Dechert's securities class actions report. Courtesy photo

A report published by Dechert earlier this month indicates that the plaintiffs bar is increasingly targeting foreign companies with little connection to the U.S. market as defendants in securities class action suits filed in U.S. courts.

David Kistenbroker, a partner and global co-leader of Dechert's white-collar and securities litigation practice in Chicago, said from 2010 to 2016 there was an average of 29 class action securities suits against non-U.S. issuers filed in U.S. courts each year. In 2017, according to the report, 57 of those cases were filed, and in 2018, 54 were filed.

The 2018 number accounts for 13 percent of the 403 securities fraud class action suits filed, according to the report. The suits against nonforeign issuers span industries and causes of action range from alleged misrepresentations of transactions and misrepresentation of business operations to allegations of bribery and Ponzi schemes.

Kistenbroker said he cannot say for sure as to why the number of cases against non-U.S. issuers has increased.

“My hunch is that securities litigation has gone global,” Kistenbroker said. “Laws of various nation-states in the EU and U.K. are now accommodating what they call 'collective actions.'”

Dana Klinges, a partner at Duane Morris in Philadelphia, said these kinds of suits are what come with participating in the U.S. market. She said foreign companies are often surprised at how often they face class action securities litigation in the U.S. because the rest of the world is not used to the litigious culture that exists in the U.S.

“If you're going to file with the SEC, given our system, I don't think it's any surprise that you may face litigation,” Klinges said.

The plaintiffs bar has had to get creative in finding ways to sue non-U.S. issuers, Kistenbroker said. He explained that in 2010 the U.S. Supreme Court ruled in Morrison v. Australian National Bank, which ended what was referred to as “F Cubed” cases. Those cases, Kistenbroker said, involved foreign issuers whose stock was traded on a foreign exchange and purchased by foreign citizens as investor stockholders. After Morrison, Kistenbroker said the plaintiffs bar found it was able to connect non-U.S. issuers to the American market through American Depository Receipts, or ADRs.

“There are some non-U.S. issuers who actually list stock on U.S. exchanges. We can readily understand why U.S. securities laws would apply to them,” Kistenbroker said. “But a whole host of them who don't do that have ADRs in the United States and those ADRs are being found by courts in the U.S. to apply U.S. securities laws to those non-U.S. issuers.”

With the number of suits increasing, Kistenbroker said foreign issuers should be aware if they're exposing themselves to the U.S. market through ADRs.

“The ADRs are being found sufficient to apply to U.S. securities laws and that understanding to a non-U.S. issuer is critically important,” Kistenbroker said.

The report indicates that when it comes to motions to dismiss these kinds of securities class action suits, the courts have been mixed. Klinges said there is not a real way to mitigate the risk of becoming a defendant in one of these class action suits.

“There is no foolproof way to mitigate this risk,” Klinges said. “Aside from not participating in the United States capital markets, which may not be appealing to many.”