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Foreign Purchasers of Securities Prevented From Bringing Claims in the US Courts
London & Bermuda Newsletter
Autumn 2008
On June 5, 2008 in Re AstraZeneca Securities Litigation, case no. 1:05-cv-02688, the US District Court for the Southern District of New York delivered a positive decision for pharmaceutical companies and their insurers when dismissing a securities class action against AstraZeneca. One of the pertinent findings of the Court was that it did not have subject matter jurisdiction over foreigners who had purchased AstraZeneca’s securities on foreign exchanges and who represented more than 90 percent of the putative class in this case.
This securities class action was brought by the plaintiffs pursuant to sections 10(b) and 20(a) of the Securities Exchange Act 1934 and the Securities and Exchange Rule 10b-5. The plaintiffs alleged that, between 2 April 2003 and 10 September 2004, AstraZeneca and certain of its directors and officers had made material misstatements and omissions concerning the safety and effectiveness of its blood-thinning drug, Exanta, which was in the final stage of clinical trials. It was alleged that this wrongful conduct had artificially increased the price of AstraZeneca’s securities and caused the plaintiffs to suffer losses when the FDA subsequently refused to recommend Exanta for approval in October 2004 amid safety concerns, and AstraZeneca’s stock price had dropped in consequence.
Upon AstraZeneca’s motion to dismiss this securities class action, the US district court concluded that it did not have subject matter jurisdiction over the foreign purchasers of AstraZeneca’s securities on foreign exchanges. This was because the plaintiffs had failed to satisfy the second limb of what is known as the “conduct test” (i.e., one of two methods adopted by the US courts to determine the question of subject matter jurisdiction) under which the plaintiffs had to prove that U.S. conduct had directly caused their losses. On the facts of the current case, the Court held that it could not be shown that the plaintiffs had relied on AstraZeneca’s allegedly wrongful conduct in the US (as opposed to its conduct elsewhere) when purchasing AstraZeneca’s securities.
In particular, the Court was guided by its view as to the intention of Congress with regard to the legislative reach of US securities laws and took the view that Congress had not intended that the reach of such laws should extend to include disputes relating to the purchase by foreign investors of shares on foreign exchanges. For the same reason, the Court also declined to adopt the “global fraud-on-the–market presumption” theory advocated by the plaintiffs in the absence of clear authority in favour of such a theory.
Given the growing number of instances in which investors located in different jurisdictions are now seeking to bring their claims in the U.S. courts, this is a decision which will clearly be welcomed by insurers of multinational companies and financial institutions alike. This decision should act as a strong deterrent to foreign plaintiffs who have bought shares on foreign exchanges from pursuing securities class actions in the U.S. against foreign-domiciled companies and will force them to carefully examine the viability of bringing securities claims. It is understood that the Court’s decision in this case is now on appeal to the Second Circuit Court of Appeals and we must now wait to see whether this appellate Court will agree with the district court’s approach and uphold its decision.
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