Sovereign Immunity

• Author: International Law Group

Gary Filler and Lawrence Perlman (Filler plaintiffs), as well as Janet and James Baker (Baker plaintiffs) sued various parties for alleged securities fraud. The Filler plaintiffs of the TRA Rights Trust are the successors-in-interest of Seagate Technology, Inc. (Seagate). They own the claims arising out of Seagate's June 2000 acquisition of stock in the Belgian software company Lernhout & Hauspie Speech Products, N.V. (L/H). The Baker plaintiffs acquired L/H stock through a stock swap for their interest in another company.

It later surfaced that L/H may have overstated its earnings by reporting income from non-existent customers. The Securities and Exchange Commission (SEC) is investigating the matter, and Belgian police have arrested several suspects. As a result, the price of L/H stock fell by 95 percent.

Defendants, Hanvit Bank and Chohung Bank, are South Korean commercial banks that allegedly took part in the securities fraud by lying to their auditors about L/H's revenue. Before 1999, they were private entities. Due to financial problems, however, they both received capital infusions through the Korean Deposit Insurance Corporation (KDIC). This is a Korean government institution created by Korea's Depositor Protection Act and by presidential decree. When plaintiffs filed these actions, the KDIC owned 80 percent of Chohung Bank, and 100 percent of Hanvit Bank (but through a holding company).

The district court initially granted the banks immunity under the Foreign Sovereign Immunities Act (FSIA) [28 U.S.C. Sections 1602ff.] and dismissed the complaints. Soon afterwards, the Supreme Court held in Dole Food Co. v. Patrickson, 538 U.S. 468 (2003) that a foreign state itself must directly own a majority of a company's shares for the latter to qualify as an instrumentality of the state under the FSIA. (See 2003 International Law Update 71).

The plaintiffs accordingly moved for reconsideration of the immunity issue. The district court later vacated its previous dismissals because the South Korean government owned the defendant banks only indirectly. Defendant banks appealed from the interlocutory orders of the district court finding that they were not entitled to sovereign immunity. The U.S. Court of Appeals for the Second Circuit affirms.

The Court reminds the parties that the FSIA is the sole basis for obtaining jurisdiction over a foreign state in U.S. courts. The definition of "foreign state" in 28 U.S.C. Section 1603 includes an "agency...