Plaintiffs in this consolidated action are a number of domestic and offshore hedge funds that had taken significant short positions in the stock of Volkswagen AG (VW) during 2008. Unbeknownst to those hedge funds, defendant Porsche Automobil Holding SE (Porsche) had quietly amassed, outright or through undisclosed options, the right to purchase over 75% of VW’s stock. Porsche had never disclosed its intention to acquire such a large percentage of VW stock. When Porsche eventually announced the true extent of its VW holdings, the plaintiff hedge funds were caught in a massive short squeeze and reportedly lost over $2 billion covering their short positions. Both Porsche and VW are German corporations. Although both corporations have ADRs available on U.S. exchanges, the funds achieved their short positions through securities-based swap agreements that referenced VW stock. The funds sued Porsche and two of its executives in U.S. District Court for the Southern District of New York, claiming violations of the antifraud provisions of the Securities Exchange Act of 1934 and common law fraud. Porsche and the individual defendants moved to dismiss the complaint for failure to state a claim upon which relief could be granted, arguing that U.S. securities laws did not apply to the swap transactions in question. Relying on the U.S. Supreme Court’s recent decision in Morrison v. National Australia Bank
, 130 S. Ct. 2869 (2010), the District Court dismissed all federal fraud claims, holding that the U.S. securities laws were not intended to apply to transactions in foreign securities, even if one of the parties is based in the United States. We summarize the Court’s decision. For further discussion of 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 (Jul. 23, 2009); “Update: Are There Still Avenues for Recovery in United States Courts for Overseas Hedge Fund Losses After Morrison v. National Australia Bank Ltd.?
,” Hedge Fund Law Report, Vol. 3, No. 27 (Jul. 8, 2010).