Three Options For Institutional Investors Pursuing Claims Against Non-U.S. Issuers In The Wake Of Morrison And City Of Pontiac

In its 2010 Morrison decision, the Supreme Court decided that Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) ("Section 10(b)"),only reaches "transactions in securities listed on domestic exchanges" and "domestic transactions in other securities," regardless of whether the alleged fraudulent conduct occurred within the United States or caused a substantial effect within the United States. Morrison v. National Australian Bank Ltd., 561 U.S. 247, 266 (2010); contrast Alfadda v. Fenn, 935 F.2d 475, 478-79 (2d Cir. 1991).

Morrison did not foreclose Section 10(b) claims for purchases of American Depository Shares (ADS) or American Depository Receipts (ADR). Indeed, investor class actions asserting Section 10(b) claims for ADS or ADR purchases are not uncommon. As a result of this door left open by Morrison, both foreign and U.S. investors have argued that they should be able to pursue Section 10(b) claims for purchases of common stock on a foreign exchange so long as the company has shares cross-listed on a U.S. exchange. This became known as "listing theory."

But the Second Circuit recently rejected this "listing theory" in City of Pontiac Policemen's and Firemen's Retirement System et al. v. UBS AG et al., No. 12-4355 (2d Cir. May 6, 2014). The court found that the "listing theory" is "irreconcilable" with Morrison because Morrison "evinces a concern with the location of the securities transaction and not the location of an exchange where the security may be dually listed."

So, with at least one circuit rejecting the "listing theory," what options remain for institutional investors seeking to recover losses resulting from frauds committed by non-U.S. issuers?

(1) Seek Recovery in Overseas Courts

One undeniable result of Morrison is that securities fraud cases in non-U.S. courts are increasing. Most times, an action in a foreign jurisdiction will be an investor's only potential source of recovery for losses on common stock purchases not made on a U.S. exchange.

However, investors not accustomed to foreign courts must tread carefully. For example, an investor usually has to be a named plaintiff in overseas cases. Additionally, many foreign jurisdictions do not follow the "American rule," meaning that in these jurisdictions, the losing party may have to pay the winning party's attorneys' fees and costs. Also, many jurisdictions bar attorneys from financing their clients' cases, resulting in large cases being funded by...