On June 24, 2010, the U.S. Supreme Court issued its eagerly-awaited decision in Morrison v. National Australia Bank Ltd., No. 08-1191, which examined the extraterritorial reach of the private right of action under Rule 10b-5 of the Securities and Exchange Act of 1934 ('34 Act). While the entire court held that the Morrison plaintiffs had no cause of action under Rule 10b-5, the majority, however, in a decision authored by Justice Antonin Scalia and joined by four of his colleagues, overturned forty years of lower court precedent and held that there was no extraterritorial application. From now on, in order for a Rule 10b-5 action to be brought, the Court ruled that the the claims must concern the purchase or sale of (1) securities listed on a U.S. exchange or (2) the purchase or sale of any other security within the U.S. Justice Breyer concurred in the judgement, as did Justices Stevens and Ginsberg. Justice Sotomayor did not participate. Justices Stevens and Ginsberg, however, wrote a separate concurrence which strongly disagreed with overturning the preexisting law which had interpreted the ‘34 Act to permit, in some instances, an investor to bring a 10b-5 action concerning securities traded or purchased abroad.
The Morrison Facts: Foreign Investors, Foreign Securities
Purchases but Alleged Fraudulent Conduct in the U.S.
The case involves an Australian bank, National Australia Bank Limited (National), whose common stock did not trade on any U.S. exchange, although National's American Depositary Receipts, or ADRs, are listed on the New York Stock Exchange. Plaintiffs on the appeal were Australians who purchased National's common stock in Australia. Plaintiffs' basis for bringing the action in the U.S. was the allegation that fraudulent misrepresentations concerning the valuation of National's subsidiary, HomeSide Lending, Inc., a mortgage servicing company in Florida, occurred in the U.S., and that those misrepresentations in turn led to a devaluation of National's common stock. Plaintiffs, seeking to represent a class of foreign purchasers of National's stock, filed a lawsuit in New York federal district court against National, HomeSide, and certain of National's and HomeSide's officers, alleging violations of of Sections 10(b) of the ‘34 Act and Rule 10b-5 promulgated pursuant to Section 10(b).
Defendants filed a motion to dismiss the case contending that the district court lacked jurisdiction or, in the alternative, that the lawsuit failed to state a claim under the law. The federal district court in New York granted the motion, finding a lack of subject matter jurisdiction because the alleged events within the U.S. were a minimal part of a scheme "culminated abroad." In re National Australia Bank Securities Litigation, No. 03 Civ. 6537 (BSJ), 2006 WL 3844465, *8 (S.D.N.Y., Oct. 25, 2006). The Second Circuit Court of Appeals affirmed the dismissal on this basis. Morrison v. National Australia Bank Ltd., 547 F.3d 167, 175-176 (2d Cir. 2008).
The Supreme Court's Opinion: No Extraterritorial Application of Rule 10b-5
The Court viewed the issues on appeal differently than did the district court or the Second Circuit. As an initial matter, the Court held that the issue was not one of subject matter jurisdiction but one going to the merits of plaintiffs' claims. Slip Op. at 4-5. Thus, the Court needed to examine whether Section 10(b) of the '34 Act and Rule 10b-5 had extraterritorial application. The majority, upending forty years of federal circuit court jurisprudence, held it did not.
Reiterating its prior holding in EEOC v. Arabian American Oil Co., 499 U.S. 244, 248 (1991), the Court noted that a "longstanding principle" of U.S. law was the presumption that legislation is meant to apply only within the territory of the U.S. unless a contrary intention appears from the statutory language. Finding Section 10(b) contains nothing to suggest it applies abroad, the Court found no basis for its application outside of the U.S. Slip. Op. at 16. Thus, the Court held that the application of Section 10(b) (and Rule 10b-5) was limited to transactions (1) involving the purchase and sale of securities listed on a U.S. exchange or (2) the purchase and sale of any other securitites if the transaction takes place within the U.S.
Among the considerations the majority noted in coming to its holding was that permitting extraterritorial application of the U.S. securities laws could cause conflicts between U.S. laws and the laws and regulatory schemes employed by other nations. Indeed, the Court's opinion notes that several countries and non-U.S. public corporations filed amicus briefs with the Court urging the adoption of a standard that prevented U.S. law from interfering with non-U.S. securities regulation. The transaction test adopted by the Court is consistent with the position advocted in the amicus submissions.
Impact of the Decision
The importance of the Morrison decision to internationally-traded companies is great. No longer is there a possibility that the purchase and sale of non-U.S. securities can lead to possible class actions in the U.S. It is noteworthy that, while two justices disagreed in the legal approach, not one justice disagreed in the result: All believed the Morrison case belonged in Australia's courts. This case should be reassuring both to other countries in the recognition and deference shown to their securities laws as well as to foreign companies whose securities are not traded or listed in the U.S. Morrison has eliminated the lack of predictability which existed under the old precedent of when and how foriegn companies could be swept up into expensive and intrusive U.S. securities class actions. In its place, Morrison has set forth a bright-line transaction test that enables companies to accurately assess their risk.
It is unclear whether the decision in Morrison impacts actions brought by the Securities and Exchange Commission and the Department of Justice. Justice Stevens, in his concurrence, suggests that actions brought by government agencies would be unaffected. However, the Court's reasoning in Morrison does not explicitly delineate between actions brought by government agencies and actions brought by private litigants. Whether or not Morrison applied to actions brought by the SEC, last week President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) which, among other things, explicitly authorizes the SEC to enforce the antifraud provisions of the federal securities laws with respect to overseas conduct. Pub. L. No. 111-203, § 929 (2010). Dodd-Frank, therefore, exposes internationally-traded companies to charges brought by the SEC under U.S. federal securities laws, which is a much smaller exposure to the risk of U.S. litigation although not one to be discounted. Dodd-Frank also authorizes the SEC to conduct a study to determine if the federal securities laws should be amended so that private rights of action are extended. The authorization of such a study indicates that Congress may at some time in the future limit or overturn Morrison. Until then, however, foreign companies may rely on Morrison's protection against private plaintiffs' Rule 10b-5 class actions so long as the security involved is not listed on a U.S. exchange or the purchase and sale does not take place in the U.S.
For more information on this client advisory please contact:
Sarah L. Reid
Philip D. Robben
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