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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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Battea: 2017 Securities Class Action Industry Lookback and Observations



This article is sponsored by Battea.

Source: Battea

There has been incredible growth in securities and antitrust class action litigations and settlements, particularly as they have unfolded in 2016 and 2017. The number of new cases and settlements from traditional securities litigation to antitrust rate rigging, spread inflation and other forms of collusion are at an all time high and shows no signs of slowing down.

With several multi-billion dollar litigations related to Libor, Euribor and Tibor rates, and spread manipulations, the securities, foreign exchange and antitrust class and collective actions litigation space rose exponentially in 2017.

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The Future of Operations: Simplify, Innovate and Transform



This article is sponsored by Broadridge.

Now that the pain of the global financial crisis and subsequent regulations are starting to fade from view, the asset management industry is facing new challenges that will transform the business. Firms must be nimble enough to support this evolution. That means not only redesigning operations, but also adopting new technologies that can be used for innovation in-house and with the help of partners.

In active management, the industry has created more complex products to generate alpha, while the growth of passive management, spurred by fintech competition, is compressing fees. At the same time, expansion into new markets has added costs. Facing these challenges will require serious improvements to back- and middle-office operations — an overhaul of everything from data validation to trade reconciliation.

For this type of transformation, experts say, it’s not enough to improve the steps in a process. Financial institutions need to eliminate steps. Specifically, executive members of the Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA) say that leading firms should:

Work collaboratively. Firms should collaborate to solve common problems; use associations to identify and promote best practices; and partner with service providers, utilities and regulators to tap their specialized skills and mutualize non-differentiating functions.

Tackle common pain points. Many of the industry’s biggest challenges come from a lack of standardized processes: Standardizing data is the top challenge and sets a foundation to accelerate change.

Leverage transformational technology. Cloud computing, artificial intelligence, and distributed ledger technology can be transformational over the coming three, five or 10 years — but investing now is vital.

Assess, accept and mitigate risks. During times of large transformational change, it should be understood that risks are higher. This traditionally risk-adverse industry must balance the need for bold change against the fear of producing subpar outcomes.

This paper asks how asset managers can move beyond incremental improvements, like shaving costs from processes like post-trade settlement, regulatory compliance and reconciliation, to reimagining how operations are handled. Based on discussions with executives from leading asset management, buy-side, and sell-side firms, as well as service providers, it assesses the drivers for change and the challenges and opportunities ahead, and discusses what actions the industry must take to reach its desired future state.

The long-term vision of how asset management operations should change is best summed up by one word: Simplify.

To learn more about “The Future of Operations” for the asset management industry, download the white paper from Broadridge and the SIFMA Asset Management Group.

To learn more about Broadridge’s solutions for the asset management industry, please visit

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Building Passive Solutions: Meeting the Unique Needs of Central Banks and Sovereign Wealth Funds



This article is sponsored by UBS.

By: Dr. Massimiliano Castelli, Head of Strategy and Advice, Global Sovereign Markets and Philipp Salman, Strategy and Advice, Global Sovereign Markets


– Passive investment strategies have grown rapidly over the last 20 years, attracting assets from investors across the spectrum.
– In recent years, sovereign wealth funds (SWF) and Central Banks have increased their allocations to passive strategies, embracing the liquidity, transparency, low costs, and customization options that these investment strategies offer.
– The goals and restrictions of SWFs and Central Banks are often quite different to those of other institutional investors. This can require a customized solution.
– We expect sovereign investors to continue exploring new passive strategies and we outline emerging trends that could be of special interest for this investor group.
– Asset managers need to respond to the evolving needs of these institutions in the passive space.

Index investing has been one of the fastest growing strategies of the last 20 years, with an estimated USD 10 trillion invested globally, tracking a wide range of benchmarks across asset classes in a variety of investment vehicles. It is an investment style which appeals to a broad range of institutional investors, from Pension Funds to Sovereign Institutions. 1


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

1. Source: IMF 2017, SWFI 2017, UBS 2017.

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