In re Petrobras Securities Litigation, No. 1:14-cv-09662 (JSR) (S.D.N.Y. Dec. 21, 2015)
On December 21, 2015, Judge Jed S. Rakoff of the United States District Court for the Southern District of New York held in In re Petrobras Securities Litigation that several plaintiff-purchasers of securities issued by Petróleo Brasileiro S.A. (“Petrobras”), a Brazilian oil and gas company, were not entitled to assert violations under § 11 of Securities Act of 1933 (the “Securities Act”) because they failed to establish that their purchase transactions held the necessary nexus with the United States required under Supreme Court precedent.
The plaintiffs alleged “a multi-year, multi-billion dollar bribery and kickback scheme, in connection with which [the] defendants made false and misleading statements,” entitling them to damages under the Securities Act for losses that were attributable to such statements. In Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), the Supreme Court held that the securities laws of the United States only reach fraudulent statements made “in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” The Petrobras plaintiffs, including both US and non-US investors, argued that they satisfied both prongs of Morrison and were therefore entitled to bring claims under US securities laws.
With respect to the first prong, the parties agreed that although the securities were listed or were intended to be listed on the New York Stock Exchange, they were never traded on that or any other US exchange. As a result, Judge Rakoff held that the claims failed under Morrison’s first prong. The Second Circuit, notwithstanding Morrison’s explicit reference to “listing,” has held that listing alone, without trading, is insufficient. Judge Rakoff explained that the rationale of Morrison clearly focused on the location of actual transactions and that listing a security in the United States acts only as a proxy for and indicia of a domestic transaction. Alternatively, the plaintiffs argued that they satisfied the first prong because the securities were traded “over-the-counter” on “the bond market” in New York. Judge Rakoff swiftly dismissed that argument, as by definition, “over-the-counter” transactions do not occur on an exchange. Therefore, no plaintiffs were able to establish the application of US securities laws under Morrison’s first prong.
Turning to the second prong, Judge Rakoff explained that the standard in the Second Circuit requires the plaintiffs to allege specific facts showing either (i) the incurrence of irrevocable liability to carry out the transaction within the United States or (ii) title passing within the United States. “Conclusory assertions that irrevocable liability has been incurred or that title has passed are insufficient.” Two US plaintiffs plead specific facts that their purchases were made from New York-based underwriters, satisfying either requirement under the second Morrison prong. Two non-US plaintiffs, however, had merely asserted without further detail that the securities were purchased in the United States, which was insufficient to adequately allege the existence of domestic transactions. One of the non-US plaintiffs also alleged that its affiliate based in the United Kingdom had instructed its US affiliate in Chicago, Illinois to transfer securities to it, but Judge Rakoff explained that a “transfer” from the United States does not allege or indicate specific facts showing a “purchase” in the United States.
The non-US plaintiffs also asserted that the second requirement that title pass within the United States was satisfied when the notes settled through the Depository Trust Company (“DTC”) and beneficial ownership in the securities was therefore “transferred” in the United States. The plaintiffs argued that DTC’s adjustments in its books and records to settle an investor’s trade were the functional equivalent of transfer of title. This argument failed to pass muster with Judge Rakoff, who noted that even assuming that DTC’s bookkeeping results in a change in beneficial ownership in New York, legal title remains throughout with either DTC or its nominee Cede & Co. The non-US plaintiffs therefore failed to assert the facts necessary to bring their claims under US securities laws.
The Petrobras decision illustrates limitations on the ability of purchasers of foreign securities to rely on the application of US securities laws. Such purchasers, even when based in the United States, must establish through specific facts that the purchase transaction underlying their claims was substantially connected to the United States.