This content is from: Local Insights

United States

Sale of securities

In a world of global finance and capital flows, the extra-territorial reach of national securities laws needs to be clearly defined. In the US, this is not the case. The absence of legislative guidelines has spawned considerable litigation.

The latest case, Europe and Overseas Commodity Traders SA v Banque Paribas London (2nd Cir 1998) involved the sale of shares in a Luxembourg bond futures fund by the London office of Paribas. Shares in the fund were sold by Paribas mostly outside the US. However, Europe and Overseas Commodity Traders SA (EOC), a Panamanian investment company, purchased its shares in the fund on the basis of telephone calls and other communications to its principal, Alan Carr, a Canadian citizen, while Carr was visiting Florida.

When its investment in the fund lost money, EOC sued Paribas in federal court in New York alleging violation of US securities laws because the shares in the fund had never been registered with the SEC and Carr had been misled by Paribas officials. On June 4 1998, the US Court of Appeals for the Second Circuit dismissed EOC's suit, holding that phone calls and facsimiles to a person temporarily on US soil are not sufficient to provide a basis for jurisdiction under US securities laws. In so doing, the Second Circuit narrowed the scope of US securities laws over international transactions.

EOC had two claims. The first was that Paribas had sold it unregistered securities in violation of the Securities Act of 1933. The SEC has issued Regulation S to define the circumstances under which transnational securities offerings need to be registered with the SEC. Regulation S provides that a sale of securities "outside the United States" is exempt from the registration requirement. In determining when a sale occurs outside the US, the court held that the conduct and effects tests should be applied. The tests have been used by courts in suits under the anti-fraud provisions of the securities laws. Applying these tests to the registration requirement, the court found that there was insufficient conduct in the US to invoke the jurisdiction of the 1933 Act. Paribas did not intend to create a market in the US for the fund's shares. The sale to Carr was an isolated transaction. Thus, there was no significant effect in the US either.

These tests were also relevant to EOC's second claim against Paribas under the anti-fraud provisions of the Securities Exchange Act of 1934. As stated by the Second Circuit: "the surrounding circumstances show that no relevant interest of the United States was implicated. In other words, a series of calls to a transient foreign national in the United States is not enough to establish jurisdiction under the conduct test without some additional factor tipping the scales in favour of our jurisdiction."

In effect, the court was saying that Paribas' solicitation of Carr while he was in his vacation home in Florida was de minimis. There was no pattern of solicitation of US residents and no harm was done to US securities markets. But this outcome leaves open the question how much solicitation is needed to justify jurisdiction in the US.

State-owned bank may be sued on foreign letter of credit

The US Court for the second circuit has held that a state-owned foreign bank may be sued in the US on a letter of credit even though all the parties to the transaction were foreign persons. The case, Hanil Bank v PT Bank Negara Indonesia (2nd Cir, June 24 1998), involved a commercial letter of credit issued by Bank Negara in favour of a Korean electronic parts supplier. The purpose of the letter of credit was to pay for goods shipped from Korea to Indonesia.

The Bank Negara letter of credit provided that: "Upon receipt of documents in conformity with the terms of this credit we will reimburse the negotiating bank according to their instruction." Hanil Bank, a Korean bank, negotiated a sight draft presented under the letter of credit and then instructed Bank Negara to remit the amount of the draft in US dollars to its account at Citibank in New York.

When Bank Negara refused, Hanil Bank brought suit in federal court in New York. Bank Negara argued that the US court did not have jurisdiction to hear the case. The Court of Appeals has sustained jurisdiction over the Indonesian bank.

It dismissed Bank Negara's argument that because the bank was owned by the government of Indonesia it enjoyed sovereign immunity and therefore could not be sued in the US. US law recognizes an exception to immunity where a state-owned corporation engages in a commercial activity outside the US which has a direct effect in the US. Both parties stipulated that the issue of a letter of credit was a commercial activity.

The court held that failure to honour a draw under the letter of credit had a direct effect in the US because it was payable into an account in New York. In the court's view it was not necessary for the letter of credit, according to its terms, to be payable in New York or for the beneficiary or the negotiating bank to be US persons. Under the letter of credit, the negotiating bank could select the place of payment, and its selection of New York was a sufficient basis to confer subject matter jurisdiction on the court.

The Court of Appeals also held that the lower court had personal jurisdiction over the Indonesian bank. The appellate court found that there were sufficient contacts with the US because Bank Negara "should reasonably have expected that Hanil Bank would choose a US destination" for reimbursement.

The Court of Appeals seems to be extending concepts of US jurisdiction to allow the lower court to hear this case. In so doing, the court's decision could have an adverse impact on New York's status as an international financial centre. Foreign banks may avoid payment arrangements using accounts in New York for fear of being sued there as a result of the arrangements.

Robert Rendell

© 2021 Euromoney Institutional Investor PLC. For help please see our FAQs.

Instant access to all of our content. Membership Options | 30 Day Trial