The narrowing of the federal securities laws’ applicability to non-U.S. transactions continues. On December 21, 2015, the U.S. District Court for the Southern District of New York held in In re Petrobras Securities Litigation that certain purchasers of Petrobras debt securities could not sue under the federal securities laws. In so ruling, the court held that settlements of transfers through the New York-based Depository Trust Company (the “DTC”) do not suffice in and of themselves to bring what would otherwise be non-U.S. transactions within the reach of the federal securities laws.

The latest decision in the Petrobras securities litigation involved claims by certain U.S. and non-U.S. purchasers of notes issued by Petrobras, a Brazilian company. All of the plaintiffs sought to assert securities-fraud claims under U.S. law. To do so, the plaintiffs needed to satisfy the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, which held that the federal securities laws apply only to allegedly fraudulent statements made “in connection with the purchase or sale of [i] a security listed on an American stock exchange, and [ii] the purchase or sale of any other security in the United States.”

Listing on U.S. Exchange. The plaintiffs argued that Morrison’s first prong applied because the Petrobras notes were listed or intended to be listed on the New York Stock Exchange. But regardless of the listing, the notes never actually traded on the NYSE, so the court ruled – in accordance with Second Circuit precedent – that “mere listing, without trading, is insufficient to satisfy Morrison’s first prong. . . . This is because the rationale of Morrison clearly focuses on the location of actual transactions, with the domestic listing acting as a proxy for a domestic transaction.” The court also held that the allegation that the notes traded in the over-the-counter bond market did not satisfy Morrison’s first prong, because “over-the-counter transactions are, by definition, those that do not occur on an exchange.”

Other Domestic Transactions. Most of the court’s opinion focused on Morrison’s second prong: “the purchase or sale of any [unlisted] security in the United States.” The Second Circuit, in its 2012 decision inAbsolute Activist Value Master Fund v. Ficeto, had held that this prong is satisfied only “when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed within the United States.” The District Court therefore addressed whether the plaintiffs had incurred irrevocable liability, or whether title had passed, in the United States.

The court ruled that two U.S. plaintiffs had adequately pled facts showing the domestic incurrence of irrevocable liability: the complaint alleged that those plaintiffs’ U.S.-based traders had purchased the foreign issuer’s notes from U.S.-based underwriters.

But certain non-U.S. plaintiffs had merely asserted the incurrence of irrevocable liability in the United States without pleading any supporting factual allegations, despite the Second Circuit’s ruling in Absolute Activistthat “the mere assertion that transactions ‘took place in the United States’ is insufficient to adequately plead the existence of domestic transactions.” The court therefore dismissed those plaintiffs’ claims.

Other non-U.S. plaintiffs had pled more specific allegations, but nevertheless failed to establish incurrence of irrevocable liability or transfer of title in the United States. For example, one U.K.-based plaintiff had allegedly instructed its U.S. affiliate in Chicago to transfer the Petrobras notes to the U.K. plaintiff. The court held that an allegation of a “transfer” is not an allegation of a “purchase” in the United States. “Moreover, the allegations suggest that irrevocable liability was incurred in the United Kingdom, where [the plaintiffs] are both located.”

Those non-U.S. plaintiffs also contended that, regardless of whether they had incurred irrevocable liability in the United States, transfer of title had occurred here because beneficial ownership had been transferred through settlement through the DTC. But the court held that “the operations of the DTC are insufficient to satisfy Absolute Activist, even assuming that DTC’s bookkeeping affects a change in beneficial ownership in New York.” The court explained that “[t]he mechanics of DTC settlements are actions needed to carry out transactions, but they involve neither the substantive indicia of a contractual commitment necessary to satisfy Absolute Activist’s first prong nor the formal weight of a transfer of title necessary for its second.” The court added that, “if all DTC-settled transactions necessarily fell under the reach of the federal securities laws[,] [t]he laws would reach most transactions, not because they occurred on a domestic exchange but because they settled through the DTC. This result cannot be squared with the plain language and careful reasoning of Morrison and Absolute Activist.”

The Petrobras decision illustrates the hurdles that purchasers of non-U.S. securities continue to face in suing under the federal securities laws. Such plaintiffs must plead specific transactional facts – not conclusory allegations – showing, at a minimum, either (i) an actual transaction on a U.S. exchange (not in the over-the-counter market) or, for non-U.S.-listed securities, (ii) the incurrence of irrevocable liability in the United States or the transfer of title in the United States. U.S.-based mechanics necessary to carry out a transaction – such as settlement through the DTC – will not suffice. Plaintiffs also need to remember the Second Circuit’s 2014 warning in Parkcentral Global Hub Limited v. Porsche Automobile Holdings SE that, “while a domestic transaction or listing is necessary to state a claim under [the federal securities laws], a finding that these transactions were domestic would not suffice to compel the conclusion that the plaintiffs’ invocation of [U.S. law] was appropriately domestic.”