The United States District Court for the Southern District of New York recently held that a U.S. court does not have subject matter jurisdiction over a lawsuit in which 90% of the proposed class is made up of foreign investors who purchased the securities at issue on foreign exchanges. In re AstraZeneca Sec. Lit., 05-CA-2688 (TPG) (June 3, 2008). In reaching its holding, the court refused to extend the "fraud-on-the-market" theory of reliance to such foreign investors.

In 2004, the plaintiffs filed a securities class action suit on behalf of all persons who acquired securities of AstraZeneca, Inc. between April 2, 2003 and September 10, 2004. Over 90% of the members of the putative class are foreign investors who purchased AstraZeneca stock on foreign exchanges. The remaining members of the putative class purchased AstraZeneca stock as American Depository Shares on a U.S. exchange. The plaintiffs alleged that AstraZeneca and several of AstraZeneca's directors and officers violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 by making material misstatements and omissions. The plaintiffs alleged that several of the fraudulent misrepresentations took place in the United States.

Accepting the facts of the complaint as true, the court considered whether it had subject matter jurisdiction over the case. In order to establish subject matter jurisdiction over transnational securities fraud claims, a plaintiff must satisfy one of two tests, commonly known as the “conduct” test and the “effects” test. The court concluded that the test to be applied in this case was the “conduct” test. Under the conduct test, a court may assert subject matter jurisdiction over claims by foreign investors buying on foreign exchanges only if: (1) the defendants' conduct in the United States was “more than merely preparatory to the fraud” and (2) “particular acts or culpable failures to act within the United States directly caused losses to foreign investors abroad.” In re Vivendi Universal, S.A. Sec. Litig., 381 F.Supp.2d 158, 169 (S.D.N.Y.2003).

The Court concluded that the complaint adequately alleged that conduct in the U.S. was more than "merely preparatory" to the alleged fraud, thus satisfying the first prong of the "conduct" test. However, the court held that the plaintiffs did not sufficiently allege facts to support the second prong of the test -- that the conduct in the U.S. “directly caused” the plaintiffs' losses. In that regard, the court refused the plaintiffs' invitation to apply a global fraud-on-the-market presumption to establish reliance.

The fraud-on-the-market presumption assumes that “in an open and developed securities market, the price of a company's stock is determined by available material information regarding the company and its business.” Basic v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). Because the United States markets are assumed to be efficient, U.S. purchasers on U.S. exchanges often use this rebuttable presumption to establish reliance. The plaintiffs argued that “it is illogical to suggest that the fraud-on-the-market theory applies within the United States but not outside of it, because if securities reacted to information only within the United States, global traders would take advantage of the price differential and buy on one exchange and sell on another." Although the court found that the price of AstraZeneca stock on foreign markets did move in alignment with the U.S. stock price throughout the class period, it nevertheless rejected a global fraud-on-the-market theory based upon its concern that allowing foreign purchasers on foreign exchanges to plead reliance in this manner (i.e. by presumption) would extend the jurisdictional reach of the United States securities laws too far.

The court noted that the Securities Exchange Act does not address the question of its extraterritorial reach, and the Second Circuit has not yet given guidance on whether the fraud-on-the-market theory should apply to foreign investors buying on foreign exchanges. In the absence of clear authority in favor of a global fraud-on-the-market theory, the court declined to adopt such a theory.

For a full copy of the decision, please click here.