Sweeping away more than 40 years of lower court precedent, the U.S. Supreme Court concluded in Morrison v. National Australia Bank Ltd.1 that § 10(b) of the Securities Exchange Act of 1934 (Exchange Act) does not apply extraterritorially. Instead, the Court ruled, § 10(b) and SEC Rule 10b-5 apply only to transactions in securities listed on U.S. domestic exchanges and to purchases or sales of unregistered securities in the United States.
Consequently, the high court rejected the "conduct" and "effects" tests that had been accepted by the circuit courts of appeal in the four decades since the United States Court of Appeals for the Second Circuit originally articulated the tests in Schoenbaum v. Firstbrook and Leasco Data Processing Equipment Corp. v. Maxwell. Although concurring in the result, Justice Stevens, joined by Justice Ginsburg, dissented from the Court's announcement of the new "transactional test," and "'the Court's continuing campaign to render the private cause of action under § 10(b) toothless.'"2
The impact of the Morrison decision is significant. Because plaintiffs can no longer bring securities fraud suits in U.S. courts against companies listed solely on foreign exchanges, public companies may weigh this as a factor in deciding whether to exclusively list their securities abroad.
The Court's bright-line test seemingly went further than required to affirm the dismissal by the courts below of this so-called foreign-cubed lawsuit involving foreign plaintiff shareholders of a foreign defendant corporation whose shares are traded on a foreign exchange. The plaintiffs in Morrison are Australian residents who purchased "ordinary shares" of defendant National Australia Bank Ltd. (NAB), Australia's largest bank. NAB's ordinary shares are traded on the Australian Stock Exchange and other foreign securities exchanges, but not on any exchange in the United States. To invoke § 10(b), the plaintiffs alleged that the fraud occurred in the United States because NAB's annual reports materially misrepresented the financial condition of its subsidiary HomeSide Lending, Inc., headquartered in Florida. The district court dismissed the action for lack of subject-matter jurisdiction because the acts alleged to have taken place in the United States were "at most, a link in the chain of an alleged overall securities fraud scheme that culminated abroad." The Second Circuit affirmed on similar grounds, concluding that the acts performed in the United States did not comprise the "heart of the alleged fraud."
As a threshold matter, the Supreme Court ruled, contrary to the Second Circuit's analysis, that the extraterritorial reach of § 10(b) is not one of subject-matter jurisdiction. The Court held that federal district courts have jurisdiction under § 27 of the Exchange Act to adjudicate the question of extraterritorial reach.
Turning to the merits, the Court relied on the "longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States."3 Starting with a presumption against extraterritoriality, the Court reasoned that "the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States." The Court observed that § 10(b) does not punish all deceptive conduct, but only deceptive conduct "'in connection with the purchase or sale of any securities registered on a national securities exchange or any security not so registered.'"4
The Morrison decision represents the latest in a line of Supreme Court rulings over the past several years that have placed restraints on the scope of § 10(b) lawsuits. This result appears intended to curtail classaction securities suits. Responding to arguments that the United States may become a "Barbary Coast" for those perpetrating frauds on foreign securities markets, the Court observed that "some fear that it has become a Shangri-La of class-action litigation for lawyers representing those allegedly cheated in foreign securities markets."
Footnotes
1 No. 08-1191 (U.S. June 24, 2010).
2 No. 08-1191 (Stevens, J., concurring in the judgment), slip op. at 14, quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 175 (2008) (Stevens, J., dissenting).
3 Id., quoting EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991).
4 Id., quoting 15 U.S.C. § 78j(b).
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
