United States: Securities Law/Commodities Exchange Act (CEA) - The World In U.S. Courts: Winter 2019

Last Updated: April 2 2019
Article by   Orrick

Personal Jurisdiction Over Japanese Parent Companies in Securities Case Found Based on “Co-Conspirator” Theory

Alfandary v. Nikko Asset Management Co., Ltd., US District Court for the Southern District of New York, October 4, 2018

This complicated case was a suit by former executives of the American subsidiary of a Japanese money manager, Nikko Asset Management, claiming they were defrauded out of vested stock purchase rights. In addition to their employer, they sued Nikko, its chief executive officer, and two Japanese parent companies, among other things for vacations of the securities laws. As relevant here, the defendants sought to be dismissed from the case on grounds that they were not subject to personal jurisdiction in New York. The Court found at the outset that the defendants had waived personal jurisdiction defenses in their written separation agreements, which established New York as the “exclusive” forum for resolving employment disputes.

The Court went further, independently concluding that personal jurisdiction was appropriate under the Due Process Clause of the US Constitution. It first addressed the assertion of “general personal jurisdiction” over the defendants, which would allow claims of any kind to be heard but is limited in the situation where a defendant’s contacts with a forum are so extensive that it might be considered “at home” there. General personal jurisdiction over the subsidiary was proper because that company was based in New York. The other defendant corporations were incorporated and based outside the US, however, and general jurisdiction over them in such case would exist only under exceptional circumstances. The Court found those circumstances to be present, principally because Nikko had registered as an investment advisor with the US Securities and Exchange Commission (SEC) and made filings documenting the large volume of assets under management in the US. It was also listed as a “control person” in its US subsidiary’s SEC filings and was directly involved in implementing the stock purchase plan that was the subject of litigation.

The Court also found it had “specific personal jurisdiction” over Nikko, which requires a lesser showing of “minimum contacts” with the forum but is limited to claims arising from or relating to those contacts. The Court noted that in a securities case the applicable constitutional inquiry was whether the defendants had “minimum contacts” with the US as a whole, not merely the forum. It found sufficient contacts by Nikko, which assertedly had implemented the stock purchase plan in part to provide incentives to US employees, did so through direct communications with a substantial number of US residents, and had committed allegedly fraudulent acts through communications with the US plaintiffs in the US. Even if these alleged actions did not give rise to all the plaintiffs’ claims, the Court found they related to the claims and so satisfied the constitutional standard. Nikko’s CEO likewise was subject to personal jurisdiction because he was alleged to have been “directly involved the scheme that caused Plaintiffs’ harm–a scheme that could not have been successfully executed without taking certain actions in the US.”

The Court likewise found Nikko’s direct and indirect parents also subject to specific personal jurisdiction because the plaintiffs had made out a prima facie showing that the companies were co-conspirators of Nikko in the alleged fraud. Personal jurisdiction over co-conspirators was said to exist where: (i) one party was alleged to have violated the securities laws, (ii) the alleged co-conspirator had agreed with the violator to violate the law, (iii) the alleged conspirator had committed an illegal or fraudulent act in furtherance of the conspiracy; and (d) a non-conspirator plaintiff had been damaged. The Court found these requirements were met, primarily because the parents allegedly “were aware of and approved” the allegedly fraudulent plan and had encouraged and facilitated it. The Court also noted the parents allegedly “had extensive control of” the allegedly fraudulent plan implemented by Nikko’s CEO, including acts taken in the US.

The Court found still another basis for personal jurisdiction in the Calder “effects test,” which permits jurisdiction in tort cases where the allegations are that a non-US defendant “expressly aims his conduct” towards the US and harmful US effects occur.

Finally, the Court found that the plaintiffs had satisfied the further Due Process requirement that the exercise of jurisdiction must be “reasonable.” It found that the litigation could be conducted in the US efficiently, that both the plaintiffs’ and the US’s interest in litigating the dispute was significant, and that the defendants had not made the required showing that litigating in the US would be “gravely difficult.”

For the foregoing reasons, the Court denied the defendants’ motions to dismiss.

[Editor’s note: The Alfandary case is also discussed in the Personal Jurisdiction/Forum non Conveniens section of this report.]

CEA Applies to Australian Dollar-Denominated Derivatives Traded on US Exchange Where Alleged Australian Scheme to Defraud Contemplated that Profits would be Earned on US Transactions

Dennis v. JPMorgan Chase & Co., US District Court for the Southern District of New York, November 28, 2018

Investors who traded in financial instruments in the US based on the “BBSW” benchmark originating in Australia sued many banks and brokerages claiming to have been injured because the benchmark was set through collusion and the defendants otherwise manipulated the market. They brought suit under the antitrust laws, the securities laws, and RICO.

As relevant here, the defendants argued that the complaint required an impermissibly extraterritorial application of the CEA. The Court observed that the CEA had no extraterritorial effect and, like other provisions of US securities law, applied to a US domestic purchase or sale of another security—in other words, a transaction in which the parties incurred irrevocable liability, or title to the securities passed, within the US. The Court noted that the basic antifraud provision of the US securities laws also applied to purchases and sales of a security listed on a US domestic exchange, but precedent had not yet extended this rule to the CEA. The Court found no need to resolve the issue, concluding that the basic rule of CEA liability would extend to the transactions at issue—purchases and sales of derivatives on the Chicago Mercantile Exchange that were denominated in Australian dollars.

The Court also considered the applicability of an exception to the general rule found in antifraud cases, which potentially could be extended to the CEA. That exception declines to apply the US statute to transactions occurring in the US that overwhelmingly implicate non-US interests and another country’s securities regulation laws. The Court found the exception inapplicable to the facts, even assuming it would be available under the CEA. Here, the defendants were alleged to have intended to use their manipulation of the benchmark to increase their profits worldwide, including in the US (a “large market”), thus providing a sufficient US interest for US law to apply.

[Editor’s note: The Dennis case is also addressed in the Antitrust/Foreign Trade Antitrust Improvements Act (FTAIA), RICO, and Personal Jurisdiction sections of this report.]

Purchases of Derivative and Related Contracts on Non-US Exchanges Subject to US Securities Fraud Laws Because Defendants Allegedly Knew That Their Trades Would “Trigger” Corresponding Purchases in the US

US Securities and Exchange Commission v. One or More Unknown Traders in the Securities of Fortress Investment Group, LLC, US District Court for the District of New Jersey, September 27, 2018

The US Securities and Exchange commission sued a variety of non-US individuals and companies alleging insider trading in derivatives linked to the stock of Fortress Investment Group. The fraud was allegedly carried out through brokerage accounts located outside the US, but the transactions led the brokerages to purchase Fortress shares in the US. As relevant here, number of defendants argued that application of Section 10(b) of the Securities Exchange Act of 1934 to certain of their transactions would represent an impermissibly extraterritorial application of the law.

The Court agreed that Section 10(b) required a domestic US transaction but noted that the statute prohibited fraudulent activity “in connection with” the purchase or sale of a security listed on an American stock exchange. It concluded that this standard had been met because the defendants’ ex-US purchases resulted in corresponding US purchases, and the defendants, as “sophisticated investors,” knew that would be the case.

[Editor’s Note: The Fortress Investment Group case is also addressed in the Personal Jurisdiction/Forum non Conveniens section of this report.]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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