In City of Pontiac Policemen's & Firemen's Retirement System v. UBS AG, 2014 WL 1778041 (2d Cir. May 6, 2014), the Second Circuit interpreted the Supreme Court's holding in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), that Section 10(b) of the Securities Exchange Act of 1934 applies only to "domestic" transactions in securities. The Second Circuit held that, after Morrison, plaintiffs cannot assert claims under Section 10(b) based on their purchases of securities on foreign (non-U.S.) exchanges simply because those securities were also listed on a domestic (U.S.) exchange. The Second Circuit further held that plaintiffs could not assert Section 10(b) claims on the basis that they placed a "buy order" in the United States for the purchase of securities on foreign exchanges.

BACKGROUND

In Morrison, the Supreme Court held that Section 10(b) of the Exchange Act applies only to (i) "transactions in securities listed on domestic exchanges" and (ii) "domestic transactions in other securities." In so holding, the Court overruled prior Second Circuit decisions holding that plaintiffs could assert Section 10(b) claims based on securities transactions that took place outside the United States, so long as the wrongful conduct took place in the United States or it had effects in the United States.

The plaintiffs in City of Pontiac-a case filed three years before Morrison was decided-included investors who had purchased UBS securities on foreign exchanges. Those investors argued that, because UBS securities were also "listed on domestic exchanges," they satisfied the first prong of Morrison and could assert claims under Section 10(b). One plaintiff that resided in the United States also argued that, because it placed a "buy order" in the United States for its foreign securities, its transactions were "domestic transactions" within the meaning of Morrison's second prong. The District Court (Sullivan, J.) rejected both arguments, dismissing all claims based on transactions on foreign exchanges. See In re UBS AG Sec. Litig., 2011 WL 4059356 (S.D.N.Y. Sept. 13, 2011).

SECOND CIRCUIT OPINION

The Second Circuit affirmed the District Court's decision. The Second Circuit held that plaintiffs' theory about cross-listing of foreign securities on domestic exchanges was "irreconcilable with Morrison read as a whole." The court noted that, according to Morrison, the Exchange Act was focused on "purchases and sales of securities in the United States"-and, as the District Court had held, "not the location of an exchange where the security may be dually listed." The court also pointed out that, in Morrison itself, the issuer listed American Depositary Receipts on a domestic exchange, yet plaintiffs who purchased securities on foreign exchanges still could not recover.

The court further rejected the argument by the U.S.-resident plaintiff that its transactions were "domestic" because it placed a buy order in the United States that was later executed on a foreign exchange. The court reasoned that, under its prior decision in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), a purchaser's citizenship or residence in the United States was insufficient to make a transaction "domestic." Rather, a transaction is only domestic "when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed within the United States." The court held that the placing of a buy order in the United States did not meet this standard, because "we have never held that the placement of a purchase order, without more, is sufficient to incur irrevocable liability[.]"

In addition to its holding on the Morrison issue, the Second Circuit also affirmed the DistrictCourt's dismissal of the remaining claims asserted under the Exchange Act andthe Securities Act by plaintiffs who did transact on domestic exchanges. In particular:

  • The court held that plaintiffs' claims based on "general statements about [UBS's] reputation, integrity, and compliance with ethical norms," which plaintiffs alleged were misleading because of UBS's supposed involvement in a tax fraud, failed because they were not material. "[P]laintiffs' claim that these statements were knowingly and verifiably false when made does not cure their generality." 
  • The court dismissed plaintiffs' claims asserting that UBS's disclosures regarding the DOJ's investigation of a purported tax fraud were supposedly insufficient because UBS did not disclose that it was still involved in an ongoing fraud. The court pointed out that "disclosure is not a rite of confession," and "companies do not have a duty to disclose uncharged, unadjudicated wrongdoing." 
  • The court rejected plaintiffs' claims based on alleged misstatements about UBS's risk management of its holdings of residential mortgage backed securities and collateralized debt obligations, because such statements also were immaterial: "the alleged misstatement must be sufficiently specific for an investor to reasonably rely on that statement as a guarantee of some concrete fact or outcome."

ANALYSIS

The Second Circuit's decision is significant to cross-listed issuers, who can now be assured that they have not subjected themselves to Section 10(b) liability in this Circuit for transactions on foreign exchanges simply by also listing in the United States. 

The Second Circuit's dismissal of the remaining claims is also interesting. The dismissal is consistent with other recent decisions in the Second Circuit holding that general statements about corporate policies, including general statements about risk management policies or procedures, are not sufficiently material to support securities fraud claims. See, e.g., Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 2014 WL 1645611 (2d Cir. Apr. 25, 2014). The recent decisions illustrate that the Second Circuit will, in appropriate cases, scrutinize purported misstatements about matters such as risk management rigorously to assess materiality as a matter of law, even at the pleading stage.