Chapter 14 - § 14.5 • JURISDICTION, VENUE, AND SERVICE OF PROCESS

• Jurisdiction: Colorado

§ 14.5 • JURISDICTION, VENUE, AND SERVICE OF PROCESS

§ 14.5.1—Jurisdiction — General

Jurisdictional facts must be alleged in all complaints under either Act. Federal courts have concurrent civil jurisdiction with state courts over 1933 Act litigation. Federal courts have exclusive jurisdiction over 1934 Act litigation. As described below in § 14.7, Congress enacted the PSLRA and SLUSA to combat abuses in plaintiff forum shopping, ensuring that valid 1934 Act claims and class actions based on 1934 Act claims were heard in a federal forum. Not all claims involving the offer or sale of a security are subject to a federal jurisdiction, however. A 2016 Supreme Court case found that federal courts do not have jurisdiction to hear an investor lawsuit alleging only state law claims even where the complaint contains allegations that the misconduct at issue violated an SEC regulation promulgated under the 1934 Act. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Manning, 136 S. Ct. 1562 (2016).

The complaint must include an allegation that defendants used means or instruments of transportation or communication in interstate commerce or the mail in the transaction. This may include such incidental use of the jurisdictional means as depositing a check in a bank that then clears the check though the Federal Reserve System or by using the mail.

§ 14.5.2—Jurisdiction Over Foreign Defendants

When a United States person affirmatively goes out of the country to purchase securities on a foreign exchange, the courts have generally held that there is no basis for U.S. jurisdiction over foreign defendants. In Europe & Overseas Commodity Traders, S.A. v. Banque Paribas London,³³ the Second Circuit directed courts to look to "conduct, . . . effects, . . . or a combination thereof . . . in the United States" when determining whether U.S. courts have jurisdiction over foreign securities transactions.³⁴ In that case, a United Kingdom national sold non-U.S. securities to a Canadian resident when the Canadian was vacationing in Florida. The Second Circuit found that the nearly de minimis "personal, minimal, and fortuitous" U.S. contacts of the defendant in the transaction precluded the federal courts from asserting U.S. jurisdiction over the U.K. national. On the other hand, when the defendants take actions abroad that adversely affect U.S. capital markets, federal courts will more willingly accept jurisdiction over foreign defendants. This is established in a long line of cases deriving from World-Wide Volkswagen Corp. v. Woodson.³⁵

In Finch v. Marathon Securities Corp.,³⁶ the court found no subject matter jurisdiction in the United States (despite some "less meaningful" contacts with the United States) when:

1) The substance of the allegedly fraudulent conduct occurred outside the United States.
2) The parties are predominantly foreign.
3) The subject shares are securities in a foreign corporation neither registered nor traded on a U.S. securities exchange.
4) There is no showing of any domestic injury.

In Bersch v. Drexel Firestone, Inc.,³⁷ a U.S. citizen brought a class action on his own behalf and on behalf of domestic and foreign class members against a Canadian corporation, alleging violation of Rule 10b-5 in a predominantly foreign transaction. This involved an offering of securities by I.O.S. Ltd. outside of the United States, and the securities were not traded in the United States. The defendant did deliver an offering circular within the United States. The court dismissed the action on behalf of the foreign class members, but maintained it on behalf of the United States class members, concluding that the anti-fraud provisions of the United States securities laws:

• Apply to losses from sales of securities to U.S. residents regardless of whether fraudulent acts occurred in the United States.
• Apply to losses from securities sold to Americans residing abroad, but only if acts of material importance occurred in the United States.
• Do not apply to losses from securities sales to foreigners outside the United States unless acts within the United States directly caused such losses.

In SEC v. Berger,³⁸ the court said that to determine whether subject matter jurisdiction extends to predominantly foreign claims, courts consider "(1) whether the wrongful conduct occurred in the United States, and (2) whether the wrongful conduct had a substantial effect in the United States or upon United States citizens." These inquiries are known as the "conduct test" and the "effects test" and both must be met.³⁹

This was reaffirmed in Howe v. Goldcorp Investments, Ltd.,⁴⁰ where the court affirmed a dismissal of an action by a Massachusetts investor against a Canadian company because the plaintiff "bought their shares abroad from misrepresentations . . . taking place abroad."⁴¹ The court also found that Canadian laws offered similar protection to those of the United States.

The following are further examples of cases when the courts in the United States have elected not to accept jurisdiction over foreign defendants because of de minimis contacts or for other reasons:

• In Robinson v. TCI/US West Communications, Inc.,⁴² the appeals court held that U.S. securities laws applied to an alleged fraud in connection with the sale of securities to foreigners outside of the United States only if acts or the culpable failures to act within the United States directly caused the plaintiffs loss. In the Robinson case, all of the material acts that led to the loss occurred in England.
• In MCG, Inc. v. Great Western Energy Corp.,⁴³ the court refused to find jurisdiction over foreign defendants when U.S. investors used a Hong Kong shell company to purchase shares in the London market. Having gone to such lengths to structure a transaction not burdened by the U.S. securities laws, the investors could not expect to "wrap themselves" in the "protective mantle" of those laws when the "deal sours."
• In Marland v. Heysel,⁴⁴ the district court found that a French resident of Switzerland could not use the U.S. courts to seek damages as a result of alleged actions of a London-based corporation whose only contacts with the United States were the state of its organization (Nevada).
• In Burke v. China Aviation Oil (Singapore) Corp. Ltd.,⁴⁵ the court found that it did not have jurisdiction over the foreign defendant simply because its website was accessible in the United States when the company had taken no steps to market its securities in the United States.

The following are examples of cases when the United States courts have found sufficient contacts to justify jurisdiction over foreign defendants in securities fraud actions:

• When a foreign company consents to U.S. jurisdiction by having its stock listed on a United States stock exchange, courts have easily found

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