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Recent Developments Concerning Purchases of Stock on Non-United States Stock Exchanges
F³•Foreign Plaintiffs who transacted in
•Foreign shares on a
•Foreign exchange
F-Cubed Transactions involve Non-United States entities that purchase the stock of a Non-United States
company on a Non-United States stock exchange.
In the case of Morrison v. National Austrialia Bank, the United States Supreme Court
recently had the opportunity to determine whether F-Cubed transactions are governed
by the United States Securities Laws.
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ISSUE
“[W]hether § 10(b) of the Securities Exchange Act of 1934 provides a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges.”
• Determination of extraterritorial reach of Sections 10(b) is a question of subject-matter jurisdiction. Courts used to apply the “conduct” and the “effects” tests.
Pre- MorrisonThe “Conduct Test” & The “Effects Test”
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The "conduct test”
A United States federal court had subject matter jurisdiction if the defendant's conduct in the United States was more than merely preparatory to the fraud, and particular acts or culpable failures to act within the United States directly caused losses to foreign investors abroad.
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The “effects test”
A United States federal court also had jurisdiction where illegal activity abroad caused a "substantial effect" within the United States.
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The Changing Landscape
Justices expressed concerns regarding the impact adjudicating the case in the U.S. would have on the efforts of foreign nations to regulate their own securities markets, whether foreign nations would even respect a U.S. judgment, and conflicts of law that may arise.
CHIEF JUSTICE ROBERTS: Do you have any indication that our friends around the world are comfortable with your test?
JUSTICE SCALIA: Well, but -- but Australia says: Look, it's up to us to decide whether there has been a misrepresentation, point one; and whether it's been relied upon by the -- by the plaintiffs, point two. And we should be able to decide that and we don't want it decided by a foreign court.
JUSTICE GINSBURG: This case is Australian plaintiff, Australian defendant, shares purchased in Australia. It has Australia written all over it.
Oral Argument
“The Supreme Court's June 2010 decision in Morrison v. NAB was the nail in the coffin for f-cubed private securities fraud actions.”
Justice Scalia: “The focus of the [U.S. securities laws] is not upon the place where the deception originated but upon purchases and sales of securities in the United States.”
“Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.”
…. And it is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies.
In an attempt to create a clear test for determining the extraterritorial reach of § 10(b) the Court adopted the “transactional test”:
Transactional Test
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Following the Supreme Court's decision in Morrison, lower courts in the United States
have been dismissing F-Cubed claims.
Section 10(b)’s focus does “not encompass purchases and sales of covered securities that occur outside of the United States.”
Alstom , 2010 WL 3069597 (SDNY) (Marrero, J.)
“[T]he Supreme Court’s discussion of the problems of conflicting laws of various countries leaves little doubt that it believed that United States laws should defer to the law of the country where the security is exchanged”
Stackhouse v. Toyota Motor Co. 2:10-cv-00922 (C.D. Cal.) (Fisher, J.)
Section 10 (b) does “not extend to foreign securities trades executed on foreign exchanges even if purchased or sold by American investors, and even if some aspects of the transaction occurred in the United States.”
Cornwell v. Credit Suisse Group, 1:08-cv-03758-vm (SDNY) (Marrero, J.)
“In Morrison, the Supreme Court roundly (and derisively ) buried the venerable ‘conduct or effect’ test the Second Circuit devised and for years had employed.”
* * *“The Morrison Court unequivocally repudiated this longstanding Jurisprudence.”
* * *“[T]he conduct and effect analysis as applied to § 10(b) extraterroriality disputes is now dead letter. Plaintiffs’ cosmetic touch-ups will not give the corpse a new life.”
* * *“This Court is not convinced that the Supreme Court designed Morrison to be squeezed, as in spandex, only into the factual straitjacket of its holding…”
Cornwell v. Credit Suisse Group, 1:08-cv-03758-vm (SDNY) (Marrero, J.)
[T]he Supreme Court's recent decision in Morrison v. National Australia Bank Ltd. forecloses any potential class members who purchased [ ] common stock on a foreign exchange – in this case, the Toronto Stock Exchange ("TSV) – from recovering in this action… and the claims of any potential class members who purchased [ ] common stock on a foreign exchange are therefore dismissed.
Sgalambo v. Mc Kenzie, No. 09 Civ. 10087(SAS), Opinion and Order (S.D.N.Y. Aug. 6, 2010) (Scheindlin, J.)
Impact of Morrison
• Less than 10% securities claims are affected
• State law remedies may still be available
• Other litigation strategies are evolving
The facts of the BP case are distinguishable from the facts in Morrison case in a variety of ways, such as:
• There are approximately 3.13 billion BP shares traded on the NYSE
• BP has significant U.S. operations
• BP’s connections to the U.S. are far more extensive than the connections in Morrison
• The oil spill occurred in the U.S.
• Will this matter?
What does this mean in regard to cases with HUGE effect in the U.S.?
Toyota Securities Litigation
• In context of Lead Plaintiff appointment, Court rejected all movants who purchased shares on foreign exchange and appointed the movant with largest losses in American Depository shares.
• In Amended Complaint, plaintiff added claims for violation of Japan’s Financial Instruments and Exchange Act.
In re: Societe Generale Securities Litigation
On September 29, 2010, Judge Berman sua sponte dismissed claims of a United States investor who purchased ADRs in the United States under theory that ADRs represent right to receive a specified number of shares (which are themselves listed on a foreign exchange).
• This is F, not F2 or F3!• Undoubtedly will be
challenged/appealed
On July 27, 2010, Judge Marerro (S.D.N.Y.) applies Morrison to American citizens who purchased on foreign exchange (F2 as opposed to F3).
Will be addressed by 2nd Circuit
Credit Suisse Group Securities Litigation
In re Alstom S.A. Securities Litigation
• U.S. purchasers on foreign (French) exchange
• F-squared
• Judge Marerro dismissed claims under Morrison (September 14, 2010)
• Foreign investors in Bahamian Funds with ultimate investment with Bernie Madoff
• Madoff’s investments were made in U.S. and on U.S. exchanges
• July 30, 2010 Judge Gold (S.D. Fla) dismissed claims under Morrison
In re Banco Santander Securities-Optimal Litigation
• Plaintiff Bar historically criticized as causing companies to list on foreign exchanges rather than domestic exchanges
• Justice Scalia is far more effective at causing this capital flight as companies may seek insulation from liability by listing shares overseas
• Investors should purchase only on domestic exchanges to ensure the ability to seek redress for fraud
• Particularly true for fiduciary investors (pension funds)
IMPACT ON U.S. INVESTING
