In Parkcentral Global Hub Ltd,. et al. v. Porsche Automobile Holdings SE, et al., Dkt. No. 11-397-cv (2d Cir. Aug. 15, 2014), the US Court of Appeals for the Second Circuit affirmed the lower court’s dismissal of plaintiffs’ claim under Section 10(b) of the Securities Exchange Act of 1934. In a broad and defense-friendly interpretation of the US Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), the Second Circuit declined to disturb the presumption against extraterritorial application of US securities laws and held that “a domestic transaction or listing is necessary to state a claim under § 10(b), [but] a finding that . . . transactions were domestic would not suffice to compel the conclusion that the plaintiffs’ invocation of § 10(b) was appropriately domestic.”  Plaintiffs/appellants in Parkcentral were hedge funds that entered domestic securities-based swap agreements, which referenced shares of Volkswagen AG that trade on European stock exchanges, to bet on a decline in Volkswagen’s stock price. When Porsche later disclosed its ownership of 74.1 percent of Volkswagen’s stock, the news caused a surge in the price of Volkswagen’s stock, which resulted in plaintiffs losing significant amounts of money in a massive short squeeze. Plaintiffs then sued Porsche and two of its executives, alleging reliance on defendants’ allegedly fraudulent statements disclaiming an interest in acquiring Volkswagen. Despite the domestic nature of the plaintiffs’ swap agreements, the Parkcentral appellate court held that “the claims in this case are so predominantly foreign as to be impermissibly extraterritorial.” The court of appeals explained that the allegedly fraudulent statements at issue were made in a foreign country and concerned a foreign company whose stock was traded on foreign exchanges.  

While Parkcentral concerned domestic securities-based swap agreements, the court of appeals did not view the domestic nature of the transaction as dispositive. Rather, the Second Circuit interpreted Morrison to hold that a domestic transaction or listing is a “necessary,” but not necessarily sufficient condition precedent to a finding of extraterritorial application under Section 10(b). The Parkcentral appellate court viewed the question of extraterritoriality as a question of fact that requires “careful attention to the facts of each case.” The court of appeals reasoned that its ruling was consistent with Morrison because a contrary ruling “would subject to U.S. securities laws conduct that occurred in a foreign country, concerning securities in a foreign company, traded entirely on foreign exchanges” simply because the claim at issue had a domestic component. The holding thus offers additional comfort to both issuers and securities-based swap agreement market participants seeking to avoid the application of US securities fraud law to extraterritorial conduct.  

A copy of the decisions can be found here.