The US must not allow its courts to accept ‘f-cubed’ cases, where foreign investors can sue foreign companies after they lose money on shares bought on foreign stock exchanges, City lawyers have warned.

In a joint response to a US Securities and Exchange Commission (SEC) consultation, the City of London Law Society (CoLLS) and the Law Society’s company law committee said that allowing foreign shareholders to bring these cases ‘has the potential to damage international relations irreparably by ignoring the sovereignty of other states’.

Congress has instructed the SEC to examine whether, and to what extent, private parties should be able to bring f-cubed actions. Non-US shareholders who lost money during the financial crisis had sought to use these actions to recover their losses.

Chancery Lane and CoLLS urged the US Congress to follow the US Supreme Court’s decision in Morrison v National Australia Bank, where the court ruled that f-cubed cases cannot be brought in US courts, even if a fraud originated in the US.

The decision confirmed that investors who purchase securities abroad are limited to protection from domestic anti-fraud provisions.

In their joint response, they said: ‘It is not in the SEC’s or the US’s interests to open US courts to the extraterritorial application of the securities laws in private actions.

'We request the SEC to urge Congress not to expand the extraterritorial application of anti-fraud securities legislation to private rights of action, but instead to urge Congress to permit the SEC to enhance international cooperation among regulators, to achieve closer monitoring of financial markets and greater protection of investors.

‘The US has long been committed to the norms of international relations that recognise and support the sovereignty of each state and individual states’ rights to legislate as they see fit.

The UK has developed, and maintains, adequate remedies for breaches of securities laws.

Robust regulation and enforcement by the FSA and judicial sanction has established an effective and well-respected system for dealing with alleged securities fraud.

‘Private litigation in the US in this context has in the past resulted in conflicting and inconsistent decisions that frustrate informed decision-making and the efficient allocation of capital resources.’