In what appears to be the first example of securities plaintiffs getting a green light to litigate in state court after their federal court case was bounced under the U.S. Supreme Court ruling in Morrison v. National Australia Bank, New York State Supreme Court Justice Charles Ramos ruled Wednesday that several hedge funds can proceed with claims that they lost more than $1 billion as a result of Porsche’s allegedly deceptive manipulation of the market for Volkswagen shares in 2008. But the 22-page opinion isn’t just good news for investors with fraud claims against foreign defendants. It’s also a rare judicial boost for so-called sophisticated investors, who’ve been smacked down this year by New York state and federal appeals courts.
The hedge funds originally sued Porsche in federal court in Manhattan, claiming that Porsche deceived them and the rest of the market when it denied intentions to buy up more than a simple majority of Volkswagen shares. Based on those reports – and significant additional due diligence – the hedge funds shorted Volkswagen, believing its share price to be inflated. When Porsche subsequently announced its intention to buy up essentially all of the Volkswagen shares on the open market in a takeover bid, the price skyrocketed and the short-sellers were squeezed. Their lawyers – including Bartlit Beck Herman Palenchar & Scott; Kleinberg, Kaplan, Wolff & Cohen; Dowd Bennett; and Quinn Emanuel Urquhart & Sullivan – asserted state-law fraud as well as federal securities claims, but when U.S. District Judge Harold Baer ruled in 2010 that the securities claims were barred by Morrison, he dismissed the entire case.
The hedge funds then refiled the fraud claims in state court, blazing a path that other Morrison refugees have since traveled. J.B. Heaton of Bartlit Beck, who represents Glenhill Capital, Greenlight Capital, Royal Capital and Tiger Global in this case, said that the state-court route doesn’t make sense for every securities plaintiff bounced out of federal court, since, generally speaking, investors can’t band together in a securities class action in state court. But for investors like his clients, who have sizable damages claims and the resources to litigate them, state court presented a viable alternative forum.
Porsche’s lawyers at Sullivan & Cromwell disagreed, but to no avail. In Porsche’s original motion to dismiss the hedge funds’ case, the company argued that New York state court was not the appropriate forum to litigate claims involving a German defendant’s purchases of German-listed stock. Those facts may have been enough to persuade Baer in federal court to invoke Morrison, but they didn’t convince Ramos in state court. In Wednesday’s ruling, Ramos focused instead on the hedge funds’ ties to New York and their New York-based due diligence on Porsche’s representations.
The state judge, in fact, adopted parochial reasoning that’s quite a contrast to the U.S. Supreme Court’s hands-off approach in Morrison. “The court rejects Porsche’s characterization of the issues in this action as the manipulation of the German stock market and the trade of German securities,” Ramos wrote. “At the core of plaintiffs’ claims [is] whether New York courts may hold responsible a foreign entity, who conducts business globally, for fraudulent misrepresentations purportedly aimed at New York plaintiffs. New York clearly has a vested interest in such an action.” (You can expect to see that language crop up in briefs by other Morrison refugees in state court.)