Domestic Transaction Necessary But Not Sufficient to Invoke U.S. Securities Laws

Posted on: August 20th, 2014 by Nadine Gartner

The Court of Appeals for the Second Circuit has ruled that a domestic transaction is necessary to invoke U.S. securities laws but that, on its own, a domestic transaction is not sufficient.  In Parkcentral Global Hub Limited v. Porsche Automobile Holdings SE, the court affirmed the dismissal of the securities suits filed by hedge fund purchasers of certain swap agreements against Porsche and its executives.

The plaintiffs had argued that, because they had completed the swap contracts transactions in the United States, those transactions represented “domestic transactions” within the meaning of the second prong of the U.S. Supreme Court’s holding in Morrison v. National Australia Bank.  In that case, the Court held that U.S. securities laws apply to “domestic transactions in other securities.”

The Second Circuit disagreed with the plaintiffs’ contention, stating that, while it is necessary that a domestic transaction is involved in order for U.S. securities laws to apply, it is not sufficient.  The court found that applying Morrison as the plaintiffs urged would extend extra-territorially U.S. securities laws in the very manner in which Morrison had sought to avoid.  The court emphasized that its holding was based on the particular facts of this case and not a “bright-line” rule binding future courts.  Thus, moving forward, courts will have to make individual determinations based on the specific facts presented in each case.

Although the Second Circuit affirmed the district court’s dismissal of the case, it nevertheless remanded the case to the lower court for further proceedings.  Specifically, the Second Circuit remanded in order to give plaintiffs an opportunity to amend their pleadings and try to satisfy the requirements set forth by the appellate court.