Courts Repudiate Attempts to Find Loopholes in Supreme Court Foreign Cubed Decision

George Conway is partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum.

Citing the Supreme Court’s decision in Morrison v. National Australia Bank, on February 22 a federal district judge in New York threw out most of a securities class action jury verdict that plaintiffs’ lawyers had estimated was worth $9.3 billion. The jury’s verdict, rendered against the French media conglomerate Vivendi, S.A. thirteen months ago—before National Australia was argued and decided, and thus under now-overturned law—upheld claims that were predominantly “foreign-cubed” (asserted by foreign investors against a foreign issuer for losses on a foreign exchange) and “foreign-squared” (asserted by American investors against a foreign issuer for losses on a foreign exchange). In categorically dismissing all the claims of those investors, the decision in In re Vivendi Universal, S.A. Securities Litigation, No. 02 Civ. 5571 (RJH) (S.D.N.Y. Feb. 23, 2011), according to Vivendi and its counsel, eliminated at least 80%, and perhaps up to 90%, of the liability that the verdict could have produced.

Vivendi marks the culmination of a series of district court decisions that have consistently—and emphatically—rejected attempts by the securities class-action plaintiffs’ bar to find loopholes in National Australia. Both of the main theories that have been advanced by plaintiffs’ lawyers to evade the Supreme Court’s decision have been repudiated by the courts, now repeatedly and sometimes scathingly.

The so-called “listed” securities theory. The most ambitious plaintiffs’ theory relied upon the statement in Morrison v. National Australia Bank that Section 10(b) of the Securities Exchange Act of 1934 applies “only 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.” (Emphasis added.) Plaintiffs’ lawyers took this to mean that whenever the home-country security of a foreign issuer was “listed” on a U.S. exchange (as must often be done, for example, in order to issue and list American Depositary Receipts), trades in that security anywhere in the world would be subject to Section 10(b). Thus, if a foreign company sponsored even a small issue of ADRs, or if it dual-listed its home-country shares on an American exchange, global foreign-cubed and foreign-squared class actions would be fair game. District judges have now repeatedly rejected this theory:

  • The language in the Supreme Court’s opinion “cannot bear the freight that plaintiffs ask it to bear. There is no indication that the Morrison majority read Section 10(b) as applying to securities that may be cross-listed on domestic and foreign exchanges, but where the purchase and sale does not arise from the domestic listing.” Vivendi.
  • “The idea that a foreign company is subject to U.S. securities law everywhere it conducts foreign transactions merely because it has ‘listed’ some securities in the United States is simply contrary to the spirit of Morrison. Plaintiffs seize on specific language without at all considering, or properly presenting, the context.” In re Royal Bank of Scotland Group plc, No. 09 Civ. 300 (DAB) (S.D.N.Y. Jan. 11, 2011).
  • Plaintiffs’ listed-securities theory is based upon “a selective and overly-technical reading of Morrison that ignores the larger point of the decision,” which, “read in total context,” compels “the opposite result.” In re Alstom SA, No. 03 Civ. 6595 (VM) (S.D.N.Y. Sept. 14, 2010).

Purchase orders made from the United States. The second theory advanced by the plaintiffs’ bar holds that a purchase or sale of a security takes place “in the United States” for purposes of National Australia whenever an American investor places a purchase or sale order from the United States, even if the trade crosses on a foreign securities exchange. District judges have made short work of this contention as well:

  • “[I]t simply blinks reality to ignore … the stark impact of the [Morrison] majority’s opinion on American investors who purchased shares abroad.” Vivendi.
  • “Plaintiffs’ approach—that it is enough to allege that Plaintiffs are U.S. residents who were in the country when they decided to buy [foreign] shares—is exactly the type of analysis that Morrison seeks to prevent.” Royal Bank of Scotland.
  • “The mere act of electronically transmitting a purchase order from within the United States” is “insufficient to subject the purchase to the coverage of Section 10(b).” Plumbers’ Union v. Swiss Reinsurance, No. 08 Civ. 1958 (JGK) (S.D.N.Y. Oct. 4, 2010).
  • “By asking the Court to look to the location of ‘the act of placing a buy order,’ … Plaintiffs are asking the Court to apply the conduct test specifically rejected in Morrison.” In re Société Générale, No. 08 Civ. 2495 (S.D.N.Y. Sept. 29, 2010).
  • The plaintiffs’ domestic-purchase theory “amounts to nothing more than the reinstatement of the conduct test” rejected by the Supreme Court. Alstom.
  • The Supreme Court was “fully cognizant” that “under its new test § 10(b) would not extend to foreign securities trades executed on foreign exchanges even if purchased or sold by American investors.” Cornwell v. Credit Suisse Group, No. 08 Civ. 3758 (VM) (S.D.N.Y. July 27, 2010).

Other applications of National Australia. In the eight short months since the Supreme Court’s decision came down, its impact has extended well beyond traditional fraud-on-the-market securities cases. As our memo of January 3, 2011 pointed out, the district court in the Porsche case held that the federal securities laws do not permit recovery of losses from swap agreements that reference securities traded on foreign exchanges. And as our memo of August 26, 2010 noted, National Australia has now been held to require dismissal of extraterritorial claims under RICO, a view that has since been taken by the U.S. Court of Appeals for the Second Circuit in Norex Petroleum Ltd. v. Access Industries, Inc., No. 07-4553-cv (2d Cir. Sept. 28, 2010). Finally, National Australia may well have an impact on the burgeoning wave of litigation under the Alien Tort Statute, with Judge Kleinfeld of the Ninth Circuit in Sarei v. Rio Tinto plc, No. 02-56256 (9th Cir. Oct. 26, 2010), calling for courts to reexamine, under National Australia, whether that law should have any extraterritorial reach at all.

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