On October 5, 2009, the U.S. District Court for the Southern District of New York granted the defendants' motion to dismiss in Cornwell v. Credit Suisse on subject matter jurisdiction grounds. Please click here to see the decision. The court held that the plaintiffs failed to plead sufficient jurisdictional facts to satisfy the "conduct" test such that the court lacked subject matter jurisdiction over the foreign plaintiffs who purchased Credit Suisse Group's ("CSG") shares on a non-US stock exchanges ("F-Cubed"). Cornwell represents the most recent in a line of Second Circuit cases that have rejected F-Cubed plaintiffs' attempt assert their Section 10(b) claims in U.S. courts.

In Cornwell, the plaintiffs allege that the CSG defendants concealed CSG’s high-risk exposure to sub-prime and Alt-A loans and touted CSG’s internal controls and risk management programs as having helped CSG avoid the negative effects from the downturn in the housing market in violation of Section 10(b) of the Securities Exchange Act of 1934. The complaint alleges that statements about CSG's internal controls and CSG’s strong financial performance were false and misleading because the defendants knew that CSG: (1) did not properly value its assets; (2) failed to disclose the full extent and amount of its exposure to sub-prime risk; and (3) improperly transferred high-risk and illiquid securities into client money market accounts in order to shift these securities off CSG’s books. Additionally, the complaint alleges that the defendants were aware that there were flaws in CSG’s risk management and internal controls because two criminal schemes were uncovered during the Class Period, one involving mis-marking of assets and the other involving falsified e-mails to clients hiding the illiquid and risky auction rate securities being transferred into their money market accounts. According to the plaintiffs, the defendants' misrepresentations inflated the value of CSG's stock throughout the class period.

The court held that the plaintiffs failed to satisfy the “conduct” test for extraterritorial subject matter jurisdiction because the vast majority of the defendants' false and misleading statements came from outside the United States. The court reached this conclusion despite the fact that CSG's investment banking division is located in New York, its risk management officers live and work in New York, the mortgage-backed securities that weighed down CSG's balance sheet were securitized and sold in New York and that the criminal ARS scheme was perpetrated in New York. In reaching its conclusion, the court focused on the fact that each of the quarterly and annual reports cited by the plaintiffs as false and misleading was prepared and issued from CSG's headquarters in Switzerland. Additionally, the court found that the false and misleading statements allegedly made by the defendants on conference calls do not allow the plaintiffs to establish subject matter jurisdiction because the complaint did not specify whether the defendants were in the United States or Switzerland when they participated in the conference calls.

The court also found that the plaintiffs had not satisfied the "effects test" for extraterritorial subject matter jurisdiction. Specifically, the court reasoned that because only 4.1 percent of CSG’s outstanding shares are traded on the New York Stock Exchange and that the plaintiffs provided no information on the amount of shares owned by U.S. investors, the defendants' alleged fraudulent conduct did not have a substantial effect on U.S. citizens.