The Halfway Point between Barbary Coast and Shangri-La: Extraterritoriality and the Viability of the Economic Reality Method Post-Parkcentral Global Hub Ltd. V. Porsche Automobile Holdings Se
2015; Volume: 65; Issue: 2 Linguagem: Inglês
ISSN
0003-1453
Autores Tópico(s)Corporate Governance and Law
ResumoINTRODUCTIONIn the increasingly globalized world, will the United States become the Barbary Coast for securities transactions where fraudsters easily flout U.S. securities regulations by finding holes in the law's narrow interpretation? Or will the United States become a Shangri-La where foreign plaintiffs who claim fraud on the foreign securities market flock to U.S. courts, despite their cases having little actual connection to the United States?Since the 1970s, U.S. courts have been trying to find a balance between the two extremes in U.S. securities regulation. In the seminal case Morrison v. National Australia Bank Ltd.,1 the Supreme Court ruled that § 10(b) of the Securities and Exchange Act of 1934 (Exchange Act)2 has no extraterritorial reach.3 Courts must perform a location-based transactional test to determine whether the transaction is sufficiently domestic to incur § 10(b) liability.4 However, with the growing prevalence of globalization and modern technology, that line is increasingly harder to draw. Securities markets can now operate fluidly across international borders with many parties conducting their transactions electronically.5 Some security instruments, like securities-based swap agreements or American Depositary Receipts, can have attenuated connections to the location of the transaction.6 Due to this trend, courts have struggled to create a clear but flexible rule that can adequately address the variety of securities instruments.In the summer of 2014, the U.S. Court of Appeals for the Second Circuit, the leader in securities regulation jurisprudence,7 made an important step towards finding that middle ground. Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE8 was a § 10(b) case regarding securities-backed swap agreements9 where the underlying security was foreign.10 The U.S. District Court for the Southern District of New York used the economic reality method to determine that § 10(b) did not cover plaintiffs' claims.11 In affirming the district court, the Second Circuit approached the issue differently, addressing the issue of whether the transactional test controlled.12 The court ultimately diverged from the bright-line traditional understanding of the transactional test,13 holding that, even if the plaintiffs had satisfied the Morrison transactional test, the transaction lacked a sufficient connection to the United States to satisfy § 10(b).14With its holding in Parkcentral, the Second Circuit created a major shift in extraterritorial considerations in securities law jurisprudence.15 No longer can courts rely solely on the transactional test to determine whether a case can be brought under § 10(b). The Parkcentral court, however, left some issues unresolved.16 Most importantly, the Parkcentral court did not clarify the specific test courts must use to determine when a case is sufficiently domestic to warrant § 10(b) liability.17 The Second Circuit indicated courts would analyze a variety of factors but left it to future courts and cases to devise the specifics of the test.18 Moreover, the court did not comment on how the economic reality method would fit into this analysis, if at all.This Comment will argue that the economic reality method is still viable after Parkcentral, but that it now constitutes one of the factors of the sufficiency analysis rather than its previous use under the transactional test. This Comment proposes a framework for the new extraterritorial inquiry based on Parkcentral's holding. Courts should now perform the Morrison transactional test and then analyze a variety of factors based on the totality of the circumstances to determine whether a case is sufficiently domestic to incur § 10(b) liability. One of these factors will be the economic reality of the security instrument.Part I describes the development of the § 10(b) jurisprudence regarding extraterritoriality. This Comment begins by briefly explaining the creation of the Securities and Exchange Act of 1934 and the structure of § 10(b). …
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