One of the tactics shareholder lawyers have employed in response
to the U.S. Supreme Court's devastating bar on federal-court
securities suits against foreign companies in Morrison v. National Australia Bank is to bring claims in state court
instead. State court litigation isn't viable for small investors
in class actions, thanks to the Securities Litigation Uniform
Standards Act, but individual investors with sizable losses can
assert common law fraud and negligent misrepresentation claims
based on exactly the same allegations as the federal securities
suits Morrison precludes. We've seen the defunct Australian
hedge fund Basis Yield Alpha Fund, for instance, sue Goldman Sachs in New York State Supreme Court over losses in two credit
default swaps after BYAF's securities fraud case was tossed out
of federal court.
The BYAF case has survived Goldman's motion to dismiss, but
it's still too early to say if these state court end runs around
Morrison will turn out to be a viable alternative for investors.
We'll have a much better idea Thursday, when the New York
Appellate Division, First Department, hears the first appeal of
a Morrison state court end around: Porsche's challenge to a
trial court ruling that 26 hedge funds can proceed with claims
that the German automaker deceptively manipulated the market for
Volkswagen shares in 2008.
The hedge funds -- represented by Bartlit Beck Herman
Palenchar & Scott; Kleinberg, Kaplan, Wolff & Cohen; Dowd
Bennett; and Quinn Emanuel Urquhart & Sullivan -- claim that
they lost more than $1 billion after Porsche actively lied to
hedge fund managers about its purchases of VW shares. Based on
the evidence of phone calls between the New York-based funds and
Porsche officials in Germany, New York State Supreme Court
Justice Charles Ramos said that the case should be tried in New
York, despite arguments by Porsche's counsel at Sullivan &
Cromwell that its home court in Germany is the more appropriate
forum, especially because parallel litigation is already under
One of the U.S. Supreme Court's concerns in Morrison was the
danger of imposing U.S. securities laws on defendants that are
already subject to the securities laws of their own countries.
So Porsche's brief to the state appeals court argues that German
laws and German courts should weigh the conduct of German
defendants, as, indeed, they already are in the Porsche case.
It's noteworthy that Porsche's position has attracted amicus support from not only a coalition of German, Swiss, French and
pan-European industry and banking groups (as you might expect)
but also from German and American securities law professors
concerned about jurisdictional overreaching by state courts. "If
the reach of United States securities laws and claims is too
far-ranging -- and particularly if state law is allowed to have
an extraterritorial range that exceeds that of federal law --
the potential for an adverse impact on foreign relations and the
global economy will be substantial," the law professors' brief
The hedge funds (which are amici-less in this fight) argue
in their joint brief that they're New York-based, that the phone
calls in which Porsche lied to them were placed in New York and
that New York has a powerful interest in assuring that its
citizens aren't defrauded within its borders. Moreover, the
funds assert, critical documents and witnesses are in New York.
Arguments, which were rescheduled because of last month's
Superstorm Sandy, will take place tomorrow afternoon.
(Reporting by Alison Frankel)
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