Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE
763 F.3d 198 (2014)
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Rule of Law:
A domestic securities transaction is a necessary, but not always sufficient, condition for applying Section 10(b) of the Securities Exchange Act. When a case is predominantly foreign in nature, involving foreign defendants, foreign securities, and primarily foreign conduct, applying U.S. securities law may be an impermissible extraterritorial application even if the plaintiff's transaction occurred domestically.
Facts:
- Porsche Automobil Holding SE ('Porsche'), a German corporation, repeatedly and publicly disavowed any intention of acquiring a controlling interest in Volkswagen AG ('VW'), another German corporation whose stock traded exclusively on European exchanges.
- Contrary to its public statements, Porsche secretly devised a plan to take over VW and began covertly acquiring call options on VW stock.
- Relying on Porsche's public denials, numerous international hedge funds (the plaintiffs) entered into securities-based swap agreements, which were economically equivalent to short selling VW stock, betting its price would decline.
- The plaintiffs alleged that they executed these swap agreements within the United States, incurring irrevocable liability in New York.
- In October 2008, Porsche reversed its public position and announced its intention to acquire 75% of VW's shares.
- This surprise announcement triggered a massive 'short squeeze,' causing VW's stock price to skyrocket and inflicting billions of dollars in losses on the plaintiffs' swap positions.
- Porsche and its executives were not parties to, nor did they participate in, the plaintiffs' swap agreements.
Procedural Posture:
- Multiple hedge funds filed complaints against Porsche and its executives in the U.S. District Court for the Southern District of New York.
- The various actions were consolidated before a single district court judge.
- Following the Supreme Court's decision in Morrison v. National Australia Bank, the plaintiffs filed amended complaints to address the new legal standard.
- The defendants moved to dismiss the amended complaints pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing Morrison barred the claims.
- The district court granted the defendants' motion to dismiss, holding that the plaintiffs' swap agreements were the functional equivalent of transactions on a foreign exchange and therefore not domestic.
- The plaintiffs, as appellants, filed a timely appeal to the U.S. Court of Appeals for the Second Circuit.
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Issue:
Does Section 10(b) of the Securities Exchange Act apply to claims against a foreign defendant for allegedly fraudulent statements made abroad concerning a foreign security traded only on foreign exchanges, even if the U.S.-based plaintiffs incurred losses through securities-based swap agreements transacted domestically?
Opinions:
Majority - Per Curiam
No. The application of Section 10(b) to these claims would constitute an impermissibly extraterritorial extension of the statute. While the Supreme Court's decision in Morrison v. National Australia Bank established that a domestic transaction is a necessary element for a § 10(b) claim involving foreign securities, it is not always a sufficient condition. This case is so predominantly foreign—involving German defendants, a German reference security traded on foreign exchanges, and fraudulent conduct that occurred primarily in Germany—that applying U.S. law would create an obvious conflict with foreign securities regulations. Such an outcome is what the presumption against extraterritoriality, as articulated in Morrison, is meant to prevent. The court must look beyond the location of the plaintiff's transaction and consider the overall context of the dispute.
Concurring - Leval
No. I fully concur with the majority's conclusion that the claims are impermissibly extraterritorial. I write separately to emphasize that the fact-intensive, flexible analysis employed by the majority is the correct approach and is not precluded by the Supreme Court's decision in Morrison. Morrison's criticism of the prior 'conduct-and-effects' test was aimed at its disregard for the presumption against extraterritoriality, not its use of multiple factors. A rigid, bright-line rule would be easily circumvented by fraudsters and would be either over-inclusive or under-inclusive. The proper inquiry requires courts to determine if the claims 'touch and concern the territory of the United States... with sufficient force to displace the presumption,' which is inherently a flexible, multi-factor analysis.
Analysis:
This decision significantly qualifies the Supreme Court's transactional test from Morrison v. National Australia Bank. It establishes that the test is a threshold requirement, not the entire analysis. By holding that a domestic transaction is necessary but not sufficient, the court introduces a second, more holistic inquiry that weighs the 'foreignness' of the overall dispute. This creates a flexible, fact-intensive standard that moves away from a simple bright-line rule and potentially reintroduces some of the unpredictability that Morrison sought to eliminate. Future cases involving transnational securities fraud will now likely require a two-step analysis: first, identifying a domestic transaction, and second, assessing whether the claim is nonetheless 'predominantly foreign' and thus beyond the reach of § 10(b).
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