US securities law update.

Transcription

1 US securities law update. In re Vivendi Universal, S.A. Securities Litigation - landmark decision for jurisdiction under the US securities laws, or just business as usual? The recent decision in In re Vivendi Universal, S.A. Sec. Litig. 1 in the United States District Court for the Southern District of New York raises important jurisdictional questions at a time when foreign companies are increasingly anxious about the prospect of being hauled before US courts for alleged violations of US securities laws. In resolving a motion to dismiss the lawsuit, US District Judge Harold Baer found that the court had subject matter jurisdiction over federal securities claims brought by non-us shareholders of Vivendi who had acquired its ordinary shares on non-us exchanges. While the Vivendi decision has been cited by some commentators as the high water mark of US courts willingness to permit foreign buyers on foreign exchanges to sue in the US, it is simply an outgrowth of prior cases that hold that fraud allegedly orchestrated from within the US will give rise to jurisdiction under the US securities laws. Contents Landmark decision or business as usual? 1 US litigation contacts 6 The extraterritorial application of US securities laws In the United States, the two principal statutes regulating the offer and sale of securities are the Securities Act of 1933 (the 33 Act ) and the Securities Exchange Act of 1934 (the 34 Act ), both of which contain provisions which allow shareholders to file suit against an issuer in federal court. Under the 33 Act, a shareholder may file suit pursuant to Section 11, which provides for civil liability for false statements or omissions in registration statements, and Section 12, which provides for civil liability where a security is offered or sold by means of a prospectus or oral communication that contains a material misstatement or omission. Under the 34 Act, investors can file suit pursuant to Section 10(b), which prohibits false and misleading statements in connection with the purchase and sale of securities, and Section 18, which prohibits false and misleading statements in certain documents that are filed with the Securities and Exchange Commission (the SEC ). 1 No. 02 Civ. 5571, 2003 WL (S.D.N.Y. Nov. 3, 2003). January 22,

2 Although the securities laws are silent concerning the issue of extraterritorial application, US courts have long recognized that subject matter jurisdiction may extend to claims involving foreign issuers and shareholders. 2 In analyzing such cases, courts must determine whether Congress would have wished the precious resources of the United States courts to be devoted to such transactions. 3 In so doing, courts examine two factors: (1) whether the wrongful conduct occurred in the United States; and (2) whether the wrongful conduct had a substantial effect in the United States or upon United States citizens. 4 In evaluating these two factors, courts have developed two basic tests the conduct test and the effects test to determine whether they have subject matter jurisdiction over extraterritorial securities transactions. 5 Under the conduct test, jurisdiction to hear a suit exists when substantial acts in furtherance of the fraud were committed within the United States. This standard is met whenever: (1) the defendant s activities in the United States were more than merely preparatory to a securities fraud conducted elsewhere and (2) the activities or culpable failures to act within the United States directly caused the claimed losses. 6 In contrast, in applying the effects test, courts look to fraudulent conduct abroad which impacts on stock registered and listed on [an American] national securities exchange and [is] detrimental to the interests of American investors. 7 Under this test, the impact of overseas activity on US investors and securities traded on US securities exchanges is the central focus. 8 While the effects test is typically of less relevance when resolving jurisdictional issues relating to foreign purchasers, the trend in US courts is to apply the conduct and effects test in combination in order to provide a better picture of whether there is sufficient United States involvement to justify [the] exercise of jurisdiction by [an] American court. 9 Applying these standards, US courts have in the past found jurisdiction to be present for See S.E.C. v. Berger, 322 F.3d 187, 192 (2d Cir. 2003); Alfadda v. Fenn, 935 F.2d 475, 478 (2d Cir. 1991). Alfadda, 935 F.2d at 478 (citations omitted). Berger, 322 F.3d at 192 (citations omitted). See, e.g., Itoba Ltd. v. Lep Group PLC, 54 F.3d 118, (2d Cir. 1995). Berger, 322 F.3d at 193 (citations omitted). Itoba, 54 F.3d at 124 (citations omitted). Europe and Overseas Commodity Traders, S.A v. Banque Paribas London, 147 F.3d 118, 128 (2nd Cir. 1998). See Itoba, 54 F.3d at January 22, 2004

3 claims brought by foreign shareholders who bought ordinary shares on non- US exchanges. 10 The facts of Vivendi In Vivendi, shareholders brought a class action against the prominent French corporation Vivendi Universal, S.A., Jean-Marie Messier (Vivendi s CEO until July 3, 2002) and Guillaume Hannezo (Vivendi s CFO until July 9, 2002) alleging numerous violations of the federal securities laws, including: (i) violations of Sections 10(b) and 20(a) of the 34 Act; (ii) violations of Sections 11, 12(a)(2) and 15 of the 33 Act; and (iii) violations of Section 14(a) of the 34 Act and SEC Rule 14a-9 promulgated thereunder. The putative class of plaintiffs included members who had purchased Vivendi American Depositary Shares, as well as members who had acquired Vivendi ordinary shares on non-us exchanges. Plaintiffs alleged principally that Vivendi undertook a scheme to acquire numerous well-known, US entertainment and publishing companies, and that to successfully accomplish this plan, it took on a $21 billion debt while fraudulently assuring all investors through false and misleading reports filed with the SEC and news releases that it had sufficient cash-flow to manage its debts. 11 Clearly mindful that their allegations would draw jurisdictional scrutiny, Plaintiffs alleged that two of the alleged principal actors in this scheme, Messier, Vivendi s former CEO and Hannezo, Vivendi s former CFO, spent half of their time in the United States from September 2001 through the end of the relevant class period of August 31, 2002, specifically to increase investments by United States investors. 12 The overall impression left by the complaint is that the US was the locus of Vivendi s allegedly fraudulent conduct. Defendants, meanwhile, countered that the alleged conduct at issue, namely the creation and dissemination of allegedly fraudulent statements and financial data, was initiated, organized and approved by Vivendi corporate executives in France. 13 In a further effort to downplay Vivendi s See, e.g., In re Nortel Networks Corp. Sec. Litig., No.01 Civ. 1855, 2003 WL (S.D.N.Y. Sept. 8, 2003) (court had subject matter jurisdiction over foreign purchasers of Nortel stock on Toronto Stock Exchange for purposes of class certification); Cromer Fin. Ltd. v. Berger, No. 00 Civ. 2284, 2003 WL (S.D.N.Y. June 23, 2003) (court had subject matter jurisdiction over claim against Bermuda auditor even though none of the named plaintiffs were United States residents); In re Gaming Lottery Sec. Litig., 58 F.Supp.2d 62 (S.D.N.Y. 1999) (court had subject matter jurisdiction over claims by non-united States residents who purchased GLC stock in the Canadian securities market). Vivendi, 2003 WL , at *6. Vivendi, 2003 WL , at *6. Vivendi, 2003 WL , at *5. US securities law update. 3

4 US conduct, the defendants also argued that Vivendi is a French corporation that is not registered to do business in the United States, and that Vivendi does not make quarterly filings as is required of American corporations by the SEC and had only one corporate officer located in the United States until September The decision in Vivendi Despite granting defendants motion to dismiss plaintiffs Section 14(a) claim against Vivendi, 15 and Section 12(a)(2) claim against Hannezo, and barring certain of plaintiffs claims for damages, the Court otherwise denied defendants motion to dismiss plaintiffs other claims, including those brought by foreign plaintiffs who acquired Vivendi ordinary shares on foreign exchanges. The Court was not persuaded by defendants contentions that the allegedly fraudulent conduct was not directly caused by activities in the United States: Contrary to defendants characterization, their conduct can hardly be deemed merely preparatory within the United States. Given Messier s and Hannezo s decision to move to the United States, allegedly to better direct corporate operations and more effectively promote misleading perceptions on Wall Street, which harbors some of the most watched securities exchanges in the world, one can reasonably infer that the alleged fraud on the American exchange was a substantial or significant contributing cause of [foreign investor s] decision[s] to purchase [Vivendi s] stock abroad. 16 In applying the conduct test, the Court also appeared to be influenced by the fact that Vivendi s American Depositary Shares were traded on the NYSE, although that is a factor that is typically more relevant in the context of weighing personal jurisdiction under the federal securities laws. The Court ultimately concluded that it possessed jurisdiction to hear the claims of foreign class members who acquired Vivendi shares on foreign exchanges. Implications for non-us issuers Public companies whose securities trade on US and non-us exchanges need not be unduly concerned by the Vivendi decision. The oft-cited rationale for finding jurisdiction in cases involving foreign issuers and foreign shareholders is that the US should not be used as a base for manufacturing Vivendi, 2003 WL , at *5. Under Section 14(a) of the 34 Act, it is unlawful to make a false or misleading statement of material fact in a proxy statement, or to omit stating a material fact that is necessary to prevent any statement in the proxy statement from being false or misleading. Vivendi, 2003 WL , at *6. 4 January 22, 2004

5 fraudulent security devices for export, even when these are peddled only to foreigners. 17 Given the quantum of US-based conduct alleged in the Vivendi complaint, the Court s ruling, while open to debate as a matter of law, 18 was not unprecedented. Among the more noteworthy aspects of the Vivendi decision is its application of this settled principle of US law to trades executed by non-us plaintiffs on European exchanges; while US courts have previously permitted non-us purchasers of securities on Canadian exchanges to participate in US class actions, those decisions have been explained on the ground that the US and Canadian markets are unitary in nature. Despite this distinction, the Vivendi decision does not significantly alter the substantive landscape for securities claims. While Vivendi s alleged conduct in the US was undoubtedly the driving force behind the Court s decision, the holding is emblematic of wider trends in US securities litigation. Just as investors and regulators have punished companies for the financial scandals that have rocked corporate America, US courts are today more willing to give class action plaintiffs the benefit of the doubt in shareholder litigation. The Vivendi decision is best chalked up to this factor, rather than as an unprecedented extraterritorial expansion of the US securities laws Itoba, 54 F.3d at 122 (citations omitted). See, e.g., Tri-Star Farms Ltd. v. Marconi, Plc, 225 F.Supp.2d 567 (W.D. Pa. 2002) (court did not have subject matter jurisdiction as alleged fraud was committed by foreign defendants on foreign individuals in a foreign country); Euro Trade & Forfaiting, Inc. v. Vowell, No. 00 Civ. 8431, 2002 WL (S.D.N.Y. March 29, 2002) (court did not have subject matter jurisdiction as culminating act in defendants allegedly fraudulent scheme did not occur in the US, acts in the US were merely preparatory); In re Baan Co., 103 F.Supp.2d 1 (D.D.C. 2000) (court did not have subject matter jurisdiction as complaint contained no allegations of specific reliance on fraudulent acts which occurred in the United States). US securities law update. 5

6 US litigation contacts For further information, please contact: Brussels Rue Brederode 13 B Brussels Tel: (32-2) Fax: (32-2) Frankfurt am Main Mainzer Landstraße Frankfurt am Main Tel: (49-69) Fax: (49-69) Hong Kong 10th Floor, Alexandra House Chater Road Hong Kong Tel: (852) Fax: (852) / London One Silk Street London EC2Y 8HQ Tel: (44-20) Fax: (44-20) Luxembourg 4 Rue Carlo Hemmer P.O. Box 1107 L-1011 Luxembourg Tel: (352) Fax: (352) Moscow Paveletskaya sq. 2, bld. 2 Moscow Tel: (7-095) Fax: (7-095) New York 1345 Avenue of the Americas 19th Floor New York, NY Tel: (1) Fax: (1) Amanda Gallagher (1) amanda.gallagher@linklaters.com James Warnot (1) jim.warnot@linklaters.com Mary Warren (1) mary.warren@linklaters.com Paul Wickes (1) paul.wickes@linklaters.com Michael Osnato Jr (1) mike.osnato@linklaters.com Paris 25 rue de Marignan Paris Tel: (33) Fax: (33) Rome Via delle Quattro Fontane, 20 I Rome Tel: (39-06) Fax: (39-06) São Paulo Rua General Furtado do Nascimento, São Paulo - SP Tel: (55-11) Fax: (55-11) Tokyo Akasaka 1-chome Center Building 12F Akasaka Minato-ku, Tokyo Tel: (81-3) Fax: (81-3) This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters, or contact the editors. Linklaters. All Rights reserved 2003 Please refer to for important information on the regulatory position of the firm. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com 6 A /0.6/21 Jan 2004