Plaintiffs sought to certify a class of purchasers of securities of an Italian company who asserted claims under the Securities Exchange Act after the company collapsed following the discovery of massive fraud. Some members of the putative class were United States-based and others were foreign. Defendants moved to dismiss the claims of the foreign purchasers, arguing that the federal securities laws did not apply to them. The United States District Court for the Southern District of New York agreed, ruling that the extraterritorial application of the federal securities was not warranted because the essential core of the alleged fraud occurred abroad and any activities that occurred within the United States were insubstantial and, at most, peripheral to the alleged fraud.
Because the federal securities laws are silent with respect to the scope of their extraterritorial application, where a foreign plaintiff seeks to invoke the federal securities laws in connection with a dispute that primarily involves foreign-based conduct, the Court must determine whether Congress would have wanted the resources of United States courts, rather than those of foreign countries, to be utilized. In the Second Circuit, this inquiry depends upon whether the wrongful conduct (i) occurred in the United States, or (ii) had a substantial effect in the United States, or upon its citizens.
The Court first ruled that the second of these tests, the “effects test,” had no bearing on the motion because the defendants only moved to dismiss claims asserted by foreign purchasers. The Court then determined that the plaintiffs’ allegations also failed to satisfy the requirements of the “conduct test.” Under the “conduct test,” the extraterritorial application of federal securities laws is appropriate if “culpable conduct” in furtherance of the fraud is alleged to have occurred in the United States. Because the alleged fraud – the company’s issuance of duplicate receivables to different entities for the same goods – occurred entirely in Italy and because none of the United States-based conduct was necessary for the fraud to occur, the Court ruled that it was too peripheral to support the foreign purchasers’ claims. (In re Parmalat Securities Litigation, No. 04 MD 1653(LAK), 2007 WL 2120279 (S.D.N.Y. July 24, 2007))