On 6 May 2014, the federal appellate court in New York considered two questions of first impression arising out of the US Supreme Court's landmark decision in Morrison v. National Australia Bank precluding certain extraterritorial applications of Section 10(b) of the Exchange Act. The court here considered whether Morrison bars such claims related to (1) foreign-issued securities that were purchased by foreign plaintiffs on a foreign exchange, but were cross-listed on a domestic exchange (i.e., the "listing theory") and (2) US investors who purchased foreign securities on a foreign exchange through a buy order that was placed in the US The court in City of Pontiac held that Morrison precludes both types of claims.
In Morrison, the Supreme Court ruled that Section 10(b) does not apply extraterritorially to so-called "foreign-cubed" claims―i.e., claims where "(1) foreign plaintiffs [are] suing (2) a foreign issuer in an American court for violations of American securities laws based on securities transactions in (3) foreign countries." The court in City of Pontiac explained why, based on Morrison's underlying rationale, two new factual variations that were not considered in Morrison are also not allowed. Morrison does not allow claims by foreign investors based on foreign securities that are cross-listed on a US exchange because Morrison's focus is on "the location of the securities transaction and not the location of an exchange where the security may be dually listed." The court in City of Pontiac also ruled that Section 10(b) does not apply to the "mere placement of a buy order" in the US by a US entity to purchase foreign securities on a foreign exchange. Using the standard from a recent ruling, the court reasoned that a buy order being placed in the US does not mean that the buyer incurs "irrevocable liability" within the US when the transaction is then executed on a foreign exchange. Moreover, "a purchaser's citizenship or residency does not affect where a transaction occurs."
Taken together, these two novel applications of Morrison should give further comfort to parties transacting in foreign securities on foreign exchanges that Section 10(b) applies only to truly domestic transactions. The fact that the securities are concurrently listed on a US exchange, that the purchaser is a US entity, or even that the buy order is placed in the US are not enough (at least according to the federal appellate court in New York) to bring foreign transactions within the ambit of Section 10(b).
Further information on City of Pontiac is available at:
http://www.shearman.com/en/newsinsights/publications/2014/05/second-circuit-rejects-listing-theory
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