As Tamar Weinrib and Marc Gross report in the August issue of The Pomerantz Monitor, overseas institutional investors, realizing that U.S. courts and U.S. securities laws provide the best protections for investors, are seeking U.S. justice. Among the numerous advantages: contingency fee arrangements are allowed here, but not in many foreign countries; we do not have a "loser pays" rule like England, which could expose representative plaintiffs to catastrophic costs; we have a well-developed system for certifying class actions; we have expansive pretrial discovery rights; and we have the right to trial by jury. It is no wonder, then, that despite years of attacks on U.S. shareholder rights, foreign investors still want to have their claims adjudicated here and that defendants are fighting back.
Overseas investors who purchased shares on a U.S. exchange have the same rights as any U.S. investor to sue here and even to be appointed lead plaintiff. For example, Pomerantz is currently representing a major Israeli pension fund as lead plaintiff in a securities class action involving purchases of shares of Comverse Technology, a U.S/Israeli company listed on the U.S. markets. In Mohanty v. Bigband Networks, Inc., a U.K. citizen who resides in Cyprus was appointed lead plaintiff in a class action under the Securities Act involving an IPO in the U.S.; while in Corwin v. Seizinger, a Luxemburg-based investment firm was appointed lead plaintiff in an action against German drug maker GPC Biotech AG, whose shares were traded both in the U.S. and overseas. A 2007 study by Institutional Investor Services showed that overseas institutional investors had sought to serve as lead plaintiffs 182 times in 98 different U.S. securities class actions.
U.S. courts have developed rules for deciding whether they have jurisdiction over international fraud claims: the "conduct" test, where the fraud emanated from the U.S. but affected investors overseas; and the "effects" test, where the fraud emanated from somewhere else but affected U.S. investors. The conduct test is the test applicable to so-called "F-Cubed" transactions, i.e., claims involving foreign investors in a foreign corporation who purchased shares on foreign exchanges. This test is generally satisfied when important, market-moving fraudulent conduct emanates from the U.S. Only where no misconduct, or only conduct "preliminary" to the fraud, took place in the U.S. will courts deny jurisdiction. For example, in the Marconi and Parmalat cases, F-Cubed claims were dismissed because all the accounting fraud and misstatements had taken place exclusively in Italy.
In contrast, in Royal Ahold defendant was a Dutch company whose common shares were traded by foreign investors on overseas exchanges. The Court held that it had subject matter jurisdiction over those transactions because the fraud had emanated from the U.S. Food Services subsidiary of Royal Ahold. A number of our foreign clients have expressed concern that a recent district court decision in Astrazeneca Securities Litigation changes the rules and closes the door to overseas investors participating in U.S. class actions. That concern is unwarranted. In the first place, the Astrazenica decision concerns only transactions that occurred overseas. It says nothing that would curtail the rights of foreign investors who purchased securities on U.S. exchanges.
Secondly, the district court's opinion and, in particular, its application of the conduct test to F-Cubed transactions, is out of the mainstream and will probably not be followed by other courts. The Astrazeneca court initially found that several of the worst misrepresentations had emanated from the U.S. That should have been enough to satisfy the conduct test; but the district court held that, because other fraudulent statements had emanated from overseas, the foreign plaintiffs had to meet the additional burden of showing that they "relied" specifically on the U.S.-generated misrepresentations rather than on the other misrepresentations coming from overseas.
In determining whether investors have relied on a misrepresentation, U.S. courts regularly apply the "fraud on the market theory," which creates a presumption that investors rely on "efficient" financial markets to set a price for stocks that reflects all publicly available information. Several U.S. courts have applied the fraud on the market theory to transactions on foreign markets which, like U.S. markets, can also be efficient. For example, in a case involving Vivendi, a French company, which the Pomerantz firm is actively litigating, proof of efficiency of several foreign markets was submitted at the class certification stage, and the Court certified a class that included British, French and Dutch investors who purchased Vivendi shares on stock exchanges in those countries. This is consistent with the result in many other F-cubed cases, including Royal Ahold, where classes including foreign investors have been certified, and where F-cubed plaintiffs have even been appointed lead plaintiffs.
But the district court in Astrazeneca refused to follow these other cases, even though it conceded that the foreign exchanges appeared to be operating "efficiently" in this case, reacting the same way as the U.S. market did to disclosures about Astrazeneca. Nevertheless, it was unwilling to "impose" the fraud on the market theory--and its presumption of reliance--on these foreign countries, absent guidance from U.S. appellate courts. Without this presumption of reliance, the Court held that the F-Cubed plaintiffs could not show that the U.S. misrepresentations had "directly caused" any injury to the overseas investors; and that, as a result, it did not have jurisdiction over their claims.
We view the Astrazeneca district court decision as an anomaly that will not likely gain acceptance from other U.S. courts. Thus, even in F-Cubed cases, non-U.S. investors should be able to participate as lead plaintiffs or class members in U.S. securities class actions, so long as an important part of the misconduct took place in the U.S.
A further factor in whether foreign investors can be included as members of the class is whether a judgment binding on the class would be enforced in their home country. This issue was addressed in Vivendi, where the Court found that courts in Britain, France and the Netherlands would likely hold that class action judgments would be binding against individual class members, but not courts in Germany or Sweden. However, this ruling did not preclude direct intervention in the litigation by individual investors from those excluded countries. Indeed, over 40 non-U.S. institutional investors and others have appeared in the Vivendi action and asserted claims individually. These investors can participate on an individual basis because there is no question that any judgment for or against them would be enforced in their home country.
When considering what role, if any, foreign investors should pursue in the U.S., consideration should be given not only to seeking appointment as lead plaintiff, but also opting out and pursuing the claim individually, particularly if the claims are sizable but not large enough to warrant appointment as lead plaintiff. While appointment as a lead plaintiff insures control over the course of the litigation, including insistence on corporate governance reforms as part of any resolution of the case, opting out with a large claim potentially provides significant leverage in securing a sizable individual settlement. Such actions can be brought in the U.S. or abroad. For example, in Royal Dutch/Shell, 28 European pension funds opted out and filed individual lawsuits, which were joined by others. These claims were ultimately settled through a proceeding in the Hague for $450 million.
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