Relying on the U.S. Supreme Court’s recent decision in Morrison v. Nat’l Australia Bank, Ltd., No. 08–1191, 561 U.S. __, 130 S. Ct. 2869 (June 24, 2010), Judge Deborah Batts of the Southern District of New York dismissed Section 10(b) and Rule 10b-5 subprime-related securities claims asserted by a class of U.S. investors against the Royal Bank of Scotland (RBS) and several underwriters relating to the purchase of ordinary (common) RBS shares listed on foreign exchanges. In re Royal Bank of Scotland Group PLC Sec. Litig., 09-Civ-00300, 2011 U.S. Dist. LEXIS 3974 (S.D.N.Y. Jan. 11, 2011). In In re Royal Bank of Scotland Group PLC Sec. Litig., plaintiffs alleged that RBS had fraudulently misled them regarding the extent of RBS’s substantial holdings in subprime and other mortgage-backed securities. Notwithstanding the fact that plaintiffs resided in the United States and decided to purchase foreign shares while in the United States, Judge Batts concluded that Morrison mandated the dismissal of plaintiffs’ securities claims where the securities at issue were not listed on U.S. domestic exchanges.
The dismissal in In re Royal Bank of Scotland is only the latest decision that has applied Morrison to reject claims asserted by purchasers of foreign securities. In Morrison, a decision issued in June 2010, the Supreme Court held that federal securities fraud laws do not apply to investment deals that take place outside the United States, even if such investments have an impact on the United States. The Supreme Court narrowed years of federal jurisprudence on the extraterritorial application of securities fraud laws, noting that Section 10(b) applies only to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” Morrison, 130 S. Ct. at 2884. It is critical to note that Morrison applies only to private securities actions. The Dodd-Frank Act, signed into law on July 21, 2010, overruled Morrison in part by expanding federal jurisdiction to give extraterritorial effect to U.S. securities laws in proceedings brought by the Securities Exchange Commission or Department of Justice.
In In re Royal Bank of Scotland, RBS moved to dismiss plaintiffs’ claims relating to the investors’ purchase of ordinary shares. RBS contended that the amended complaint should have been dismissed because the securities at issue were not purchased or sold in the United States or on an American stock exchange, as required by Morrison. In contrast, plaintiffs argued that, because RBS listed American Depositary Shares (ADS) on the New York Stock Exchange (NYSE), the court had jurisdiction under Section 10(b) even if the securities at issue in the litigation were listed on foreign exchanges.
The Southern District of New York rejected plaintiffs’ “listing theory,” noting that the determining factor in applying Section 10(b) would be the “true territorial location where the purchase or sale was executed,” rather than the fact that RBS listed any stock on a U.S. market. In re Royal Bank of Scotland, 2011 U.S. Dist. LEXIS 3974 at *18. The court specifi cally stated: “The idea that a foreign company is subject to a U.S. securities law everywhere it conducts foreign transactions merely because it has ‘listed’ some securities in the United States is simply contrary to the spirit of Morrison.” Id. at *17–18.
Judge Batts likewise rejected plaintiffs’ contention that both their U.S. residences and their U.S.-based decisions to invest in foreign shares provided a suffi cient nexus for their securities claims. In the court’s view, plaintiffs’ suggested fact-intensive approach—“that it is enough to allege that plaintiffs are U.S. residents who were in the country when they decided to buy RBS shares—is exactly the type of analysis that Morrison seeks to prevent.” Id. at *20.
The dismissal of federal securities claims in In re Royal Bank of Scotland suggests that future courts applying Morrison will likely adhere to a narrow view of the extraterritorial reach of Section 10(b). Indeed, both investors in foreign securities and foreign companies with U.S. investors should familiarize themselves with Morrison and continue to monitor lower courts’ application of the Supreme Court decision in the coming months.