In a decision that could foreclose a possible way for claimants to try  to circumvent the U.S. Supreme Court’s decision in the Morrison v. National Australia Bank case, a New York appellate court has reversed a lower court and dismissed the fraud suit short-seller hedge funds had brought in New York state court against Porsche on forum non conveniens grounds. A copy of the December 27, 2012 New York Supreme Court Appellate Court, First Department, decision can be found here (starting at page 138).


The appellate court’s decision is the latest step in an effort by short-seller hedge funds to pursue claims in the U.S. against Porsche. As discussed here, the  hedge funds first filed an action in the Southern District of New York  alleging that during 2008, Porsche and certain of its executives made a series of misrepresentations in which Porsche claimed that it did not intend to acquire control of Volkswagen, while at the same time it allegedly was secretly accumulating VW shares with the purpose of obtaining control. In October 2008, after Porsche disclosed its intent to obtain control of VW, VW’s share price rose significantly and the short sellers suffered significant trading losses. The short-sellers federal court complaint asserted claims under the U.S. securities laws and also for common law fraud.


As discussed here, on December 30, 2012, Southern District of New York Judge Harold Baer dismissed the securities claims  based on Morrison, on the grounds that the subject transactions — securities-based swap agreements — represented a foreign transaction and are therefore not within the purview of the U.S. securities laws. Judge Baer declined to exercise supplemental jurisdiction over the common law claims. Judge Baer’s ruling is now on appeal to the Second Circuit.


In March 2011, several of the same short sellers launched a separate action in New York Supreme Court against Porsche alleging claims for fraud and unjust enrichment. Porsche moved to dismiss the state court complaint on the grounds of forum non conveniens and for failure to state a claim. Porsche also moved in the alternative to stay the state court action pending the outcome of the Second Circuit appeal in the federal court action. As discussed here, on August 6, 2012, New York (New York County) Supreme Court Judge Charles E. Ramos rejected Porsche’s motion to dismiss the case on forum non conveniens ground. A copy of Judge Ramos’s decision can be found here. Porsche filed an appeal.


In its December 27 opinion, a five-Justice panel of the appellate division unanimously reversed Judge Ramos’s decision and entered a judgment of dismissal in Porsche’s favor. In dismissing on the grounds that New York was not an appropriate forum, the appellate court noted that the only alleged connections between the action and New York “are the phone calls between plaintiffs in New York and a representative of the defendant in Germany” and “emails sent to plaintiffs in New York but generally disseminated to parties elsewhere.”


The appellate court state that “these connections failed to create a substantial nexus with New York, given that the events of the underlying transaction otherwise occurred entirely in a foreign jurisdiction.” In light of this “inadequate connection” between the transaction and New York, as well as “the fact that defendant and most plaintiffs are not New York residents, the VW stock is traded only on foreign exchanges, many of the witnesses and documents are located in Germany, which has stated its interest in the underlying events and provides an adequate alternative forum,” Porsche has met its “heavy burden” to establish that New York is “an inconvenient forum.”


The hedge fund claimants may well attempt to appeal the dismissal to the New York Court of Appeals. IF they do not appeal or if the intermediate appellate court’s ruling stands, the ruling will mean the hedge funds will not be able to pursue their claims in New York state court. The outcome will also undercut the possibility that the hedge fund plaintiffs might have found a way to circumvent Morrison. Judge Ramos’s prior ruling, which would have allowed the hedge funds to pursue their claims in New York state court, seemed to suggest that the hedge funds had found a way to pursue claims against the non-U.S. defendant in U.S. court, by asserting common law claims not subject to Morrison’s constraints.


The appellate court’s conclusion that the hedge funds had not established that New York was a convenient forum for this case suggests that the hedge funds may not have found a way around Morrison after all. Of course, it is possible that they may yet be further appeals in this case and so the final story may yet to be told. In that regard, it is interesting to note that the appellate court did not even discuss in its opinion Judge Ramos’s statement in his ruling that the question is whether New York courts “may hold responsible a foreign entity, who conducts business globally, for fraudulent misrepresentation purportedly aimed at New York plaintiffs.” New York, Judge Ramos said, “clearly has a vested interest in such an action.” The appellate court apparently saw it differently.


While the Second Circuit appeal in the federal court case remains pending, on March 1, 2012 the Second Circuit did release its opinion in the Absolute Activist Value Master Fund decision, which provided significant interpretation of Morrison and, as discussed here, could have a substantial impact on the Second Circuit appeal in the Porsche case.


Yet another alternative for investors who want to pursue claims against Porsche would be to sue them in the company’s home country courts – which is what at least some investors have done. As discussed here, other investors have also initiated an action against Porsche in Stuttgart based on the same allegations. According to news reports, Porsche recently won a procedural skirmish as part of its ongoing efforts to have investors’ civil claim heard in German courts.


As noted here, on December 18, 2012, prosecutors in Germany filed criminal charges against former Porsche CEO Wendelin Wiedeking and ex-Chief Financial Officer Holger Haerter alleging that they had made misrepresentations in order to manipulate VW’s shares in connection with Porsche’s efforts to take over VW.


Susan Beck’s December 27, 2012 Am Law Litigation Daily article about the New York appelllate court’s ruling in the Porsche case can be found here.