The Supreme Court’s decision last month in the Morrison v. National Australia Bank precludes so-called "f-cubed" claims (claims brought by foreign plaintiffs who bought foreign stock on a foreign exchange). An unanswered question is whether Morrison also precludes "f-squared" claims – that is, claims by Americans who bought their shares of foreign companies on foreign exchanges. In a July 27, 2010 opinion, Southern District of New York Judge Victor Marrero ruled in the Credit Suisse Group case that Morrison also precludes the f-squared claims as well.
As discussed at greater length here, In the majoirty opinion in Morrison, the U.S. Supreme Court said that the relevant portions of the U.S. securities laws related solely to "transactions in securities listed on domestic exchanges" and to claims relating to "domestic transactions in other securities." Unfortunately, the opinion does not say what is meant by "domstic transactions," although the opinoin does later provide an alternative formulation of this second prong, clarifying that the relevant scope of the securities laws includes "the purchase or sale of any other security in the United States."
As I recently noted (here), on July 16, 2010, Central District of California Judge Dale Fischer held in connection with the lead plaintiff motion in the Toyota securities class action lawsuit that the argument that Morrison precluded f-squared claims was "better supported" by the Supreme Court’s decision. However, Judge Fischer emphasized that she was not making a "final determination" of the issue, and that her analysis for purposes of the lead plaintiff motion would not preclude the plaintiffs in that case from arguing that U.S. residents who purchased Toyota common stock on the Tokyo stock exchange have claims under the U.S. securities laws.
Though Judge Fischer drew back from making a "final determination" in the Toyota case that Morrison precluded f-squared claims, at least one U.S. court has now made such a determination on the merits. In his July 27 opinion in the Credit Suisse case, Judge Victor Marrero concluded that, in addition to f-cubed cases, Morrison also precludes claims f-squared claims as well.
As detailed here, Credit Suisse shareholders first sued the company and certain of its directors and officers in April 2008. The plaintiffs alleged that defendants failed to record losses on the deterioration in mortgage assets and collateralized debt obligations ("CDOs") on Credit Suisse’s books; that Credit Suisse’s internal controls were inadequate to ensure that losses on residential mortgage-related assets were accounted for properly; and that Credit Suisse’s traders had put incorrect values on CDOs and other debt securities, concealing the exposure the Company had to losses.
As discussed here, Judge Marrero had initially dismissed the plaintiffs’ claims, but in a February 11, 2010 decision, he held that the plaintiffs’ proposed Second Amended Complaint was sufficient to overcome the initial defects and he allowed the case to go forward as to plaintiff shareholders who had purchased Credit Suisse ADRs on the NYSE and as to U.S.-based shareholders who had purchased Credit Suisse shares on the Swiss Stock Exchange. However, he also ruled that he also ruled that the court lacked jurisdiction over the claims of plaintiffs that resided outside the U.S. and that had purchased their shares outside the U.S. – that is, he previously precluded the f-cubed claimants’ claims.
The July 27 Decision
Judge Marrero’s July 27 ruling related to one of the two groups of claimants whose claims he had previously ruled could go forward – that is, the U.S.-based shareholders who bought their shares outside the U.S. The defendants in the Credit Suisse case moved, in light of the Morrison decision, for a partial judgment on the pleadings to dismiss the plaintiffs who had purchased their Credit Suisse shares on the Swiss Stock Exchange. In his July 27 opinion, Judge Marrero granted the defendants’ motion.
In opening his discussion of the issues, Judge Marrero said that Morrison had "buried the venerable ‘conduct or effect’ test." For the remainder of the opinion, Judge Marrero worked this metaphor that the prior test is dead and buried. Thus, he characterized plaintiffs’ arguments by saying that the plaintiffs "seek to exhume and revive the body." However, the jurisprudence on which the plaintiffs seek to rely is now a "dead letter" and the plaintiffs’ "cosmetic touch-ups will not give the corpse a new life."
The Morrison court had held that Section 10(b) related only to the purchase or sale of a security listed on an American exchange or the purchase or sale of any other security in the United States. Judge Marrero said that "a corollary of this rule" is that the Act’s provisions "would not apply" to transactions involving the purchase or sale, wherever it occurs, of securities listed only on a foreign exchange or a purchase or sale of securities, foreign or domestic, which occurs outside the United States.
Judge Marrero said that the Morrison court had eliminated the prior doctrine and replaced it with "a new bright-line transactional rule embodying the clarity, simplicity, certainty and consistency" that the prior rule lacked. He said further that nothing in Morrison envisions the "exceptions and embellishments with which Plaintiffs seek to embellish the rule" – indeed an exception for U.S.-based investors who purchases shares on foreign exchanges would, Judge Marrero said, merely reinstate the old "effects" test and an exception because portions of the transactions took place in the U.S. would restore the old "conducts" test.
The urged exception, Judge Marrero said, would "defeat the various purposes the Supreme Court’s rule seeks to achieve" and would also, contrary to require U.S. courts to "enforce American laws regulating transactions in securities that are also governed by the laws of the foreign country."
The plaintiffs had argued that the Morrison court had not decided any of these issues, and that Morrison appropriately should be limited to its facts and limited holding. Judge Marrero said, however, that the Supreme Court’s decision in Morrison cannot be "squeezed, as in spandex, only into the factual straightjacket of its holding." The Supreme Court, Judge Marrero said, "went out of its way to fashion a new rule designed to correct the enumerated flaws" of the prior "conduct and effects" test, and the "geographic exception" "would not satisfy the new rule."
Judge Marrero concluded by saying that in the Morrison case, the Second Circuit’s conduct and effect doctrine "took a great fall" and "neither the Plaintiffs’ law horses nor this Court’s pen can put the pieces together again."
Despite the tone of certainty of Judge Marrero’s opinion, it remains to be seen whether or not other courts will similarly conclude that Morrison precludes f-squared claims. His opinion depends fundamentally on what he describes as the "corollary" of the Supreme Court’s holding in Morrison – the issues he decided were not, strictly speaking, before the Supreme Court in Morrison. Plaintiffs in other cases will undoubtedly argue, as the plaintiffs attempted to argue here, that the Supreme Court’s holding simply did not reach these issues, which were not before the Court.
But Judge Marrero in the Credit Suisse case, as well as Judge Fischer in the Toyota case, had no problem concluding that Morrison required them to reach the result they did, and it clearly will be challenging for plaintiffs in other cases to argue that the "transaction" test enunciated in Morrison left enough room for U.S-based shareholders of who purchased their shares on foreign exchanges – particularly with these lower court decisions on the books.
Fundamentally, the claimants in other cases will have to argue that the second prong of the Supreme Court’s "transactional" test – that is "(ii) the purchase or sale of any securitiy in the U.S." — preserved courts’ authority to reach claims of U.S.-based purchasers, even where the transaction may have taken place outside the U.S. If Judge Marrero’s opinion is any indication, these claimants may face an uphill battle.
Special thanks to the several loyal readers who sent me copy of Judge Marrero’s opinion.
Did the Dodd-Frank Act Change Anything?: Judge Marrero notes in a final footnote to his opinion, for "whatever comfort it may bring to Plaintiffs and counsel," that Section 929(b) of the Dodd-Frank Act granted federal courts extraterritorial jurisdiction under the conduct or effect test for proceedings brought by the SEC. (The Act also calls for further SEC study of the issue of the extraterritoriality of the U.S. securities laws.)
However, according to a July 21, 2010 memo by George T. Conway, III of the Wachtell Lipton law firm, as a result of a "drafting error," the new provision purporting to give the SEC extraterritorial authority under certain circumstances is ineffective. (Conway, it should be noted, briefed and argued the Morrison case for the defendants.) Conway points out that the new statutory provision unambiguously refers only to the "jurisdiction" of the U.S. courts, which he says, is not sufficient to extend court’s authority in light of the Morrison case:
In National Australia Bank, the Supreme Court reiterated the longstanding principle that the territorial scope of a federal law does not present a question of "jurisdiction," of a "tribunal’s power to hear a case," but rather a question of substance—of "what conduct" does the law "prohibit"? The new law does not address that issue, and accordingly does not expand the territorial scope of the government’s enforcement powers at all.
Of course, Conway notes, some courts may be "tempted" to find that Section 929(b) extended the courts’ reach, but courts generally are admonished to refrain from correcting Congressional drafting errors. In other words, Congress may have to go back and tone up the language in Section 929(b) in order for the SEC effectively to be able to exercise the authority Congress intended to extend in that provision.
Meanwhile, Vivendi Plaintiffs Get "Creative": The defendants in the Vivendi securities class action case are also trying to narrow the plaintiffs’ claims in their case, which is an exercise of considerable import give the jury verdict entered on behalf of plaintiffs in the case in January 2010. According to Andrew Longstreth’s July 27, 2010 Am Law Litigation Daily article (here), the plaintiffs are getting rather "creative" in their efforts to argue that Morrison does not preclude the claims of the claimants who purchased their Vivendi shares outside the U.S.
The plaintiffs arguments are complicated but basically they are arguing that because Vivendi ADRs trade on the NYSE, and the ADRs are backed by common shares, the company’s common shares trade in the U.S. (there may be more to it than that, but I have to admit I really didn’t understand the argument after a couple of tries). The article quotes George Conway (whom I cited in the preceding item) as saying that the plaintiffs’ arguments are "Completely nuts. N-U-T-S."
The point is that plaintiffs in many pending are scrambling to try to preserve what they can in the wake of the Morrison decision. For many plaintiffs, it is going to be an uphill battle.