While international securities transactions have become the norm in today's globalized economy, such transactions necessarily implicate the laws of more than one nation, thereby creating both conflict and confusion. Due to the depth and breadth of U.S. securities laws, plaintiffs often prefer to sue in the United States under U.S. law. Yet inappropriately applying U.S. law to transnational transactions may offend notions of comity. This Note discusses the different tools used to decide the following jurisdictional issues. First, under what circumstances do U.S. anti-fraud rules apply to securities transactions? Second, under what circumstances do U.S. registration laws apply? Over the past two decades, the judicially created "conduct" and "effects" tests used to decide whether U.S. anti-fraud laws apply have produced inconsistent results and have created uncertainty and unpredictability for both investors and issuers. Conversely, Regulation S, used to determine whether U.S. registration laws apply, was designed by the Securities and Exchange Commission (SEC) to promote predictability and clarity. While commentators have recommended revising the conduct and effects tests to more closely resemble the bright line of Regulation S, the Second Circuit did the reverse in 1998. In Europe and Overseas Commodities Traders, S.A. v. Banque Paribas London (EOC), the Second Circuit essentially revised Regulation S to more closely resemble the conduct and effects tests. This Note begins with an historical analysis of the United States securities laws and the effect of globalization on these laws. It then analyzes the issues and holding of EOC and the SEC's response. Finally, it evaluates the weakness of the Second Circuit's decision and predicts its international ramifications.
While transnational flows of capital are not an entirely new phenomenon,(1) at the time that the United States enacted its securities laws in the early 1930s securities transactions were primarily domestic.(2) The intense trend toward globalization in the past decade and the sharp upswing in transnational securities transactions(3) may require reconsideration of those laws. As cross-border transactions have become the norm rather than the exception, foreign and domestic issuers and investors have been left wondering: When are offerings and sales of foreign securities in the United States subject to U.S. registration provisions? What is the extraterritorial scope of U.S. enforcement and antifraud protection?
Due to the strengths of U.S. securities regulation--its extensive liability standards, its competent and knowledgeable federal judiciaries, and its powerful tools for the enforcement of judgments--foreign victims of securities violations are tempted to seek recovery in the United States, rather than in their own countries.(4) In addition to overburdening U.S. courts, however, this raises serious concerns of regulatory arbitrage, lack of comity, and disrespect for the sovereignty of other nations.(5) Securities regulation requires a careful balance of investor protection and market efficiency.(6) The responsibility for assessing such concerns should not be a judicial one.(7) Yet, because the text of U.S. securities laws provides little jurisdictional guidance and few, if any, jurisdictional limits, courts have often been left to balance these issues case by case.(8)
The tests for jurisdiction over transnational antifraud cases-the "conduct" test and the "effects" test--were judicially constructed.(9) The conduct test scrutinizes the nature of the defendant's conduct in the United States and its relation to the alleged fraudulent securities transaction.(10) The effects test examines the effects of a fraudulent transaction on American investors or on the U.S. securities markets.(11) Over the past two decades, these tests have produced inconsistent results and created uncertainty and unpredictability for investors and issuers. How much conduct and of what type is required to satisfy the conduct test? How much effect? The answers to these questions vary from Circuit to Circuit and from year to year.
Conversely, jurisdiction over registration claims is regulated through a test specifically designed by the Securities and Exchange Commission (SEC).(12) With Regulation S, the SEC announced a detailed and carefully constructed limit to the extraterritorial application of U.S. registration requirements.(13) The regulation reconciles the conflicting goals of investor protection with the need for an efficient system of international securities regulation.(14) It is specifically designed for predictability and clarity.
Commentators have expressed the need for Congress to outline a more appropriate and clear scope for the antifraud provisions.(15) Specifically, it has been suggested that Congress look to Regulation S as a guide.(16) In 1998, however, the U.S. Court of Appeals for the Second Circuit, referred to as the "Mother Court"(17) and "de facto Supreme Court"(18) of securities regulation, stood this recommendation on its head, foregoing the bright-line text of Regulation S in favor of the heavily fact- and judgment-based conduct and effects analyses.(19)
This Note suggests that the Second Circuit took no steps forward and two steps back when it decided Europe and Overseas Commodity Traders, S.A. v. Banque Paribas London (EOC). Part II of the Note provides an historical analysis of U.S. securities laws and the effect of globalization on those laws. Part III analyzes the issues and holding of EOC and considers the brief submitted by the SEC as amicus curiae for the EOC case. Finally, Part IV evaluates the weaknesses of the Second Circuit's decision and predicts its international ramifications.
GLOBALIZATION OF THE SECURITIES MARKETS
While historically American investors have shown little interest in foreign securities,(20) within the past ten years investment capital has moved beyond U.S. boundaries at unprecedented rates.(21) In 1990, the large growth in U.S. investments in foreign securities was led primarily by institutional investors seeking higher rates of return as a result of low interest rates and slow corporate earnings growth in the United States.(22) Additionally, individual investors began to recognize that they could lower investment portfolio risk by diversifying holdings to include foreign stock.(23) Fiber optics, satellites, and advances in telecommunications allowed money to move instantaneously from country to country,(24) making the world a smaller place in which to conduct business. Investors worldwide could easily and quickly purchase and sell securities in various national markets.(25)
The rush to foreign markets is illustrated by the following: in the mid-1980s, U.S. investors purchased $2 billion of foreign securities per year, whereas in the third quarter of 1993, they bought $2 billion of foreign securities per week.(26)
Despite the obvious hunger and market for foreign securities, many foreign companies that are eligible to list securities on the New York Stock Exchange remain unlisted.(27) Several reasons account for this reluctance. First, foreign companies, whose own accounting principles, registration, and disclosure practices differ markedly from those that apply to U.S. issuers, often shy away from the strict regulations of the United States.(28) Second, the United States has paired this extensive system of regulation with a liberal enforcement policy.(29) Commentators note that litigation in the United States "tends to be more intrusive, more time-consuming, and more costly than litigation in other countries."(30)
Issuers may also fear that any negative information divulged in the U.S. market(31) will find its way from the United States to the issuer's home market, where it otherwise would have remained hidden.(32) For example, German companies for years refused to submit to U.S. securities laws, unwilling to forgo the use of German accounting practices that permitted companies to increase profits on paper by using hidden reserves(33) to take advantage of the depth, breadth, and liquidity of the U.S. markets.(34) For example in 1993, Daimler-Benz became the first German company to list on the New York Stock Exchange.(35) As required under U.S. law, Daimler-Benz agreed to publicly disclose for the first time hidden reserves maintained on its balance sheet. When it recalculated its 1993 earnings according to U.S. accounting standards, Daimler's profit of $97 million became a loss of $548 million.(36)
Alongside the development of a global capital market, therefore, has come conflict, as multinational securities deals have implicated the laws and interests of more than one sovereign nation.(37) The United States views its jurisdiction expansively, often imposing its regulations on transactions that are essentially foreign.(38) As the United States has become more militant in applying its laws to international securities transactions, other countries have objected.(39) Some countries have retaliated by passing legislation designed to protect domestic transactions while discriminating against U.S. businesses.(40) Additionally, some countries have enacted rules aimed at preventing the encroachment of the U.S. litigation process.(41)
Regulation of foreign securities transactions, thus, requires a careful balance of competing risks. While too little protection increases investment risks for Americans, too much protection reduces investment opportunity, as countries opt out of U.S. business for fear of invoking its stringent regulations.
U.S. Securities Laws
While around-the-clock trading venues and instantaneous multinational communications suggest that capital markets know no national boundaries, regulation of those markets does remain national.(42) The primary U.S. statutes governing the offer, sale, and trading of securities are the Securities Act of 1933 (1933 Act) and the Securities Exchange Act of 1934 (Exchange...