Academic journal article Suffolk Transnational Law Review

Securities Law-Section 10(b) Liability Not Applicable to Domestic Securities-Based Swap Agreements on Foreign Securities-Parkcentral Global Hub Ltd. V. Porsche Auto. Holdings SE, 763 F.3d 198 (2D Cir. 2014)

Academic journal article Suffolk Transnational Law Review

Securities Law-Section 10(b) Liability Not Applicable to Domestic Securities-Based Swap Agreements on Foreign Securities-Parkcentral Global Hub Ltd. V. Porsche Auto. Holdings SE, 763 F.3d 198 (2D Cir. 2014)

Article excerpt

The Securities Exchange Act of 1934 (the Act) has long provided protections for investors from fraud and misrepresentation through section 10(b) of the Act ([section] 10(b)) and the Securities Exchange Commission Rule 10b-5 (Rule 10b-5); however, the extraterritorial application of the Act has undergone changes since 2010. (1) In Parkcentral Global Hub, Ltd. v. Porsche Auto. Holdings SE, (2) the Second Circuit focused on the extraterritorial application of [section] 10(b) to alleged fraud perpetrated by Porsche Automobile Holdings SE (Porsche), a German based automobile manufacturer, in Germany relating to domestic se- curities-based swap agreements on foreign listed securities of another German automobile corporation, Volkswagen (VW). (3) Securities-based swap agreements are derivative securities, which are based on predicting the volatility of an underlying security, but are still considered protected securities under the Act. (4) The Second Circuit held that domestic securities-based swap agreements are not regulated by [section] 10(b) when the alleged fraud occurs overseas because the application of [section] 10(b) in such cases would undermine Congressional intent, conflict with foreign laws, and impermissibly extend [section] 10(b) extraterritorially. (5)

Between 2005 and 2007, Porsche gradually increased investments in VW stock and acquired 31% of VW stock by the end of 2007. (6) VW shares were primarily traded on European stock exchanges, and were not available for purchase on any stock exchange in the United States. (7) In 2008, Porsche allegedly made false statements regarding their motive for increasing shareholdings in VW by stating that their reason for acquiring shares was to prevent a hostile takeover of VW by another company. (8) In reality, Porsche intended on gaining a 75% interest in VW stock in order to take over VW itself. (9) The problem Porsche faced with this plan was that most of VW shares were owned by shareholders who could not, or would not sell; however, Porsche's allegedly false 2008 statements made VW shares appear overvalued in relation to other companies, which induced investors to short sale VW stock and encouraged Parkcentral Global Hub Ltd. and other hedge funds (Parkcentral) to purchase securities-based swap agreements through various financial institutions located in the United States. (10) The statements made by Porsche also induced shareholders to lend shares to third parties by short sales, providing Porsche the opportunity to purchase these shares as call options. (11)

Once shareholders began short-selling VW stock, Porsche purchased enough call options to acquire 74.1% of VW stock at a future date and price. (12) In October of (2008), Porsche disclosed its intentions after VW stock fell 39% and purchased the call options, securing 74.1% of stock in VW, as any further decrease in VW stock would create a greater loss for Porsche's call options. (13) The high demand for stock required various short-sellers to return nearly 13% of the stock they borrowed but they were unable to because of the shortage, creating a short-squeeze. (14) Only 5.9% of stock was theoretically available for purchase because Porsche owned the majority of stock and the German State of Lower Saxony owned another 20%. (15) Porsche agreed to release 5% of its holdings to ease the market demand, at a windfall to Porsche. (16) These actions dramatically increased value in VW stock, which created a huge loss for Park central's securities-based swap agreements because the agreements predicted that VW stock price would decrease. (17)

At the trial court level, multiple plaintiffs filed separate complaints, at varying times, in the United States District Court for the Southern District of New York regarding the same operative facts. (18) Porsche's motion to dismiss was granted by the district court and was applied to all claims, including the one brought by Parkcentral. (19) The district court held that the securities-based swap agreements were not covered under [section] 10(b) because it would "extend extraterritorial application of the Act's antifraud provision to virtually any situation in which one party to a swap agreement is located in the United States. …

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