Article Law360

Extraterritorial Reach Of U.S. Securities Laws Post-Morrison

23 September 2016

Six years ago, the U.S. Supreme Court definitively rejected the plaintiffs bar’s request to permit foreign securities claims with tenuous connections to the U.S. to be litigated here. In Morrison v. National Australia Bank, the court refused to hear a claim for fraud under the Securities Exchange Act of 1934 brought by foreign plaintiffs against a mix of foreign and American defendants regarding securities traded on a foreign exchange. The court held that it is “only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which [the securities fraud section of the Exchange Act] applies.”[1]

Yet, filings of securities suits in the U.S. against foreign companies are on track to increase for the third year in a row.[2] One reason is that many of these lawsuits involve foreign companies with securities that are traded on U.S. exchanges, which Morrison did not directly address. There are other reasons as well. First, Morrison arose in the context of civil litigation, and its criminal and regulatory implications are still being worked out.

Criminal. It was at first unclear whether the presumption against extraterritoriality suggested by Morrison would apply in the context of criminal cases, where jurisdictional tests looked to the location of the conduct at issue and whether that conduct had a substantial effect in the United States. In 2013, however, the Second Circuit Court of Appeals held that Morrison applied to criminal actions, stating “a defendant may be convicted of securities fraud ... only if he has engaged in fraud in connection with (1) a security listed on a U.S. exchange, or (2) a security purchased or sold in the United States.”[3]

Regulatory. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed just three weeks after Morrison, expanded the extraterritorial reach of the Exchange Act, as enforced by the Securities & Exchange Commission and the U.S. Department of Justice. Under the Dodd-Frank amendments, courts have jurisdiction over claims brought by regulators regarding “(1) 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 (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.”[4]

Second, Morrison did not address all of the permutations that may arise from complex financial transactions, including the following:

Swaps. One of the first major cases after Morrison was the Porsche case, which dealt with swap agreements that were executed in the United States, required the application of New York law, and specified New York courts as the forum for disputes. Notwithstanding the swaps’ U.S. connections, the trial court in the Southern District of New York concluded that the agreements fell outside the scope of the Exchange Act in light of Morrison. The court reasoned that the agreements “were the functional equivalent of trading the underlying [Volkswagen] shares on a German exchange.”[5] In affirming the decision, the Second Circuit reasoned that allowing the Exchange Act claims to proceed “would permit the plaintiffs, by virtue of an agreement independent from the reference securities, to hale the European participants in the market for German stocks into U.S. courts and subject them to U.S. securities laws.”[6]

Securities Cross-Listed on U.S. and Foreign Exchanges. In another significant case, a federal district court was presented with securities that were cross-listed on U.S. and foreign exchanges. The court held that plaintiffs who purchased securities on the foreign stock exchange could not avail themselves of the Exchange Act even though the securities were cross-listed in the U.S. The court held that “the transactions [at issue] must occur on a domestic exchange.”[7] In a later case with similar facts, another court reached the same conclusion: “The idea that a foreign company is subject to U.S. Securities laws everywhere it conducts foreign transactions merely because it has ‘listed’ some securities in the United States is simply contrary to the spirit of Morrison.”[8]

American Depository Receipts. Although ADRs are traded on U.S. stock exchanges, one court has held that “because trade in ADRs is considered to be a predominantly foreign securities transaction, [the securities fraud section of the Exchange Act] is inapplicable.”[9] Other courts have gone further and examined whether the factual allegations tie to the sale of the ADR in the United States or elsewhere in determining whether the claims may be brought in the U.S.[10]

OTC Trading. Recently, the Third Circuit Court of Appeals considered whether claims arising out of the trading of shares of a Canadian company over the counter in the United States could proceed. The court held that while an over-the-counter purchase of a foreign security fails the first prong of Morrison (“securities listed on domestic exchanges”), it remains subject to liability under the second prong (“domestic transactions in other securities”).[11]

Given the complexity of financial transactions, it should come as no surprise that the application of Morrison continues to be ironed out in courts across the country. Issuers of foreign securities and their U.S. counsel should continue to monitor developments to assess the potential application of the U.S. securities laws to securities in the U.S. and abroad.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Morrison v. National Australia Bank Ltd., 561 U.S. 247, 267 (2010).

[2] Securities Class Action Filings 2016 Midyear Assessment, Cornerstone Research (available at https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2016-Midyear-Assessment.pdf).

[3] United States v. Vilar, 729 F.3d 62, 66 (2d Cir. 2013).

[4] 15 U.S.C. § 78aa(b). Dodd-Frank became law after the conduct at issue in Vilar and was not invoked by the government in that case.

[5] Elliott Associates v. Porsche Auto. Holding SE, 759 F. Supp. 2d 469, 476 (S.D.N.Y. 2010).

[6] Parkcentral Glob. Hub Ltd. v. Porsche Auto. Holdings SE, 763 F.3d 198, 216 (2d Cir. 2014).

[7] In re Alstom SA Sec. Litig., 741 F. Supp. 2d 469, 473 (S.D.N.Y. 2010).

[8] In re Royal Bank of Scotland Grp. PLC Sec. Litig., 765 F. Supp. 2d 327, 336 (S.D.N.Y. 2011)

[9] In re Societe Generale Sec. Litig., No. 08 CIV. 2495 RMB, 2010 WL 3910286, at *6 (S.D.N.Y. Sept. 29, 2010).

[10] Stoyas v. Toshiba Corp., No. CV 15-04194, 2016 WL 3563084, at *11 (C.D. Cal. May 20, 2016).

[11] U.S. v. Georgiou, 777 F.3d 125 (3d Cir. 2015).

Matthew Solum, P.C.

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