On Monday, Judge Scheindlin dismissed securities fraud claims brought by a putative class of investors in Optimal, an investment fund that invested 100% of its assets with Bernie Madoff and his firm. On March 6, Judge Scheindlin had issued an Order to Show Cause why the plaintiffs’ securities law claims should not be dismissed in light of the Second Circuit’s decision in <emAbsolute Activist Value Master Fund, Ltd. v. Ficeto, which clarified the scope of extraterritorial application of the Exchange Act after the Supreme Court’s decision in Morrison v. National Australia Bank. In briefing, the plaintiffs argued not that their investments in Optimal took place in the U.S., but instead that their purchases of shares in the fund were “‘in connection with the purchase or sale of a security listed on an American stock exchange’ –namely, Madoff’s purported trades on the New York Stock Exchange.” The plaintiffs sought to rely on the “broad interpretation generally given to the phrase ‘in connection with'” by courts.
Judge Scheindlin rejected this argument. The cases cited by the plaintiffs that broadly interpreted the “in connection with” language were not (like Morrison) determining the extraterritorial reach of the Exchange Act. Indeed, Judge Scheindlin held, a broad construction of that language would conflict with the presumption against extraterritorial reach announced by the Supreme Court in Morrison.
Judge Scheindlin also rejected the plaintiffs’ alternative “economic reality” theory of jurisdiction. Relying on the opinion of Judge Baer in Elliott Associates v. Porsche Automobile Holdings, the plaintiffs argued that their purchase of shares in Optimal was “essentially an investment in the NYSE” through Madoff. Judge Scheindlin distinguished the present case from Elliott Associates — which, she noted, had been argued before the Second Circuit in February and was awaiting decision on the appeal — on the grounds that here the plaintiffs were seeking to expand the reach of the Exchange Act, while Judge Baer’s application of the economic reality test had been based on the presumption against extraterritorial application of the Act. Further, unlike Elliott Associates, which dealt with securities that had a “direct, one-to-one relationship with the U.S. security referenced,” here the investments in Optimal just went into the Madoff fund generally, which (purportedly) purchased a portfolio of securities on the NYSE.
Finally, Judge Scheindlin expressed skepticism about another recent Southern District case, Valentini v. Citigroup, in which Judge Sand used the economic reality test to expand the reach of the Exchange Act to foreign transactions so that parties could not engage in foreign transactions simply to avoid the specter of U.S. law. Judge Scheindlin stated that she could not “reconcile this holding with the presumption against extraterritoriality in Morrison.”