Recent Developments In Global Securities Litigation

1. INTRODUCTION

   As the capital needs of global corporations continue to grow, such companies often tap capital markets on multiple exchanges across the globe. Securities markets have become increasingly interconnected, and alleged securities fraud frequently crosses borders and exchanges. Until recently, the federal courts of the United States have proven to be a friendly home with well-developed laws for these cross-border securities class actions.

   As this process developed, however, a threshold legal issue came into focus. Foreign companies regularly argued that the U.S. securities laws are not applicable to securities fraud claims that were brought against foreign issuers on behalf of foreign investors who purchase securities on foreign exchanges. So-called "foreign-cubed" or "f-cubed" cases became commonplace, but not without resistance from the companies charged with wrongdoing under the securities laws.1

   Prior to the Supreme Court's landmark decision in Morrison v. National Australia Bank Ltd.,2 the law with regard to f-cubed cases was in flux and not consistent in its application to seemingly similar fact patterns. However, the United States Supreme Court in Morrison has announced a new test for pursuing of redress for alleged violations of U.S. securities laws by foreign plaintiffs against foreign companies. While the U.S. traditionally led the world in addressing allegations of securities fraud, the Morrison decision has opened a new frontier for global securities litigation and has encouraged, or is in the process of encouraging, many countries around the world to reconsider their own legal structures as they relate not only to securities laws generally, but also to class actions, ligation funding, settlement procedures, and access to the courts by plaintiffs alleging injuries in the global marketplace. Now that investors who have purchased shares on foreign exchanges are no longer welcome in U.S. courts, those same investors may find the remedies available in other countries to be an attractive alternative.

   This article will discuss the Morrison decision and focus on the changes now taking place in the global legal landscape to accommodate the types of cases that Morrison now bars from the U.S. courts.

2. THE SUPREME COURT'S DECISION IN MORRISON V. NATIONAL AUSTRALIA BANK

   Prior to 2010, U.S. district and circuit courts generally framed the question of whether U.S. securities laws applied to f-cubed cases as one of jurisdiction.3 The U.S. Court of Appeals for the Second Circuit, for four decades, examined two factors when it considered whether it had jurisdiction over securities fraud claims brought by foreign investors: "(1) whether the wrongful conduct occurred in the United States, and (2) whether the wrongful conduct had a substantial effect in the United States or upon United States citizens."4 These factors were known as the "conduct" and "effects" tests.5

   The Second Circuit regularly held that the conduct and effects tests were satisfied when: "(1) 'the defendant's activities in the United States were more than 'merely preparatory' to a securities fraud conducted elsewhere' and (2) the 'activities or culpable failures to act within the Unites States 'directly caused' the claimed losses.'"6 In practice, the test meant that in order to access U.S. courts, foreign investors were required to demonstrate that substantial acts in furtherance of the fraud were committed in the United States.7 Similarly, the Fifth and Seventh Circuits adopted an interpretation of the conduct test that closely followed the formulation set forth by the Second Circuit.8 Other circuit courts adopted a range of interpretations of the test as well. For example, the DC Circuit Court rigorously applied the test and required that "the domestic conduct [at issue] comprise[d] all the elements . . . necessary to establish a violation of section 10(b) and Rule 10b-5."9 On the other hand, the Third, Eighth, and Ninth Circuits were much less restrictive, requiring only that "at least some activity designed to further a fraudulent scheme occur[ed] within th[e U.S]."10

   Until the Supreme Court's June 24, 2010 decision in Morrison v. Australia Nat'l Bank Ltd. ("Morrison"),11 f-cubed cases proceeded apace by passing muster under the circuit courts' varying applications of the conduct and effects tests. The Supreme Court's decision in Morrison, however, substantially altered the law.

   In Morrison, the defendant, National Australia Bank ("NAB"), was a foreign corporation whose ordinary shares were not traded on American exchanges.13 Petitioners were Australian citizens who purchased their stock on Australia's primary securities exchange and brought suit in U.S. District Court on behalf of a putative class of foreign investors alleging violations of § 10(b) of the Exchange Act.14

   NAB had a U.S. subsidiary based in Florida, known as Homeside, that serviced residential mortgages. In NAB's public filings, it praised Homeside's performance, and executives of NAB made additional public statements while in the U.S. touting Homeside's success.15 NAB eventually announced, however, that it was writing down the value of Homeside's assets by $450 million and only two months later made a second announcement of another $1.75 billion write-down. Prices of NAB's ordinary shares dropped. Petitioners brought suit alleging that they, and the putative class members, were defrauded after relying on the allegedly misleading statements when making their purchases.16

   At the lower court level, the Second Circuit, applying the conduct and effects tests, concluded that the actions, which took place in the U.S., were too insignificant to allow the plaintiffs' claims to proceed in U.S. courts.17 Plaintiffs appealed.

   In Morrison, the Supreme Court agreed with the Second Circuit's conclusion but flatly rejected the circuit court's analysis and its use and application of the conduct and effects tests, addressing what it called the "threshold error" of the Second Circuit in framing the question of the "extraterritorial reach" of § 10(b) as a jurisdictional issue.18 Instead, the Court viewed the question as a merits issue, which implicated only statutory interpretation, not whether a court had "the power to hear a case."19 The Court thus proceeded with a straightforward 12(b)(6) analysis of whether the plaintiffs had stated a claim under the Exchange Act.20

   Beginning its analysis, the Court determined that the Exchange Act is silent as to the extraterritorial application of § 10(b) and that a presumption against extraterritorial application, therefore, should apply.21 The Court observed that "[w]hen a statute gives no clear indication of an extraterritorial application, it has none."22 In this context, the Court concluded that § 10(b) should be given "the effect its language suggests, however modest that may be."23 The Court next criticized the conduct and effects tests developed by the lower courts as one that improperly extended the statute and caused a "proliferation of vaguely related variations" and, moreover, summarily rejected the test as the result of "judicial-speculation-made-law."24

   The Court also addressed the investors' argument that § 10(b) should apply because the fraudulent scheme was advanced by actions taken in the U.S. In rejecting this argument, the Court concluded that "the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case."25

   Ultimately, the Court held that the "focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States" and that "section 10(b) does not punish [all] deceptive conduct, but only deceptive conduct 'in connection with the purchase or sale of any security registered on a national securities exchange . . . .'"26

   With this language, the Court has created what has quickly become known in the lower courts as a bright-line "transaction test."27 According to the test, § 10(b) only reaches manipulative or deceptive conduct in the sale of securities if "the purchase or sale is made in the United States, or involves a security listed on a domestic exchange."28 In applying its newly articulated test to the facts in NAB, the Court noted that the securities at issue were not traded on U.S. exchanges and easily concluded, therefore, that none of the transactions could have occurred in the U.S.29 Thus, the transactional test was not satisfied, and the court affirmed dismissal of the case for failure to state a claim.30

3. DISTRICT COURTS APPLY MORRISON STRICTLY AND EXPANSIVELY: MORRISON MEANS WHAT IT SAYS

   In quick succession, district courts applying Morrison's transaction test have issued opinions in which they have had no trouble turning away foreign investors' Exchange Act claims against foreign issuers. Moreover, lower courts applying the test have dismissed not only f-cubed cases, but also cases in which the plaintiffs are Americans who have purchased shares of foreign companies on foreign exchanges. In addition, a district court recently applied Morrison to limit the reach of the SEC. The following district court opinions demonstrate the difficulties that the Morrison test presents for plaintiffs attempting to survive a motion to dismiss for securities fraud claims involving securities purchased on non-U.S. exchanges. In fact, given these opinions, it is hard to imagine a case in which a plaintiff who purchased securities on a foreign exchange could ever survive a motion to dismiss.

   1. Cornwell V. Credit Suisse Group ET AL.

      In Cornwell v. Credit Suisse Group,31 an opinion issued just a month after the Morrison decision, Judge Marrero of the Southern District of New York decisively rejected assertions by plaintiffs that remnants of the conduct and effects tests have survived Morrison. The district court held that under the new...