International Securities Litigation: Unique Issues

The increasing internationalization of the securities markets presents novel and difficult issues in both SEC enforcement actions and private damage actions. The SEC frequently must coordinate with international regulators to obtain evidence in its enforcement actions. Earlier this year for example, in the Manterfield case, the SEC found itself litigating in a U.K court, as discussed here. Many of its insider trading cases involve international transactions such as the recent Macdonald case, discussed here, where much of the case occurred in Toronto and some trades were on foreign exchanges or as in the amendment to the complaint in Kohler, discussed here, where all the trades originated in Switzerland.

The same trends are evident in private securities litigation. Recent rulings in In re Vivendi Universal, S.A. Sec. Litig., Civil Action No. 02 Civ. 5571 (S.D.N.Y.), a securities class action, illustrates the difficulties which can arise. Last week the court in Vivendi was asked to reconsider its order requiring Ernst & Young LLP (U.S.) to produce work papers from audits undertaken at the request of Vivendi’s two statutory auditors, the French accounting firms of Ernst & Young et Autres (E&Y France) and Salustro-Reydel (a firm unaffiliated with E&Y (U.S.)).

The district court previously affirmed an order from the magistrate requiring the production 35 cartons of documents generated by E&Y (U.S.) during its audits of Vivendi subsidiaries in this country. The audits were done under the direction of the two French companies. E&Y (U.S.) declined to produce the materials citing French law, which provides that such materials are confidential.

The court resolved the question using a comity analysis which essentially balances the interests involved in the context of the particular case. That analysis applies if there is a true conflict between the U.S. discovery rules and French law. Here, E&Y established that such a conflict exits. French law clearly provides that statutory auditors and their employees and experts are bound by professional secrecy in respect of all facts and actions. In addition, French penal law contains criminal penalties for violating those laws. Since E&Y was an expert within the meaning of the statute, there is a clear conflict between the secrecy requirements of French law and U.S. discovery rules. In reaching this conclusion the court rejected plaintiff’s claims that the documents should be produced simply because the court has jurisdiction over E&Y (U.S.) and the documents.

Principles of comity balance in favor of production, the court concluded. Here, both the U.S. and French legal interests are strong. There is a strong interest in favor of enforcing the federal securities laws, the court found. At the same time the French courts, in considering a request by plaintiffs for the documents at issue here, concluded that they could not be produced. This evidences a strong interest under French law.

The balance tips in favor of production however, since the papers were prepared by a U.S. auditor and are in this country. This is particularly true here, the court found, since there is no indication that the French government would prosecute E&Y (U.S.) in this country for producing the materials in the United States.

If E&Y (U.S.) had confidential information from the French corporations, the situation might be different the district court concluded. Here however there was no indication that E&Y (U.S.) had such materials. Presumably the 35 cartons of documents relate to an audit of the U.S. entities under U.S. standards.

The documents here are also reasonably related to the case and thus should be produced. The court rejected an argument by E&Y (U.S.) that plaintiffs should be required to demonstrate a compelling interest in the documents before they are produced. Accordingly, the court affirmed the order of the magistrate to produce the documents.

The court’s order was not the last round in this international saga, however. E&Y (U.S.) moved for reconsideration of the production order. In its petition, the accounting firm argued that the court did not properly consider the rulings of two French courts on this issue. Those proceedings were initiated by plaintiffs after initially requesting the documents here. The French courts concluded that the documents could not be produced. Plaintiffs chose not to appeal those rulings. Accordingly, principles of collateral estoppel suggest that the rulings of the French courts be followed and the documents not produced. This petition is pending before the court and, in probability, is only the next round in this international battle.