On August 30, 2013, the United States Court of Appeals for the Second Circuit unanimously held that Section 10(b) of the Securities Exchange Act of 1934 (“Section 10(b)”) does not apply to extraterritorial conduct, “regardless of whether liability is sought criminally or civilly.” Interpreting the scope of the Supreme Court’s landmark ruling in Morrison v. National Australian Bank Ltd.,  the Second Circuit’s significant decision in United States v. Vilar, et al. means that a criminal defendant may be convicted of fraud under Section 10(b) only if the defendant engaged in fraud “in connection with” a security listed on a United States exchange or a security “purchased or sold” in the United States. In reaching its conclusion, the court rejected the government’s attempts to distinguish criminal liability under Section 10(b) from the civil liability at issue in Morrison, holding that “[a] statute either applies extraterritorially or it does not, and once it is determined that a statute does not apply extraterritorially, the only question we must answer in the individual case is whether the relevant conduct occurred in the territory of a foreign sovereign.”
Posts Tagged ‘Morrison v. National Australia’
2012 proved to be a mixed year for defendants in securities litigation, with several open questions and rare causes for optimism. The raw statistics show a steady stream of new filings, increasing median settlement amounts, and relatively low dismissal rates for existing cases. The Supreme Court will decide an important case this coming term on the issue of class certification in securities class actions, while another important case on standing awaits the Court’s decision on a pending petition for certiorari. In the appellate courts, a number of trial court decisions dismissing class action suits were affirmed, but district courts continue to issue conflicting rulings on critical disclosure issues, including the application of the SEC’s Regulation S-K to private class actions-where several courts have allowed class claims to proceed on the basis of alleged failure to disclose “known trends.”
Trial courts are issuing divergent opinions on the application of the Supreme Court’s 2010 decision in Morrison v. Australia National Bank to claims involving the extraterritorial reach of the federal securities laws. District courts also are struggling to define who can be sued for primary liability for “making” an allegedly false statement, following the Supreme Court’s 2011 ruling in Janus Capital Group Inc. v. First Derivative Traders. We discuss each of these trends below. Finally, we summarize several notable decisions arising in the world of M&A litigation, an area of securities litigation that has shown explosive growth over the last few years. For a comprehensive review of related trends in the Securities Enforcement and the Foreign Corrupt Practices Act areas, please see our 2012 Year-End Client Alerts, here and here.
The volume of US securities class action litigation targeting companies outside the US has recently reached record levels, despite a 2010 decision by the US Supreme Court, in Morrison v. National Australia Bank, which substantially restricted the extraterritorial reach of many such cases. This increase is attributable in large part to a wave of suits filed against Chinese companies listed on US stock markets. Even excluding Chinesecompany litigation, however, the pace of US securities class actions against non-US companies has not fallen below the levels observed prior to the Morrison decision.
On the other hand, Morrison may have had some effect on settlement sizes. In the past several years, there have been few very large settlements in US securities class actions against non-US companies, a development that, as discussed below, may be attributable in part to the decision. This article surveys recent trends in filings of US securities class actions against non-US company defendants, drawing upon data up to mid-2012. It also discusses trends in settlements, and concludes by reviewing the outlook for such litigation going forward.
The Commission has authorized that a Study be sent to Congress expressing the views of the Staff on the cross-border scope of the private right of action under Section 10(b) of the Securities Exchange Act of 1934. However, my conscience compels me to write separately to record my views on the Study. I write to convey my strong disappointment that the Study fails to satisfactorily answer the Congressional request, contains no specific recommendations, and does not portray a complete picture of the immense and irreparable investor harm that has resulted, and will continue to result, due to Morrison v. National Australia Bank, Ltd.
In the United States we have a strong belief that, whether rich or poor, we are all entitled to our day in court. Sadly, for many American investors this is no longer true.
If American investors are defrauded by a company that they have invested in – and that company is listed on a foreign exchange – investors may be unable to have their day in court and seek redress against this company for its lies and misrepresentations. Thus, investors have been stripped of a traditional American right.
This was not always the case. For decades, federal courts applied the same standard to determine whether U.S. federal securities law applied to frauds that took place, in whole or in part, outside of the United States. Under that standard, Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and other antifraud provisions applied “when there was ‘significant U.S. fraudulent conduct that directly caused the plaintiffs losses’ (the conduct test) or when there were ‘significant effects’ on the U.S. securities markets (the effects test).”
Recently, in Global Reinsurance Corp.–U.S. Branch v. Equitas Ltd., the New York Court of Appeals, New York’s highest court, refused to apply the state’s antitrust statute, the Donnelly Act, to allegedly anticompetitive conduct in Great Britain that had only incidental effects in New York. Reversing a divided decision of the intermediate appellate court, the Court of Appeals reasoned that state antitrust law could not have a broader extraterritorial reach than federal antitrust law; otherwise, statutory and judicial limitations on the federal Sherman Act “would be undone if states remained free to authorize ‘little Sherman Act’ claims that went beyond it.”
This rationale may have significant implications beyond the antitrust arena, as the Court of Appeals more broadly reaffirmed that “[t]he established presumption is, of course, against the extra-territorial operation of New York law.” For example, the potential impact on securities claims under state common law is particularly notable. In the wake of the United States Supreme Court’s decision in Morrison v. National Australia Bank, which held that Section 10(b) of the Securities Exchange Act applies only to domestic securities transactions (see our memo here), a number of plaintiffs have attempted to invoke state common law to recover losses on extraterritorial transactions. One potential obstacle to such state-law suits appeared to have been removed late last year, when the Court of Appeals, in Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management, rejected a line of lower-court and federal precedents that had held common-law securities actions preempted by New York’s securities statute, the Martin Act (see our memo here).
In its 2010 decision in Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010), the Supreme Court addressed whether Section 10(b) of the Securities Exchange Act applies to a securities transaction involving foreign investors, foreign issuers and/or securities traded on foreign exchanges. The Morrison decision curtailed the extraterritorial application of the federal securities laws by holding that Section 10(b) applies only to (a) transactions in securities listed on domestic exchanges or (b) domestic transactions in other securities.
In Absolute Activist Value Master Fund Ltd. v. Ficeto, et al., Docket No. 11-0221-cv (2d Cir. Mar. 1, 2012), the Second Circuit addressed for the first time what constitutes a “domestic transaction” in securities not listed on a U.S. exchange. The Court held that, to establish a domestic transaction in securities not listed on a U.S. exchange, plaintiffs must allege facts plausibly showing either that irrevocable liability was incurred or that title was transferred within the United States.
Plaintiffs in Absolute Activist were nine Cayman Island hedge funds (the “Funds”) that had engaged Absolute Capital Management Holdings (“ACM”) to act as their investment manager. Plaintiffs alleged in their complaint that the ACM management defendants engaged in a variation of a pump-and-dump scheme. Specifically, defendants were alleged to have caused the Funds to purchase billions of shares of U.S. penny stocks issued by thinly capitalized U.S. companies – stocks that defendants themselves also owned – and then to have traded those stocks among the Funds in a way that artificially drove up the share value. Defendants thereby were alleged to have profited both from the fees generated through the fraudulent trading activity and the profits they earned when they sold their shares of the penny stocks at a profit to the Funds.
American securities law is at an important crossroads, and the direction it takes will affect investors well into the future. For decades, federal securities law protected U.S. domiciled and citizen investors against fraud affecting the securities they purchased, even if purchased on foreign markets. Under the longstanding conduct and effects tests, the antifraud provisions of U.S. securities law covered all conduct that injured American investors. Fraudsters could not escape a private right of action for securities fraud by consummating a transaction abroad.
The U.S. Supreme Court’s June 2010 ruling in Morrison v. National Australia Bank  changed the landscape for U.S. investors. In Morrison—a dispute about the territorial reach of the antifraud provisions of U.S. securities law—the Supreme Court rejected four decades of federal court jurisprudence applying the conduct and effects tests and adopted a new rule that focuses narrowly on the location where securities were purchased and sold. Under prior law, if the fraud involved conduct in the United States or had an effect in the United States, victims had a private right to bring suit. Under Morrison’s new test, so long as the fraud relates to securities that trade only on foreign exchanges or other foreign platforms, no amount of harm to American investors triggers the antifraud protection of U.S. securities law, even if investors submitted their orders from the United States.
Recently, the Amsterdam Court of Appeal issued an important decision in the Converium case with implications for class action suits in the United States and internationally. The decision authorizes the use of the Dutch collective-settlement statute to settle disputes on a classwide, opt-out basis. Given that the U.S. Supreme Court’s decision in Morrison v. National Australian Bank significantly limited the extent to which claims by foreign investors can be settled in United States securities cases, the Amsterdam Court of Appeal’s decision is significant because it provides a practical mechanism for structuring global securities class action settlements through the use of the Dutch statute in concert with U.S. proceedings, particularly in cases involving a large number of European investors.
Recent and Upcoming Supreme Court Decisions
In 2011, the Supreme Court decided three significant securities cases: Matrixx Initiatives, Inc. v. Siracusano 131 S. Ct. 1309 (2011), regarding statistical significance in the context of securities fraud; Erica P. John Fund, Inc. v. Halliburton Co. 131 S. Ct. 2179 (2011), addressing the relationship between loss causation and class certification; and Janus Capital Group, Inc. v. First Derivative Traders 131 S. Ct. 2296, 2305 (2011), construing the phrase “to make” under the SEC’s Rule 10b-5. Coming up in the term that began in October 2011, the Court will decide Credit Suisse Securities v. Simmonds, to clarify the two-year statute of limitations under Section 16(b) of the Securities Exchange Act.
In our paper, Cross Border Shareholder Class Actions Before and After Morrison, we conduct an empirical inquiry into the effect of the Supreme Court’s 2010 decision in Morrison v. National Australia Bank on the competitiveness of US markets as a venue for listings by foreign issuers and trading in cross-listed stocks. Passed in the wake of Morrison, the Dodd-Frank Act requires that the SEC inform Congress about the merits of creating a new extraterritorial private right of action. We provide input into the debate by using data on 329 shareholder class actions filed against foreign companies and discussing the effects of such a right on the competitiveness of U.S. capital markets.
We conclude that foreign companies’ expected litigation costs should fall after Morrison, because investors who purchased their shares on overseas exchanges will be excluded from classes. By reducing expected litigation costs, Morrison eases a deterrent to US listing by foreign issuers and thereby makes the US a more competitive venue for cross-listings, as well as for the volume in the cross-listed stocks. We submitted our paper to the SEC as part of its public comment process, and have posted it on SSRN.