The Eleventh Circuit Court of Appeals has found that the district court has subject matter jurisdiction over securities claims brought by “F-Cubed” plaintiffs– i.e., a foreign investors who purchased shares in a foreign company on a foreign stock exchange. See In re: CP Ships Ltd. Securities Litig., Docket No. 08-16334 (Aug. 13, 2009).
Background: On August 12, 2004, a purported class of shareholders in a Canadian shipping company, CP Ships Ltd. (“CP Ships”), brought a securities class action against CP Ships and certain of its officers and directors, alleging that the defendants had understated the company’s operational costs in connection with a transition in its accounting systems. CP Ships’ headquarters is located in the United Kingdom, but CP Ships’ former CEO allegedly “micromanaged” the transition in accounting systems while based in the United States and made certain of the alleged misstatements about CP Ships’ financial condition while in the United States. CP Ships’ shares mainly trade on Toronto Stock Exchange, but approximately 20% of its shares trade on the New York Stock Exchange.
On April 5, 2007, the district court dismissed the suit for failure to satisfy the pleading requirements under the PSLRA. While an appeal of this decision was pending, the plaintiffs agreed to settle this action. The settlement class included certain foreign shareholders, but did not include any F-Cubed plaintiffs.
Subsequently, a Canadian shareholder (who had purchased CP Ships shares on the New York Stock Exchange) objected to the settlement, which would have included him, on the grounds that there is no subject matter jurisdiction over the foreign investors’ claims, including the claims brought by those who had purchased their shares on the Toronto Stock Exchange (i.e., the F-Cubed plaintiffs). It is not clear why the objecting shareholder made this objection, but we note that a parallel proceeding addressing the same issues is pending in the Canadian courts.
The district court overruled the Canadian shareholder's objection, who appealed to the Eleventh Circuit.
Holding: The Eleventh Circuit held that the district court had subject matter jurisdiction over all of the foreign plaintiffs in the securities class action based on the “conduct test” for extraterritorial application of Section 10(b) of the Securities and Exchange Act (the “conduct test” requires the court to examine whether the alleged wrongful conduct took place in the United States). The Court concluded that the wrongful conduct principally complained of – the alleged falsification of the company’s financial statements and the transmission of this false financial information to the company’s headquarters in the United Kingdom – occurred in the United States.
Notably, the court rejected the objector’s argument that the U.S.-based wrongful conduct was merely “preparatory” to the company’s dissemination, from the U.K., of false and misleading financial information, and that the U.K.-based, rather than the U.S.-based, conduct directly injured the plaintiffs. The objector’s argument was largely based on a recent F-Cubed case, Morrison v. Nat’l Australia Bank, Ltd., 547 F.3d 167 (2d Cir. 2008), about which we previously posted here. In rejecting the objector’s argument, the Court stated that although certain defendants allegedly disseminated the false financial information from the U.K., the conduct that was “central” to the plaintiffs’ claims occurred in the United States. The Court noted that the defendants allegedly falsified CP Ships’ accounting information, signed off on this accounting information, and made certain public misrepresentations about CP Ships’ financial condition, all from within the United States. The Court thus concluded that the causal link between the U.S. conduct and the plaintiffs’ alleged injuries was direct and immediate.
It is unclear whether the underlying settlement will go forward given the Eleventh Circuit’s ruling that the district court has subject matter jurisdiction over the F-Cubed plaintiffs (F-Cubed plaintiffs were not included in the settlement). It is possible that the plaintiffs will seek to broaden the scope of the settlement to now include F-Cubed plaintiffs.