In Parkcentral Global Hub v. Porsche, Automobile Holdings SE, et al., No. 11-397-cv, the United States District Court for the Second Circuit Court of Appeals held that the plaintiff did not state a securities action against Porsche Automobile Holdings SE ("Porsche") because none of the relevant conduct was domestic and the Securities and Exchange Act does not apply extraterritorially. The plaintiffs argued that Porsche violated Section 10(b) of the Securities and Exchange Act by acquiring stock in Volkswagen AG ("VW") while simultaneously denying that it wanted to acquire VW. When Porsche owned 74% of VW, the price of VW stock rose, causing the plaintiffs to lose significant sums due to security swaps they engaged in that referenced VW's price.1
The Morrison rule of 2010 holds that Section 10(b) of the Exchange Act "applies only to transactions in securities listed on U.S. exchanges or to domestic transactions in other securities."2 Prior to the Morrison rule, courts relied on the fact-intensive "conduct" and "effects" tests to determine if a securities transaction was extraterritorial. The "conduct" test looked at whether the securities actions occurred in the U.S. The "effects" test determined whether the actions, despite not occurring in the U.S., "had a substantial adverse effect in the United States or upon United States citizens."3 In Parkcentral, the Second Circuit qualified this rule. Despite the fact that the stock swaps technically were domestic transactions, the Court ruled that a domestic transaction is "'necessary but not necessarily sufficient' to state a claim under Section 10(b) of the act."4 Wanting to maintain the strong presumption against extra territoriality, the Second Circuit reasoned that the application of the Morrison rule relied upon a careful review of the facts.
The Second Circuit opinion shows that the Morrison rule is far from perfectly clear, especially with regards to its second prong, "domestic transactions in other securities."5 The securities swaps took place domestically, but, despite that the Second Circuit found that it did not make sense to hold that the Exchange Act can be used against a German company for activities that mainly took place in Germany. "We think it clear that the claims in this case are so predominantly foreign as to be impermissibly extraterritorial."6 We expect federal courts to continue to tackle the uncertainty of the Morrison rule especially with regard to cases where courts must determine extraterritorial issues.
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