Pomerantz Monitor, March/April 2012
by Robert J. Axelrod and Marc I. Gross
Two years ago, in the wake of the Supreme Court’s decision in Morrison concerning the extraterritorial application of United States securities laws, we noted that most legal commentators predicted a major decline in securities litigation. In that case the Supreme Court created a bright line rule that lawsuits alleging securities fraud involving companies whose securities were traded on a non-U.S. exchange could not be brought under U.S. law. This ruling extended even to cases where the conduct at issue – such as the alleged fraudulent misrepresentations – actually took place at a company’s U.S. headquarters.
Of course, many institutional investors routinely purchase securities on many different exchanges throughout the world. When a company whose stock trades on a non-U.S. exchange engages in securities fraud, are investors who purchased those securities outside the United States simply out of luck?
Class Cases Filed in Foreign Courts
The answer is decidedly “no.” Since the Supreme Court decided Morrison, we have seen an increase in securities actions brought in jurisdictions outside the United States. Some of these are class actions, or actions similar to U.S.-based class actions. Others are individual securities actions.
For example, there are by our count more than two dozen active securities class actions pending in Canada. A recent report by the consulting firm National Economic Research Associates confirms that last year alone, 15 securities class actions were filed there, the most ever. Similar actions are also pending in the Netherlands, Germany, and Israel. New laws allowing class actions were passed in Mexico, and England also allows “group actions,” which can be pursued on a representative basis, just like class actions.
A good example of the migration of securities fraud class actions is the action against Fortis, a financial services company based in Belgium. The plaintiffs in that action – some of the largest European pension funds, which purchased their Fortis securities on a foreign exchange – initially brought a class action in the U.S., but their case was dismissed by a U.S. court under Morrison. A year later they brought their case, which mirrors the allegations of the U.S. action, in a Dutch court.
There are a number of differences in the procedural and substantive law in these foreign jurisdictions, of course, including how damages may be calculated, whether attorneys fees can be shifted to the losing party, the rules for defining and certifying a class, and (particularly in the case of Canada) whether, as in the U.S., discovery is going to be held up until a motion to dismiss is decided. Whether it may be worthwhile to bring a securities fraud action in a foreign jurisdiction, whether the action should see certification of a class of all similarly situated investors or be brought as an individual action, and how to litigate and win whichever action is brought, are critical questions investors should ask their securities counsel. That counsel must also have relationships with the few securities practitioners in other countries who represent plaintiffs, rather than corporate clients, and who may be willing to forego hourly fees in favor of the contingent fee structure utilized by many U.S. based securities firms who represent institutional investors.
Individual Cases Under State Law
Morrison made clear that class actions for recovery of fraud related to damages arising from purchases abroad cannot be pursued under the federal securities laws. In so doing, the Supreme Court relied principally on the text of the 1934 Exchange Act. However, there is no such textual limitation for fraud claims arising under state statutory and common law. Thus, to the extent that a domestic investor purchased shares on a foreign exchange, and relied upon materials disseminated in the U.S., the injury arose in the U.S. at the place where the purchaser was misled -- not where the trade was executed. Thus, the case could be brought under the state law where the purchaser resided.
By the same token, if wrongdoing that contributed to the fraud occurred in a particular state (e.g., improper accounting for revenues by a U.S. subsidiary), that state should have an interest in protecting all persons injured by the misconduct, regardless of where they reside or purchased the shares. Under this rationale, even foreign investors could bring claims under the laws of the state where the subsidiary of the corporation was domiciled. These cases must be brought individually, not on a class basis, in order to avoid the federal statutory preemption of securities fraud class actions under SLUSA. There will likely be forum-non conveniens hurdles as well, but these obstacles should be minimal if class actions are otherwise pending for those who purchased ADRs of the same company on U.S. exchanges.