Christopher Robertson and Erik Weibust Published in The Hedge Fund Law Report
"Are There Avenues for Recovery in United States Courts for Overseas Hedge Fund Losses?"

Christopher Robertson and Erik Weibust's article "Are There Avenues for Recovery in United States Courts for Overseas Hedge Fund Losses?," was published in the July 23, 2009 issue of The Hedge Fund Law Report. Their article discusses what happens when a foreign company that only trades its securities on a foreign exchange commits acts that would constitute violations of the anti-fraud provisions of the U.S. securities laws, but are not necessarily violations of its own country's securities laws, and American investors are harmed. They explain that provided American investors are substantially affected by a foreign company's wrongful acts, even if those acts are committed exclusively overseas, the U.S. courts may, and often will, apply the anti-fraud provisions of the U.S. securities laws to such claims.

To illustrate this issue, the attorneys discuss how several large hedge funds in the United States lost a substantial amount of money in 2008 relying on public statements that Porsche Automobil Holding SE (Porsche) made regarding its ownership interest in Volkswagen AG (Volkswagen). The attorneys explain: "Believing previous public statements by Porsche that it had no intention of taking a majority interest in Volkswagen, and with the available data indicating that Volkswagen was highly overvalued, many hedge funds shorted Volkswagen's stock." However, Porsche later announced that is had, in fact, taken majority interest in Volkswagen, causing the price of Volkswagen shares to skyrocket. According to Chris and Erik, the Porsche/Volkswagen issue comes down to the question of "whether a court in the United States would apply the United States securities laws to a case involving the purchase by a United States hedge fund of shares of a foreign company on a foreign exchange; that is, whether the court would exercise subject matter jurisdiction and keep the claim in the United States as opposed to forcing any such claim to be brought by the hedge fund in Germany."

In the article, the authors note, "A review of several recent cases strongly suggests that a United States court has the authority to do so, provided it could be shown that the United States hedge fund investors (as well as other American investors) were substantially affected by Porsche's misleading statements, even if those statements originated from Europe." They conclude, "This issue is of particular importance to hedge funds, as they are the most likely American investors to buy and sell shares of foreign companies that trade solely on foreign stock exchanges, and they have both the high level sophistication and large amount of capital required to do so effectively."