In re Petrobras Securities Litigation, 14-cv-9662 (S.D.N.Y. Dec. 21, 2015)

Plaintiffs brought a putative class action against Brazilian oil company Petrόleo Brasileiro, S.A. (“Petrobras”), two of Petrobras’ wholly-owned subsidiaries, and various former officers and directors.  Plaintiffs allege Petrobras was at the center of a multi-year, multibillion dollar bribery and kickback scheme, in connection with which Defendants made false and misleading statements in violation of federal securities law.  Defendants moved to dismiss several of the claims in Plaintiffs’ Fourth Amended Complaint, arguing, inter alia, that Petrobras debt securities (the “Notes”) were not purchased in the United States under the Morrison test. 

The Supreme Court in Morrison limited the extraterritorial application of federal securities laws and articulated a bright-line test: Federal securities laws only apply to fraudulent statements made in connection with the purchase or sale of (1) a security listed on an American stock exchange; or (2) any other non-listed security in the United States.  The Second Circuit in Absolute Activist held a non-listed security is purchased or sold in the United States if (a) the parties incur irrevocable liability in the United States; or (b) title is passed within the United States. 

To meet the first prong of the Morrison test, Plaintiffs pleaded that the Notes were listed or were to be listed on the New York Stock Exchange.  The court found that notes listed or to be listed on the New York Stock Exchange did not establish that the Notes traded there.  The court also rejected Plaintiffs’ argument that trading on an over-the-counter bond market constitutes trading on an American stock exchange because over-the-counter transactions, by definition, are those that do not occur on an exchange.

The court then considered whether Plaintiffs adequately pleaded that irrevocable liability was incurred in the United States.  The court found that, where two Plaintiffs purchased Notes from underwriters in New York, they adequately pleaded that irrevocable liability was incurred in the United States.  However, where a company located in the United Kingdom instructed its United States affiliate to transfer Notes to a Plaintiff, the court found this was an alleged transfer and not a purchase in the United States.

Plaintiffs also alleged that purchasing Notes “on the offering date and at the offering price” demonstrates irrevocable liability because the underwriters who sold the initial offerings did so from the United States.  The court rejected this argument where some supplemental Prospectuses did not state that the Notes were exclusively initially offered in the United States and some underwriters initially offered Notes outside of the United States.

Alternatively, the court considered whether the Plaintiffs adequately pleaded that title passed in the United States where Plaintiffs alleged “beneficial ownership” was transferred in the United States when Note purchases settled through the Depository Trust Company (“DTC”) in New York, which holds securities for owners and facilitates clearance and settlement of transactions by adjusting its books to reflect trades.  The court rejected this argument, finding that domestic actions necessary to complete transactions do not constitute a transfer of title in the United States under Absolute Activist or Morrison.  The court also noted Morrison would be undermined if all DTC-settled transactions fell within the reach of federal securities laws.

The court thus granted Defendants’ motion to dismiss in part.