United States: Three Options For Institutional Investors Pursuing Claims Against Non-U.S. Issuers In The Wake Of Morrison And City Of Pontiac

In its 2010 Morrison decision, the Supreme Court decided that Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) ("Section 10(b)"),only reaches "transactions in securities listed on domestic exchanges" and "domestic transactions in other securities," regardless of whether the alleged fraudulent conduct occurred within the United States or caused a substantial effect within the United States.  Morrison v. National Australian Bank Ltd., 561 U.S. 247, 266 (2010); contrast Alfadda v. Fenn, 935 F.2d 475, 478-79 (2d Cir. 1991).   

Morrison did not foreclose Section 10(b) claims for purchases of American Depository Shares (ADS) or American Depository Receipts (ADR).  Indeed, investor class actions asserting Section 10(b) claims for ADS or ADR purchases are not uncommon.  As a result of this door left open by Morrison, both foreign and U.S. investors have argued that they should be able to pursue Section 10(b) claims for purchases of common stock on a foreign exchange so long as the company has shares cross-listed on a U.S. exchange.  This became known as "listing theory."

But the Second Circuit recently rejected this "listing theory"  in City of Pontiac Policemen's and Firemen's Retirement System et al. v. UBS AG et al., No. 12-4355 (2d Cir. May 6, 2014).  The court found that the "listing theory" is "irreconcilable" with Morrison because Morrison "evinces a concern with the location of the securities transaction and not the location of an exchange where the security may be dually listed." 

So, with at least one circuit rejecting the "listing theory," what options remain for institutional investors seeking to recover losses resulting from frauds committed by non-U.S. issuers?

(1) Seek Recovery in Overseas Courts

One undeniable result of Morrison is that securities fraud cases in non-U.S. courts are increasing.  Most times, an action in a foreign jurisdiction will be an investor's only potential source of recovery for losses on common stock purchases not made on a U.S. exchange. 

However, investors not accustomed to foreign courts must tread carefully.  For example, an investor usually has to be a named plaintiff in overseas cases.  Additionally, many foreign jurisdictions do not follow the "American rule," meaning that in these jurisdictions, the losing party may have to pay the winning party's attorneys' fees and costs.  Also, many jurisdictions bar attorneys from financing their clients' cases, resulting in large cases being funded by third parties.  These litigation funders often take a large share of any recovery, on top of the share taken by the attorneys for fees, and require investors to sign "funding agreements" in order to be eligible to take part in a case.

(2) Bring Common Law Fraud Claims In United States Courts

The Securities Litigation Uniform Standards Act of 1998 precludes common law claims in securities fraud class actions.  But one limited option for U.S. investors is to opt-out of a securities class action and maintain a separate claim based on common law. 

For example, in the BP Securities Litigation now progressing through the United States District Court for the Southern District of Texas, the court ruled that investors must bring claims under English Common law seeking recovery for losses in BP common shares, which trade on the London Stock Exchange, because England had "the most significant relationship" to the claims and because "the Court is certainly capable of applying English law, which shares so many strong similarities with U.S. law due to a common heritage."  In re BP Sec. Litig., MDL No. 10-md-2185 (S.D. Tex. Dec. 5, 2013).

In contrast, the United States District Court for the Central District of California, declined to exercise jurisdiction over Japanese law claims in the case arising out of Toyota's alleged misrepresentations about its vehicles "unintended acceleration."  In re Toyota Motor Corp. Sec. Litig., No. 2:10-cv-00922 (C.D. Cal. July 7, 2011).  In the Toyota case, the Court noted that "[t]he clear underlying rationale of the Supreme Court's decision in [Morrison] is that foreign governments have the right to decide how to regulate their own securities markets," and that "respect for foreign law would be completely subverted if foreign claims were allowed to be piggybacked into virtually every American securities fraud case."  Thus, the Court concluded:  "[w]hile there may be instances where it is appropriate to exercise supplemental jurisdiction over foreign securities fraud claims, any reasonable reading of Morrison suggests that those instances will be rare."

(3) Recovery of Common Share Losses Through SEC Settlements

SEC settlements with non-U.S. issuers often include ADS or ADR purchasers in the plan of distribution of the settlement funds.  But what about including common shares purchased on a foreign exchange in a SEC settlement's plan of distribution? Notably, while Morrison eliminated investors' ability to pursue a private action under Section 10(b) for securities trading on a non-U.S. exchange, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") amended the Exchange Act to grant "extraterritorial jurisdiction" in actions brought by the SEC. 

Specifically, Section 929P(b)(2)(A) of Dodd-Frank grants U.S. District Court jurisdiction over "an action or proceeding brought or instituted by the Commission or the United States" involving "conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors" or "conduct occurring outside the United States that has a foreseeable substantial effect within the United States."

As a result and in some circumstances, the SEC could include common stock purchasers within the plan of distribution in a settlement with a non-U.S. issuer.  However, while the plan of distribution in some case may cover common stock traded on a foreign exchange, the plan may only cover U.S. purchasers because an important rationale of including common stock would be to protect U.S. investors. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Joel D. Rothman
Similar Articles
Relevancy Powered by MondaqAI
Katten Muchin Rosenman LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Katten Muchin Rosenman LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions