## Facts

- A group of hedge funds entered into securities-based swap agreements that referenced shares of Volkswagen AG (VW), whose stock traded only on German exchanges.
- Some swap agreements were allegedly negotiated and executed in the United States, but the swap counterparties were financial institutions, not Porsche.
- Plaintiffs alleged Porsche and two executives accumulated VW shares and derivatives while publicly denying any intent to take over VW.
- Plaintiffs claimed Porsche used options positions to create hidden economic exposure to VW stock and continued making allegedly misleading public statements abroad.
- In October 2008, Porsche announced it effectively controlled a large majority of VW voting stock, contributing to a short squeeze in VW shares.
- The price spike allegedly caused large losses to plaintiffs’ short-exposed swap positions.
- Plaintiffs sued under § 10(b) and Rule 10b-5, asserting that the domestic execution of some swaps brought the claims within U.S. securities law.

## Issues

1. Whether securities-based swap agreements executed in the United States, but referencing foreign-traded VW shares, qualify as “domestic transactions in other securities” under Morrison.
2. Whether, even assuming domestic transactions, applying § 10(b) is impermissibly extraterritorial when the parties, referenced securities, and alleged misconduct are predominantly foreign and defendants were not alleged to have participated in the swap transactions.

## Decision

- The Second Circuit affirmed dismissal of the § 10(b) and Rule 10b-5 claims.
- The court assumed, without deciding, that plaintiffs plausibly alleged domestic swap transactions.
- Even with that assumption, the court held the requested application of § 10(b) was impermissibly extraterritorial because the case was predominantly foreign.
- The court remanded only for the district court to consider whether to permit amended pleadings upon motion.

## Legal Principles

- Under Morrison, § 10(b) applies only to (1) transactions in securities listed on domestic exchanges and (2) domestic transactions in other securities; the location of the transaction is a necessary threshold, but may be insufficient in a case that is otherwise predominantly foreign.
- A domestic securities-based swap referencing a foreign security does not, by itself, justify imposing § 10(b) liability on foreign defendants for predominantly foreign conduct tied to foreign markets.
- Application of § 10(b) is impermissibly extraterritorial where foreign defendants’ alleged misstatements and conduct occur largely abroad, the referenced securities trade only on foreign exchanges, and defendants are not alleged to have been involved in or aware of plaintiffs’ particular domestic swap transactions.
- Comity and predictability concerns counsel against exposing foreign issuers to § 10(b) liability solely because U.S. investors enter domestic derivatives tied to foreign-traded shares.

## Conclusion

The Second Circuit held that even if plaintiffs’ securities-based swaps were domestic transactions, § 10(b) could not be applied because the dispute centered on foreign defendants, foreign conduct, and foreign-traded securities, and imposing liability would function as an extraterritorial extension of U.S. securities law.


Parkcentral Glob. Hub Ltd. v. Porsche Auto. Holdings SE, 763 F.3d 198 (2d Cir. 2014)