Extraterritorial Application of US Securities Law – Will the US Become the Default Jurisdiction for European Securities Litigation?

Abstract

US courts have analyzed the question of whether Section 10(b) of the 1934 Securities and Exchange Act and SEC Rule 10b-5 can be applied to foreign litigants in securities fraud cases as a question of subject matter jurisdiction. The most frequently used approach is the Second Circuit’s so-called “conduct and effects” test which looks at whether conduct contributing to the violation took place in the United States or whether the conduct had an effect on US investors. Before Morrison v. National Australia Bank, US courts have avoided a bright line rule to determine which cases can be litigated in US courts and which cannot. In the past decade, US courts have faced a rise in foreign cubed cases. In 2008, foreign cubed cases exceeded any previous year and the trend is continuing. One reason for this development could be a lack of securities class actions in European jurisdictions. This void increases incentives for forum shopping by plaintiffs’ lawyers. US law allows plaintiffs to proceed on the basis of the “fraud on the market theory” rather than requiring plaintiffs to prove actual reliance on misleading statements. The paper evaluates the impact of overlapping regulation and legal uncertainty. Section 7216 of H.R. 5173 would explicitly provide for extraterritorial jurisdiction with respect to antifraud provisions in the federal securities laws if there is “conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors”. The paper evaluates the impact of Section 7216 on European financial intermediaries, European lawyers, European investors and diplomacy.