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Is Your Purchase or Sale of Securities Covered Under U.S. Law?




This article is sponsored by Goal Group.

Written by Michele Carino and Noah Wortman

As world financial markets become increasingly complex and intertwined, the question of whether your investment is protected by law and by which country is oftentimes challenging to answer. However, due to the rise of the global investment portfolio and the fact that more institutional investors are looking beyond their own shores for investment, it is important to evaluate and understand the implications of such a globally-diversified portfolio and the possible methods of shareholder redress available to institutional investors.

Is your purchase or sale of securities covered under U.S. law? While the answer may be clear for securities that actively trade on a U.S. national exchange, the answer is far less certain when the transaction involves a non-U.S. purchaser or seller and/or a non-listed security. Indeed, in a recent decision in the Petrobras Securities Litigation1, a federal district court in New York departed from existing precedent and excluded certain claims by two European investment funds, finding that their purchases of Petrobras debt securities did not qualify as U.S. transactions under the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank Ltd.2 In so doing, the court re-evaluated what it viewed Morrison requires in order to establish that your transactions are within the scope of U.S. securities laws.

The debt securities at issue in Petrobras were sold in two public offerings registered in the U.S. Although the offering materials suggested that the securities were listed or intended to be listed on the New York Stock Exchange, they never actually traded there, but instead, were sold over-the-counter in New York, as well as outside the U.S. Many of the trades settled through the Depository Trust & Clearing Corporation’s subsidiary, the Depository Trust Company (“DTC”), also located in New York.

First and foremost, the court reaffirmed that “mere listing, without trading” falls short of Morrison’s first prong, which defines trading activity on an American stock exchange as taking place within the U.S. This meant that in order for the Petrobras plaintiffs to proceed on their claims related to those debt offerings, they needed to demonstrate that their transactions otherwise occurred in the U.S.

In Absolute Activist Value Master Fund Ltd. v. Ficeto, the U.S. Court of Appeals analyzed Morrison’s second prong and created two avenues to “domesticate” transactions for non-listed securities: (1) the parties must incur irrevocable liability to carry out the transaction in the U.S.; or (2) title must be passed in the U.S.3 Applying this framework, the Petrobras court conducted a detailed analysis that mirrored the “minimum contacts”-type inquiry that is made in the context of determining whether a U.S. court is a proper jurisdiction. For instance, the court considered that as to both of the U.S. investment funds, the complaint alleged that purchases were initiated by traders and investment managers physically located in the U.S. from underwriters also located in the U.S. These facts concerning “the formation of the contracts, the placement of purchase orders, the passing of title, and the exchange of money” were sufficient to show that irrevocable liability was incurred in the U.S.

The exercise was more challenging for the European funds. In one case, the fund purchased Petrobras debt securities through an affiliate, who purportedly placed an order through a U.S. underwriter. The court noted that the only reason this transaction might serve as the basis for establishing a U.S. transaction was because the affiliate expressly assigned its legal claim to allow the fund to proceed on its behalf. However, because there was a slight gain on the transaction, and therefore no damage, this purchase was excluded from consideration.

Likewise, a confirmation slip that recorded a purchase of Petrobras notes in U.S. dollars with the notation that the securities were held in “safekeeping … abroad, depository country: U.S.A.” failed to establish either irrevocable liability or transfer of title in the U.S. According to the court, referring to the U.S.A. as “abroad” created the exact opposite impression.

Finally, both European funds contended that settling their trades through the DTC in New York was functionally equivalent to transferring title and therefore satisfied Morrison. Specifically, the DTC, or its nominee, Cede & Co., holds legal title to the vast volume of securities, and Cede & Co. is therefore listed as the registered owner of these securities. However, when the DTC adjusts its books to settle a trade, it changes the name of the ultimate beneficial owner, in this case, the European funds purchasing Petrobras securities. The lower court in Absolute Activist had affirmed settlement of trades through DTC as a proper method to transfer title under Morrison’s second prong.4 But the Petrobras court rejected this argument, labeling this as mere “mechanics,” which neither created “the substantive indicia of a contractual commitment … nor the formal weight of a transfer of title.” The court further found that because most securities transactions settle through the DTC or similar depository institution, this would extend U.S. securities laws too far.

While the issue remains undecided, it may be advisable to take certain precautions if the intent is to create a U.S.-based transaction within the scope of U.S. securities laws. For those securities not actively traded on an American exchange, it may be unwise to presume that perfunctory transfers or use of affiliates will permit access to U.S. courts. In addition to settling trades through New York-based DTC, specific details, such as notations on confirmation slips and the physical location of employees, agents, or underwriters, are critically important and will increase the likelihood that a U.S. court will find transactions are sufficiently “domestic.” These factors should be evaluated early on to ensure that each transaction meets the objectives for managing the potential legal implications.

1 See In re: Petrobras Sec. Litig., Consol. C.A. No. 14-cv-9662 (JSR), 2015 BL 418754 (S.D.N.Y. Dec. 21, 2015).
2 See Morrison v. National Bank Australia Ltd., 561 U.S. 247 (2010).
3 See Absolute Activist Master Value Fund, Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012).
4 See Absolute Activist Master Value Fund, Ltd. v. Ficeto, No. 09 Civ. 8862(GBD), 2013 WL 1286170, *18 (S.D.N.Y. Mar. 28, 2013) (holding that title was transferred in New York, where trades were settled through DTC), on remand from Absolute Activist Master Value Fund, Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012).

About the authors:

Michele Carino is Of Counsel at Pomerantz LLP and has over a decade of experience litigating securities fraud, corporate governance, and complex commercial cases in federal and state courts throughout the United States. She has participated in the prosecution and settlement of numerous class actions seeking to maximize recovery for investors.

Noah Wortman is Chief Operating Officer, Americas for the Goal Group, the leading class actions and international tax reclamation services specialist. He has over fifteen years of experience assessing and analyzing potential corporate misconduct in the financial markets, in addition to helping to find litigation solutions for investors worldwide. Additionally, Noah is a frequent speaker around the globe on the topic of shareholder legal redress, recovery, rights and responsibilities.

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How Does Geopolitics Affect Financial Markets?



This article is sponsored by State Street Global Advisors.

In Alexandre Dumas’s 1844 novel The Count of Monte Cristo, news of an impending cross-border revolution in Spain leads to financial panic among French investors. Some investors end up selling Spanish bonds at a great loss, only to see the price bounce back after the news proves to be erroneous.

Geopolitics matters to markets in the real world too and has been a major theme in 2018, as the post-war global order is dismantled and protectionism takes hold. But, as in Dumas’ tale, it can be hard for investors to know how to react to such uncertainty. In this paper, we examine attempts to assess the impact of geopolitics on markets and conduct our own analysis on how it plays out over different time periods. Our hope is that investors can use this analysis when considering how best to respond to future geopolitical events, in terms of both the risks and opportunities they may present.

By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.

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Through the looking glass



This article is sponsored by Dominion.

The decision taken by the British Government to require the 14 British Overseas Territories (BOTs) to establish Public registers of the beneficial owners of Companies registered in these territories has so far created a divided reaction. The BOTs, have generally taken the view that it is grossly unfair for the UK Government to use ancient Constitutional rights to impose the new legislation whereas the Crown Dependencies who are not affected by this decision have unsurprisingly provided a more measured response. This is reflected by Deputy Gavin St Pier in statements very similar to those issued by Politicians in Jersey stating that ‘Guernsey will introduce a public register if that becomes the agreed global standard.’

Gavin St Pier’s words have I am sure been chosen carefully since the body that has the necessary authority to end this debate is The Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) that has been the multinational framework within which work in the area of transparency and exchange of information has been carried out by both OECD and non-OECD economies since 2000. The Global Forum is the only international body endorsed by the G20 on issues of transparency and Exchange of Information for tax purposes.

So what does the Global Forum have to say on this issue. Well, paragraph 14 of the report of the Plenary Meeting of the Global Forum held in Cameroon in November 2017 states ‘The second round of peer reviews launched in 2016 reflects the latest developments in international tax transparency, including the requirement to have beneficial ownership information which strengthens the fight against anonymous shell companies and the use of legal arrangements to conceal ownership of identity.’ So reasonably one might expect, this issue should already have been dealt with. Unfortunately not it seems. The information sharing framework created by the Global Forum is designed as an exchange of information programme between Governments. Information exchanged is not available to the Public. So therein lies the problem. Public disclosure of beneficial ownership, despite what paragraph 14 might say, does not appear to have been clarified by the Global Forum, leaving it to Governments, pressure groups and other Organisations around the World to set the Public Agenda on this thorny subject.

Hopefully at this years Plenary Meeting of the Global Forum guidance will be provided on this issue that will feed through into legislation in all Countries that have adopted CRS. In the Plenary Meeting in Cameroon it was noted that ‘Some Members expressed concern that the ongoing EU listing process (referring to a proposed blacklisting of certain jurisdictions by the EU) is occurring outside the framework of the Global Forum… Statements like this would not I imagine encourage the Crown Dependencies to make further comment on this issue or to take any specific action as the Global Forum is clearly through these remarks reinforcing it’s mandate granted to it by the G20. The direction of travel, if one considers EU anti-money laundering Directives and bodies such as the EITI of which the UK is an important Member, would appear to favour a new regime creating a framework for Public Disclosure but when and in what form all stakeholders in this process will just have to wait and see what develops and whether the Global Forum will opine and then issue model legislation on this important issue.

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How Do Public Pension Funds Invest?



This article is sponsored by State Street.

Public Pension Funds (PPFs) are highly idiosyncratic and distinct from other types of institutional investors. The universe of investors that fall within our definition of a PPF is numerous and varied. We count 115 institutions in 70 jurisdictions, diverse in geography and economic development. For the purposes of our study, we examined the top 16 funds whose assets constitute just over two-thirds of the total universe. Despite all the idiosyncrasies of PPFs, we have found some shared characteristics in the evolution of their asset allocation over the past decade.

According to our definition, PPFs held around $5.9 trillion in total assets of 2016 and over 4% of all publicly traded assets, making them a significant global investor group. In particular, given their preferences for specific asset classes, their share is disproportionate in some segments. For example, we estimate that by year-end 2016, PPFs owned over 7% of global tradeable fixed income assets (including 8% government bonds and over 13% of inflation-linked bonds) and over 3% of listed public equities.

Similar to other asset owners, PPFs have undertaken a major reallocation of assets over the past decade. However, the motivating driver has not only been the low yield environment, but also changing regulatory and macro policy settings, which either permitted or encouraged greater diversification along asset classes and geographical exposure.

In detail, the most dominant trend has been the move away from holding domestic (local currency) bonds; in their place, PPFs have redeployed assets towards equities and alternatives, with a small share also diverted into foreign bonds. These allocation trends have been almost universal despite a huge diversity of geography and economic development.

It is important to acknowledge how much this investor group has changed over the past decade, with the asset pool growing by over 40% in dollar terms, and even more if measured in local currencies. While some funds are still predominantly captive buyers of government debt, the bulk of PPFs have been transforming into financial institutions with independent firepower and income-generating capacity. The long-term trend towards more diversified fixed income portfolios is likely to continue, as is the shift towards taking on more risk via equity allocations, subject as ever to changes in market cycles. In this context, we expect most PPFs to not only continue taking on more risk overall, but to further internationalise their portfolios.

Finally, one consideration is that maturing funds catering for aging populations will have to make further adjustments to their asset allocations to account for changing cash flow directions and seek greater contributions and investment returns to bridge any funding gaps.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

This document may contain certain statements deemed to be forward-looking statements. All statements, other than historical facts, contained within this document that address activities, events or developments that SSGA expects, believes or anticipates will or may occur in the future are forward-looking statements. Please note that any such statements are not guarantees of any future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.

Tracking Code: 2172159.1.1.GBL.RTL


By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.

Elliot Hentov, Ph.D. Head of Policy and Research, Official Institutions Group
Alexander Petrov Policy and Research, Official Institutions Group
Sejal Odedra Business Analyst, Client Strategy, Official Institutions Group

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