Proskauer Rose International Practice Guide Proskauer Rose LLP | Proskauer.com
      Proskauer on International Litigation and Arbitration:
       Managing, Resolving, and Avoiding Cross-Border Business or Regulatory Disputes
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  1. Overview
    1. The Securities Act of 1933 (15 U.S.C. §§ 77a et seq.) and the Securities Exchange Act of 1934 (15 U.S.C. §§ 78a et seq.) (“SEA”) are silent as to their extraterritorial application. However, federal securities laws have been construed to cover transactions initiated within the U.S. but executed abroad and vice-versa.
    2. When a plaintiff alleges securities fraud in connection with an international transaction and bases subject matter jurisdiction on these statutes, a federal court must first determine whether Congress would have wished the resources of the U.S. courts to be expended to resolve the claim. Generally, the courts will exercise subject matter jurisdiction under the securities laws if the transaction involved has significant contact or effects within the U.S. Courts are typically more receptive to the exercise of U.S. jurisdiction in fraud cases than in regulatory matters.
  2. Determining Whether U.S. Securities Laws Apply
    1. The U.S. courts have articulated multiple “tests” to determine whether U.S. securities laws apply to an international transaction.
    2. The “Effects” Test: This concept requires the court to consider whether a transaction outside the U.S. has had a substantial adverse effect on the U.S. market or U.S. investors.
      1. A court may exercise jurisdiction over a cause of action where conduct abroad has significantly injured U.S. securities markets. See Schoenbaum v. Firstbrook, 405 F.2d 200, 206 (2d Cir. 1968), cert. denied, 395 U.S. 906 (1969).
      2. Jurisdiction may hinge on the magnitude of the impact the transaction will have in the U.S. Compare Des Brisay v. Goldfield Corp., 549 F.2d 133 (9th Cir. 1997) with Bersch v. Drexel Firestone, 519 F.2d 974 (2d Cir), cert. denied, 423 U.S. 1018 (1975).
      3. Courts also rely on considerations, including policy factors like courts’ distaste for fraud, to decide whether the effect on U.S. interests is significant. ITT v. Cornfeld, 619 F.2d 909 (2d Cir. 1980); Continental Grain (Australia) Pty. Ltd. Pacific Oilseeds, 592 F.2d 409 (8th Cir. 1979) (admitting that the court’s jurisdictional determination was “largely a policy decision”).
    3. The Conduct Test: This concept requires the extraterritorial application of U.S. securities law where any material part of a transnational securities fraud was perpetrated in the U.S., even if the transaction was ultimately consummated outside of the U.S. The test currently has at least three iterations:
      1. The D.C. Circuit has taken the most stringent approach, requiring that all factors required to establish a securities fraud claim under SEA Section 10(b) must have occurred in the U.S. E.g., Zoelsch v. Arthur Andersen & Co., 824 F.2d 27 (D.C. Cir. 1987).
      2. The Second, Fifth and Seventh Circuits have essentially required that (1) more than mere preparatory conduct to the fraud has occurred in the U.S.; and (2) the U.S. conduct has caused the non-U.S. claimant’s loss. See e.g., Psimenos v. E.F. Hutton & Co., 722 F.2d 1041, 1046 (2d Cir. 1983).
      3. The Third, Eighth and Ninth Circuits have adopted a more relaxed approach, looking to whether the U.S. conduct has significantly contributed to the fraudulent scheme. See, e.g., SEC v. Kasser, 548 F.2d 109, 114 (3d Cir.), cert. denied, 431 U.S. 938 (1977).
    4. Practice Tip: Application of the conduct and effects test has not been consistent and even where subject matter jurisdiction is established, there are still issues of comity, personal jurisdiction and forum non conveniens to be considered. That being said, there are a few general rules of thumb.
      1. U.S. courts will not exercise federal jurisdiction over a wholly non-U.S. transaction; an action brought by a non-U.S. purchaser who purchased a non-U.S. security on a non-U.S. exchange on the basis of false statements, even if the non-U.S. issuer had made similar false filings in the U.S. See e.g., Kaufman v. Campeau Corp., 744 F. Supp. 808 (S.D. Ohio 1990), Bersch v. Drexel Firestone, 519 F.2d 974 (2d Cir), cert. denied, 423 U.S. 1018 (1975).
        1. A Section 10(b) claim only arises if the corporate issuer makes a materially false or misleading statement to an investor who makes an actual purchase of sale of securities in reliance on that statement.  Where all of the alleged misstatements about both the projections and U.S. environmental liabilities were made by a non-U.S. entity's officers and directors in an non-U.S. territory, the firs prong of the "conduct test" could not be satisfied.  In re Rhodia S.A Securities Litigation, Slip Copy 2007 WL 2826651 (S.D.N.Y. September 26, 2007).  The court noted that Congress did not intend the "U.S. courts to adjudicate entirely foreign disputes involving foreign investors and their securities in foreign corporations traded on foreign markets." Id. at *12.
      2. U.S. courts will exercise jurisdiction over the claims of non-U.S. nationals when there has been substantial activity in the U.S., which was not merely preparatory to the fraud, but instead caused the non-U.S. purchasers’ losses. See e.g., In re Royal Ahold N.V. Sec. & ERISA Lit., 351 F.Supp. 2d 334 (D. Md. 2004). However, the definition of preparatory conduct and the degree of U.S. conduct necessary to justify jurisdiction have not been consistent.
      3. U.S. courts will exercise of jurisdiction over a non-U.S. issuer any time that a fraud committed by a non-U.S. issuer has an impact on U.S. investors or markets. Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir. 1968), cert. denied, 395 U.S. 906 (1969).
      4. U.S. courts will exercise jurisdiction over any scheme in which a U.S. citizen has been defrauded, even when the U.S. citizen purchased non-U.S. securities on a non-U.S. exchange. Where the U.S. citizen lives outside the U.S., a substantial portion of the conduct underlying the fraud must have been conducted in the U.S. Bersch v. Drexel Firestone, 519 F.2d 974 (2d Cir), cert. denied, 423 U.S. 1018 (1975).
  3. Insider Trading

    The practice of an insider, or related party, trading on material non-public information obtained during the performance of the insider’s duties at the corporation, or otherwise misappropriated. In light of the rise of complex international brokerage and banking systems, this area continues to motivate the development of SEC policy to extend application beyond the U.S. See e.g., SEC v. Leon Levy, et al., 3-04-CV-0351 (N.D. Tex) (Lit. Rel. No. 18584, Feb. 20, 2004) (finding subject matter jurisdiction); SEC v. Gonzalez de Castilla, et al., 145 F. Supp. 2d 402 (S.D.N.Y. 2001) (denying subject matter jurisdiction); Itoba, Ltd. v. LEP Group, Inc., 54 F.3d 118 (2d Cir. 1995), cert. denied, 516 U.S. 1044 (1996) (finding subject matter jurisdiction).

  4. Sarbanes-Oxley Act (“SOX”)
    1. SOX protects employees who disclose potential violations of federal securities laws from retaliation by their employers. The Whistleblower Provision does not specifically protect, nor does it explicitly exempt from protection, employees working for non-U.S. subsidiaries of U.S. corporations.
    2. To date, there has been little opportunity for the courts to evaluate the extraterritorial application of SOX. However, in Carnero v. Boston Scientific Corp., 433 F.3d 1 (1st Cir.), cert. denied, 126 S. Ct. 2973 (2006), the First Circuit declined to apply the “effects” test and determined that the Whistleblower Provision did not reflect the “necessary clear expression of congressional intent” to extend the reach of the provision to non-U.S. employees working outside the U.S. Had the First Circuit employed the effects test in Carnero, it would likely have found that the Whistleblower Provision had extraterritorial effect. The Supreme Court’s decision not to hear the case leaves other circuit courts free to adopt a competing approach.
  5. The Racketeer Influenced and Corrupt Organizations Act (“RICO”)

    RICO (18 U.S.C. §§ 1961-1968) provides for extended penalties for criminal acts performed as part of an ongoing criminal organization. Like the securities laws, RICO is silent as to its extraterritorial application. Thus, in cases involving predominantly non-U.S. disputes and conduct, the courts must ascertain whether Congress intended the statute to have extraterritorial effect.

    1. Where the predicate acts underlying the RICO claims take place within the U.S., courts are likely to find that the statute applies. See e.g., Alfadda v. Fenn, 935 F.2d 475 (2d Cir.), cert. denied, 502 U.S. 1005 (1991); Gen. Motors Corp. v. Ignacio Lopez de Arriortua, 948 F. Supp. 670 (E.D. Mich. 1996). However, where the conduct in the U.S. is not material to the RICO violation or the direct cause of the harm to the plaintiff, courts are likely to find the statute inapplicable. See e.g., North South Fin. Corp. v. Al-Turki, 100 F.3d 1046 (2d Cir. 1996); Butte Min. PLC v. Smith, 76 F.3d 287 (9th Cir. 1996).
    2. In U.S. v. Noriega, 746 F.Supp. 1506 (S.D. Fla. 1990), aff’d, 117 F.3d 1206 (11th Cir. 1997), the district court extended RICO to actions occurring wholly outside the U.S. because the acts had a substantial effect on U.S. commerce.

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