Brief Fact Summary. The district court’s dismissal of its action against Lep Group PLC(Defendant) was appealed by Itoba Limited(Plaintiff) on the basis that the court lacked subject matter jurisdiction.
Synopsis of Rule of Law. A federal court hassubject matter jurisdiction over a securities fraud conducted in another country when the plaintiff proves that the activities taking place within the United States directly caused the plaintiff’s injury.
Issue. Does a federal court have subject matter jurisdiction over a securities fraud conducted in another country when the plaintiff proves that the activities taking place within the United States directly caused the plaintiff’s injury?
Held. (Van Graafeiland, J.) Yes. A federal court has subject matter jurisdiction over a securities fraud conducted in another country when the plaintiff proves that the activities taking place within the United States directly caused the plaintiff’s injury. The “conduct test” and the “effects testâ€ are two tests the courts have applied to determine subject matter jurisdiction in cases like this.Â Do not consider these tests to be mutually exclusive; instead, the courts should properly apply a mix of them both in deciding whether a United States court is justified in affirming jurisdiction over a securities fraud conducted somewhere else. Where the defendant’s activities within the United States were more than preparatory and directly caused the injury the federal court is provided with subject matter jurisdiction by the â€œconduct test.â€ It concentrates on the sort of activity that occurs within the United States as it relates to the overall plan of fraud. As seen here, commissioned by Canadian Pacific, the Warbug Report heavily influenced ADT and Itoba’s executives, so much so that they decided to invest in Lep. The Warbug Report was based on the Form 20-F that was filed with the SEC for 1988 by Lep, Lep’s annual reports, and Lep’s shareholder and broker reports. As stated in the Warburg Report, the contents of Form 20-F directly contributed into Itoba’s decision to buy Lep, even without Itoba’s board reading the entire SEC filing. Liability in a Rule-10(b) may be proven when the plaintiff shows a derivative reliance on a misleading statement, even if the statement was not read explicitly. In this case, the SEC filings were directly linked to its shares on the London Exchange so if those shares were to decrease, so would the NASDAQ shares. It does not matter if the misleading statement pertains exclusively to the security traded but instead the basis of liability switches to if reasonable investors would usually rely in making investment decisions based on the misstatement.Â Here, subject matter jurisdiction may be appropriate due to reasonable investors relying on misrepresentation laden SEC filings to make investment choices. Subject matter jurisdiction on fraud that occurs in another country, with domestic stock detrimental impacts on registered and listed on a domestic securities exchange, is referred to as the â€œeffects test.â€ In this case, the fraud took place on a United States securities exchange and continued elsewhere, with losses in excess of $100 million to domestic investors. Also, a wholly owned subsidiary of ADT, Itobastock had 50% of its shares held domestically and was actively traded on the New York Stock Exchange, meaning that the claims are satisfactory to warrant the exercise of jurisdiction over the case by United States courts. Reversed and remanded.
Discussion. Courts have generally held that in application of the â€œeffects test,â€ where a corporation’s shares are listed on an American securities exchange, listings like that lay the groundwork to subject matter jurisdiction in an action based on fraud. The trading of securities with the U.S. could reasonably result in danger to American investors, even though the fraud may have been perpetrated outside the United States. The SEC does not usually initiate enforcement actions against transactions that occurred outside the U.S. where trading like that is conducted over a foreign securities exchange.