Sovereign Wealth Fund Not Immune From U.S. Securities Fraud Suit

A U.S. court has ruled that a sovereign wealth fund is subject to U.S. securities fraud claims when U.S. investors rely on misrepresentations by the fund.

What You Need To Know

  • Foreign investors can bring a claim if they can show a U.S. investor was harmed.
  • This recent decision offers reassurance to companies doing business with sovereign wealth funds that they have a forum for the resolution of disputes in the U.S. when the fund’s conduct "causes a direct effect in the United States."


The U.S. Court of Appeals for the Second Circuit recently held, in a matter of first impression, that a sovereign wealth fund is not immune from suit in the United States for alleged misrepresentations it made outside the United States concerning the value of securities purchased by at least some U.S. investors.1


The defendant, referred to as SK Fund, is wholly owned by the Republic of Kazakhstan and is the majority owner of BTA Bank, a Kazakhstani corporation. The plaintiffs are three Panamanian investment funds and three individual United States residents who purchased subordinated notes issued by BTA Bank. The notes, which the plaintiffs acquired through their broker in Miami, Florida, were marketed in the U.S. and, according to a BTA Bank presentation, 17% of them were held by U.S. investors.

The plaintiffs claim that when they purchased the notes, they relied on misrepresentations contained in an Information Memorandum issued by BTA Bank. They sued SK Fund in a New York federal court asserting a securities fraud claim under Section 10(b), and "control person" liability under Section 20(b), of the Securities Exchange Act. SK Fund moved to dismiss the suit, claiming immunity under the Federal Sovereign Immunities Act of 1976 (FSIA). The trial court denied the motion, relying on the exception to sovereign immunity for claims based on a sovereign entity’s commercial activity, and the appellate court affirmed.

The Court’s Analysis

The Court of Appeals concluded that the plaintiffs’ claims were based on alleged misrepresentations in the Information Memorandum that were made outside the U.S. in connection with commercial activity outside the U.S. Under those circumstances, the claims would be subject to jurisdiction in the U.S. under an exception to sovereign immunity if the alleged misrepresentations caused a "direct effect" in the U.S.

Although the Court of Appeals had not previously considered this direct-effect issue in the securities fraud context, it relied on earlier cases holding that the locus of a securities fraud claim—the location where the wrong occurs—is where the economic loss is sustained, not where the fraudulent misrepresentations are made. Therefore:

[i]f the locus of a Section 10(b) claim is the place where the plaintiff suffers economic loss from reliance on the defendant’s misrepresentations, then it follows that in a securities fraud case, an FSIA direct effect may be felt where the plaintiff suffers such loss.

The court held that the three plaintiffs who were U.S. residents (and presumably other U.S. holders of the subordinated notes) suffered economic loss in the U.S. Accordingly, the alleged misrepresentations had a direct effect in the U.S. and the claims were not barred by sovereign immunity.

Significantly, the court also held that the Panamanian investment fund plaintiffs were not barred by sovereign immunity even though they had not suffered an economic loss in the U.S. The fact that there were other investors who had suffered a direct effect in the U.S. was sufficient to overcome SK Fund’s sovereign immunity defense. That conclusion followed from the FSIA’s text, which requires only that a sovereign’s conduct causes a direct effect in the United States, not that plaintiff’s claim is based on the conduct’s domestic effect..


1 Atlantica Holdings, Inc. v. Sovereign Wealth Fund Samruk-Kaznya JSC, No. 14-917-cv, slip op., 2016 WL 403445 (2d Cir. Feb. 3, 2016).

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