Extraterritorial Application of U.S. Securities Laws — Conduct Test in Second Circuit — Rule 12(b)(1) Standards

From Terra Secs. v. Citigroup, Inc., 2010 U.S. Dist. LEXIS 14378 (S.D.N.Y. Feb. 16, 2010):

The inquiry on a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1) concerns whether the district court has the statutory or constitutional power to adjudicate the case. See Makarova, 201 F.3d at 113. "[J]urisdiction must be shown affirmatively, and that showing is not made by drawing from the pleadings inferences favorable to the party asserting it." Shipping Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir. 1998). "A plaintiff asserting subject matter jurisdiction has the burden of proving by a preponderance of the evidence that it exists." Makarova, 201 F.3d at 113. The preliminary showing that must be made by the plaintiff, however, is not meant to be overly burdensome, "allowing for subject matter jurisdiction so long as the 'the federal claim is colorable.'" Cromer Fin. v. Berger, 137 F. Supp. 2d 452, 467 (S.D.N.Y. 2001) (quoting Savoie v. Merchants Bank, 84 F.3d 52, 57 (2d Cir. 1996)); see also Europe and Overseas Commodity Traders, S.A. v. Banque Paribas London, 147 F.3d 118, 121 n.l (2d Cir. 1998) ("[A] plaintiff ... should not be deprived of its day in an American court by a Rule 12(b)(1) order based on erroneous facts.... In a close case, the factual basis for a court's subject matter jurisdiction may remain an issue through trial, and, if and when doubts are resolved against jurisdiction, warrant dismissal at that time." (citations and quotations omitted)). As noted above, in reviewing a motion to dismiss for lack of subject matter jurisdiction, a court may consider evidence outside the pleadings. See Banque Paribas, 147 F.3d at 121 n.l.

Although the Exchange Act is silent as to its extraterritorial application, federal courts have exercised subject matter jurisdiction over claims "implicating transnational securities fraud." *** Courts tasked with determining whether subject matter jurisdiction exists for transnational securities law claims must consider "whether Congress would have wished the precious resources of the United State courts ... to be devoted to such transactions." *** Specifically, courts in the Second Circuit engage in two inquiries to determine whether a district court may exercise subject matter jurisdiction over the claims of foreign plaintiffs arising out of transnational securities transactions: (1) whether the wrongful conduct occurred in the United States (the "Conduct Test"), or (2) whether the wrongful conduct, even if it occurred in a foreign country, had a substantial adverse effect in the United States or upon United States citizens (the "Effects Test"). *** A plaintiff need only satisfy either the Conduct or the Effects Test to support a finding of subject matter jurisdiction. ***

[Footnote 4] The parties agree that the Effects Test is not applicable to the Court's determination of subject matter jurisdiction. ...[U]nder the Effects Test, "a federal court has jurisdiction ... where illegal activity abroad causes a substantial effect within the United States." Euro Trade & Forfaiting, Inc. v. Vowell, No. 00 Civ. 8431, 2002 WL 500672, at *6 (S.D.N.Y. Mar. 29, 2002) (citing Alfadda v. Fenn, 935 F.2d 475, 478 (2d Cir. 1991)). "The effects test concerns the impact of overseas activity on U.S. investors and securities traded on U.S. securities exchanges," Bangue Paribas, 147 F.3d at 128 n.12, and it has no bearing in an action involving the claims of foreign purchasers of foreign securities on foreign exchanges, such as is the case presented here. ***

The seminal formulation of the Conduct Test applicable in the Second Circuit is that enunciated in Bersch v. Drexel Firestone, Inc. , 519 F.2d 974 (2d Cir. 1975). The Second Circuit declared that the antifraud provisions of the federal securities laws "[d]o not apply to losses from sales of securities to foreigners outside the United States unless the acts (or culpable failures to act) within the United States directly caused such losses." *** Emerging from Bersch is a two-step analysis consistently employed by courts in this Circuit applying the Conduct Test. *** First, the conduct alleged must be more than "merely preparatory" to a securities fraud conducted elsewhere. *** Second, the "activities or culpable failures to act in the United States must have directly caused the claimed losses." ... Inherent in the Conduct Test is the principle that Congress did not want "the United States to be used as a base for manufacturing fraudulent security devices for export, even when these are peddled only to foreigners." ***

The considerations enunciated in Bersch, though still routinely applied, have been recast over the years to address the myriad permutations and combinations of parties, places, timing and conduct that arise out of transnational securities fraud cases. See In re Alstom SA Sec. Litig., 406 F. Supp. 2d 346, 371-73, 374 n.17 ("Several other district courts have pronounced the standard for the conduct test in terms that may be broadly read as variations on the Bersch theme."). The Bersch doctrine has evolved to account for various considerations, including (1) the conduct in question in relation to plaintiff's theory of fraud; (2) the location of the relevant conduct; (3) the timeline of relevant acts; (4) the materiality or substantiality of the relevant conduct; (5) the causal connection between the domestic conduct and the alleged losses; and (6) considerations of "reasonableness gauged by the intent of congressional policy and principles of fairness in the circumstances surrounding the particular case." Id. at 375-76; see also Tabor v. Bodisen Biotech, Inc., 581 F. Supp. 2d 552, 558-63 (S.D.N.Y. 2008). But none of these considerations are meant to be weighed independently of the others; rather they must be considered in conjunction, and no particular consideration is dispositive. See IIT, an Int'l Inv. Trust v. Cornfeld, 619 F.2d 909, 918 (2d Cir. 1980) ("It should be evident by now that the presence or absence of any single factor which was considered significant in other cases dealing with the question of federal jurisdiction ... is not necessarily dispositive in future cases" (quotations omitted)). Further, despite nuanced applications of the Conduct Test, the primary inquiry remains the two-part determination articulated in Bersch, consisting of (1) whether the alleged domestic acts constitute the core of the alleged fraud, and (2) whether the acts directly caused the plaintiff's alleged losses. See Morrison, 547 F.3d at 173 ("To clear up any confusion, we reiterate that our 'conduct test' requires that 'the defendant's conduct in the United States be more than merely preparatory to the fraud, and [that] particular acts or culpable failures to act within the United States directly cause[] losses to foreign investors abroad' for subject matter jurisdiction to exist." (quoting Alfadda v. Fenn, 935 F.2d 475, 478 (2d Cir. 1991)); see also Banque Paribas, 147 F.3d at 128-29.

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