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Sullivan & Cromwell discusses Second Circuit’s Application of Morrison v. National Australia Bank


On August 15, 2014, in a case of first impression involving cross-border securities-based swap transactions, the Second Circuit held that the presumption against the extraterritorial application of Section 10(b), announced by the U.S. Supreme Court in Morrison v. National Australia Bank, 561 U.S. 247 (2010), applies even to claims involving supposedly “domestic” securities-based swap transactions if those claims are “so predominantly foreign as to be impermissibly extraterritorial.” In this case, where the claims against a non-U.S. company were based on statements made abroad and were based on swap transactions that referenced securities trading “only on foreign exchanges,” the Court held that the application of Section 10(b) would “obviously implicate the incompatibility of U.S. and foreign laws.”

Sullivan & Cromwell represented Porsche in successfully briefing and arguing both this appeal and the earlier motion to dismiss before the district court. Our team included Robert Giuffra, Suhana Han and Alexander Willscher.


The Second Circuit issued its opinion in Parkcentral Global Hub Ltd., et al. v. Porsche Automobil Holding SE, et al., No. 11-403-cv. Appellants were more than thirty international hedge funds who alleged, among other things, that Porsche and its former Chief Executive Officer and former Chief Financial Officer violated Section 10(b) of the Exchange Act when defendants, in connection with Porsche’s acquisition of a stake in Volkswagen (“VW”), misrepresented Porsche’s intention regarding a takeover of VW and the level of its ownership stake in VW. Appellants alleged that, following Porsche’s October 26, 2008 press release announcing the extent of its holdings in VW, the price of VW ordinary shares shot up, resulting in a massive “short squeeze” forcing the hedge funds to cover their short positions at artificially high prices and causing billions of dollars of losses.

Appellants allegedly obtained their short positions through short sales of VW shares and securities-based swap agreements referencing VW shares that were the economic equivalent of short sales. While the actual short sales were clearly foreign transactions, Appellants claimed that the swap agreements were entered into in the United States and were thus “domestic” transactions for purposes of Section 10(b).

On December 30, 2010, Judge Harold Baer of the Southern District of New York granted Porsche’s motion to dismiss, finding that Appellants’ swaps “were the functional equivalent of trading the underlying VW shares on a German exchange” and thus, under Morrison, were foreign transactions to which Section 10(b) did not apply.[1] The Second Circuit—in a panel comprising Circuit Judges Leval, Sack and Hall—affirmed the district court’s dismissal, “although on the basis of different reasoning.”


The Second Circuit assumed the swaps were entered into in the United States and identified the critical question before it as “whether, under Morrison, a domestic transaction in a security (or a transaction in a domestically listed security)—in addition to being a necessary element of a domestic § 10(b) claim—is also sufficient to make a particular invocation of § 10(b) appropriately domestic.”

The Court held, for two reasons, that the mere ability to allege the existence of a domestic “transaction is not alone sufficient to state a properly domestic claim under” § 10(b). First, Morrison did not affirmatively state that the mere presence of a domestic transaction was enough to make the statute applicable. Second, a rule to the contrary “would seriously undermine Morrison’s insistence that § 10(b) has no extraterritorial application,” because it “would require courts to apply the statute to wholly foreign activity clearly subject to regulation by foreign authorities solely because a plaintiff in the United States made a domestic transaction, even if the foreign defendants were completely unaware of it.” Such a rule would, in the Court’s words, “inevitably place § 10(b) in conflict with the regulatory laws of other nations.”

The Second Circuit specifically noted “the problem with treating the location of a transaction as the definitive factor in the extraterritoriality inquiry”: if the “domestic execution” of an agreement to enter into a swap transaction “alone” were sufficient to bring related conduct under Section 10(b), then “conduct that occurred in a foreign country, concerning securities in a foreign company, traded entirely on foreign exchanges” would be subject to U.S. securities laws—“a result Morrison plainly did not contemplate.”

With respect to the particular situation at hand, the Second Circuit held that, even assuming (which it did not decide) that Appellants’ securities-based swap agreements were “domestic transactions” as defined in the Second Circuit’s decision in Absolute Activist Value Master Fund Ltd. v. Ficeto, et al., 677 F.3d 60 (2d Cir. 2012), “we think it clear that the claims in this case are so predominantly foreign as to be impermissibly extraterritorial.” Because the allegations “concern[ed] statements made primarily in Germany with respect to stock in a German company traded only on exchanges in Europe,” the Court reasoned that allowing the suit to proceed “would permit the plaintiffs, by virtue of an agreement independent from the reference securities, to hale the European participants in the market for German stocks into U.S. courts and subject them to U.S. securities laws.” Noting that the “potential for regulatory and legal overlap and conflict would have been obvious to any legislator who considered the possibility that the statute would result in such an application,” the Court concluded that “the relevant actions in this case are so predominantly German as to compel the conclusion that the complaints fail to invoke § 10(b) in a manner consistent with the presumption against extraterritoriality.”

The Court noted that Appellants did not allege that “Porsche was a party to any . . . swap agreements referencing VW stock, or that it participated in the market for such swaps in any way.” It also referred to an amicus brief filed by a group of law professors explaining that swap agreements enable “swap investors to wager on the value of a stock in quantities that are unrelated to the amount of stock available,” raising the issue of whether “this multiplier effect could impose liability beyond the appropriate limits of § 10(b).” The Court then expressly stated that it was not deciding “whether a party to even a domestic securities-based swap agreement may, on that basis alone, have statutory standing to sue a non-counterparty who merely functioned as an issuer of or trader in the securities referenced by the swap.”

The Second Circuit cautioned that its conclusion in this case “cannot, of course, be perfunctorily applied to other cases based on the perceived similarity of a few facts.” In a concurring opinion, Circuit Judge Leval reiterated that the Court’s holding was based on “a number of facts” unique to the case and that the Court was not announcing “any bright-line, or single-factor, test for determining whether an application of § 10(b) is appropriately domestic.”

The Second Circuit concluded by affirming the district court’s dismissal of the complaints. The Court, “[o]ut of an abundance of caution,” remanded “to allow the district court to entertain a motion to amend the complaints,” recognizing that “our decisions here and in Absolute Activist have elaborated on the standards set forth in Morrison in such a way that the plaintiffs might conceivably be able to draft amended complaints that would invoke a domestic application of § 10(b).”


This decision marks an important contribution to the developing post-Morrison law concerning the territorial scope of Section 10(b). In acknowledging that a formalistic application of Morrison’s “domestic transactions” definition could improperly permit Section 10(b) claims to proceed in cases that “are so predominantly foreign as to be impermissibly extraterritorial,” the Second Circuit foreclosed the possibility that sophisticated private parties, by entering into securities-based swap agreements in the United States, can expand the scope of Section 10(b)’s private right of action to authorize claims against non-U.S. companies and individuals who were not parties to the swaps. By avoiding such a result—which neither Congress nor the Morrison Court could have intended—the Second Circuit reinforced Morrison’s application of the presumption against the extraterritorial application of U.S. law.

The Second Circuit was careful to caution that it was not announcing a bright-line rule. The Court recognized that in the modern “world of easy and rapid . . . financial innovation, transactions in novel financials instruments . . . can come in innumerable forms of which we are unaware and which we cannot possibly foresee.” As a result, the Court refused to announce “a test that will reliably determine when a particular invocation of § 10(b) will be deemed appropriately domestic or impermissibly extraterritorial.” But it did note that, “in many instances, especially where the parties to the suit were the parties to the transaction, the fact that the transaction was domestic might well be deemed sufficient” to invoke Section 10(b).

The Second Circuit’s reasoning is consistent with the December 2012 decision in Porsche’s favor by the New York State Appellate Division, First Department.[2] There, the First Department dismissed, on forum non conveniens grounds, state law fraud and unjust enrichment claims against Porsche brought by many of the same hedge fund plaintiffs. In its decision, the First Department stated that “the events of the underlying transaction” occurred almost “entirely in a foreign jurisdiction.” The First Department held that it was inappropriate for New York courts to hear a lawsuit where the “defendant and most plaintiffs are not New York residents, the VW stock is traded only on foreign exchanges, [and] many of the witnesses and documents are located in Germany.” In combination, the clear message of the twin decisions of the Second Circuit and the First Department is that cases that are predominantly non-U.S. in nature ought to be litigated in a non-U.S. jurisdiction that is more closely-connected to the facts of the case.

[1] See Sullivan & Cromwell Memorandum, “Extraterritorial Application of Section 10(b) to Security-Based Swap Agreements,” January 3, 2011, available at

[2] See Viking Global Equities, LP v. Porsche Automobil Holding SE, 101 A.D.3d 640 (1st Dep’t 2012).

The full and original memorandum was published by Sullivan & Cromwell LLP on August 19, 2014, and is available here.

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