Federal Court Dismisses CDO Fraud Case Based on Transactional Locus
The U.S. District Court for the Southern District of New York has dismissed a securities fraud claim made by an offshore hedge fund that purchased CDOs sponsored and sold by a large U.S. investment bank. The Court cited the recent Supreme Court case Morrison v. National Australia Bank, which applies a transactional test, rather than the old conduct and effects test, to determine whether a securities fraud claim is subject to U.S. jurisdiction. The Court opined that the plaintiff did not provide sufficient facts to allow the Court “to draw the reasonable inference that the purchase or sale was made in the United States.” The dismissal without prejudice allows the plaintiff to re-plead its case and provide the relevant facts.
OUR TAKE: This is a very aggressive reading of Morrison because of the substantial sales activities that emanated from the U.S. The lower courts will continue to wrestle with this transactional standard applied to multi-jurisdictional securities fraud cases.