Guest Post: A Response to the Vivendi Plaintiffs About Morrison v. National Australia Bank.
Earlier this week, I hosted a guest post from the counsel for the plaintiffs in the Vivendi securities class action lawsuit, in which plaintiffs’ counsel summarized their position on the impact that the U.S. Supreme Court’s decision in Morrison v. National Australia Bank had on their case.
In response to their post, University of Minnesota Law Professor Richard Painter prepared the following commentary and submitted it to me for publication here. By way of background, Professor Painter’s opening reference is to George Conway of the Wachtell Lipton firm, who, as reported in the prior post on this topic, briefed and argued the Morrison case for National Australia Bank, and who has been quoted as characterizing the position of the Vivendi plaintiffs on this issue as “Completely nuts, N-U-T-S.”
Here are Professor Painter’s comments:
Actually, Conway has to be right. The argument that Section 10(b) applies to foreign transactions in securities merely because those securities are listed in the United States is absurd.
First, a reading of the entire Morrison opinion leads to the conclusion that the Court did not extend the reach of Section 10(b) to foreign transactions in securities listed on an American exchange. The Court’s unequivocal holding is that Section 10(b) does not apply “extraterritorially.” The Court repeatedly emphasizes that the “focus” of American securities laws is on “domestic transactions” and on “purchases and sales of securities in the United States.”
An extremely large hole would be driven through that holding if the mere listing of a stock or an ADR on an American exchange were enough to justify application of U.S. law to a foreign purchase of the stock on a foreign exchange, as there are hundreds if not thousands of foreign issuers that list their home-country shares or ADRs on a U.S. exchange.
Second, the Court was well aware that NAB had ADRs listed in New York. In order for a foreign issuer to sponsor and list ADRs on a U.S. exchange, it must register the underlying, deposited shares with the SEC and, at least for the NYSE, actually list the underlying shares (though not for trading). NAB’s registration statement in the United States, for example, pertained to “ordinary shares” (At page 58 of the Supplemental Joint Appendix in Morrison v. NAB, the 20-F cover says NAB’s ordinary shares were “registered on the NYSE.” This cover looks exactly like the 20-F cover for Vivendi that the plaintiffs there are relying on.)
The Court nonetheless held that Section 10(b) did not apply to NAB’s ordinary shares traded in Australia. This holding is inconsistent with a theory that the Court would apply Section 10(b) to any security listed on a U.S. exchange even if the transaction in that security is outside the United States.
Many companies have ADRs trading in the United States. It cannot possibly be the case that the Court intended Section 10(b) to apply not only to the ADR itself but also to a foreign purchase of the underlying stock on a foreign exchange simply because the underlying shares are registered in the United States to enable the company to issue the ADR.
Indeed, if the Vivendi plaintiff’s counsel were correct, Section 10(b) after Morrison would have a broader extraterritorial reach than ever before. Think of the many foreign-cubed claims dismissed under the Second Circuit’s conduct test before the Supreme Court ruled: many – if not most – of the defendant issuers in those cases had sponsored ADRs that traded on American exchanges, just like NAB, and just like Vivendi. On plaintiffs’ reading of Morrison, those cases were wrongly dismissed. Section 10(b) – which the Supreme Court said did not have any extraterritorial application “at all” – according to Vivendi plaintiffs’ counsel would apply more extraterritorially than ever before.
This is the exact opposite of what the Court clearly intended. And it would mean that the Court got the result wrong in Morrison itself.
There are other points to make against the plaintiffs’ contention, such as the significance of Section 30 of the Exchange Act, whose territorial limitations would be rendered meaningless if plaintiffs’ reading of Morrison were correct. The bottom line is: it is quite clear that plaintiffs who transacted in securities outside the United States have no cause of action under Section 10(b) merely because these securities or related ADRs are listed on a U.S. securities exchange.
Nice try plaintiffs, but if you want a different rule, ask the SEC to recommend one in its study of extraterritorial private rights of action that Congress mandated in Dodd-Frank. Don’t waste your time with a meritless interpretation of Morrison.
I encourage reader to respond to Professor Painter’s commentary or to the Vivendi plaintiffs’ prior column using this blog’s comment function.
I welcome guest blog posts from responsible commentators on topics of interests to readers of this blog. Please contact me (using the Contact function in the right hand column) if you are interested in submitting a guest column.
"From February 2005 to July 2007, he was Associate Counsel to the President in the White House Counsel's office, serving as the chief ethics lawyer for the President."
In other words, Mr. Painter was the chief ethics lawyer for the most unethical presidential administration in US history. Enough said about the source. You can see feel the seething anger coming through Mr. Painter's commentary. Nice try plaintiffs? What is this, a junior high playground?
Mr. Painter avoids the most crucial and substantive issue in Morrison. THREE TIMES, Scalia says that 10(b) applies to two types of situations: (1) transactions in securities listed on domestic exchanges, and (2) domestic transactions in other securities. For all you strict constructionists out there, when Scalia says something THREE TIMES, don't you think it means what it says? If a US citizen buys a foreign company's ADR through his US broker on a US exchange where that ADR is listed, that claim survives Morrison. If that same US citizen has his US broker buy shares of an ADR listed company on the London Stock Exchange, that too fits into both parts of the Morrison test. Remember, the Morrison plaintiffs left standing were all Australians. The only American investor was dismissed for lack of damages. The Court expressly avoided that issue. I'd like to hear what Mr. Painter has to say about what the second part of the Morrison test means. Because as it stands now, Mr. Painter has essentially deleted that part of the opinion from his memory. Nice try, Mr. Painter.
Remind me again of where the Morrison opinion makes a distinction based on whether the plaintiff is or is not a U.S. citizen?
That seems to be about as relevant to this matter as who did or did not work for which President prior to commenting on the Morrison case.
RWP
An ounce of rule is worth the world's weight in discussion and dictum.
The discussion about intent is, lets be honest, best phrased as "Everyone knows Scalia hates plainiffs lawyers, so he must have meant Y even though he plainly says X, so lets pretend everyone who says the rule is X, is crazy". It's bad legal reasoning and an appelate court will at some point say so.
Question for the professor: if the citizenship of the plantiff doesn't matter, does the citienship of the defendant company matter?
The Court's opinion quite clearly focuses on one thing: the location of the transaction.
Citizenship of the plaintiff or defendant is not a factor that is given weight in the opinion. The statutory language -- which never created an express private right of action to begin with -- also does not mention citizenship of a violator or investors affected by a violation.
Whether citizenship, residency, listings on exchanges, or any other factor should be given weight is a policy issue for Congress to decide. Hence my reference to the SEC study.
RWP
Mr. Painter, you still haven't answered the question about what the "domestic transactions in other securities means." Have you forgotten that part of the opinion? Also, if a US investor calls his broker at Merrill Lynch and says buy Stock Z after market hours and that stock is listed on both a US and foreign exchange, and the broker buys it from the foreign exchange, where does the "transaction" take place? Similarly, if a foreign investor wants to trade after LSE closes and asks his UK broker to buy shares or ADRs of a foreign company listed on a US exchange and he does so on a US exchange, where does that transaction take place? In an era of 24-hour global electronic trading networks and arbitrage, this undoubtedly happens all the time. Please explain your position on what "domestic transaction in other securities" means and why Scalia used that language three times in the opinion.
So Prof. Painter knows that Justice Scalia, that paragon of literal interpretation, himself did not mean what he said when stating the holding in Morrison (multiple times). Scalia's extensive deference to the language of 10(b) was just a charade; he really meant to exclude all assertedly "foreign" transactions, no matter what his analysis of the statutory text concluded. -- That's a sorry comment on either Prof. Painter, Justice Scalia, or both. Juvenile accusations like "intellectual dishonesty" and "hypocrisy" come to mind too readily. Unfortunately, I fear that too many federal judges have been chosen from the same pool as Prof. Painter, and an honest application of the first-part Morrison holding is by no means assured.
But I'd also like to engage on the second part of the Morrison test, which Prof. Painter also seems to think is self-executing: What is the "location of the transaction"? Once again, Justice Scalia gave us some analysis. The second part of his holding refers to "domestic transactions in other securities." His decision provided authority for interpreting that test as well -- 17 C.F.R. §230.901, cited to explain “sales that occur outside the United States" and thus aren't covered by 10(b). That regulation does indeed exclude “sales that occur outside the United States‚ - but it goes on to clarify that sales in which the purchaser is located “in the United States" are not sales “outside the United States." Specifically, 17 C.F.R. §230.903(a)(1) defines offers and sales that “occur outside the United States" as offers or sales made in an “offshore transaction, and 17 C.F.R. §230.902(h)(1)(i) then defines “offshore transaction" to exclude sales “made to a person in the United States." It follows that a transaction in which the purchaser is located "in the United States" is a domestic transaction. The Morrison Court could not logically have cited the regulation if it was excluding purchasers in the United States from "domestic transaction" coverage (assuming the second part of the Morrison test even needs to be invoked).
So far as I know, the courts and counsel assessing whether "f-squared" (domestic purchaser) claims are dead after Morrison have failed to undertake this elementary analysis as well. Are we all, including most plaintiffs' lawyers, so blindly in thrall to the idea that Scalia is so smart and so anti-class-action that he could not possibly have penned a holding reflecting the (rather expansive) language of 10(b), regardless of the consequences?
Mr. Painter mentions that section 10b does not allow for a private right of action. But it's critical for readers to ralize that Morrison impacts the SEC too, and the defense position essentially is that the Securities EXCHANGE Commission could not use the workhorse federal anti-fraud statute on transactions in securities that are listed on US exchanges if the transactions execute overseas. Insider traders rejoice! Under the defense approach, insider traders can escape 10b liability by directing their brokers to route the order overseas, even if the insider is a US citizen placing an order from the US and works at a US company.
And what if a purchase of a secutity executes in the US but the sale upon which damages are incurred gets executed overseas? The purely transactional approach, in addition to not reflecting the actual rule, simply does not work.
Professor Painter - your statements here appear to contradict a 7/28/10 Bloomberg article where you're para-phrase quoted as stating "[t]he impact of the high court ruling on private transactions, including derivatives, may prove complicated," and directly quoted stating “[y]ou could have one party in Paris, one party in New York and the derivative security was designed by Goldman Sachs in London....[w]here did the transaction take place?”
How do you reconcile: (i) the level of complexity (and potential non-applicability of Morrison) you would attribute to a transaction in partially-foreign derivatives with (ii) transactions executed by U.S. investors on electronic exchanges from their U.S. locations that ultimately get transacted on some foreign exchange?
Whether a transaction takes place in the United States is usually clear, but not always clear, as I pointed out to Bloomberg News. Derivative securities is one area where the location of the transaction may not be clear. Appellate courts will have to determine how the "location of the transaction" test is to be applied.
NAB prevailed in this case. NAB had ADRs and registered the underlying stock with a U.S. stock exchange in order to have the ADRs trade here. Under the Vivendi plaintiffs' theory NAB would have lost.
The bulk of the opinion makes it clear that Section 10(b) applies to transactions in the United States and not to other transactions. Justice Scalia conveyed this message by using a poorly crafted paraphrase of Section 10(b), the language of which reaches transactions in "any security registered on a national securities exchange or any security not so registered" Why he wrote it this way I am not certain, but the statute he is interpreting expressly applies to securities registered on a national securities exchange in the same way as it applies to securities not so registered. Whether the securities are listed on a national securities exchange makes no difference.
The Court held that NAB could not be sued in the United States over securities traded in Australia. The Court knew that the Australian securities were also listed in the United States. That made no difference.
I think it's clear at this point that the majority of commentators in this post have gotten it quite wrong. Although Prof. Painter may have hijacked his arguments from the Vivendi hearing transcript, they still very much represent the better reading of Morrison. A quick look at the Sgalambo, Cornwell, and Alstom opinions readily reveals the obvious meaning of the Morrison decision. Even Justice Stevens in his dissent recognizes the import of the case... you should do the same.
Mr. Spencer is on to something, but not what he thinks. Scalia simply doesn't understand that when you "register" or "list" securities in the U.S., those same securities may actually be traded on a foreign exchange. Once you comprehend that misunderstanding, the whole thing becomes clear.