In 2010, the United States Supreme Court in Morrison v. National Australia Bank Ltd. sharply limited the extra-territorial reach of the United States securities laws, finding that the focus of those laws is “upon purchases and sales of securities in the United States” and that they do not apply to purchases of stock by foreign investors in foreign countries.1 In doing so, the Supreme Court held that Section 10(b) of the Securities Exchange Act of 1934 only allowed claims arising out of “(1) transactions in securities listed on domestic [United States] exchanges, and (2) domestic transactions in other securities.” 2
Last week, in City of Pontiac v. UBS AG et al., the United States Court of Appeals for the Second Circuit clarified, “as a matter of first impression,” two questions regarding Morrison’s two-factor test: (1) does Section 10(b) apply to foreign transactions — the purchase of foreign-issued shares by foreign investors on a foreign exchange — simply because those shares are cross-listed on a United States exchange; and (2) does Section 10(b) apply to the purchase of foreign shares on a foreign exchange when the “buy order” for the shares was placed by a United States resident in the United States.3 In both instances, the Second Circuit answered in the negative.
As is relevant here, City of Pontiac involved Section 10(b) claims alleging that UBS AG (“UBS”) had made false statements about its exposure to mortgage-backed securities and a purported scheme to violate United States tax laws.4 Three of the plaintiffs were European institutional investors and one (“OPEB”) was a United States-based institution. All purchased foreign-issued UBS securities on foreign exchanges, although OPEB had placed the “buy order” for its UBS securities in the United States. The underlying securities, in addition to being listed on foreign exchanges, were also listed on the New York Stock Exchange. The plaintiffs argued, under a so-called “listing theory,” that the listing of the UBS securities on the New York Stock Exchange satisfied Morrison’s requirements. OPEB also asserted that its placement of a “buy order” in the United States constituted a “domestic transaction” under Morrison. As noted, the Second Circuit rejected both arguments.
Listing Theory. Although the plain language of Morrison could be interpreted to allow plaintiffs to bring claims arising from “transactions in securities listed on domestic exchanges,” even if the transaction itself was foreign in nature, the Second Circuit found that this would not comply with the Supreme Court’s clear concern in Morrison that Section 10(b) liability should be limited to securities transactions taking place in the United States. Under this analysis, the security must be purchased or sold in the United States. The mere fact that the security is also cross-listed on a United States exchange will not, in and of itself, give rise to potential liability.
“Buy Order.” OPEB also argued that its placement of a “buy order” in the United States constituted a “purchase … of a security in the United States” because it incurred irrevocable liability to carry out its purchase of UBS securities when it placed its “buy order.”5 The Second Circuit rejected that argument, albeit with little analysis. Specifically, it found that the placement of a “buy order in the United States that was then executed on a foreign exchange, standing alone,” does not “establish that OPEB incurred irrevocable liability in the United States.”6 The Second Circuit, however, did not explain what factors in addition to the placement of a “buy order” in the United States would satisfy Morrison. Thus, while City of Pontiac clearly limits the scope of transactions subject to the United States securities laws, it does not eliminate the possibility that United States based activities in addition to the placement of a “buy order” could, depending on the circumstances, be sufficient for the United States securities laws to apply to a transaction executed on a foreign exchange.