Case Analysis: International Law and Investment Regulations

This assignment involves a detailed analysis of the HUNT IRA IRA v. ALLIANCE NORTH AMERICAN GOVERNMENT INCOME TRUST INC case, which was upheld by a higher court except for one allegation related to the interpretation of a statement in a prospectus. The case highlights the importance of including clear and precise clauses in registration statements and prospectuses, as well as the need to specify risks covered by investment companies. It also has implications for governments in formulating legal regulations for companies inviting investment.

Legal Aspects of International
Trade and Enterprise

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
A. Background of the dispute .....................................................................................................1
B. Brief facts of the case ............................................................................................................1
C. The legal issues related with case ..........................................................................................1
D. The arguments of individual parties, with particular emphasis on arguments of defendant.2
E. The tribunal’s decision ..........................................................................................................4
F. The importance of the case in international law....................................................................5
REFERENCES................................................................................................................................7

INTRODUCTION
PLAINTIFFS: SHAREHOLDERS -: ROBERT B. HUNT, IRA; PAUL JAMES, IRA
DEFENDANTS: ALLIANCE NORTH AMERICAN GOVERNMENT INCOME TRUST
INC (here after addressed as 'FUND')
A. Background of the dispute
In this case, shares were purchased in relevant period (from 27th March 1992 to 23rd
December 1994) by plaintiffs. In this case, the defendant Alliance North American Government
Income Trust Inc., started an open ended mutual fund for making investment in government
securities of Canada, US and Mexico. Shares were to be sold pursuant to registration statement
and prospectus. It was clearly stated in prospectus that hedging technique would be sussed by
fund managers for avoidance of adverse effect of currency fluctuations. Another thing which
was mentioned in prospectus particularly, that fund 'may' enter into future and option on future
contracts. Along with this it was also defined that fund had may intended to write covered put
and call options on securities it was dealing in. With devaluation of currency Mexican peso in
December 1994, there was a decline in the net asset value of trust.
B. Brief facts of the case
A case was brought against the fund and relate entities in 1995 in district Court of New
York and California stating that there had been misrepresentation regarding availability of
hedging technique for reduction of currency risk and in actual trust was aware of the fact that this
technique is too expensive to be used. Name of funds was misleading and trust has changed the
objective of investment without taking votes from shareholders. Risks of investing in the
Fund were not properly disclosed, and that the Fund had falsely represented it
would use hedging techniques to reduce currency risk
After that they consolidated their claim in court of New York. In trial court, consolidated
complaint was dismissed stating that no one can be misled by statement printed in prospectus
and does not provide any assurances about use of hedging as described in it and would entertain
a motion for leave to replead.
Plaintiffs filed an application in court to pass motion against defendant alleging that
hedging technique were possible to use and authorities of fund were to use the same for purpose
of reducing foreign currency fluctuation risk and they recklessly discarded the fact that hedging

technique were economically feasible to use. Upon this application was rejected by the district
court to file a motion to replead. Against this, an appeal was made to United States Court of
Appeal and Plaintiffs contented that judge erred in dismissal of their motion for leave to replead.
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C. The legal issues presented
The issues which are presented by plaintiffs in the appeal were:
1. Misleading information to investors by prospectus about use of hedging technique, when
in fact they were not available,
2. Misinterpretation in sales material,
3. non-disclosure in prospectus about mortgages which were backed with derivatives; and
4. improper changes in objectives of investment
D. The arguments of individual parties, with particular emphasis on arguments of
defendant:
Arguments of plaintiffs:
Hedging technique:
In this case, it was contented that representation of fund related with availability of
hedging technique would have mislead investor and is adequately pleads as an actionable claim.
It was clearly stated in the prospectus that funds are exposed to risk through fluctuation in
foreign currency and hedging would reduce the risk and fund is intended to used hedging devise.
Another thing mentioned in prospectus was that Fund intends to write call option for cross
hedging purpose of Government securities which it trades in.
Proposed Amended Complaint:
Allegation was made that a reader when read those passages mentioned in prospectus
mean that hedging devise is available and that Fund would make an attempt to protect the
investment against currency risk. For this actionable claims were made for misrepresentation in
prospectus.
Averment was made by plaintiff that cautionary language in prospectus does not
necessarily disclosed all liabilities as it had warned investors about different constituencies other
than the claim of plaintiffs. It was warned in prospectus that hedging technique might fail but did
not mention that it was not available for use. The contention was related with misrepresentation
of latter statement. It was mentioned that hedging devise might fail but this cannot be used as a
shield for protection of misrepresentation about availability of hedging opportunities.
Plaintiffs claim the prospectuses promised the Fund would attempt to use
hedging devices when in fact it could not. Because we agree a reasonable
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investor could have been misled by the prospectuses, and would have
considered the availability of hedging devices important in deciding whether to
purchase Fund Shares but it was not mentioned anywhere in the prospectus that to reduce
the risk, opportunity of using hedging technique is not available at all. As per the contention of
defendant, prospectus use a clear cautionary language but it was not distinct that warning means
non availability of option to hedge the risk related with investment of security in international
market.
Other claims:
It was contented that, plaintiffs must be allowed to amend their complained to allege that
annual report and advertising material of defendant was also misleading. The brochures which
are one of the most important document for making an investment decision by an investor also
contained unwarranted comparison of various fixed income investment.
Averment was made that a chart includes in annual report of the defendant presents
misleading information about comparison of risk of those Lehman brothers. Another contention
was that they should be allowed to amend their compliment for inclusion of an allegation that
defendant failed to disclose information that Fund would invest in mortgage backed derivatives
called as “collateralized mortgage obligation.” plaintiffs stated that these securities should have
been identified separately in registration statements and prospectus.
The amendment of compliant was decanted on the basis of contention that Fund deviated
the prudent investment risk without taking vote from the shareholders and was in violation of
section 13(a) (3) of Investment Company Act.
Arguments of Defendants:
Hedging technique:
In defence, respondent states that language used in prospectus was cautionary means that
along with providing information it also makes reader responsible for judgement of risk involved
before making any investment. The statements were presented warning form that, Fund might be
ineffective in reducing the risk by using hedging technique. Prospectus gave warning that a
successful investment depends on the ability of the investor to forecast the interest rate and
movement of currency exchange rate correctly.
Another statement from prospectus was that- The Ability of Fund to use its position in
future option, contract and forward contract depends on availability of the liquidity market in
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such instruments. It was not always possible to predict the interest on such securities. If as
secondary market is not available in respect of an option purchased, it might not be possible to
effect the disposal of such instrument to close the transaction. Hence, no assurance was given by
Trust that it would be able to utilise those instruments for hedging as stated in previous
statements in prospectus.
In was held by defendant that this case is controlled by the “Olkey, 98F.3d at 2”, which
was affirmed on 12 (b) (6) where plaintiffs’ complaint was dismissed on the ground that
prospectus provide an extensive cautionary language and it was clearly mentioned that Trust
advisor would not attempt perfect balancing but instead make a claim that interest rate would
rise.
Emphasis was added by defended:
An emphasis was given as 'prospectus must be read as a whole.' the main issue is not that
whether a particular statement taken separately were literally true, but whether the whole
representation by defendant, taken together would have misled an investor about the investment
in securities, this means the fact to be consider here is that, do the whole prospectus when read
in one reading makes a misrepresentation about the availability and use of hedging technique to
reduce the foreign currency change risk. The cautionary languages must be directly relating to
the claim of plaintiff as it clearly states that the investor must be able to evaluate risk related with
investment and fluctuation of currency markets.
Other claims:
It was stated that no investor could have been misled by advertisement when it read along
with prospectus and relate material offered. Defendant made the claim that any investor who
possess a minimum diligence would have easily discovered the truth about the Fraud risk which
is contemplating in the prospectus.
For contention of plaintiffs about the investment in mortgage backed securities it was
held that prospectus contained a broad disclosure about the coverage of these instruments, it was
clearly mentioned that Fund would invest in government guaranteed mortgage related securities.
For violation of section of Investment company Act, it was held that, there can be no violation
because it was not clearly alleged by plaintiffs that there is change in the objective for investment
by Fund.
E. The tribunal’s decision
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With application of contention of defendant for referring case of Olkey, 98F.3d at 2 in
present case, it was held by the court that prospectus did not warn investor with the risk
involved with availability of hedging opportunities. It was said in the court that, a reasonable
number of inverters could have been misled by the prospectus and must have considers the
possibility of availability of hedging technique to protect form the risk of currency value
changes, as this was a main factor for deciding whether to invest in those governments securities
or not.
The court reverses the decision given by tribunal stating that a statement in prospectus do
not create a binding effect when it involve cautionary languages and warning investors about
contingencies other than mentioned in prospectus but it did not give clear meaning that hedging
option was not available and considered it to be an open ended statement.
In court, it was decided that, with amended complaint, a relief can be granted and the
decision of district court is reversed for denying the leave to replead this claim for
misrepresentation and misleading statement in prospectus.
For other claims it was held that plaintiff’s contention was correct and court was in
affirmation of decision of district court.
For this case of “HUNT IRA IRA v. ALLIANCE NORTH AMERICAN
GOVERNMENT INCOME TRUST INC” it was held by the court that motion for leave to
replead can be allowed only for one contention and for other allegation the compliant cannot be
amended and decision given be district court was held in affirmation.
For allegation of misleading statement in prospectus related with availability of opportunity to
use hedging technique for protection of risk against fluctuation in the rates of foreign currency. It
was held that plaintiffs were eligible for seeking remedy and relief can be granted to them. For
all other claimed contention of plaintiffs were rejected and decision of district court was upheld
in form of denial of amendment in compliant thorough motion for leave to replead.
F. The importance or significance of the case in international law:
In the given case law, the higher court upheld the decision of district court, except for one
allegation which was related with interpretation of statement in prospectus. For this decision was
given by the court that in prospectus it was clearly mentioned that hedging technique might not
fully cover the risk but it was not mentioned anywhere that option of hedging is not at all
available to protect the risk.
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Importance of case in international law:
Unambiguous clauses in registration statements and prospectus|:
With decision of this case, one think which was made very clear that in making
prospectus for inviting investment in international securities one must include all the clauses and
condition in very clear and precise language.
Risk cover:
In case, any risk is covered by the investment company, it shall be stated that which risk
is covered, how it will be carried out and the extent up to which it will be protected. With
declaration of decision of present case it became very clear that name and level of risk covered
for investment in international securities must made precise.
Formulation of legislation:
With this decide law, intentional government authorities were assisted in formulation of
legal regulation for companies, which are invited for investment in their securities.
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REFERENCES
Book and Journals
Baber, G., 2017. Essays on International Law. Cambridge Scholars Publishing.
Baker, W., 2017. XIX Bibliography, Textual Criticism, and Reference Works. The Year's Work
in English Studies. 96(1). pp.1335-1468.
Read, D. W. and Bailey, W. A., 2015. A primer on teaching the law of wills, probate, and basic
estate planning documents to business law students. Southern Journal of Business and
Ethics, 7, pp.11-35.
Saxunova, D., 2017, August. GREEN BONDS AS A COMPONENT OF THE SUSTAINABLE
FINANCING AND THEIR PERFORMANCE. In 3rd 2017 Academy of Business and
Emerging Markets (ABEM) Conference (p. 6).
Online
HUNT IRA IRA v. ALLIANCE NORTH AMERICAN GOVERNMENT INCOME TRUST INC.
2018. [Online/Pdf]. Available through
:<https://caselaw.findlaw.com/us-2nd-circuit/1281286.html>.
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