In its June 2010 decision in Morrison v. National Australia Bank, the U.S. Supreme Court held that the U.S. securities laws do not apply extraterritorially. Since then, the lower U.S. federal district courts have struggled with applying Morrison in securities lawsuits involving foreign issuers. A host of recent U.S. lawsuits involving high-profile foreign companies has highlighted the important questions that can arise under Morrison. In the following guest post, David Topol and Margaret Thomas of the Wiley Rein law firm survey the post-Morrison case law, particularly as relates to lawsuits filed in U.S. courts under U.S. securities laws against companies domiciled outside the U.S. I would like to thank David and Maggie for their willingness to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is David and Maggie’s guest post.
Recent high-profile securities litigation in the United States against foreign companies, including Volkswagen and Toshiba, has renewed focus on a decades-old question: the extent to which U.S. securities laws apply extraterritorially. Before 2010, in considering this question, courts generally applied various versions of what became known as the conduct and effects tests. These tests looked at whether allegedly wrongful conduct occurred in the U.S. and/or whether allegedly wrongful conduct that occurred abroad had a substantial effect in the United States. However, this fact-dependent analysis resulted in what the Supreme Court characterized as “unpredictable and inconsistent application of Section 10(b) to transnational cases.”
In 2010, the U.S. Supreme Court stepped in to bring clarity to the application of U.S. securities laws to foreign issuers and conduct. In Morrison v. National Australia Bank, the Court held that Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) does not apply extraterritorially. Rather, Section 10(b) applies only to (1) “transactions in securities listed on domestic exchanges” and (2) “domestic transactions in other securities.” In so holding, the Supreme Court attempted to replace the conduct and effects tests with a bright-line, two-prong transactional test in order to bring more clarity and consistency to the application of U.S. securities laws abroad.
However, the Morrison decision did not end, or even reduce, securities lawsuits in the United States against foreign companies. To the contrary, filings against foreign issuers continue to increase each year. There were 42 securities filings against foreign issuers in the U.S. in 2016, up from 34 in both 2015 and 2014 and 30 in 2013. As lawsuits against foreign issuers become more and more common, their geographical focus has shifted. Filings against Chinese firms, previously the most common target of foreign filings, have substantially decreased. Meanwhile, filings against European companies increased from 6 in 2015 to 15 in 2016. In particular, lawsuits against companies headquartered in Ireland, the United Kingdom and Germany were the highest on record.
Part of the reason securities actions against foreign companies remain post-Morrison is that, if foreign companies choose to trade their securities on U.S. exchanges, these transactions fall squarely within prong one of Morrison (“transactions in securities listed on domestic exchanges”) and thus remain subject to U.S. securities laws. However, even foreign companies whose shares are not traded on U.S. exchanges remain vulnerable to potential liability under U.S. securities law after Morrison. This is in part because Morrison was a civil case and did not specify whether its holding also applies in the criminal or regulatory context. Additionally, lower courts have been left to interpret and apply the two prongs of Morrison to various kinds of securities and factual scenarios with little guidance.
While the lower courts appear to have reached consensus on some of the remaining open questions after Morrison, other issues continue to percolate, leaving non-U.S. companies uncertain as to the applicability of U.S. securities laws to their actions and possibly unaware of their potential risk of liability under these laws. Just as global companies need to be aware of the lingering extraterritorial effect of U.S. securities laws after Morrison, these companies’ D&O insurers should be aware of their insureds’ potential exposure to U.S. securities lawsuits, particularly in light of the increasing prevalence of filings against foreign issuers. This article summarizes some of the outstanding questions following the Morrison decision, analyzes how courts have addressed them, and outlines the current state of the law with respect to these issues.
Morrison in the Criminal and Regulatory Context
One of the main lingering questions following the Morrison decision in 2010 was whether its holding applied only in the civil context or whether it would also be applied to criminal and regulatory cases.
With respect to criminal cases, all courts to consider the issue have held that Morrison applies in criminal actions. In U.S. v. Vilar, the Second Circuit was the first appellate court to address the issue. The Second Circuit rejected the government’s argument that Morrison’s geographic limit on the reach of Section 10(b) and Rule 10b-5 applies only in the civil context, holding that Morrison also applies to criminal cases. Since then, the Third Circuit has followed suit, applying the Morrison framework in a criminal case involving securities and wire fraud.
Whether Morrison applies in the regulatory framework is less certain. Just weeks after the Supreme Court issued its decision in Morrison, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which included a provision (Section 929P) stating that federal courts shall have jurisdiction of an action or proceeding brought or instituted by the SEC or DOJ alleging a violation of the antifraud provisions of the Exchange Act involving “(1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.”
The insertion of this extraterritoriality provision—which is largely out of place in the broader context of Dodd-Frank—was almost certainly intended as a direct response to the Supreme Court’s Morrison decision just three weeks prior. What is less clear is what Congress intended the extraterritoriality provision to do and whether the language used actually accomplishes its intent. Legislative history suggests that that Congress intended to make clear that, in cases brought by the SEC or DOJ, the Securities Act, the Exchange Act, and the Investment Advisers Act have extraterritorial application. However, as counsel for NAB in Morrison has noted, the text of Section 929P states only that federal courts will have jurisdiction to hear certain securities cases involving foreign conduct, something that was never disputed in Morrison. Whether the focus on jurisdiction is merely a drafting error or a conscious decision by Congress remains open to debate.
The SEC has repeatedly asserted that the Dodd-Frank extraterritoriality provision effectively overrules Morrison and reinstates the conduct and effects tests used by courts of appeals prior to Morrison in civil cases brought by either the SEC or DOJ. In S.E.C. v. Tourre, the court stated in dicta that “[b]ecause the Dodd-Frank Act effectively reversed Morrison in the context of SEC enforcement actions, the primary holdings of this opinion affect only pre-Dodd Frank conduct.” However, no court has yet to address directly the effect of Section 929P. In fact, several courts, after explaining in detail the conundrum regarding the effect of Dodd-Frank on the Morrison test, have avoided “resolv[ing] this complex interpretation issue[,]” ruling instead that a motion to dismiss can be denied even under the narrower Morrison test. Therefore, Morrison’s application in the regulatory context remains an open question.
Application of the Morrison Framework in the Lower Courts
Although the Supreme Court purported to establish a “bright-line” test in Morrison, the decision left lower courts with limited guidance as to how to apply the framework to cases that did not precisely match the facts of that case: a foreign plaintiff bought stock of a foreign company, and the alleged wrongful conduct took place on foreign soil (known as an “F-Cubed case”). What if a foreign plaintiff buys stock in a foreign company whose securities are cross-listed on U.S. exchanges? What if a U.S. plaintiff purchases American Depositary Receipts (“ADRs”) in the U.S. that are tied to a foreign company’s stock? These are just a few of the questions that the courts have had to grapple with since the Morrison decision.
Lower courts have generally interpreted prong one of Morrison (“transactions in securities listed on domestic exchanges”) narrowly and consistently, requiring the security at issue to have been actually traded on one of the eighteen registered American securities exchanges. The more contentious post-Morrison disputes have centered around what constitutes a “domestic” transaction under prong two. A consensus is emerging that a transaction is “domestic” for purposes of Morrison if irrevocable liability was incurred or title was transferred within the United States. However, the courts have not been as consistent in their application of that test to various transactions and facts. Further, courts have suggested—and even explicitly held—that, while a domestic transaction is necessary, it is not necessarily sufficient to trigger the application of U.S. securities laws under Morrison’s second prong.
A review of some of the key post-Morrison debates demonstrates both those areas where courts have reached a general consensus and those which remain open to debate, leading to somewhat unpredictable and inconsistent application of the Morrison framework, particularly its second prong.
One of the first questions raised after Morrison was whether the U.S. listing of a foreign security is sufficient for 10(b) liability after Morrison. In the wake of Morrison, plaintiffs argued that this listing on domestic exchanges brought the securities at issue within prong one of Morrison. This “listing theory” would have essentially allowed f-cubed claims to proceed as long as the security at issue was cross-listed on a U.S. exchange. However, a majority of courts to consider the “listing theory” have rejected the notion that the mere listing of a foreign security is sufficient for section 10(b) liability under the Morrison framework. For example, the Second Circuit concluded that Morrison’s emphasis on transactions in securities listed on domestic exchanges in prong one made clear that “the focus of both prongs was domestic transactions” and that listing on a domestic exchange was merely intended to act as a proxy for a domestic transaction. Therefore, the court concluded that Morrison did not permit the application of U.S. securities laws in an F-Cubed case (foreign plaintiff, foreign issuer, foreign transaction) merely because the securities at issue were also listed on a domestic exchange.
Over-the-Counter Market and Unregistered Exchanges
Another key question regarding prong one of Morrison is what constitutes a “domestic exchange.” In S.E.C. v. Ficeto, an early post-Morrison case, a California court suggested that trading the domestic over-the-counter market would fall within prong one of Morrison. More recently, the Third Circuit became the only appellate court to weigh in on this issue and reached the opposite result, holding that a “domestic exchange” under the first prong of Morrison means one of the eighteen registered national security exchanges and does not include either the over-the-counter market or non-registered exchanges such as the OTCBB or Pink Sheets. While plaintiffs continue to rely on Ficeto in an attempt to bypass the more-detailed factual analysis under prong two, most courts have followed the Third Circuit. Indeed, federal courts in California have declined to follow Ficeto on at least two subsequent occasions. This general consensus means that Section 10(b) will only apply to the purchase or sale of a security over-the-counter or on a non-registered exchange if the transaction at issue is a “domestic transaction” under prong two of Morrison.
One of the earliest high-profile cases against a major foreign company following Morrison involved claims by U.S. purchasers of security-based swap agreements that referenced the price of Volkswagen shares. Plaintiffs alleged that they had purchased the swap agreements in reliance on Porsche’s misrepresentations that they did not intend to buy Volkswagen. The Southern District of New York granted Porsche’s motion to dismiss on Morrison grounds. Putting a gloss on Morrison’s “bright line” rule, the court concluded that “domestic transaction” means “purchases and sales of securities explicitly solicited by the issuer in the U.S.” and not transactions in foreign shares—or swap agreements referencing them—made in the U.S.
The Second Circuit affirmed this decision in 2014 in the seminal case of Parkcentral Global Hub Ltd. v. Porsche Auto Holdings SE. The court acknowledged that a “domestic transaction” is one where irrevocable liability is incurred or title is passed in the United States and suggested that the transactions at issue would satisfy this test. However, critically, the court held that a domestic transaction, while necessary to trigger Section 10(b) under Morrison, is not sufficient. Thus, the court did not expressly decide whether the swap agreements constituted “domestic transactions” because it found the claims at issue to be “so predominantly foreign as to be impermissibly extraterritorial.”  The Second Circuit was careful to state that its decision was limited to the facts of the case before it and that Section 10(b) may apply to securities-based swap agreements where transactions are domestic or where the defendants are more involved in the transactions. No court has confronted such a case to date, though the ADR cases discussed below foreshadow how such cases might turn out.
The latest debate in this area is how the Morrison framework applies to foreign companies that have ADRs that trade over-the-counter in the U.S. Large foreign companies such as Toshiba, TESCO, and Volkswagen have recently been sued in the U.S. in connection with trading of their ADRs. Such high-profile litigation has highlighted the uncertainty surrounding the application of U.S. securities laws to such transactions.
In re Societe Generale Securities Litigation, an early post-Morrison case in New York, held that trade in ADRs is “predominantly foreign” and therefore Section 10(b) did not apply even when U.S. plaintiffs purchased the ADRs at issue on U.S. exchanges. However, subsequent cases have declined to follow the bright-line rule announced in In re Societe Generale, electing to undertake a more detailed factual review of the security at issue and the involvement of the foreign issuer in the transaction.
In Stoyas v. Toshiba Corporation, a California federal court held that U.S. securities laws did not apply to transactions in unsponsored and unlisted Toshiba ADRs in the U.S. However, the court did not rely on the broad rule enunciated in In re Societe Generale, instead closely examining the nature of the securities at issue and Toshiba’s involvement in the U.S. transactions. In the end, the court found it critical that the ADRs at issue were unsponsored, meaning that they were established with little or no involvement of Toshiba. Therefore, although the transactions at issue were facially domestic, the court nonetheless held that U.S. securities laws did not apply because Toshiba had no connection to those domestic transactions.
The most recent chapter in this debate involves the securities litigation against Volkswagen in connection with its global diesel emissions practices. Volkswagen moved to dismiss securities fraud claims filed against it by U.S. purchasers of ADRs on Morrison grounds. Notably, the Volkswagen ADRs were only traded over-the-counter, so plaintiffs’ claims could only prevail if they fell within prong two. The court denied Volkswagen’s motion to dismiss, finding Parkcentral and Toshiba distinguishable because, whereas in those cases the defendants had no real involvement in the domestic transactions, Volkswagen had sponsored the ADRs at issue and was thus directly involved in the domestic offering of the ADRs. Interestingly, the court expressly called into question the continuing persuasive value of In re Societe Generale and declined to follow it. The court also noted that “relevant conduct” occurred in the United States because Volkswagen provided English versions of its public disclosures in connection with the ADR offerings and plaintiffs alleged specific misrepresentations in the United States. Such analysis clarifies that key inquiries in post-Morrison cases will be the character of the securities at issue and the level of involvement of the foreign issuer in the U.S. transactions. However, it also suggests that a defendant’s conduct and its effects in the United States are not irrelevant to the inquiry.
The Supreme Court issued its Morrison decision in an attempt to rectify what it viewed as “inconsistent and unpredictable” application of the U.S. securities laws to foreign issuers. However, U.S. securities actions against foreign issuers have continued to increase in the wake of Morrison, and the Court’s new transactional test has merely brought with it new unpredictability.
As the above discussion demonstrates, lower courts have become increasingly willing to undertake a more detailed factual review when applying the Morrison framework in recent years, considering both the nature of the security at issue and the involvement of the foreign issuer in the transaction. This fact-dependent analysis is beginning to look more like the conduct and effects tests rejected by the Supreme Court in Morrison than the bright-line transactional test that supposedly replaced it.
Unless and until the Supreme Court steps in to further clarify its transactional test and when it applies, foreign companies should be aware of the very real risk that they could face litigation under U.S. securities laws even if their securities are not traded on U.S. exchanges. Similarly, these companies’ D&O insurers may wish to keep these risks in mind when drafting and underwriting policies for global companies.
David is a partner and Maggie is an associate in the Insurance Practice at Wiley Rein LLP. They serve as monitoring and coverage counsel for insurance companies on a wide variety of professional liability policies, including directors and officers liability, financial institutions liability, investment advisor liability, employment practices liability, and other professional liability lines of coverage.
 Morrison v. National Australia Bank Ltd., 561 U.S. 247, 260 (2010).
 Id. at 267.
 Securities Class Action Filings: 2016 Year in Review, cornerstone research (2017) https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2016-YIR
 729 F.3d 62, 70 (2d Cir. 2013).
 U.S. v. Georgiou, 777 F.3d 125, 133-34 (3d Cir. 2015).
 15 U.S.C. § 78aa(b).
 See George T. Conway III, Extraterritoriality After Dodd-Frank, Harvard Law School Forum on Corporate Governance and Financial Regulation, (Aug. 5, 2010) https://corpgov.law.harvard.edu/2010/08/05/extraterritoriality-after-dodd-frank/
 S.E.C. v. Tourre, No. 10-cv-3229, 2013 WL 2407172, *1 at n.4 (S.D.N.Y. June 4, 2013)
 U.S. S.E.C. v. Chicago Convention Center, LLC, 961 F. Supp.2d 905, 916 (N.D. Ill. 2013); see also United States Securities and Exchange Commission v. Brown, No. 14 C 6130, 2015 WL 1010510, *5 (N.D. Ill. Mar. 4, 2015); S.E.C. v. Funinaga, No. 2:13-cv-1658 2014 WL 4977334, *7 (D. Nev. Oct. 3, 2014).
 See, e.g., Georgiou, 777 F.3d at 137; Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60
 See, e.g., Stoyas v. Toshiba Corp., 191 F. Supp. 3d 1080, 1094 (C.D. Cal. 2016) (holding that Section 10(b) did not apply where, although ADS transactions at issue occurred domestically, plaintiffs had not pled that defendant was involved in those transactions in any way); Parkcentral Global Hub Ltd. v. Porsche Auto Holdings SE, 763 F.3d 198, 215 (2d Cir. 2014) (holding that “a domestic transaction (or a transaction in a domestically listed security) [is] necessary to a properly domestic invocation of §10(b), [but] such a transaction is not alone sufficient to state a properly domestic claim under the statute”).
 See, e.g., City of Pontiac Policemen’s and Firemen’s Retirement System, et al. v. UBS AG, et al., 752 F.3d 173, 181 (2d Cir. 2014); In re BP p.I.c. Securities Litigation, 843 F. Supp. 2d 712, 797 (S.D. Tex. 2012); In re Infineon Technologies AG Securities Litigation, No. C 04-04156, 2011 WL 7121006, *3 (N.D. Cal. Mar. 7, 2011).
 City of Pontiac, 752 F.3d at 180.
 S.E.C. v. Ficeto, 839 F. Supp. 2d 1101, 1108 (C.D. Cal. 2011).
 777 F.3d 125, 134-35 (3d Cir. 2015).
 See, e.g., In re Volkswagen “Clean Diesel” Marketing, Sales Practices, and Products Liability Litigation, 15-md-02672-CRB, 2017 WL 66281 (N.D. Cal. Jan. 4, 2017); Toshiba, 191 F. Supp. 3d at 1091.
 Elliott Assoc. v. Porsche Automobile Holding SE, 759 F. Supp. 2d 469 (2010).
 Id. at 476.
 763 F.3d 198 (2d Cir. 2014).
 Id. at 201.
 Id. at 215.
 Id. at 216.
 See id. at 217
 Level 2 and Level 3 ADRs, which trade on U.S. exchanges, seemingly fall within prong one of Morrison and are therefore subject to U.S. securities laws. The main debate here is over Level 1 ADRs, which trade only over-the-counter.
 No. 08-cv-2495 (RMB), 2010 WL 3910286, *6 (S.D.N.Y. Sept. 29, 2010).
 In re: Volkswagen “Clean Diesel Marketing, Sales Practices, and Products Liability Litigation,” MDL No. 2672, 2017WL 66281, *5 (N.D. Cal, Jan. 4, 2017).
 Id. at n.4.
 See generally Yaron Nili, So Much for Bright-Line Tests on Extraterritorial Reach of US Securities Laws?, Harvard Law School Forum on Corporate Governance and Financial Regulation (Sept. 2, 2014) https://corpgov.law.harvard.edu/2014/09/02/so-much-for-bright-line-tests-on-extraterritorial-reach-of-us-securities-laws/