In its June 2010 decision in the Morrison v. National Australia Bank, the U.S. Supreme Court enunciated a "transactions" test to determine the applicability of the U.S. securities laws. The Court said that the U.S. securities laws apply only to "transactions in securities listed on domestic exchanges and domestic transactions in other securities." Lower courts have wrestled with Morrison’s “second prong” as they struggled to determine what constitutes a "domestic transaction in other securities." As the Second Circuit has commented, Morrison itself “provides little guidance as to what constitutes a domestic purchase or sale.”
Recent developments in the SEC’s pending case against mid-level Goldman Sachs executive Fabrice Tourre and involving the infamous “built to fail” Abacus CDO transaction underscore the difficulties courts face in wrestling with Morrison’s second prong.
As discussed here, in April 2010, the SEC filed an enforcement action against Goldman and Tourre. Goldman settled the SEC’s claims against the company for a total of $550 million in penalties and disgorgement (as discussed here). Tourre was not a part of the settlement and the SEC’s action against him has remained pending and is moving toward a July 2013 trial date. Tourre, who allegedly was involved in structuring and marketing the securities at issue in the case, is perhaps best known for his reference to himself in an email as “fabulous Fab.” (An April 2010 New York Magazine article entitled “The Fabulous Life of Fabrice Tourre” can be found here.)
As the case against Tourre went forward, one important development was Southern District of New York Judge Barbara Jones’s June 2011 ruling (here) dismissing a part of the SEC’s case based on Morrison. Tourre moved to dismiss a portion of the complaint relating to the sale of Abacus notes to IKB, a German bank. Tourre argued that because the actual seller in the transaction was a Cayman Islands based issuer, there was an insufficient connection to this country to allow the SEC to pursue claims pertaining to IKB’s purchase of the notes.
As discussed in a guest post on this blog (here) by Angelo Savino of the Cozen O’Conner law firm, Judge Jones found that Morrison’s second prong requires a showing that “irrevocable liability” has been incurred in the U.S. She specifically rejected that argument that it was sufficient to satisfy Morrison’s second prong that the transaction closing took place in the United States; she said that
In view of the fact that none of the conduct or activities alleged by the SEC, including the closing, constitute facts that demonstrate where any party to the IKB note purchases incurred “‘irrevocable liability [,]’” . . . the SEC fails to provide sufficient facts that allow the court to draw the reasonable inference that the IKB note “purchase[s] or sale[s were] made in the United States.”
Judge Jones dismissed the portion of the complaint relating to the IKB transaction, but other portions of the complaint involving domestic securities purchasers remained pending.
The SEC’s enforcement action has now been reassigned from Judge Jones to Southern District of New York Judge Katherine Forrest, a relatively new judge who has been on the bench for just one year. The SEC, perhaps trying to take advantage of this change, has now moved to reconsider Judge Jones’s ruling pertaining to the IKB notes transaction, as discussed in detail in interesting October 19, 2012 article on the New York Times Dealbook blog (here) by Wayne State University law professor Peter J. Henning.
The SEC’s motion for reconsideration is based on the Second Circuit’s March 2012 decision in Absolute Activist Value Master Fund Ltd. v. Ficeto, in an opinion that came down about nine months after Judge Jones’s ruling in the Goldman Sachs case. The Second Circuit quoted with approval the “irremovable liability” standard Judge Jones had articulated in the Goldman case. But the appellate court added that “a sale of securities can be understood to take place at the location at which title is transferred” and held that “to sufficiently allege a domestic transaction in securities not listed on a domestic exchange, we hold that a plaintiff must allege facts suggesting that irrevocable liability was incurred or title was transferred within the United States.” (The Second Circuit’s decision in the Absolute Activist Value Master Fund case is discussed in detail here).
In moving for reconsideration of Judge Jones’s ruling, the SEC, in reliance on the fact that the closing of the IKB transaction took place in the United States, argued that the U.S. securities laws do apply to the IKB transaction and therefore that its claims pertaining to the IKB transaction should not have been dismissed. Toure disputes whether these charges can be reinstated at the point in the case, arguing in particular that the parties have already conducted extensive discovery and if the dismissed claims were reinstated, discovery would have to be reopened and the trial date would have to be further postponed.
Judge Forrest has yet to rule on the SEC’s motion, which, according to Professor Henning’s article, was argued last week. While the motion has not yet been resolved, the issues that it presents highlight the struggle the lower courts have had to deal with in trying to apply Morrison’s second prong. Judge Jones did the best she could with what was essentially a blank slate at the time, and it is noteworthy that the Second Circuit itself not only did not reject her “irrevocable liability” test but expressly incorporated it into the standard the appellate court applied. But the Second Circuit further held that the place where title transferred can also be sufficient to establish that a deal is a “domestic transaction in other securities.” That is, the appellate court affirmed a basis for the securities laws to apply on a ground Judge Jones expressly rejected.
As Judge Forrest takes up the SEC’s motion for reconsideration, it is not going to be enough for her simply to consider the Second Circuit’s decision in Absolute Activist Value Master Fund case. She is also going to have to take into account the fact there are at least two other cases pending before the Second Circuit that could even further impact evolving standards under Morrison’s second prong. As discussed here, appeals before the Second Circuit remain pending both in the Porsche case and in the Société Générale case. Both are high-profile cases and both raise potentially significant issues under Morrison’s second prong. (Background on the Société Générale case can be found here and background on the Porsche case can be found here.)
Although the standard the Second Circuit articulated in the Absolute Activist Value Master Fund case seemingly provides a sufficient basis to address both of these two remaining appeals, there is always the possibility that the appellate court’s rulings in the two pending cases might provide further gloss on the standard the court previously articulated. In other words, there is a danger that even if Judge Forrest were now to reconsider Judge Jones’s earlier ruling in the Goldman case, it is possible that when the Second Circuit’s rulings later come down in the two pending cases that there might be yet other considerations presented that might affect the question whether or not the SEC’s allegations concerning the IKB transaction should be reinstated.
It is entirely possible that when the Second Circuit finally releases its long awaited rulings in the Porsche and Société Générale cases that these issues will substantially cleared up. That isn’t much help now for Judge Forrest, the SEC or Tourre. As Professor Henning points out in his article linked above, the stakes for Goldman and for the SEC are high in this pending case, which is one of the highest profile cases to come out of the financial crisis. And it seems possible that Judge Forrest’s ruling on the SEC’s motion for reconsideration will provide judicial interpretation of Morrison’s vexing second prong.
Silver Anniversary: Long-time readers of this blog will know that The D&O Diary is an attentive follower of American Lawyer writer Susan Beck, whom I interviewed for this site in January 2012 (refer here). In recognition of her 25th anniversary with The American Lawyer, Beck wrote a retrospective article entitled “The Paper Chase” (here) reflecting on her two and a half decades with the publication. Beck’s article not only provides an interesting overview of her career in legal journalism, it also provides an interesting perspective on the changes in the legal industry and in her profession during her time with the magazine. It was interesting to recall the events on which she has reported and even to see many familiar names, like that of our old friend Tower Snow, whom Beck has interviewed.
I had to laugh at her reminiscences about the magazine’s coverage of the collapse of the Shea and Gould law firm, whose 80-year old principals continued to come to work every day. Beck recalled one of the principals, Milton Gould, as saying: “We’re kind of like an octogenarian’s gonads, still there but not of much use."
During her time with the American Lawyer, Beck has been posted to New York and San Francisco, but she is now a neighbor of mine here in Northeast Ohio. As she notes in her American Lawyer article, “In 2007 I moved back to my hometown of Cleveland, which I love. With a phone and an Internet connection, I can work almost anywhere. The one thing that hasn’t changed is that every day I’m still searching for a great story.” When I interviewed her for this site, Beck had this to say about living in Cleveland:
I love it. There are a lot of great things about New York and San Francisco, but I feel a level of comfort in Cleveland that I missed in those other cities. It’s a lovely place to live. The cost of living is so much better, the people are so nice and friendly, and I even prefer the weather. Those SF summers were way too cold and foggy, and I like snowy winters. On the down side, all our pro sports teams really suck right now.
As befits her journalistic skills, Beck’s assessment of living in Cleveland is succinct and accurate. Everyone here at The D&O Diary congratulates Beck on her 25 years at the American Lawyer. We all also look forward to reading her terrific articles for years to come.