In a January 11, 2011 ruling that for the first time extends the U.S. Supreme Court’s decision in Morrison v. National Australia Bank to claims under the Securities Act of 1933, and that for the first time rejects the "U.S. listing" theory by which plaintiffs in many cases had hoped to contain Morrison, Southern District of New York Judge Deborah Batts granted defendants’ motions to dismiss in the RBS subprime-related securities class action lawsuit. A copy of the opinion can be found here.
The ruling does not relate to the claims of investors who had purchased RBS preferred shares, which claims will proceed.
Background
The near failure and British government bailout of RBS was one of the highest profile features of the global financial crisis. RBS’s collapse follow a series of massive asset write-downs that occurred at RBS due to the companies substantial holdings in subprime and other mortgage-backed assets and as a result of the company’s disastrous October 2007 acquisition of 38% of ABN Amro.
In April 2008 the company announced a $11.6 billion write down of subprime assets, following which it launched a $23.7 billion Rights Issue, which was the largest in European history. The company was forced in January 2009 to report a loss of $41.3 billion, following which the price of its shares collapsed.
As reflected here, RBS investors launched a number of securities class action lawsuits. The plaintiffs’ consolidated amended complaint (here) presents four categories of claims:
(1) claims under Section 10(b) of the Securities Exchange Act of 1934 on behalf of purchasers of RBS ordinary (common) shares;
(2) claims under the Securities Act of 1933 on behalf of purchasers of RBS preferred shares;
(3) claims under the Securities Act of 1933 on behalf of those who tendered ABN Amro share in exchange for ordinary RBS shares; and
(4) claims under the ’33 Act on behalf of those who purchased RBS ordinary shares in the Rights Issue.
After the Supreme Court issued the Morrison ruling, the defendants’ moved to dismiss with respect to categories 1, 3 and 4. The defendants did not move to dismiss in reliance on Morrison with respect to the RBS preferred shares, and so the category 2 claims were not before the court in connection with the motion on which Judge Batts ruled on January 11.
As discussed at greater length here, the Supreme Court had held in Morrison that the ambit of Section 10(b) of the ’34 Act is to be determined according to a "transaction" test. The court said that Section 10(b) only to the purchase or sale of a security on a U.S. exchange or a domestic transaction in any other security.
The January 11 Ruling
The ’34 Act Claims Regarding RBS Ordinary Shares: RBS’s ordinary shares are listed on the London and Amsterdam stock exchanges. The defendants moved to dismiss in reliance on Morrison, contending that the amended complaint does not allege that RBS ordinary shares were purchased or sold on a U.S. exchange or that the ordinary shares were otherwise purchased in the U.S.
The plaintiffs opposed this motion on two ground: first, because RBS ADRs are listed on the NYSE, RBS shares are "listed" in the U.S. and therefore the ’34 Act applies to all transactions in RBS shares regardless of location; and second, because the named plaintiffs (two U.S.-based pension funds) are located in the U.S. and made their purchase from the U.S., the transaction took place in the U.S.
Judge Batts rejected the plaintiffs’ "listing" theory, stating
The idea that a foreign company is subject to a U.S. securities laws everywhere it conducts foreign transactions merely because it has ‘listed’ some securities in the United States is simply contrary to the spirit of Morrison. Plaintiffs seize on specific language without at all considering, or properly presenting, the context….The Court makes clear its concern is on the true territorial location where the purchase or sale was executed and the particular securities exchange laws that governed the transaction…. Plaintiffs’ interpretation would be utterly inconsistent with the notion of avoiding the regulation of foreign exchanges. (Citations omitted).
Judge Batts also observed in a footnote that the plaintiffs argument was also "badly undercut" by the fact that in the Morrison case itself, the National Australia Bank had ADRs that trade on the NYSE.
In rejecting plaintiffs’ argument that their own U.S. residence and U.S.-based decision to invest in the U.S. was sufficient to subject their transaction to the U.S. securities laws, Judge Batts said that this investor-specific, fact-specific approach "is exactly the type of analysis that Morrison seeks to prevent," adding that the Morrison court did not reject the "conduct and effects" test "to replace it with another difficult-to-employ, fact intensive case."
The defendants apparently conceded that the Exchange Act might reach RBS ADRs trading on the NYSE, but because the named plaintiffs had not purchased RBSs ADRs, Judge Batts held the named plaintiffs lacked standing to bring ADR claims. Because all claims relating to ordinary RBS shares were dismissed and because the two named plaintiffs lacked standing to assert the remaining claims, the two named plaintiffs were dismissed from the action. (A separate named plaintiff remains in the case with respect to the preferred RBS share claims, which remain pending.)
The ’33 Act Claims Relating to the ABN Amro Share Exchange: The defendants moved to dismiss the ABN Amro Share Exchange Claims on the ground the ordinary shares issued in the Share Exchange Offer were listed on foreign exchanges not U.S. exchanges. Judge Batts granted this motion, noting that the complaint is "void of any allegations that the purchase of RBS ordinary shares pursuant to the Exchange Offer actually took place in the United States." She affirmatively citing Morrison for the holding that the Securities Act "does not include ‘sales that occur outside the United States.’"
The ’33 Act Rights Issue Claim: Judge Batts also granted the defendants motion to dimiss the ’33 Act Rights Issue claim, holding that Morrison is "dispositive" of the Rights Issue claim "as no U.S. public offering is present and the Rights Issue did not involve a domestic securities transaction."
Discussion
It seems like each successive lower court application of Morrison represents further proof of the decision’s sweeping reach. Judge Batts’ rulings in the RBS case may represent one of the most significant applications of Morrison yet, because along the way she rejected a couple of the theories on which plaintiffs in this and other cases had hope to try to contain Morrison – particularly the plaintiffs’ argument that a company’s U.S. listing subjects all transaction in the company’s shares regardless of where it takes place to the U.S. securities laws.
Plaintiffs in a number of pending cased involving foreign domiciled companies have urged the same "domestic listing" theory. Tthe plaintiffs in the Vivendi case, eager to preserve the value of the jury verdict they obtained, have presented much the same argument in that case. Indeed, one of the plaintiffs’ counsel in the Vivendi case, Michael Spencer of the Milberg law firm, had detailed these contentions in a guest post on this blog (here).
This "listing" theory has been the subject of much spirited commentary, including a subsequent guest post on this blog by University of Minnesota law professor Richard Painter (here). George T. Conway III of the Wachtell Lipton law firm – who briefed and argued the Morrison case for the defendant bank –described the "listing" argument as "Completely nuts, N-U-T-S."
Out of respect for my friends in the plaintiffs’ bar I will allow the possibility that the debate on the "listing" theory may not yet be over. However, Judge Batts’ rejection of the theory in this case, and in particular the ease with which she rejected the theory, suggests that plaintiffs may face significant difficulty in persuading other courts to accept the theory. At a minimum, Judge Batts’ rejection of the "listing" theory is distinctly unhelpful to the Vivendi plaintiffs and could represent an ominous threat to their efforts to try to preserve the value of their jury verdict in that case.
Judge Batts’ ruling is also significant with respect to her affirmative holding that Morrison applies to claims under the ’33 Act as well as to claims under the ’34 Act. Morrison itself only ruled on claimants’ claims under Section 10(b) of the ’34 Act. I had speculated just the other day, when discussing the Barclays related subprime case, that defendants in other cases would likely try to argue that Morrison applied to ’33 Act claims. As far as I know, Judge Batts’ ruling in the RBS case is the first to hold that Morrison does apply to ’33 Act claims.
There is one other element of significance in Judge Batts’ comments about RBS’s ADRs, and in particular what she did not say about the ADRs. Judge Batts did not conclude, as did Southern District of New York Judge Richard Berman in the Societe Generale case that under Morrison even ADR transactions on a U.S. exchange are outside the ambit of the ’34 Act (about which refer here).
To the contrary, she seemed to accept (perhaps because the defendants in the RBS case apparently conceded as much) that the ’34 Act does reach ADR transactions in the U.S. Indeed, it seems apparent that had there been a named plaintiff in the RBS case with sufficient standing to assert RBS ADR claims, she would have been prepared to allow those claims to go forward (at least for purposes of the motions to dismiss under Morrison).
My final observations have to do with the fact that this is a subprime-related securities class action lawsuit. At one level, Judge Batts’ rulings are inconsistent with my recent observation that the highest profile subprime-related securities suits seem to be going forward. The RBS case definitely qualifies high profile. To be sure, the preferred securities claimants’ claims are going forward, at least to the next found of dismissal motions, but the other claims on behalf of the many RBS ordinary shareholders are not going forward (at least not in the U.S.)
The RBS case is the exception to the generalization about the highest profile subprime cases because it runs smack into the other generalization I recently noted about subprime cases, namely that Morrison is being relied on to try to dismiss the many subprime cases that have been filed against foreign domiciled companies.
The interesting question is whether the disappointed RBS claimants, like the disappointed investors who with claims against Fortis (the other participant in the disastrous ABN Amro transaction) whose U.S. claims were also dismissed by a U.S. court, will now seek to pursue their claims against the RBS defendants in a non-U.S. jurisdiction.
I have in any event added the RBS ruling to my running tally of subprime-related securities class action lawsuit rulings, which can be accessed here.
Special thanks to George Conway of the Wachtell Lipton firm for providing me with a copy of the January 11 ruling.