By Matthew McNally, Esq.
A federal judge has tossed on jurisdictional grounds a shareholder class-action suit alleging bond insurer Swiss Reinsurance Co. violated U.S. securities laws in 2007 by hiding the extent of its exposure to the American subprime mortgage market.
The share sales at issue occurred on Switzerland’s stock exchange and therefore were not covered by federal securities laws, U.S. District Judge John Koeltl of the Southern District of New York said.
He relied on a June decision by the U.S. Supreme Court limiting the reach of federal courts in cases of alleged securities fraud. Morrison v. Nat’l Australia Bank, 130 S. Ct. 2869 (2010).
The high court ruled in Morrison that the Securities Exchange Act of 1934 does not cover securities transactions on foreign stock exchanges.
The lead plaintiff, Plumbers’ Union Local No. 12 Pension Fund, tried to get around Morrison by arguing its share purchase orders were placed electronically in Chicago, making the transactions domestic.
Judge Koeltl rejected the argument.
“As a general matter, a purchase order in the United States for a security that is sold on a foreign exchange is insufficient to subject the purchase to the coverage of … the Exchange Act,” he said.
“There may be unique circumstances in which an issuer’s conduct takes a sale or purchase outside this rule, but the mere act of electronically transmitting a purchase order from within the United States is not such a circumstance,” he added.
The pension fund also argued that its suit should survive as a common-law-fraud case under state law.
But Judge Koeltl said no, finding that Swiss Re adequately disclosed the risks associated with subprime mortgages.
According to the complaint, the Zurich-based insurer hid about $1 billion in losses stemming from its guarantee of securities tied to subprime mortgage loans.
The suit also named as defendants Swiss Re CEO Jacques Aigrain and CFO Georges Quinn.
The company’s trouble stemmed from a pair of credit default swaps. A CDS is a kind of financial insurance lenders use to hedge against default risk.
The lawsuit said investors paid an artificially inflated price for Swiss Re common stock because of the company’s alleged deception.
After Swiss Re announced the losses in fall 2007, its stock price fell more than 10 percent.
The pension fund was seeking compensation on behalf of investors who bought Swiss Re shares between March and November 2007.
Plumbers' Union Local No. 12 Pension Fund v. Swiss Reinsurance Co. et al., No. 08-CV-1958, 2010 WL 3860397 (S.D.N.Y. Oct. 4, 2010).