Guest Post: Vivendi Plaintiffs' Argument on the Impact of Morrison v. National Australia Bank
In a series of recent posts (most recently here), I have been taking a look at the practical impact that the U.S. Supreme Court’s June 24, 2010 decision in Morrison v. National Australia Bank will have on securities litigation in the United States involving non-U.S. companies. Among the cases seemingly most impacted by the decision is the Vivendi securities class action lawsuit pending in the Southern District of New York. Not only is the defendant company domiciled outside the United States, but about three quarters of its shareholders reside in France and most presumably purchased their shares on non-U.S. exchanges.
The question of whether these shareholders may assert a claim in a U.S. court under U.S. law is particularly acute due to the verdict that the jury returned on behalf of the plaintiffs in the case in January 2010.
As Andrew Longstreth reported on July 27, 2010 in the Am Law Litigation Daily (here), the parties to the Vivendi case recently presented their arguments to the court on the impact of Morrison. Among other things, the article characterized the plaintiffs’ argument that the foreign plaintiffs may proceed in the case as "highly creative" and the article also quoted George T. Conway III of the Wachtell Lipton law firm – who briefed and argued the Morrison case for the defendants – as describing the plaintiffs arguments as "Completely nuts, N-U-T-S."
After I linked to the Am Law Litigation Daily article, counsel for the plaintiffs in the Vivendi case reached out to me to express their concerns that their position has been misunderstood and is not receiving a fair hearing in the press and the blogosphere. In response, I offered to host a guest blog post on this site, in which the plaintiffs counsel could present their position as they wished. What follows is the guest post submitted to me by Michael Spencer of the Milberg law firm.
The emerging conventional wisdom in legal circles and the media is that the Supreme Court’s decision in Morrison v. National Australia Bank sounded the death knell for use of Section 10(b) of the Securities Exchange Act on behalf of "foreign" purchasers of securities who were allegedly defrauded. Some are even suggesting that defrauded Americans who bought shares traded on a foreign exchange have no remedy.
Any fair and careful lawyer should find that conventional wisdom galling. The first part of the test articulated by the Morrison Court is being missed -- or deliberately ignored. In assessing the so-called extraterritorial scope of Section 10(b), the Court applied the plain language of the statute and found coverage for "transactions in securities listed on domestic exchanges and domestic transactions in other securities." That holding is repeated several times in the Court’s decision, including in the final paragraph. But the first part of the test has been passed over in lower court decisions, legal commentary, and media reports in the month since Morrison was issued. It’s as though the words repeatedly used by Justice Scalia -- "securities listed on domestic exchanges" -- disappeared the moment he wrote them.
It is indubitable that many "foreign" companies’ ordinary (common) shares are registered under the Exchange Act and listed on the NYSE, even if the shares are not traded on the exchange and quoted in the Wall Street Journal. (Justice Scalia used "registered" and "listed" interchangeably; he said "The Act's registration requirements apply only to securities listed on national securities exchanges.") That is not surprising, since many provisions of the Exchange Act, including Section 10(b), come into play when securities are registered under the Act. Any competent corporate lawyer practicing in this area will confirm that foreign companies sponsoring upper-level ADR programs in the U.S. must, and do, register and list. Some observers are confusing registration and listing with "trading," but the Court repeatedly used "registered" and "listed," the terms from the statute and regulations. And those who think only the particular custodial shares "underlying" an ADR program get registered should please refer to 17 C.F.R. § 240.12d1-1 ("Registration effective as to class or series"). It takes 20 seconds to google a foreign company’s Form 20-F cover page to ascertain the status of its shares.
Justice Scalia usually means what he says. Under the plain language of the Supreme Court’s holding, Section 10(b) covers transactions in shares "listed on a domestic exchange." Period. No matter whether the purchaser is foreign or domestic, no matter where the transaction occurred.
That result apparently gets defense lawyers in a dither. Wachtell partner George Conway, who represented the winner in Morrison, was quoted as calling the argument "N-U-T-S." As a plaintiffs’ lawyer, I’m happy to read that reaction -- if Conway can respond only with a quip rather than a substantive answer, we are probably on to something. The argument wasn’t made by plaintiffs’ counsel in recent motion practice over whether claims even by domestic purchasers of Credit Suisse ordinary shares traded abroad survive after Morrison; SDNY Judge Marrero dismissed the claims, persumably without knowing that the company is registered and listed on the NYSE. SDNY Judge Holwell has the question squarely before him in post-verdict motions in Vivendi for both foreign and domestic ordinary share purchasers, and will probably rule within the next month or so. Today’s conventional wisdom should by right become tomorrow’s embarrassment.
I encourage readers who have comments in response to Michael Spencer’s guest post to add their comments to this post using the site’s Comment feature.
I would like to thank Michael Spencer for his willingness to submit this post and have it published on this site. I welcome the opportunity to publish guest posts from responsible observers on this site. Those who may be interested in publishing a guest post on this site should feel free to contact me using the Contact function in the upper right hand column of this site.
It seems that plaintiff's counsel would have us believe that all of a company's securites are "domestic securities" if they registered and/or listed on a domestic exchange. However, the Court is careful to point out that "Section 10(b) does not punish deceptive conduct, but only deceptive conduct 'in-connection with the purchase or sale of any security.'" The Court goes on to state that "those purchase-and-sale transactions are the objects of the statue's solicitude." A plain reading of the opinion shows that the Court is seeking to define the reach of the statute as it relates to the purchase or sale (i.e. the trading of) securities. The "in connection with the purchase or sale" language of the statute has been the remedial trigger since its creation and the Court has not at all deviated from that principle. Thus, when a foreign company registers shares as ADRs on a US exchange the statute would clearly apply in the Court's view becuase they are "traded" on the US exchange. But, this privilege would not somehow apply to other securities issued by the same company but purchased and sold on a foreign exchange. The rule promulgated by the Court is, by the Court's own words, a "transactional rule." It is focused on the transaction (i.e. the trade) and not on the status of the issuer. Plaintiff's counsel is attempting to take one line of the opinion and fit it into a framework that was not intended by the Court. If one where to accept, for example, what I think plaintiff's counsel is arguing it would render moot the Court's clear intent to place limitations on the extraterritorial application of the statute. How would plaintiff counsel's interpretation of the opinion not result in unbridled US regulation of foreign exchanges? Simply put, it would. And, the Court plainly said that this was not within the scope of the statute. "We know of no one who thought that the Act was intended to "regulate" foreign securities--or indeed who even beleived that under established principles of international law Congress had the power to do so." If US listed securities are issued by a foreign defendant and traded on a foreign exchange by a foreign plaintiff they must, by definition, be foreign securities. If they are not, I would like plaintiff's counsel to tell me what are. It is not at all unreasonable to conclude that securities issued by US companies but listed and traded on foreign exchanges would be beyond the reach of the statute. The trigger for statutory claims in Section 10(b) is the purchase and sale of securities. How plaintiff's counsel sees this as separate and apart from "trading" in securities is beyond me.
If it is a completely transactional test what could the words "transactions in securities listed on domestic exchanges and domestic transactions in other securities" possibly mean? For the rule to be that the security has to have been bought on a US exchange, the first part of the sentence must be ignored. I agree the decision is schizophrenic in its dictum, likely because Scalia really wanted to shut the door completely, but, ultimately, needed to stick to the statutory language which talks about listing on a US exchange. As for "we know of no one who thought the act was intended to regulate foreign secutities . . .", the answer is that if a security is listed in the US, it is not deemed by law a foreign security. Transactions in securities listed on a US exchange but traded elsewhere are not extraterritorial transactions.
The 34 Act is the Securities EXCHANGE Act, to be implemented by the Securituies EXCHANGE Commission. Listing on a US exchange was obviously intended to be meaningful. Where a security is listed is not incidental to the reach of the Act.
There is the purely transactional language in there, but the actual holding and express rule Scalia lays down is really really clear and simple and can't be brushed away. Defense lawyers are reading everything in the decision except the part that counts: the express and plain rule set by the Court.
Lit E Ral responded more adroitly than I could have to the contortions Luke Green had to endure in trying to escape the plain and repeated language of Morrison's holding on this point.
But to answer the one question Green asked (under my reading of Morrison, what securities ARE "foreign"?): Believe it or not, plenty of securities are not listed on a US exchange. I think even Vivendi de-listed its shares when it downgraded its ADR program a couple of years ago. The "listing" test is meaningful.
Speaking of being careful about the language of the opinion, the lanugage at issue in Section 10(b) states "in connection with the purchase or sale of any security
registered on a national securities exchange.” "National securities exchange" is a term of art in the 34 Act. It is an exchange that has registered with the SEC under Section 6 of the 34 Act, of which there are only about 20. Only the issuer can take the initiative to file/register with one of those exchanges, at which point the securities may be "listed" on the exchange. The securities are always "listed" on the exchange that the issuer applies to, though they may be traded on other exchanges. As an example, see the listing process for NASDAQ: http://www.nasdaq.net/PublicPages/ListingProcessMain.aspx.
Also seemingly important is the fact that the reference is to the "security" rather than the "issuer." While an issuer may be listed on the NYSE, all of its securities are likely not. Some securities may only be registered on foreign exchanges, or not registered at all. It would seem that you need to look at whether the securities that were purchased were registered on a national securities exchange, which may be a difficult factual inquiry.
If the test is simply whether the securities are registered with a national securities exchange, this seems like a meaningful requirement, and one that would not surprise any issuer that has taken the effort to register with a US exchange. If an issuer purposely avails itself of a national securities exchange (not always the case with ADR programs), I see no comity issues. So there is something there, but I don't think it is going to help plaintiffs that are confronted with these issues in the first place.