Four Decades for Justice
Implications of the U.S. Supreme Court’s Decision in Morrison v. National Australia Bank (The “F-Cubed” Case)
On June 24, 2010, the U.S. Supreme Court issued its decision in Morrison v. National Australia Bank, a so-called “f-cubed” case because it involved foreign purchasers suing a foreign issuer over shares purchased on a foreign exchange. At issue in Morrison was the extraterritorial reach of Section 10(b) of the Securities Exchange Act of 1934, including in particular whether Section 10(b) and Rule 10b-5 provide a cause of action to foreign plaintiffs suing foreign defendants for misconduct in connection with securities traded on foreign exchanges. The Supreme Court in Morrison held that Section 10(b) and Rule 10b-5 do not apply extraterritorially, and only reach alleged fraud 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.” We asked Rich Clary, Head of Cravath, Swaine & Moore’s Litigation Department, to explain the implications of this decision.
What are the implications of the Morrison decision?
There are two separate important aspects of the Supreme Court’s Morrison decision. One aspect relates to the general issue of extraterritorial application of United States law. The Court emphasized the presumption that U.S. statutes do not have extraterritorial application unless Congress specifically says so. This has implications not only for Federal securities law, specifically an issue in Morrison, but also for lots of other Federal statutes, such as the Racketeer Influenced and Corrupt Organizations Act (RICO).
What is the other important aspect of the Morrison decision?
The second important aspect of the Morrison decision pertains to Section 10(b) of the Securities Exchange Act of 1934. The Court ruled that Section 10(b) and Rule 10(b)(5) do not have extraterritorial application, which means that the Court had to define what is covered and what is not covered. The case had been widely reported as being a so-called “f-cubed” case, where foreign plaintiffs sue foreign issuers over securities that were bought on a foreign exchange. The Court actually went past the “f-cubed” issues and also addressed whether Section 10(b) applies to purchases or sales of securities by Americans on a foreign exchange, ruling that those claims are also outside the reach of the Section 10(b) statute. By doing so, the Court narrowed Section 10(b) so that there has to be either a purchase or sale of a security listed on an American stock exchange, or the purchase or sale of any other security in the United States in order to establish a viable cause of action. From the reasoning in the Court’s opinion, including the amicus curiae briefs to which the Court cites—including the one written by Cravath partner John Beerbower on behalf of the United Kingdom of Great Britain and Northern Ireland—and the hypotheticals discussed in the concurring opinion by Justice Stevens, I think the proper way to read that last phrase, “the purchase or sale of any other security in the United States,” is quite narrowly. So, the other important aspect of the case is that it went past the “f-cubed” situation. The “f-cubed” claims are definitely outside the reach of Section 10(b), and so are claims by an American shareholder who bought securities on a foreign exchange.
What are the restrictions placed on foreign plaintiffs as a result of this decision?
What foreign plaintiffs cannot do is buy shares of a company on one of the overseas exchanges and then come and sue in the United States under Section 10(b), saying that the underlying conduct at issue is sufficient to permit suit in the United States under Section 10(b). Another striking feature of Morrison is that in the majority opinion there is some rather transparent criticism of the plaintiff’s bar, which we also saw in the Stoneridge case, a sense from the majority of the Court that too many non-meritorious securities class actions are being filed in the United States.
What role did the amicus curiae briefs have on the Court’s decision?
The briefing by the parties in this case was very much focused on the “f-cubed” issues. The amicus curiae briefs helped shape the debate and expanded that “f-cubed” focus of the case to a more general question of whether foreign securities transactions should just be subject to the rules and regulations of the exchange on which they occur.
There have been several Supreme Court decisions in recent years in which the Court has narrowed the scope of claims under Section 10(b) and SEC Rule 10b-5. Is this true?
Definitely. With cases such as Morrison, Stoneridge (which rejected scheme liability) and Central Bank (which rejected aiding and abetting liability), over the past few years the U.S. Supreme Court has definitely narrowed the scope of the Section 10(b) implied right of action.
Does this decision have repercussions for other jurisdictions?
In its opinion, the Court reflected on the amicus briefs submitted by various foreign governments, including the United Kingdom, France, Australia and others. In those briefs, those countries described how they have their own securities exchanges, and the rules and regulations governing those exchanges and the securities transactions occurring within their territorial reach. And what the Supreme Court was saying is, in essence, if you buy shares on the London exchange then, as a purchaser, you have whatever other rights and remedies British law provides; if you buy on the French exchange, you have whatever rights and remedies are provided for under French law. So, by eliminating the extraterritorial scope of Section 10(b), the Court has avoided interference with foreign securities regulation by saying each exchange would be governed by its own rules and regulations and not the rules of the United States.
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