The Morrison Decision
In its highly publicized June 2010 opinion in Morrison v. National Australia Bank Ltd., 130 S.Ct. 2869 (2010), the U.S. Supreme Court held that Section 10(b) of the ’34 Act applies only to deceptive acts “in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” The Court held that foreign-domiciled claimants who purchase securities in foreign companies on foreign exchanges (“F-cubed” claimants) may not assert a Section 10(b) claim. This new “transactional” test focuses on the location of the purchase or sale of the securities in question, rather than on the location of the alleged fraud, as the determinative factor in whether the claim may proceed.
In re Infineon: Morrison Means What It Says
In the wake of Morrison, plaintiffs have naturally sought to explore the boundaries of this new doctrine. In In re Infineon Technologies AG Securities Litigation, No. 5:04-cv-04156 (N.D.Cal. Mar. 17, 2011), plaintiffs alleged that the German company Infineon and some of its officers and directors had engaged in securities fraud by participating in a price-fixing scheme and then making misrepresentations about the impact on the company’s value of the artificially fixed prices. The court certified a class of plaintiffs that included investors who had purchased Infineon securities on the Frankfurt Stock Exchange (“Foreign Investor Plaintiffs”).
After Morrison was decided, the defendants moved to dismiss all claims made by the Foreign Investor Plaintiffs. The Foreign Investor Plaintiffs sought to evade application of Morrison by arguing that although Infineon’s shares were only actively traded on the Frankfurt Stock Exchange, they were also listed and registered on the New York Stock Exchange.
The court rejected this argument and granted defendants’ motion to dismiss the Foreign Investor Plaintiffs’ claims: “Given Morrison’s holding that § 10(b) only applies to securities transactions that take place on domestic exchanges, these allegations are insufficient to state a claim under § 10(b).” It noted that the defendant in Morrison had been in just the same position as Infineon, with securities that were listed on the New York Stock Exchange, but only traded on foreign exchanges. The domestic listing did not deter the Supreme Court from finding that the Morrison plaintiffs had not stated a claim under Section 10(b); what matters for Section 10(b) purposes is not where the security is listed, but where it is purchased or sold. Accordingly, the Infineon court found that Morrison mandated dismissal of the Foreign Investor Plaintiffs’ claims.
In so holding, the Northern District of California follows the Southern District of New York’s similar reasoning in In re Alstom SA Securities Litigation, 741 F. Supp. 2d 469 (S.D.N.Y. 2010) and In re Royal Bank of Scotland Group PLC Securities Litigation, 2011 WL 167749 (S.D.N.Y.).
In re Elan: But Morrison’s Reach Is Not Infinite
While the Northern District of California was busy giving Morrison teeth, the Southern District of New York defined the holding’s outer limits. In In re Elan Corp. Securities Litigation, No. 1:08-cv-08761 (AKH) (S.D.N.Y. Mar. 18, 2011), investors brought suit against the Irish pharmaceutical company Elan, alleging that Elan had made misleading representations about two drugs. Some investors had purchased Elan stock or call options on that stock, while others had purchased American Depositary Receipts (“ADRs”) or call options on those ADRs.
The court found that Morrison did not compel dismissal of claims relating to purchases of ADRs or call options on ADRs. An ADR is a certificate evidencing an interest in securities in foreign issuers. While a holder of an ADR may exchange it for the underlying foreign shares, the ADR itself is issued by a U.S. bank and is traded on a U.S. exchange.
The Elan court did not explain the reasoning behind its finding. However, it did also hold that claims based on purchases of Elan stock or call options on Elan stock were precluded by Morrison. The court evidently saw a distinction between foreign securities traded on foreign exchanges on the one hand, and ADRs—based on underlying foreign securities—traded on U.S. exchanges on the other. It appears that the dispositive factor in determining whether a claim is precluded by Morrison is where the securities were traded. Elan, then, is simply the flip side of Infineon. Claims based on securities—including ADRs—traded in the U.S. may proceed, while claims based on securities traded abroad—even if those securities were also “listed and registered” in the U.S.—may not.
Elan is somewhat of a departure from earlier Southern District of New York case law. In In re Société Générale Securities Litigation, No. 1:08-cv-02495 (RMB) (S.D.N.Y. Sept. 29, 2010), the court found that the Exchange Act was inapplicable to plaintiffs’ ADR transactions. It cited Copeland v. Fortis, 685 F. Supp. 2d 498, 506 (S.D.N.Y. 2010), a pre-Morrison opinion, for the proposition that a trade in ADRs is considered a predominantly foreign securities transaction. The court then noted that Société Générale’s ADRs were traded not on an official U.S. exchange, but rather in a less formal market. It is not clear whether the court based its holding on Morrison or on the over-the-counter nature of the particular ADR trades in question, but in any event, the combination of Société Générale and Elan makes it hard to predict how courts in the Southern District will approach ADR transactions in the future. This uncertainty may have a chilling effect on foreign companies considering sponsoring the creation of ADR programs.
Some might also perceive Elan to be in conflict with the Southern District of New York’s 2010 decision in Elliott Associates v. Porsche Automobil Holding SE, 2010 WL 5463846 (S.D.N.Y.). There, plaintiffs had invested in security-based swap agreements that rose or fell in value based on the price of VW shares. The plaintiffs sought to protect their claims from Morrison dismissal by arguing that the swap agreements were transacted entirely in the United States, and in fact contained New York choice of law and forum selection clauses. The court rejected their argument. It reasoned that the swaps were “the functional equivalent of trading the underlying VW shares on a German exchange” because their value was “intrinsically tied” to the value of the underlying securities. Therefore, the court found that the swaps constituted a transaction on a foreign exchange outside the scope of Section 10(b). The same logic could potentially be applied to ADRs, the value of which is generally related to the value of the underlying securities.