Extraterritorial Application of Section 10(b) to Security-Based Swap Agreements: Following Morrison v. National Australia Bank, Court in the Southern District of New York Holds that Section 10(b) Does Not Apply to Certain Security-Based Swap Agreements

Sullivan & Cromwell LLP - January 3, 2011

On December 30, 2010, Judge Harold Baer, Jr. of the United States District Court for the Southern District of New York granted a motion dismissing with prejudice six complaints seeking more than $2.5 billion in damages against Porsche Automobil Holding SE (“Porsche”) and two of its former executives. In so doing, the Court held in a question of first impression that, in light of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010), Section 10(b) of the U.S. Securities Exchange Act of 1934 (“Exchange Act”) does not apply to security-based swap agreements referencing shares traded on foreign exchanges merely because plaintiffs allege that they signed confirmations in the United States. The Court ruled that the swap agreements at issue in the case are the “functional equivalent” of trading the underlying shares on a foreign exchange, and, therefore, the “economic reality” is that such agreements are “essentially transactions conducted upon foreign exchanges and markets, and not domestic transactions that merit the protection of § 10(b).”

Sullivan & Cromwell represented Porsche in successfully briefing and arguing this motion. Our team included Vince DiBlasi, Robert Giuffra, John Warden and Suhana Han.