Parkcentral Global Hub Limited v. Porsche Automobile Holdings, No. 11-403-cv (2d Cir. Aug. 15, 2014) [click for opinion]

Plaintiff hedge funds entered into domestic securities-based swap agreements referencing Volkswagen AG (“VW”) shares. The swap agreements gave the hedge funds an economic short interest in VW based on the price of the shares traded on foreign exchanges. Under the swap agreements, Plaintiffs would experience a gain if VW share prices went down and suffer a loss if VW share prices went up. The swap agreements were entered into in the United States by various entities in the U.S., but did not include Defendants. Porsche was not a party to any securities-based swap agreements and did not participate in the market for such swaps in any way.

In 2008, certain public statements made by Porsche, in conjunction with other actions it took, led the price of VW shares to rise dramatically, causing Plaintiffs to suffer large losses. Plaintiffs alleged that Porsche and two of its executives fraudulently claimed that Porsche was not planning to acquire VW when it actually was, causing the price of VW shares to rise and resulting in a loss for Plaintiffs. Plaintiffs also alleged that Porsche secretly accumulated a large interest in VW stocks by buying call options and selling put options. When Porsche announced that it held an approximately 74 percent interest in VW and that it intended to acquire a controlling interest, the stock prices skyrocketed, causing a “short squeeze” which led the short sellers to lose over $38 billion. Plaintiffs filed a lawsuit in the Southern District of New York alleging violations of section 10(b) of the Securities Exchange Act (the “Exchange Act”). Defendants moved to dismiss on the ground that the swap agreements referenced securities trading on foreign exchanges. The district court granted the motion, concluding that the swaps were essentially transactions in securities on foreign exchanges.

The Second Circuit affirmed. It held that, although the swap agreements were entered into in the U.S., the action underlying the agreement was tied to the stock of a foreign issuer listed only on foreign exchanges. Consequently, a section 10(b) suit against a foreign company for alleged fraudulent statements made abroad regarding foreign stocks could not be brought. The court relied on the Supreme Court’s 2010Morrison decision.

In Morrison v. National Australia Bank Ltd., the Supreme Court ruled that, in an extraterritorial context, section 10(b) only provided a cause of action arising out of “[1] transactions in securities listed on domestic exchanges, and [2] domestic transactions in other securities.” Plaintiff hedge funds argued that the swap agreements were entered into in the U.S. and therefore constituted domestic transactions under Morrison. However, the Second Circuit ruled that, in the case of securities not listed on domestic exchanges, a domestic transaction is necessary but not necessarily sufficient to make section 10(b) applicable. Because the relevant actions in this case were so predominantly German, the complaints failed to invoke section 10(b) in a manner consistent with the presumption against extraterritoriality.

The Second Circuit also declined to adopt a bright-line rule, stating that the presence of some foreign element in a transaction does not necessarily mean that section 10(b) does not apply. The court instead implied that determining the extraterritorial applicability of section 10(b) of the Exchange Act would be a fact intensive inquiry.

Erin Hughes of the Chicago office contributed to this summary.