US Federal Appeals Court limits extraterritorial application of anti-fraud provisions of the U.S. Federal securities laws

In Parkcentral Global Hub Limited v. Porsche Automobile Holdings, SE, 11-397-CV (2d Cir. N.Y. Aug. 15, 2014), the US Court of Appeals for the Second Circuit has clarified the manner in which courts should apply the Supreme Court's seminal decision in Morrison v. National Australia Bank, 561 U.S. 247 (2010), and further limited the extraterritorial application of § 10(b) in private civil actions.  

The plaintiffs, more than thirty international hedge funds, had taken civil proceedings against Porsche Automobile Holdings SE ("Porsche"), and two of its senior officers, alleging that the defendants defrauded them by making false statements about their intent to take over Volkswagen AG ("VW"), a company whose stock traded only on exchanges in Europe.  The plaintiff hedge funds had in entered into securities-based swap agreements relating to the stock of VW, which meant that the amount of gain and loss in the transactions depended on prices of VW stock recorded on foreign exchanges.  The swap agreements were executed and performed in the US.  The defendants were not parties to those swap agreements, which referenced, but did not confer any ownership interest in, the VW stock.  

The Second Circuit held that "the imposition of liability under § 10(b) on these foreign defendants with no alleged involvement in plaintiffs' transactions, on the basis of the defendants' largely foreign conduct, for losses incurred by the plaintiffs in securities-based swap agreements based on the price movements of foreign securities would constitute an impermissibly extraterritorial extension of the statute." 

To read more about the case from John O'Donnell in our New York office, click here.