The staff of the Securities and Exchange Commission has published its study analyzing the effects of Morrison on cross-border private securities litigation, as mandated by the Dodd-Frank Act.
The 106-page “Study on the Cross-Border Scope of the Private Right of Action Under Section 10(b) of the Securities Exchange Act of 1934” issued on April 11 stems from the U.S. Supreme Court's decision in Morrison v. National Australia Bank, which was handed down in June. That decision sharply curbed the extraterritorial scope of Section 10(b) of the Exchange Act, barring so-called “F-cubed” securities fraud actions—that is, lawsuits filed in U.S. courts by foreign investors against foreign companies that trade on foreign exchanges. Essentially, the Court said that such cases have no business being heard in the United States.
In the weeks following Morrison decision, Congress tried for a legislative fix in the Dodd-Frank Act by adding provision Section 929P, giving federal district courts jurisdiction over SEC and Justice Department Rule 10b-5 actions if the fraud involves certain defined types of conduct that take place in the United States, or if the conduct occurs outside the United States with a “foreseeable substantial effect” in the United States.
As mandated by the Dodd-Frank Act, Congress also directed the SEC to conduct a study to consider the effect of the Morrison decision on private actions. The provision additionally required the SEC to consider the potential implications on international comity and the potential economic costs and benefits of extending the cross-border scope of private actions.
Rather than make any specific recommendation on the question of whether Congress should overturn Morrison, however, the SEC study contains two “options for consideration.” The first option would be to preserve some form of the “conduct and effects” test that prevailed prior to the Morrison decision.
A variation of this approach would be to require that the plaintiff demonstrate that the plaintiff's injury resulted directly from conduct in the United States. The study noted that the direct injury requirement “could serve as a filter to exclude claims that have a closer connection to another jurisdiction.” The SEC reiterated in the study that this is the same position it took with the Solicitor General before the U.S. Supreme Court, adding that it has “not altered its view in support of this standard.”
With the second option, the SEC considered four possible alternative approaches to the question of cross-border private securities litigation. These include:
- Permit investors to pursue a Section 10(b) claim in connection with the purchase and sale of any securities of the same class of securities registered in the United States, regardless of where the transaction took place.
- Permit private rights of action against securities intermediaries such as brokers who are involved with the purchase or sale of a security overseas.
- Provide a cause of action for investors who were fraudulently induced in the U.S. to enter into the transaction regardless of where it took place.
- Permit lawsuits when either party made or accepted the offer to sell or purchase, while in the United States.
The study additionally provides a detailed overview of how lower courts have approached these issues in the wake of Morrison.
In a dissenting statement, Commissioner Luis Aguilar criticized the SEC's report. “I write to convey my strong disappointment that the study fails to satisfactorily answer the Congressional request, contains no specific recommendations, and does not portray a complete picture of the immense and irreparable investor harm that resulted and that will continue to result due to Morrison.”
The data that the SEC's Division of Risk, Strategy, and Financial Innovation used in conducting the study can be found here.