In In re Petrobras Securities Litigation, the Second Circuit Court of Appeals recently issued an opinion regarding the standards for certifying a class involving foreign securities. Petrobras is a multinational Brazilian gas company whose value has declined due to the exposure of money-laundering and a kickback scheme, which prompted a class action by holders of Petrobras equity and debt.

The District Court certified two classes under Rule 23 relating to claims under the Securities Act of 1933 and the Securities Exchange Act of 1934. Since the notes do not trade on any U.S.-based exchange, noteholders in each class are only entitled to assert claims under the ’33 and ’34 Acts if they can show that they acquired their notes in domestic transactions. While the District Court limited the classes to members who purchased notes in domestic transactions, Appellants argued that the putative class members must establish domesticity on an individual basis. The 2nd Circuit explained that legislation of Congress is meant to apply only within the territorial jurisdiction of the U.S.

Since the debt securities do not trade on a domestic exchange, the District Court must assess each class member’s over-the-counter transactions for markers of domesticity. The 2nd Circuit explained that who sold the plaintiff’s the securities, how the transactions were effectuated, and what forms of documentation exists in support of domesticity appear to be individualized inquiries. The predominance analysis of Rule 23 must account for such individualized questions and. as a result, the 2nd Circuit vacated the District Court Order, in part, since Rule 23’s predominance requirement was not satisfied.

With global markets and foreign traded securities, the decision is important for properly defining purported class members, defending against such claims, and determining whether class certification is appropriate based on, among other things, documentation sufficient to show domesticity.