Landmark 'Morrison' Ruling: Supreme Court Rejects Extraterritorial Application of Securities Exchange Act

In the watershed decision of Morrison et al. v. National Australia Bank Ltd., the United States Supreme Court has held that private causes of action under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act)1 may not be based on the purchase or sale of securities on foreign exchanges or on securities transactions otherwise occurring outside the United States.2

In so ruling on June 24, 2010, the Court reversed decades of precedent in federal appellate courts, which had developed various tests to determine when the extraterritorial application of Section 10(b) and its related Rule 10b-5 was appropriate.3 Instead of selecting among these tests or developing a different test, the Supreme Court found Congress did not intend Section 10(b) to apply extraterritorially. In the process, the Supreme Court made clear that the United States would not become a global forum for securities fraud cases imported from overseas securities exchanges even if the case involved US actors or US-based activity.

Section 10(b) of the Exchange Act authorizes the US Securities and Exchange Commission to promulgate rules forbidding "any manipulative or deceptive device or contrivance" used in connection with the purchase or sale of any security "registered on a national securities exchange or any security not so registered." Section 10(b) has long been understood to support a private cause of action against persons or entities violating SEC Rule 10b-5, which generally prohibits the use of deceptive acts or schemes to buy or sell securities.

At issue in Morrison was what has become known as a "foreign-cubed" or "f-cubed" set of facts, involving non-US investors who purchased shares of a non-US company on exchanges outside of the United States and who then bring suit in US courts. In Morrison, the plaintiffs resided outside of the US and purchased shares of the defendant National Australia Bank (NAB), Australia's largest bank, on the Australia Securities Exchange, the London Stock Exchange, the Tokyo Stock Exchange and the New Zealand stock exchange. While NAB has American Depositary Receipts (ADR) trading on the New York Stock Exchange, US ADR holders were not part of the case before the Supreme Court.

In 1998, NAB acquired a Florida-based mortgage service provider, Homeside Lending, Inc. In 2001, NAB disclosed that the interest assumptions in the valuation model used by Homeside to calculate the value of its mortgage servicing rights were incorrect...