After the U.S. Supreme Court issued its opinion in Morrison v. National Australia Bank, the plaintiffs’ lawyers developed a number of theories to try to circumvent Morrison to assert claims under the U.S. securities laws on behalf of investors who purchased their shares in the defendant foreign company on a foreign exchange. These theories – including the so-called “listing theory” and the “f-squared” theory– have been largely rejected in the district courts, but the appellate courts had not yet weighed in. That is, until now.
In a May 6, 2014 opinion in the UBS credit crisis-related securities suit (here), the Second Circuit affirmed the district court and rejected the theories on which the plaintiffs had tried to assert the claims of UBS investors who had purchased their shares on foreign exchanges. Specifically, the appellate court rejected the plaintiff’s argument that because the company’s shares are cross-listed on the U.S., the U.S. securities laws apply even to transactions on the company’s securities on foreign exchanges. The appellate court also rejected the plaintiff’s argument that the U.S. securities laws applied to purchases on foreign exchanges that originated with a buy order in the U.S. Finally, the appellate court affirmed the district court’s dismissal of the remainder of the plaintiffs’ claims on substantive grounds.
As discussed at length here, the case on appeal involved a consolidated securities class action filed against UBS and certain of its directors and officers. The action was filed on behalf of shareholders who purchased ordinary shares of UBS between August 13, 2003 and February 23, 2009. The shares were listed both on foreign exchanges and on the NYSE exchange. The plaintiffs argued that the defendants had made fraudulent statements concerning UBS’s mortgage-related assets portfolio and about UBS’s purported compliance with U.S. tax and securities laws by its Swiss-based global cross-border private banking business.
In a September 13, 2011 order (here), Southern District of New York Judge Richard Sullivan, in reliance on the U.S. Supreme Court’s holding in Morrison, dismissed the claims of foreign and domestic plaintiffs who purchased UBS shares on foreign exchanges. Judge Sullivan expressly rejected the plaintiffs’ argument that because UBS’s ordinary shares were cross-listed on a U.S. securities exchange, the U.S securities laws applied to all transaction in those securities, even those purchased on foreign exchange (the plaintiffs’ so-called “listing theory”). Judge Sullivan also rejected the plaintiffs’ arguments that the U.S. securities laws applied to purchases of UBS shares on a foreign exchange where the buy order had been placed in the U.S.
On September 28, 2012, the district court dismissed the plaintiff’s remaining claims. The plaintiff appealed.
For purposes of the appeal it is important to note that in its 2010 opinion, the U.S. Supreme Court held that the U.S. securities laws apply to “ transactions in securities listed on domestic exchanges; and  domestic transactions in other securities.” These two phrases from the U.S. Supreme Court’s opinion often are referred to as Morrison’s first and second prongs.
The May 6 Opinion
On May 6, 2014, in an opinion written by Judge José A. Cabranes for a unanimous three-judge panel, the Second Circuit affirmed the district court’s dismissal of this case.
With respect to the district court’s dismissal of the claims of the UBS shareholders who had purchased their shares on foreign exchanges, the plaintiff argued that because these foreign-purchasers shares were cross-listed on the NYSE, their acquisition of these shares satisfied Morrison’s first prong, because they involved “transactions in securities listed on domestic exchanges.”
The appellate court said that “while this language, which appears in Morrison and its progeny, taken in isolation, supports’ plaintiffs’ view, the ‘listing theory’ is irreconcilable with Morrison read as a whole.” The court noted that in Morrison the Supreme Court had emphasized that “the focus” of the Exchange Act is “upon purchases and sales of securities in the United States,” with the concern upon “ the location of the securities transaction.” The focus of both of Morrison’s prongs “was domestic transactions of any kind, with the domestic listing acting as a proxy for a domestic transaction.”
The Second Circuit also noted in the Morrison case itself the securities at issue, while purchased on a foreign exchange, were cross-listed in the U.S., yet this “did not affect the Court’s analysis of the shares that were purchased on foreign exchanges.” Accordingly the Court concluded that Morrison does not support the application of the Exchange Act to claims by a foreign purchaser simply because those shares were also listed on a domestic exchange.
The appellate court also rejected the plaintiff’s so-called “f-squared” argument (so-called because it involved a foreign company defendant and shares purchased on a foreign exchange by a U.S. purchaser or based on a U.S. purchase order). The plaintiff had argued that the U.S. securities laws applied to purchases of UBS shares on a foreign exchange based on a “buy order” originated in the U.S. The plaintiff had contended that a purchase of this type satisfies Morrison’s second prong because it constitutes a “domestic transaction in other securities.”
The appellate court noted that in its own March 2012 Absolute Activist decision interpreting Morrison’s second prong (about which refer here), it had held that he purchaser’s citizenship or residency does not affect the determination of where a transaction occurs. The court had also said in the Absolute Activist case that a transaction takes place where “irrevocable liability” attaches. The court said that the allegation that a shareholder placed a buy order in the United States that was then executed outside the U.S. does not “standing alone” establish that the shareholder “incurred irrevocable liability in the United States.”
Finally, the appellate court affirmed the district court’s dismissal of the plaintiff’s remaining claims, holding that UBS”s statements about its compliance on which the plaintiff sought to rely were mere puffery and therefore immaterial; and holding further that the statements about UBS’s positions in mortgage-related assets were properly dismissed for failure to adequately plead a material misrepresentation or scienter.
The “listing theory” on which the plaintiff sought to rely here has not fared well in the district courts. For example, in a September 14, 2010 ruling in the Alstom securities class action lawsuit (about which refer here), Southern District of New York Judge Victor Marrero described the theory as dependent on a “selective an overly-technical reading of Morrison that ignores the larger point of the decision.”
Similarly, as discussed here, in a January 11, 2011 ruling in the RBS credit crisis-related securities class action lawsuit, Judge Deborah Batts also rejected the “listing theory,” saying that it is “simply contrary to the spirit of Morrison,” noting that Supreme Court had made clear that the concern of the securities laws is on “the true territorial location where the purchase or sale was executed.”
The appellate did court that the language of Morrison’s first prong on which the plaintiff’ relied in support of the “listing theory” – when “taken in isolation” – “supports plaintiffs’ view.” Nevertheless the theory did not fare any better in the appellate court than it has fared in the district court. Like the distict court’s the appellate court that the “listing theory” is “irreconcilable with Morrison read as a whole.”
Similarly the district courts have held that the mere fact that the purchaser is a U.S. citizen or that that the purchase order was placed in the U.S. was not enough to bring a transaction on a foreign securities exchange within the requirements of Morrison’s second prong. (Refer here, for example, with respect to Judge Marrero’s July 27, 2010 dismissal of the Credit Suisse credit crisis securities lawsuit.)
While the Second Circuit’s holdings on these issues are consistent with the district courts’ holdings, the appellate courts rulings were, as the court itself noted, each a “matter of first impression” –meaning of first impression for an appellate court. The Second Circuit’s rulings, while entirely consistent with rulings of the lower courts, are important because they are the first by an appellate court on these issues. The rulings make it clear that the plaintiffs will not be able to use these theories to try to circumvent Morrison in order to present the claims of shareholders who purchased their shares in the defendant company on a foreign exchange.