this was not sufficient under Morrison to justify the application of Section 10(b). First, the Supreme Court “never said that an application of § 10(b) will be deemed domestic whenever such a transaction is present.” Second, applying the statute “to wholly foreign activity clearly subject to regulation by foreign authorities solely because a plaintiff in the United States made a domestic transaction” would “inevitably place § 10(b) in conflict with the regulatory laws of other nations.” As to the VW-related swap agreements, the court held “that the relevant actions in this case are so predominately German as to compel the conclusion that the complaints fail to invoke § 10(b) in a manner consistent with the presumption against extraterritoriality.”

Holding: Dismissal affirmed and case remanded for proceedings consistent with decision.

Quote of note: “We have neither the expertise nor the evidence to allow us to lay down, in the context of the single case before us, a rule that will properly apply the principles of Morrison to every future § 10(b) action involving the regulation of securities-based swap agreements in particular or of more conventional securities generally. Neither do we see anything in Morrison that requires us to adopt a ‘bright-line’ test of extraterritoriality when deciding every § 10(b) case. . . . It is enough to say that we think our decision in this case is compelled by the text of the Exchange Act and the principles underlying the Supreme Court’s decision in Morrison, as applied to our facts.”

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