Yet another securities class action lawsuit against a non-U.S. company has been dismissed based on the U.S. Supreme Court decision in Morrison v. National Bank of Australia. In a decision that specifically addresses many of the questions that have been discussed in the wake of Morrison, Southern District of New York Judge John Koeltl, in an October 4, 2010 opinion (here), granted the defendants’ motion to dismiss the Swiss Re subprime-related securities class action lawsuit..


Though the case was dismissed, the opinion does suggest some alterative approaches plaintiffs may use to try to avoid Morrison’s preclusive effect.


As discussed here, the plaintiffs first sued Swiss Re and certain of its directors and officers in 2008. As Judge Koeltl later put it in his October 4 opinion. "the gist of many of the plaintiffs’ alleged misstatements or omissions is that Swiss Re failed to disclose that it had issued two [credit default swaps, of CDSs] that insured CHF 5.3 billion of assets… It eventually suffered a CHF 1.2 billion loss on these CDS when it suddenly wrote down the value of the CDOs and sub-prime securities that were insured by the CDSs."


After the Supreme Court issued its opinion in Morrison, the defendants in this case moved to dismiss, contending that the Exchange Act did not apply to the plaintiffs’ purchases of their Swiss Re securities, which had taken place on a non-U.S. exchange.


The plaintiff, Plumbers Union Local No. 12 Pension Fund, argued that Morrison did not preclude their claims, even though the transaction on which they had acquired their shares had taken place on a London-based subsidiary of the Swiss stock exchange. The plaintiffs argued that they had decided to purchase their Swiss Re shares in Chicago, and that the purchase orders were placed electronically by traders located in Chicago. The plaintiffs contended that the purchase occurred when and where an investor places a buy order.


Judge Koeltl, citing the several recent decisions, held that the term purchase "cannot bear the expansive construction plaintiffs propose, at least for purposes of Morrison’s transactional test." A contrary ruling, Judge Koeltl said "would require a fact-bound, case-by-case inquiry into when exactly an investor’s purchase order became irrevocable. It would also produce the multiplicity that the Supreme Court directed courts to avoid."


Accoringly, Judge Koeltl held that "a purchase order in the United States for a security that is sold on a foreign exchange is insufficient to subject the purchase to the coverage of section 10(b) of the Exchange Act." He acknowledged that there might be "unique circumstances in which an issuer’s conduct takes a sale or purchase outside this rule," but "the mere act of electronically transmitting a purchase order from within the United States is not such a circumstance."


Judge Koeltl also expressly rejected the suggestion that merely because the purchaser was domiciled in the U.S., that the U.S. securities laws applied to the transaction, noting that "a purchaser’s citizenship does not affect where a transaction occurs; a foreign resident can make a purchase within the United States, and a United States resident can make a purchase outside the United States.." Where the decision to purchase took place and even the location of the harm are also irrelevant. .


Having determined that the U.S. securities laws do not apply to the plaintiffs’ shares, Judge Koeltl then addressed the plaintiffs’ argument that even if they could not assert claims under the U.S. securities laws, they could assert their claims under state common law and the Court would have diversity of citizenship jurisdiction over such claims.


The parties had previously stipulated that if the plaintiffs’ claims under section 10(b) where dismissed under Rule 12 (b)(6) for failure to state a claim on which relief could be granted (as opposed to a dismissal under Morrison), the dismissal would also be dispositive of any common law fraud claims.


Judge Koeltl then proceeded to address the defendants’ motion to dismiss the section 10(b) claim and granted the motion to dismiss, finding that the plaintiffs had failed adequately to allege that the defendants had made materially or misleading statements. Judge Koeltl also found that the plaintiffs had failed adequately to allege scienter. Based on this determination, he concluded granted the defendants’ motion to dismiss, which was determinative not only of plaintiffs’ section 10(b) claims but also the plaintiffs’ claims for common law fraud.



There are a number of interesting things about this opinion. The first is the specificity of Judge Koeltl’s analysis about what factors are or are not relevant to the post-Morrison analysis of whether or not the U.S. securities laws apply. His analysis seems to make clear that the location on the exchange on which the transaction took place is going to be determinative, and neither the citizenship nor location of the purchaser is relevant.


This view, which is consistent with the growing string of post-Morrison decisions, suggest that the so-called "f-squared" cases (that is, involving claims by U.S. claimants who purchased their shares in a non-U.S. company on a non-U.S. exchange) seem increasingly unlikely to have remain viable post-Morrison.


Judge Koeltl’s opinion does not address the more controversial question, raised sua sponte by Judge Berman in his recent opinion in the SocGen case (about which refer here), that under Morrison even the claims of purchasers who acquired ADRs in domestic transactions are precluded. Indeed, Judge Koeltl’s opinion is silent on the question of whether Swiss Re ADRs trade in the U.S.


But though Judge Koeltl’s opinion does not address the claims of domestic purchasers of ADRs, his analysis seems to suggest that he would not have gone as far as Judge Berman and concluded that the securities don’t apply to U.S. ADR purchases. First, he states that "Morrison held that a domestic purchase or sale is necessary (and as far as the opinion reveals, sufficient) for section 10b) to apply to a security that is not traded on a domestic exchange" — which suggests that in Judge Koltl’s view, Morrison does not preclude claims even of domestic ADR purchasers who acquired their shares over the counter, rather than on an exchange.


The Swiss Re decision is the latest in a string of rulings suggesting that plaintiffs face significant hurdles in attempting to pursue securities claims against companies domiciled outside the U.S., particularly where the company’s share trade largely outside the U.S. However, the Swiss Re decision does suggest, albeit indirectly, some the ways the plaintiffs may attempt to circumvent these obstacles.


Thus, for example, even though Judge Koeltl’s ruling on the defendants’ motion to dismiss resulting in a dismissal of the plaintiffs’ common law claims, there was certainly nothing in his opinion that suggests that plaintiffs could not assert such claims. The fact is that Morrison only applies to claims under the Exchange Act. Although the plaintiffs’ common law claims were dismissed in Swiss Re, the clear suggestion is that in another case, sufficient allegations could survive a dismissal motion, in which circumstance the case would go forward, notwithstanding Morrison.



A footnote in the Swiss Re case suggests another possibility. In footnote 5, Judge Koeltl observes that "the plaintiffs also noted that they might have a claim under Swiss law, but they have not pursued that avenue." Whether the plaintiffs in fact would have had such a claim under Swiss law and whether the U.S. court would have had an appropriate jurisdictional basis for entertaining such a claim is not addressed in Judge Koeltl’s opinion. But at least the theoretical possibility is posed by the footnote. UPDATE: An October 6, 2010 article (here) reports that the plaintiff shareholdes in the Toyota securities class action lawsuit have amended their complaint to add allegations of violations of Japanese securities laws, which demonstrates that one way plaintiffs may attempt to circumvent Morrison is by asserting in a U.S. lawsuit alleged violations of the securities laws of the non-U.S. company’s home country.


Whether plaintiffs’ lawyers might ultimately choose to frame their U.S. claims against foreign companies based on common law or foreign law rights of recovery remains to be seen. But if the present trend of decisions continues, these alternatives may begin to look more attractive.


I have in any event added the Swiss Re decision to my running tally of subprime and credit crisis-related lawsuit dismissal motion rulings, which can be accessed here.


Special thanks to the several readers who sent me copies of the Swiss Re decision.