Martin Flumenbaum and Brad S. Karp
Martin Flumenbaum and Brad S. Karp ()

This month, we discuss Atlantica Holdings v. Sovereign Wealth Fund Samruk-Kazyna,1 in which the U.S. Court of Appeals for the Second Circuit decided, in an issue of first impression, that a sovereign wealth fund owned by a foreign government is not immune under the Foreign Sovereign Immunities Act (FSIA) from a lawsuit alleging that it misrepresented an affiliate’s debt notes to investors.

At issue in Atlantica Holdings was “whether the FSIA immunizes an instrumentality of a foreign sovereign against claims that it violated federal securities laws by making representations outside the United States concerning the value of securities purchased by investors within the United States.”2

In an opinion by Judge Debra Ann Livingston, joined by Judges Denny Chin and Richard C. Wesley, the Second Circuit affirmed the district court’s holding that losses suffered by U.S. investors in the notes as a result of alleged misrepresentations about those notes’ value fell under the commercial activity exception to the FSIA.


Defendant Sovereign Wealth Fund Samruk-Kazyna JSC (SK Fund) is a joint-stock company wholly owned by the Republic of Kazakhstan. In February 2009, SK Fund obtained a controlling stake in BTA Bank, JSC, a Kazakhstani company. The investors, Panamanian investment funds Atlantic Holdings Inc. and Baltica Investment Holding Inc., were creditors of BTA Bank.

In 2010, shortly after BTA Bank stopped making principal payments on its outstanding securities, SK Fund decided to restructure BTA Bank’s capital structure. In connection with its restructuring, BTA Bank issued an information memorandum, describing the terms of the 2010 restructuring. As part of the restructuring, Atlantica and Baltica agreed to exchange their original debt securities for the new subordinated notes. The two investment funds participated in the restructuring by communicating with their broker in the Miami office of UBS. The two funds and other plaintiffs, some of which were U.S. residents, also acquired the notes on the secondary market through UBS’s Miami office.

Afterwards, there was a complex and undisclosed series of transactions between BTA Bank and SK Fund, pursuant to which BTA Bank paid interest on SK Fund deposits at a rate significantly higher than BTA Bank was earning on bonds it had purchased from SK Fund. Plaintiffs claimed that these transactions contradicted representations in the information memorandum that BTA Bank would not pay SK Fund any dividends on its equity holdings until the notes were fully paid. These transactions came to light in May 2011 when BTA Bank disclosed that it was paying more on its liabilities than it was receiving on its assets. These disclosures led to a significant drop in the face value of the notes. BTA Bank eventually defaulted on its debt in January 2012, less than 18 months after its 2010 restructuring.

In connection with a second restructuring in 2012, BTA Bank prepared PowerPoint presentations that failed to disclose its liability on certain instruments issued to some creditors during the earlier restructuring. When the market discovered these senior liabilities, the value of the notes dropped even further.

Prior Proceedings

Plaintiffs brought suit in the U.S. District Court for the Southern District of New York on Dec. 5, 2012, and filed an amended complaint on April 4, 2013. The complaint contained claims against SK Fund under Sections 10(b) and 20(a) of the Securities Exchange Act. Plaintiffs alleged that they invested in the SK Fund in reliance on a number of misrepresentations in the information memorandum in connection with the 2010 restructuring and misrepresentations in the PowerPoint presentations in connection with the 2012 restructuring. On May 6, 2013, SK Fund moved to dismiss the complaint for lack of subject-matter jurisdiction under the FSIA, lack of personal jurisdiction, failure to state a claim, and failure to plead fraud with particularity.

On March 10, 2014, the District Court denied the bulk of SK Fund’s motion.3 The court held that it had subject-matter jurisdiction under the FSIA’s “commercial-activity exception.” It found that there was personal jurisdiction because the FSIA authorizes personal jurisdiction over a foreign state when it is not immune from suit.4 With respect to the merits of plaintiffs’ claims, the court found that plaintiffs had adequately alleged a domestic securities transaction, reasonable reliance on SK Fund’s alleged misstatements and omissions, loss causation, scienter, and control-person liability under Section 20(a) of the Exchange Act.

Following the denial of the motion to dismiss, SK Fund appealed the District Court’s order on March 25, 2014, since a denial of a motion to dismiss on sovereign immunity grounds is an immediately appealable collateral order.

The Second Circuit’s Decision

The Second Circuit began its analysis by reviewing the FSIA, which provides the sole basis for asserting jurisdiction over a foreign state in the United States. The court noted that the single most important exception to FSIA is the commercial activity exception. That exception provides that a foreign state is not immune from jurisdiction “in any case” in “which the action is based [1] upon a commercial activity carried on in the United States by the foreign state; or [2] upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or [3] upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.”5

The Second Circuit first addressed what plaintiffs’ claims are “based upon.” Relying on a recent Supreme Court decision, the court explained that “an action is ‘based upon’ the ‘particular conduct’ that constitutes the ‘gravamen’ of the suit.”6 Applying this test, the court identified the misrepresentations made by SK Fund and BTA Bank as the gravamen of the plaintiffs’ suit.

Next, the court addressed whether the third clause of the commercial activity exception applied. The third clause, known as the “direct effect clause,” does not immunize a foreign state if the suit is “(1) ‘based upon…an act outside the territory of the United States’; (2) that was taken ‘in connection with a commercial activity’ of [the foreign state] outside this court; and (3) that ’cause[d] a direct effect in the United States.”7 The court held that the losses suffered by U.S. investors in the notes as a result of SK Fund’s alleged misrepresentations about those securities’ value qualified as a “direct effect” in the United States.

The Second Circuit reasoned that a direct effect must follow as an immediate consequence of defendant’s activity and does not need to be “substantial” or “foreseeable.” Analogizing from contract cases that a breach of contractual duty causes a direct effect in the United States if the United States is the place of performance for the breached duty, the court acknowledged that plaintiffs’ claims were tort claims and stated that the locus of the tort is the equivalent of contract law’s place of performance. The court further observed that the tort’s locus is the “place of wrong.”

The Second Circuit thus concluded that a determination that plaintiff has been injured in the United States by the defendant’s tortious actions essentially means that those actions caused a “direct effect” in the United States. Noting its previous ruling that the locus of an alleged misrepresentation actionable under Section 10(b) is the forum “where the loss is sustained, not where fraudulent misrepresentations are made,”8 the court found that it also follows that a FSIA direct effect may be felt where plaintiff suffered such loss.

The Second Circuit was careful to cabin its holding by stating that “locating an economic injury within the United States, without more, will not suffice to bring a foreign sovereign within the commercial activity exception.” Nonetheless, the court found that in this case plaintiffs did show more by alleging that SK Fund marketed the securities in the United States and also directed the securities toward U.S. persons.

The Second Circuit rejected three arguments raised by SK Fund arguing against application of the “direct effect” conclusion. First, SK Fund argued that some Panama-based plaintiffs are not U.S. persons and therefore could not be injured in the United States. The Second Circuit explained that an FSIA plaintiff need only show a direct effect on someone, plaintiff or not, in the United States, basing its conclusion on the text which states that the “act causes a direct effect in the United States.”9

The Second Circuit also rejected SK Fund’s second argument that a financial loss to American investors cannot be a direct effect under the FSIA. The Second Circuit distinguished this case from other cases where the initial injury caused by defendant’s alleged tortious conduct occurred in a foreign country, not in the United States. In these cases, the injury, such as a personal injury from an accident, happened in a foreign country, but the lingering effects such as an ongoing disability from the physical injury was not a direct effect. The Second Circuit, thus, contrasted the initial injury caused by defendant’s allegedly tortious conduct with the less immediate downstream consequences of that injury.

The court stated that the case did not resemble a case where the tort occurred abroad, but instead a products liability case where courts have held that the direct effect clause is satisfied by allegations that a plaintiff was injured in the United States by a flawed product manufactured abroad by defendant.10 In a products liability case, although the defect is created abroad, the initial injury occurs in the United States with the use of the product. Similarly here, the court found that, although the relevant conduct such as the initial sale of the notes occurred abroad, the financial loss suffered from the decline in plaintiffs’ investment was the initial injury.

Finally, the Second Circuit rejected SK Fund’s argument that the relationship between the alleged misrepresentations and plaintiffs’ financial loss is too attenuated to constitute a “direct effect.” SK Fund argued specifically that plaintiffs could only obtain the memorandum containing SK Fund’s alleged misrepresentations from third party intermediaries whose conduct was an intervening act between the commercial activity and any resulting effect. The court noted that third-party actions “may sometimes break the causal chain” between the actions and the effect felt in the United States.

The court, however, again compared the case to products liability cases where a defective product may go through many sales and shipments, without attenuating the causal chain because the sequence is not a function of the defect. The court found in this case that UBS’s distribution of the information memorandum was not undertaken in reliance or as a result of SK Fund’s misrepresentations, and thus the misrepresentations acted directly on plaintiffs that experienced losses.

The court, however, did not want to foreclose entirely the possibility that an alleged misstatement by a foreign state may be so far removed from the American investor that there will be no FSIA jurisdiction. The court reiterated that since investors in securities offerings make purchases through underwriters that distribute offering documents on behalf of the issuer, adopting SK Fund’s argument that UBS’s actions broke the causal chain would “result in near blank immunity for foreign states against securities fraud claims.”


In addressing what commercial activities may strip a foreign state or instrumentality of sovereign immunity, the Second Circuit clarified that investors—either foreign or U.S.—bringing suit against a foreign state or instrumentality do not need to have suffered a loss in the United States as long as they can establish that investors in the United States did so. The court’s holding makes it easier for investors to sue a foreign state or instrumentality for alleged violations of federal securities laws in connection with securities offerings that occur abroad.

The decision has important ramifications for sovereign wealth funds and other similar foreign entities that may not be immune from suit in the United States. In particular, sovereign wealth funds and similar foreign entities must be sensitive to the implications of marketing efforts in the United States and secondary market trading of the funds’ debt in the United States.


1. __ F.3d __ No. 14-917-cv, 2016 WL 403445 (2d Cir. Feb. 3, 2016).

2. Id. at *1.

3. Atlantica Holdings v. Sovereign Wealth Fund Samruk-Kazyna JSC, 2 F.Supp.3d 550 (S.D.N.Y. 2014).

4. See 28 U.S.C. §1330(b).

5. 28 U.S.C. §1605(a)(2).

6. OBB Personenverkehr AG v. Sachs, __ U.S. __, 136 S.Ct. 390, 396 (2015).

7. Republic of Argentina v. Weltover, 504 U.S. 607, 611 (1992) (quoting 28 U.S.C. §1605(a)(2)).

8. Sack v. Low, 478 F.2d 360, 365 (2d Cir. 1973).

9. 28 U.S.C. §1605(a)(2).

10. See, e.g., Lyon v. Agusta S.P.A., 252 F.3d 1078, 1083 (9th Cir. 2001); Aldy ex rel. Aldy v. Valmet Paper Mach., 74 F.3d 72, 75 (5th Cir. 1996); Vermeulen v. Renault, U.S.A., 985 F.2d 1534, 1545 (11th Cir. 1993).