In areas of the law in which statutes give rise to causes of action, the courts have imposed limitations on the extent to which claims may extend to persons and conduct outside the territory of the United States. The Supreme Court, in its 1991 decision in EEOC v. Arabian American Oil Co., set forth the principle that federal statutes are presumed to be territorial unless there is clear Congressional intent to extend the statute extraterritorially. The courts have recognized that the federal securities laws are silent as to their extraterritorial application, but the courts have repeatedly applied them to transactions extending outside the borders of the United States. A decision by the Second Circuit, Itoba Limited v. LEP Group PLC, appears to have enlarged the class of cases to which the courts may apply the securities laws extraterritorially.

'Effects’ and ‘Conduct’ Tests

Until Itoba, conventional wisdom held that, in the Second Circuit, the issue of subject matter jurisdiction in transnational securities claims was determined by the so-called “effects” test and “conduct” test. The former was first announced in Schoenbaum v. Firstbrook. In Schoenbaum, the issuance of stock in Canada to insiders of a Canadian company, allegedly at an unfairly low price, adversely affected the value and the price of its shares listed on the American Stock Exchange, some of which were held by American citizens, including the plaintiff. The court held that the alleged conduct had a sufficiently serious effect upon United States commerce to warrant assertion of jurisdiction for the protection of American investors. According to the court, there was subject matter jurisdiction over alleged violations of the U.S. securities laws, “at least when the transactions involve stock registered and listed on a national securities exchange and are detrimental to the interests of American investors.” On the other hand, plaintiffs have had a more difficult time obtaining jurisdiction on the basis of more generalized economic consequences, such as adverse effects on investor confidence in the United States.

The “conduct” test was originally formulated in Leasco Data Processing Equipment Corp. v. Maxwell. The plaintiff, a corporation with its principal place of business in New York, alleged fraud in its purchase, through British brokers on the London Stock Exchange, of a British corporation whose stock was not registered or traded on United States exchanges. The court said that the adverse effect on an American corporation of the fraudulently induced purchases in England of securities of an English corporation not traded on an organized American securities market was insufficient to be the basis for jurisdiction under Schoenbaum. The Second Circuit nevertheless upheld jurisdiction because significant misrepresentations were made in the United States—i.e., domestic conduct was sufficient to trigger the applicability of the securities laws to a transaction occurring abroad.