City of Pontiac Policemen's and Firemen's Retirement Sys. v. UBS AG, No 12-4355 (2d Cir. May 6, 2014) [click for opinion]

Plaintiffs were purchasers of shares of UBS stock who alleged that, beginning with the 2006 launch of an internal hedge fund (Dillon Read Capital Management), UBS failed to disclose its accumulation and overvaluation of billions of dollars of mortgage-backed securities and collateralized debt obligations in contravention of disclosed risk policies. Some of the named plaintiffs were non-U.S. investors who purchased the stock of UBS – a Swiss corporation – on one or more non-U.S. exchanges. Another plaintiff, a U.S. entity, purchased its shares by placing a buy order in the U.S., which then was executed on a Swiss exchange.

Relying on Morrison v. Australian National Bank, the district court dismissed these shareholders' claims. In Morrison, the Supreme Court held that Section 10(b) of the Exchange Act does not apply extraterritorially to create a cause of action for plaintiffs suing foreign defendants for misconduct in connection with securities traded on foreign exchanges.

Some of the foreign plaintiffs in UBS attempted to avoid Morrison'slimitations by invoking the "listing theory," arguing that the cross-listing of UBS's shares on the New York Stock Exchange provided a sufficient domestic nexus to sustain their claims even though they had conducted their own transactions on a Swiss exchange. The Second Circuit rejected the "listing theory," explaining that Morrison "evinces a concern with the location of the securities transaction and not the location of an exchange where the security may be dually listed" (emphasis in original). The Second Circuit further stated that “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. Indeed, the Supreme Court explicitly rejected the notion that the ‘national public interest pertains to transactions conducted on foreign exchanges and markets.’”

The U.S. plaintiff that had purchased UBS shares on a foreign exchange argued that its Section 10(b) claim was viable because it incurred "irrevocable liability" in the United States by placing its buy order in this country, citing Absolute Activist Value Master Fund Lt. v. Ficeto. The Second Circuit in Absolute Activist had held that a transaction is "domestic" under Morrison if irrevocable liability is incurred in carrying out the transaction in the U.S. In rejecting the UBS plaintiff's interpretation of the Absolute Activist test, the Second Circuit noted that the plaintiff's U.S. citizenship was not relevant. The court additionally held that placing a buy order in the U.S., "standing alone," does not establish that a party incurred irrevocable liability in the U.S.

Thus, according to the Second Circuit, Morrison precludes extension of the Exchange Act to purchases of stocks on foreign exchanges, even if the shares are cross-listed on a U.S. exchange, and even if the plaintiffs are U.S. purchasers who placed buy orders in the U.S.