In November 2007, shareholders of Vodafone Group Plc ("Vodafone") filed a securities class action complaint in the U.S. District Court for the Southern District of New York under section 10(b) of the Securities Exchange Act of 1934 (the"34 Act") alleging that Vodafone and several of its directors and officers artificially inflated the price of Vodafone's stock through allegedly false and misleading statements about its financial health and business prospects. The lead plaintiff, the City of Edinburgh Counsel on behalf of the Lothian Pension Fund (believed to be located in Edinburgh, Scotland), did not purchase its shares of Vodafone on a U.S. stock exchange. Accordingly, the Vodafone defendants moved to dismiss the the complaint for lack of subject matter jurisdiction and for various pleading deficiencies. Absent subject matter jurisdiction, a court lacks constitutional or statutory power to adjudicate a case.

By order dated November 24, 2008, the court dismissed the complaint for lack of subject matter jurisdiction. The court explained that the text of the 34 Act does not explicitly set forth any application to extra-territorial activity but that subject matter jurisdiction has been extended to claims implicating transnational securities fraud when: (1) the wrongful conduct occurred in the United States (the conduct test); or (2) the wrongful conduct had a substantial effect in the Unites States or upon U.S. citizens (the effects test). In this case, the lead plaintiff relied exclusively of the conduct test to establish subject matter jurisdiction.

In applying the conduct test, the court analyzed whether the alleged fraudulent conduct of the Vodafone defendants were "substantial acts in furtherance of the fraud" committed in the United States. Citing to Second Circuit precedent, the court explained that "substantial acts" occur whenever (1) the defendant's activities in the Unites States were more than merely preparatory to a securities fraud conducted elsewhere; and (2) the activities or culpable failures to act within the Unites States directly caused the claimed losses.

The court concluded that the lead plaintiffs did not plead substantial acts in the United States to confer subject matter jurisdiction. The court was troubled by the fact that the complaint was silent as to where many of the alleged misstatements were made, where the purportedly fraudulent scheme was devised, and the locations of the various global actors who were party to (or harmed by) the alleged misstatements. The lead plaintiff's jurisdictional assertions that the court found deficient included: (1) a citation to portions of Vodafone's 2004 Annual Report that appears to assert that Vodafone is subject to the U.S. securities laws; (2) Vodafone submits filings to the U.S. Securities and Exchange Commission; (3) Vodafone's common shares, while traded on the London Stock Exchange and the Frankfurt Stock Exchange, are listed as American Depository Receipts on the New York Stock Exchange (the American Depository Receipt is the financial instrument which enables non-U.S. domiciled companies to access the U.S. equity markets); and (4) lead plaintiff's allegation that "many of the false and misleading statements were made or issued from this District."

Although this decision is good news for Vodafone and its D&O insurers, the subject matter jurisdiction standard for transnational securities fraud still remains a very fact intensive inquiry. D&O insurers who write insurance for global corporations still struggle to assess maximum exposure for a potential securities fraud lawsuit brought in the United States. Depending on the allegations of wrongdoing and if subject matter jurisdiction is granted over foreign purchasers who purchase their shares or foreign exchanges, the potential damages in a securities class action could grow by many multiples (depending on the amount of shares traded abroad). If subject matter jurisdiction is denied for foreign purchasers who purchase their shares or foreign exchanges, potential damages would be limited to just the purchasers of the company's shares on a U.S. exchange.