The United States District Court for the Southern District of New York yesterday certified two classes of investors who had purchased Petrobras securities on U.S. exchanges or in other U.S. transactions. The February 2, 2016 decision in In re Petrobras Securities Litigation held that potential questions about whether foreign courts would recognize a U.S. class-action judgment and whether individual off-exchange purchasers bought their Petrobras securities in U.S. transactions did not preclude class certification.
The court’s ruling continues the exploration of the ramifications of the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, which held that the federal securities laws apply only to allegedly fraudulent statements or omissions made “in connection with the purchase or sale of [i] a security listed on an American stock exchange, and [ii] the purchase or sale of any other security in the United States.” The Petrobras court had previously excluded purchasers in non-U.S. transactions from the case, and it now confronted issues applicable to purchasers who satisfied the Morrison test.
Judgment-Recognition Issues. In the decades before Morrison, courts had frequently entertained securities class actions involving global classes of investors who contended that foreign issuers’ U.S.-based conduct had caused injury to foreign investors in their home countries and elsewhere throughout the world. When those cases reached the class-certification stage, the foreign issuers often contended that U.S. courts should not certify global classes of investors if the investors’ home countries would not recognize a U.S. class-action judgment. The defendants argued that a class action would not be a superior method of adjudication if non-U.S. class members could go to their home courts and relitigate whatever the U.S. court had decided in the class action. The success of this argument often depended on the extent to which the U.S. court believed that a particular foreign country’s courts would or would not recognize a U.S. class-action judgment.
The Morrison decision did not exclude non-U.S. residents from the scope of the U.S. securities laws, because non-U.S. purchasers can buy a foreign issuer’s shares on a U.S. exchange or in other U.S. transactions. Petrobras – a Brazilian company – therefore invoked the line of judgment-recognition cases to argue that the plaintiffs could not satisfy the “superiority” requirement for class certification under Federal Rule of Civil Procedure 23 unless they could demonstrate a “‘probability’” that foreign courts would recognize and grant res judicata effect to a U.S. class-action judgment.
The Petrobras court rejected this contention, holding that it was “not aware of any binding precedent that sets out such a requirement” and that the primary case on which Petrobras had relied was a pre-Morrison decision. The court opined that “Morrison materially lessens the foreign res judicata concerns animating” the pre-Morrison case and that, in any event, the case had “only concluded that res judicata concerns could be one consideration that could lead to the exclusion of foreign members from a class.”
Petrobras also argued that the court should exclude residents of specified countries from the class because of judgment-recognition concerns. But the court disagreed, because “defendants have not explained in any detail why these particular countries would not recognize a U.S. class action judgment in this case.”
The court’s refusal to exclude putative class members residing in specific countries thus appears to have turned on a perceived lack of proof about judgment recognition. Foreign issuers who believe that putative classes of U.S. purchasers might include significant numbers of foreign investors can still raise judgment-recognition concerns as a defense to class certification, but they must be prepared to show in detail, on a country-by-country basis, why they believe that courts in the relevant foreign countries would not recognize a U.S. class-action judgment. Such a showing usually requires exhaustive declarations by foreign experts on foreign law.
Ascertainability/Manageability Issues. Petrobras raised a second Morrison-related argument against class certification: putative class members’ need to show that they had purchased Petrobras securities on an American exchange or in a domestic transaction. Petrobras argued that those putative class members who had not purchased their shares on an exchange would need to satisfy the Second Circuit’s standard for proof of an off-exchange domestic transaction – the incurrence of irrevocable liability or the passing of title in the United States – and that such individualized proof would be unmanageable in a class action. Petrobras therefore asked the court to exclude from the class anyone who had purchased Petrobras securities in off-exchange transactions or from non-U.S. underwriters.
The court declined to do so, because “[a]mending the Class definitions in this way would cut off purchasers who have valid claims under Morrison’s second prong.” The court was “confident that the Morrison determination [concerning the existence of domestic transactions] is administratively feasible” in a class action. According to the court:
The criteria identified by [the Second Circuit], as relevant to the determination of whether a transaction was domestic, are highly likely to be documented in a form susceptible to the bureaucratic processes of determining who belongs in a class. For example, documentation of “the placement of purchase orders” is the sort of discrete, objective record routinely produced by the modern financial system that a court, a putative class member, or a claims administrator can use to determine whether a claim satisfies Morrison.
Subsequent cases might explore whether the court was unduly optimistic in believing that questions involving Morrison’s second prong can be managed on a classwide basis. The Second Circuit has propounded a nonexclusive list of factors to assess whether an off-exchange transaction was a domestic transaction under Morrison: where the contract was formed; where the purchase order was placed; where title passed; and where money was exchanged. Some of those factors might be more manageably ascertainable than others in a class-action context.