## Facts

- Lep Group PLC, a London-based holding company, sought access to U.S. capital markets by placing shares in a U.S. depository and having ADRs/ADSs trade on NASDAQ.
- To support its U.S. market presence, Lep made filings with the SEC and became subject to U.S. reporting and disclosure obligations.
- Itoba Ltd., a Channel Islands company wholly owned by ADT Limited (a Bermuda holding company with major U.S. operations through A.D.T. Security Systems, Inc.), explored acquiring control of Lep to obtain control of National Guardian, a U.S. security business linked to Lep.
- During due diligence, analysts and decisionmakers relied in part on Lep’s SEC filings and related U.S.-directed disclosures as indicating Lep was financially sound.
- After a potential joint acquirer withdrew, ADT proceeded alone using Itoba and purchased more than 37 million Lep shares.
- Subsequent disclosures revealed serious, previously undisclosed financial problems at Lep, and Lep’s share price collapsed, sharply reducing the value of Itoba’s holdings.
- Itoba sued Lep and certain officers/directors under Exchange Act § 10(b), Rule 10b-5, and § 20, alleging that misstatements and omissions, including in SEC filings, induced the purchases and caused the loss.

## Issues

1. Whether federal courts have subject-matter jurisdiction over Exchange Act fraud claims involving predominantly foreign transactions when substantial conduct in the United States directly caused the plaintiff’s injury.
2. How to apply the Second Circuit’s “conduct” and “effects” tests for transnational securities fraud jurisdiction, including whether they may be applied together.

## Decision

- The Second Circuit reversed the district court’s dismissal for lack of subject-matter jurisdiction and remanded.
- The court held jurisdiction may exist where substantial U.S. conduct is an integral part of the alleged fraud and directly causes investor losses, and/or where the fraud has significant effects in the United States or on U.S. investors.
- The court concluded the alleged U.S.-based elements—particularly Lep’s SEC filings connected to its U.S. trading program—were not merely preparatory and were plausibly tied to the investment decision and resulting harm.
- The court explained that the conduct and effects inquiries are not mutually exclusive and may be considered in combination in assessing jurisdiction.

## Legal Principles

- Exchange Act subject-matter jurisdiction can extend to foreign-centered securities fraud when conduct in the United States directly causes the plaintiff’s injury.
- Jurisdiction can also be supported when a foreign fraud produces substantial effects in U.S. markets or on U.S. investors.
- Courts in the Second Circuit may apply a combined conduct-and-effects analysis rather than treating the two tests as exclusive alternatives.
- Creating and using U.S. market mechanisms (e.g., ADR/ADS trading) and making SEC filings can constitute substantial domestic conduct when those acts are alleged to be material components of the fraudulent scheme and causally connected to the loss.

## Conclusion

The Second Circuit held that U.S. courts could hear Itoba’s Exchange Act claims because the alleged fraud included significant U.S.-based conduct—particularly SEC filings made in connection with Lep’s U.S. trading program—that plausibly formed an integral, loss-causing part of the scheme, and the case was remanded for further proceedings.


Itoba Ltd. v. Lep Grp. PLC, 54 F.3d 118 (2d Cir. 1995)