Just over a year ago, Christopher F. Robertson and Erik W. Weibust, Partner and Associate, respectively, at Seyfarth Shaw LLP, published a guest article in the Hedge Fund Law Report focusing on the ability of U.S.-based hedge funds to sue foreign corporations in U.S. courts for violations of the antifraud provisions of the U.S. securities laws. See “Are There Avenues for Recovery in United States Courts for Overseas Hedge Fund Losses?
,” Hedge Fund Law Report, Vol. 2, No. 29 (July 23, 2009). In that article, they opined that, under existing precedents, U.S. federal courts would likely apply the antifraud provisions of the U.S. securities laws to a lawsuit involving the purchase or sale of shares of a foreign company on a foreign exchange, provided American investors were substantially affected by the foreign company’s wrongful acts – even if those acts were committed exclusively overseas. They focused on a real life example in which numerous U.S. hedge funds lost a substantial amount of money in 2008 relying on public statements that Porsche Automobil Holding SE (Porsche) made regarding its ownership interest in Volkswagen AG (Volkswagen), which resulted in a massive short squeeze that by some accounts led to over $1 billion in hedge fund losses. They ultimately concluded that the hedge funds could assert securities fraud claims against Porsche in a U.S. court, and that such claims would not be dismissed merely because Porsche is a foreign company whose shares trade solely on foreign exchanges. (Porsche offers limited ADRs in the United States that are seldom traded.) Since publication of that article, several of the aggrieved hedge funds have filed lawsuits in U.S. District Court in New York alleging that Porsche violated, among other things, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (the principal antifraud provisions of the U.S. securities laws) by making false and misleading statements and manipulating the market for Volkswagen’s shares. How quickly things have changed. Just last month, the United States Supreme Court ruled, in Morrison v. National Australia Bank Ltd.
(Scalia, J.), Slip Op. No. 08-1191 (decided June 24, 2010), that the principal antifraud provisions of the U.S. securities laws do not have extraterritorial reach and thus do not apply to foreign companies whose shares trade solely on foreign exchanges. While the Morrison
decision is clearly a major victory for foreign companies faced with allegations that they violated the more investor-friendly antifraud provisions of the U.S. securities laws, the decision is not necessarily as damaging as it may seem for U.S. hedge funds that were harmed as a result of Porsche’s alleged fraud. In this update to their July 23, 2009 article in the Hedge Fund Law Report, Robertson and Weibust discuss the implications of the Morrison
decision for hedge funds generally, the implications of the decision for the Porsche case specifically and the likely market impact of the Morrison