Sullivan & Cromwell’s Robert Giuffra Jr. scored another major victory on Friday in Porsche Automobile Holdings SE’s long, multifront battle with a coalition of disgruntled hedge funds. Echoing a 2012 ruling by a state appeals court, the U.S. Court of Appeals for the Second Circuit agreed with S&C and found that billions of dollars in claims against the German automaker don’t belong in the United States.
In a 51-page opinion, a three-judge Second Circuit panel upheld a ruling that the hedge funds’ claims are barred by the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank. The Second Circuit ruling comes two-and-a-half years after the panel heard oral arguments in the case, and nearly a year and a half after New York’s Appellate Division, First Department, shot down parallel litigation on jurisdictional grounds.
The hedge funds’ claims stem from Porsche’s 2008 announcement that it had gathered a controlling 75 percent stake in German rival Volkswagen AG as part of an ultimately disastrous takeover attempt. That news devastated hedge funds that had taken short positions on VW’s stock price through complex securities-based swap agreements in the U.S. The hedge funds filed suit in January 2010, claiming Porsche made misleading statements about its takeover intentions in order to manipulate VW’s stock price for Porsche’s benefit.
Unfortunately for the plaintiffs, the Supreme Court decided Morrison just six months later, ruling that U.S. securities laws don’t apply extraterritorially. U.S. District Judge Harold Baer Jr. dismissed the Porsche case in December 2010, finding the hedge funds’ claims were foreclosed by Morrison because they involved allegations about a foreign company’s stock traded on a foreign exchange.
Some of the plaintiffs attempted an end-run around Morrison by suing Porsche in New York state court, and their fraud claims initially survived a motion to dismiss. But in December 2012 Sullivan’s Giuffra convinced the First Department that the state court claims were barred on forum non conveniens grounds. (We named Giuffra Litigator of the Week for the appellate win.)
Friday’s Second Circuit ruling affirms Baer’s earlier decision, but the panel chose to apply Morrison differently. The per curium decision by Judges Pierre Leval, Robert Sack, and Peter Hall points out that it’s directed at a very specific set of facts: The swaps in question were executed in the U.S., but they referenced wholly foreign securities. The plaintiffs claimed securities fraud based on allegedly misleading statements by Porsche, a German company, concerning the stock of Volkswagen, another German company, whose stocks both trade on foreign exchanges. Porsche didn’t participate in any of the hedge funds’ swap agreements. The underlying conduct is subject to investigations by German authorities, and, as we previously reported, many of the hedge funds are litigating against Porsche in German courts.
“The relevant actions in this case are so predominantly German as to compel the conclusion that the complaints fail to invoke [the U.S. securities law] in a manner consistent with the presumption against extraterritoriality,” the panel wrote. In a concurring opinion, Judge Leval noted that the judges did not rely on “any single factor or bright-line rule” in coming to their decision. The panel remanded the case to the district court to consider allowing the plaintiffs to file amended complaints in line with the decision.
Giuffra told us Friday that the decision was a big win for Porsche.
“This decision should put an end to all of the U.S. litigation against Porsche,” he said. “Based on the reasoning of this decision, we don’t see how plaintiffs can plead a valid U.S. securities fraud claim.”
Bartlit Beck Herman Palenchar & Scott’s J.B. Heaton III, who argued the case at the Second Circuit on behalf of the hedge funds, didn’t immediately respond to requests for comment. Other plaintiffs firms representing the funds include Quinn Emanuel Urquhart & Sullivan, Kleinberg, Kaplan, Wolff & Cohen, Grant & Eisenhofer and Lowenstein Sandler.
Quinn Emanuel’s Marc Greenwald, who represents hedge funds Parkcentral Global Hub Limited and Seneca Capital LP, said his clients are gratified that the Second Circuit offered them a chance to file an amended complaint. “Our clients will be weighing the facts and considering whether to do so,” he said.
Grant & Eisenhofer’s James Sabella, who represents Black Diamond Offshore Ltd., said his client is considering its next steps.
Lawyers from Skadden, Arps, Slate Meagher, & Flom and Simpson Thacher & Bartlett represented Porsche’s former CEO Wendelin Wiedeking and former vice president of finance Holger Haerter, respectively.