In the Morrison v. National Australia Bank ("NAB") case, the U.S. Supreme Court has held that Section 10(b) of the Exchange Act applies only to transactions in securities listed on U.S. exchanges and to U.S. transactions in other securities. The 8-0 decision (Justice Sotomayor did not participate) authored by Justice Scalia thus rejects the use of the conduct/effects test to determine the extraterritorial application of the U.S. anti-fraud securities laws.
In NAB, the court considered a so-called "foreign-cubed" securities case - i.e., a securities class action brought against a foreign issuer by foreign investors who purchased their securities on a foreign exchange. The Second Circuit applied its existing "conduct test" for determining the extraterritorial application of Section 10(b) and held that the plaintiffs needed to adequately allege that "activities in this country were more than merely preparatory to a fraud and culpable acts or omissions occurring here directly caused losses to investors abroad." The court found that this test was not met in NAB because the locus of the fraudulent activity, including the issuance of the false statements, was in Australia.
On appeal, the Supreme Court reached the same result, but took a notably different approach.
First, the Court found (contrary to the Second Circuit and other lower federal courts) that the extraterritorial application of Section 10(b) does not "raise a question of subject-matter jurisdiction." Instead, it is an issue of "what conduct Section 10(b) prohibits, which is a merits question."
Second, it is a longstanding principle that Congressional legislation, "unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States." The fact that the "Exchange Act is silent as to the extraterritorial application of Section 10(b)" does not give courts license to speculate as to what Congress would have wanted. In the absence of any "affirmative indication" that Section 10(b) applies extraterritorially, the Court concluded "that it does not."
Finally, the Court addressed the plaintiffs' contention that even if Section 10(b) does not apply extraterritorially, there was sufficient deceptive conduct in the U.S. to make it a "domestic" case. Although the Court agreed that applying the presumption against extraterritorial application may require analysis, the presumption "would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case." The Court found that the focus should be on the location of the securities transaction, not "the place where the deception originated." Accordingly, it is "only transactions in securities listed on our domestic exchanges, and domestic transactions in other securities, to which Section 10(b) applies."
Notes on the Decision
(1) Although technically a unanimous decision, the concurrence written by Justice Stevens (and joined by Justice Ginsburg) effectively acted as a dissent. The justices urged affirmance on the grounds set forth in the Second Circuit's opinion.
(2) The Court's bright-line rule would appear easy to apply. One can envision fact patterns, however, that might make it difficult to assess whether a securities transaction is "domestic" (i.e., has taken place within the United States).
(3) While the decision does not discuss whether it applies to the SEC, there is no principled reason why the Court's construction of Section 10(b) would not extend beyond private plaintiffs. Congress has been considering a codification of the extraterritorial application of Section 10(b). By indirectly limiting the scope of the SEC's authority, the Court may have improved the prospects for such legislation.
(4) The Court showed some sympathy for the argument that the extraterritorial application of Section 10(b) will encourage suits of questionable merit and compromise the ability of foreign countries to regulate their own securities markets. To wit: "While there is no reason to believe that the United States has become the Barbary Coast for those perpetrating frauds on foreign securities markets, some fear that it has become the Shangri-La of class action litigation for lawyers representing those allegedly cheated in foreign securities markets."Posted by Lyle Roberts at June 25, 2010 11:49 PM | TrackBack