22 January 2013
A New York appellate court recently issued a decision favorable to securities issuers whose shares trade on non-US exchanges. The court held that certain hedge fund plaintiffs—whose federal securities fraud claims earlier were dismissed pursuant to the US Supreme Court’s decision in Morrison—could not pursue a new state court suit that was based on nearly identical allegations as the original federal suit. The decision comes in Viking Global Equities, LP v. Porsche Automobil Holding SE, where the New York Supreme Court, Appellate Division, First Department, held that the hedge fund plaintiffs’ claims should be dismissed pursuant to forum non convenience doctrine because the claims were more appropriately resolved in Germany, where the dispute was centered.
In Viking Global Equities, the hedge fund plaintiffs alleged that Porsche made false representations in 2008 regarding its intention to takeover Volkswagen (VW), causing the plaintiffs more than one billion dollars in losses on short sales of VW stock and private swap agreements.
The hedge funds initially sued in federal court, asserting federal securities claims as well as common law causes of action. The US District Court for the Southern District of New York dismissed the federal claims. According to the court, shorts of securities traded abroad, and swap agreements that reference foreign securities, are not within the ambit of Section 10(b) under Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010), which held that Section 10(b) covers only US domestic securities transactions. Noting “the strong connection of all aspects of this action to Germany,” the Southern District declined to exercise supplemental jurisdiction with respect to the common law claims. The hedge funds’ appeal of that decision remains pending in the Second Circuit.
Having been turned away from federal court, some of the hedge funds initiated a new litigation in New York state court, reasserting their common law causes of action. Because the hedge funds did not make class-wide allegations, the preclusion provision of the Securities Litigation Uniform Standards Act of 1998 (SLUSA) did not bar the suit.
Porsche moved to dismiss the state court action, asserting the forum non conveniens doctrine, among other arguments. That doctrine, which rests in part upon principles of international comity, permits a US court to decline exercise of jurisdiction if, among other things, a different forum has a greater interest in adjudicating the controversy. Here, Porsche contended that Germany was the more appropriate forum because (i) the conduct at issue occurred there, (ii) VW stock is traded on a German exchange, (iii) both Porsche and VW are German companies, (iv) there are ongoing civil and criminal proceedings in Germany, (v) the relevant witnesses and evidence are located in Germany, (vi) the claims will likely turn on German law and (vii) Porsche had minimal contact with New York.
The New York state trial court denied Porsche’s motion, and Porsche appealed.1
Agreeing with Porsche, the appellate court concluded that “Porsche met its heavy burden to establish that New York was an inconvenient forum” because of the “inadequate connection between the events of the transaction and New York, as well as the facts that defendant and most plaintiffs are not New York residents, the VW stock is traded only on foreign exchanges, many of the witnesses and documents are located in Germany, which has stated its interest in the underlying events and provides an adequate alternative forum.”
This decision constitutes an important step in ensuring that plaintiffs cannot use state courts—particularly those of New York—to circumvent Morrison’s holding that US federal anti-securities fraud laws do not apply to extraterritorial securities transactions.
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1 Mayer Brown filed an amicus brief in the appellate court on behalf of the Federation of German Industries, German Issuers, the Association of German Banks, The Swiss Bankers Association, the European Banking Federation, Economiesuisse, and Mouvement des Entreprises de France, urging reversal in deference to Germany’s superior interest.