Friedman Kaplan Attorneys Publish NYLJ Article on Remedies for Defrauded Offshore-Fund Investors

November 30, 2011

The New York Law Journal recently published an article by Friedman Kaplan partner Scott M. Berman and associate Robert S. Landy analyzing the effects of the Supreme Court's 2010 decision in Morrison v. Australia National Bank and the Securities Litigation Uniform Standards Act of 1998 (SLUSA) on the ability of investors in offshore investment funds to bring actions against U.S.-based investment managers for fraud, breach of fiduciary duty, and other malfeasance.

In the article, titled 'Morrison,' SLUSA Make 'Group Action' Best Option for Offshore Fund Fraud, the authors analyze Morrison, which held that there is no private right of action under the Securities Exchange Act of 1934 unless the claim involves a purchase or sale of a security in a domestic transaction. The authors note that federal district courts have had difficulty determining whether an investment in an offshore fund is a "domestic transaction" - and whether, therefore, a federal securities claim by an investor would be barred by Morrison - since both U.S. and foreign managers and service providers may be responsible for processing investors' subscriptions and redemptions. Because of this uncertainty, the authors argue that investors in offshore funds would be better off pursuing state-law claims. However, SLUSA prohibits groups or classes of more than fifty plaintiffs from pursuing state-law claims premised on fraudulent or manipulative practices in connection with the purchase or sale of securities traded on U.S. exchanges. This prohibition has been interpreted by some courts to extend to investments in offshore funds that invest in securities traded on U.S. exchanges.

The authors argue that the combination of Morrison and SLUSA has created a "devastating whipsaw" for investors in offshore funds who are victims of fraud but who may find themselves prohibited from bringing securities claims under both federal and state law. They conclude that the best option for these investors is to band together in groups of 50 or fewer plaintiffs and prosecute actions based on state law.