F-Squared Claim Rejected

The United States District Court for the Southern District of New York has strongly reaffirmed limitations on the extraterritorial application of U.S. securities laws, concluding that U.S. investors who buy shares in foreign companies on foreign exchanges may not be able to invoke Rule 10b-5 to redress alleged frauds that principally occurred overseas.

In In re European Aeronautic Defence & Space Company Securities Litigation, No. 08 Civ. 5389 (S.D.N.Y. March 26, 2010), the court dismissed an action brought by an American pension fund on behalf of U.S. purchasers of shares of a European aerospace company. The pension fund alleged that the company’s disclosures with respect to the delivery schedule for a major aircraft violated Rule 10b-5. The purchases were made on European exchanges.

The court observed that “[t]he only thing American about this case is” the plaintiff, and that allowing a class action where the relevant conduct occurred overseas could result in “a very small tail . . . wagging an elephant.” That the putative class was limited to U.S. investors and that the plaintiff alleged “generalized activities” in the U.S. by the defendant were not enough to warrant applying U.S. securities laws. The court added that even if U.S. law could apply, the case would have been dismissed because European courts are adequate alternatives and a U.S. court need not defer to a plaintiff’s choice of forum where the connection of the claims to the U.S. is a “gossamer.”

This ruling came three days before the Supreme Court will hear argument in Morrison v. National Australia Bank Ltd., 547 F.3d 167 (2d Cir. 2008), cert granted, 130 S. Ct. 783 (2009), which will address so-called “f-cubed” securities claims—claims of foreign plaintiffs who purchased shares of foreign companies on foreign exchanges. In advance of that argument, the EADS decision shows that even in cases involving domestic plaintiffs American courts will exercise restraint in applying American securities laws extraterritorially.