U.S. Court Says Foreign Wealth Funds Not Always Immune from U.S. Fraud Claims

By | February 8, 2016

Foreign sovereign wealth funds are not automatically immune from U.S. lawsuits claiming that they defrauded investors into buying securities in the United States by making misleading statements outside the country, the federal appeals court in Manhattan ruled.

The 2nd U.S. Circuit Court of Appeals said the funds are not shielded by the Foreign Sovereign Immunities Act from securities fraud claims over alleged misrepresentations that cause a “direct effect” in the United States.

Wednesday’s 3-0 decision is a victory for U.S. investors who sought to hold Kazakhstan’s Samruk-Kazyna JSC fund liable for misstatements about bonds sold by BTA Bank, in which it held a 75 percent stake, that later went into default.

It may also make it easier for U.S. investors to pursue some claims over alleged foreign fraud, despite a series of recent rulings limiting the reach of domestic laws.

Lawyers for the Kazakh fund and the plaintiffs did not respond to requests for comment or had no immediate comment.

The plaintiffs, including investment funds as well as individuals in Florida and Illinois, had bought subordinated BTA notes issued through a 2010 debt restructuring.

They claimed that the Kazakh fund later siphoned hundreds of millions of dollars of interest payments from BTA, despite having promised in an offering memorandum for the notes that such payments would not be made until the notes were paid off.

The plaintiffs also said Samruk-Kazyna later falsely assured in the last few months before BTA’s January 2012 default that the bank would remain viable. Instead, BTA underwent a second restructuring, and the Kazakh fund took a 97 percent stake.

In a 42-page decision, Circuit Judge Debra Ann Livingston said there was enough evidence to show that Samruk-Kazyna expected U.S. investors to buy BTA’s notes, and that their losses stemmed from the alleged misstatements.

Livingston said the case resembled product liability litigation where courts have consistently found that the “direct effect” requirement is satisfied when plaintiffs suffer injuries in the United States from products made elsewhere.

“If the locus of a (securities fraud) claim is the place where the plaintiff suffers economic loss from reliance on the defendant’s misrepresentations,” Livingston wrote, “then it follows that in a securities fraud case, an FSIA direct effect may be felt where the plaintiff suffers such loss.”

Wednesday’s decision upheld a March 2014 ruling by U.S. District Judge Jesse Furman in Manhattan. The case now returns to his court.

The case is Atlantica Holdings Inc et al v. Sovereign Wealth Fund Samruk-Kazyna JSC, 2nd U.S. Circuit Court of Appeals, No. 14-917.

(Reporting by Jonathan Stempel in New York; Editing by Tom Brown)

Topics USA Claims Fraud

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