In the wake of the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., the United States Court of Appeals for the Second Circuit held in Absolute Activity Value Master Fund Ltd. v. Ficeto that a “domestic transaction in securities,” for purposes of Section 10(b) of the Exchange Act, is a transaction in which “the parties incur irrevocable liability to carry out the transaction in the United States or when title is passed within the United States.” In its May 6, 2014, opinion in City of Pontiac v. UBS AG, the Second Circuit further addressedMorrison and the applicability of Section 10(b) to transactions on foreign exchanges, and held that: (i) Section 10(b) does not automatically apply to a share bought or sold on a foreign exchange just because those shares are dual-listed on a domestic exchange; and (ii) placing a “buy order” in the United States for shares purchased on a foreign exchange alone does not constitute a “domestic transaction in securities” to which Section 10(b) applies.
City of Pontiac was a putative class action proceeding brought by a group of foreign and domestic institutional investors (“plaintiffs”) against UBS and others (“UBS”), alleging, among other claims, violations of Sections 10(b) and 20(a) of the Exchange Act in connection with the purchase of UBS “ordinary shares” listed on both foreign exchanges and the New York Stock Exchange (“NYSE”). The Second Circuit held that the Supreme Court’s decision in Morrisonprecludes Exchange Act claims by purchasers of shares of a foreign issuer on a foreign exchange, even if: (i) those shares were cross-listed on a United States exchange; (ii) the purchaser was a domestic entity; and (iii) the “buy order” was placed in the United States.
In Morrison, the Supreme Court held that Section 10(b) of the Exchange Act provided a private cause of action arising out of “ transactions in securities listed on domestic exchanges, and  domestic transactions in other securities.” Plaintiffs argued that under the first prong of Morrison (“transactions in securities listed on domestic exchanges”) Section 10(b) claims could be brought with respect to shares purchased on the foreign exchange if those securities had been cross-listed on a U.S. Exchange.
While the Court recognized that the cited language, when taken in isolation, supports the plaintiffs’ view, it held that plaintiffs’ view was not consistent with Morrison read as a whole. The Court noted that Morrison made clear that the Exchange Act was primarily concerned with the location of purchases and sales of securities within the United States. The Court explained that this focus:
evinces a concern with the location of the securities transaction and not the location of an exchange where the security may be dually listed. Morrison’s emphasis on transactions in securities listed on domestic exchanges makes clear that the focus of both prongs was domestic transactions of any kind, with the domestic listing acting as a proxy for a domestic transaction.
As further support for its reading of Morrison, the Second Circuit noted that, in Morrisonitself, the Supreme Court rejected any notion of a national public interest in transactions conducted on foreign exchanges. The Court also observed that Morrison explicitly rejected the “conduct and effects” test that had been adopted by the Second Circuit prior toMorrison, which had provided that “the Exchange Act [applies] to transactions regarding stocks traded in the United States which are effected outside the United States….”
One plaintiff in City of Pontiac was a U.S. entity that purchased UBS shares on the foreign exchange by placing a “buy order” in the United States that was later executed on a Swiss exchange. Plaintiffs argued that this two-part purchase of a security satisfied the second prong of Morrison because it constitutes a “purchase…of [a] security in the United States.” Plaintiffs argued that, under Absolute Activity, “[w]hen a purchaser is a U.S. entity,” “‘irrevocable liability’ is not incurred when the security is purchased on a foreign exchange,” but rather it is incurred “in the U.S. where the buy order is placed.”
The Court disagreed, first holding that a purchaser’s citizenship or residency has no bearing on the determination of where a transaction takes place. The Court then held that “the mere placement of a buy order in the United States for the purchase of foreign securities on a foreign exchange is [not] sufficient to allege that a purchaser incurred irrevocable liability in the United States, such that the U.S. securities laws govern the purchase of those securities.” The Court mainly rested its decision on the fact that the execution of the domestically placed buy order occurred on a foreign exchange.
The Second Circuit’s decision has potentially important consequences for funds and investors who transact in shares of dually-listed companies. The Second Circuit also articulated a broad reading of the Supreme Court’s Morrison opinion and its prior precedent that can support arguments to bar private securities actions based on shares of foreign issuers traded on foreign exchanges – even where a United States entity places a buy order in the United States.