17 Pages Posted: 2 Sep 2010
Date Written: August 20, 2010
This article explores two issues that arise from a case decided by the Supreme Court this term: Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010), which held that the Securities Exchange Act antifraud provisions do not apply to claims brought by foreign investors against foreign defendants over securities transactions outside the United States (so called f-cubed securities litigation).
First, throughout the opinion Justice Scalia defined the reach of the federal securities laws based on a single inquiry: whether the United States was the place of the securities transaction. Then in summarizing the holding he said that Exchange Act Section 10(b) applies only to “transactions in securities listed on domestic exchanges . . . and domestic transactions in other securities.” The problem is that the National Australia Bank (NAB) securities at issue in the case were in fact listed in the United States, which was required so NAB could have American Depository Receipts (ADRs) trade in New York. For other issuers that list the same securities both in the United States and in another country, as many issuers do, the confusion created by Justice Scalia’s summary of the holding could be problematic. As discussed more fully in this article, the Court did not intend to grant a right to sue in the United States when such securities are bought outside the United States, but this will not stop some plaintiffs from claiming otherwise. This article explains why this argument is incorrect.
Next Congress has had its own drafting problems. In the Dodd-Frank Act, Congress wanted to respond to Morrison by giving the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) power to pursue fraudulent conduct inside the United States that affects securities transactions outside the United States. For SEC and DOJ suits, Congress intended to reverse Morrison and make United States securities laws apply. Congress drafted the Dodd-Frank provisions based on the assumption that the question they were addressing – whether the securities laws applied to transactions outside the United States – was a question of subject matter jurisdiction, which is how courts of appeals had analyzed the issue for the past forty years. The Dodd-Frank provisions responded to Morrison by expressly giving federal courts jurisdiction in certain circumstances over SEC and DOJ suits concerning securities transactions outside the United States. The problem is that the Supreme Court in Morrison had already decided that under existing law federal courts had jurisdiction over these cases and that jurisdiction thus was not the issue. Rather, securities transactions outside the United States were not covered by the language of Section 10(b), a question of the merits.
It seems obvious what Congress intended to do. The problem is that a credible case can be made that Congress didn’t do it. Indeed, the day the Dodd-Frank Act was signed by the President, George Conway, the lawyer who had argued and won the Morrison case for NAB, published a memo to his firm’s clients stating that Congress in the Dodd-Frank provisions may have done nothing meaningful at all. The Dodd-Frank provisions merely restated what Morrison clearly said – that the federal courts had jurisdiction. Because Dodd-Frank only approached this as a question of jurisdiction and did not address the substantive reach of Section 10(b), the Dodd-Frank provisions left the SEC and DOJ with no more power then they had the day Morrison was decided. This article observes that the SEC would have some good arguments in litigation on this issue, but that the statutory language is problematic and should be changed.
Keywords: securities litigation, extraterritorial reach of US law, f-cubed litigation
Suggested Citation: Suggested Citation
Painter, Richard W. and Dunham, Douglas and Quackenbos, Ellen, When Courts and Congress Don’t Say What They Mean: Initial Reactions to Morrison v. National Australia Bank and to the Extraterritorial Jurisdiction Provisions of the Dodd-Frank Act (August 20, 2010). Minnesota Journal of International Law, Forthcoming; Minnesota Legal Studies Research Paper No. 10-40. Available at SSRN: https://ssrn.com/abstract=1662590 or http://dx.doi.org/10.2139/ssrn.1662590
By Erez Reuveni