SEC v. Torre — German Discovery Rejected; Many Claims Dismissed Under Morrison

 

By Louis M. Solomon

We have previously posted on the Magistrate Judge's rejection of Fabrice Tourre's discovery requests concerning Germany in SEC v. Goldman Sachs & Co. and Fabrice Tourre, 10 Civ. 3229 (S.D.N.Y.) [(Motion for judgment on the pleadings available 88-101026-047B )].  In a short order, the District Court has now affirmed the Magistrate Judge's Report and Recommendation.

At the same time, the District Court, on June 10, 2011, issued a decision on Tourre's motion to dismiss the securities claims filed against him for failure to state a claim.  Of interest to international practice is the bulk of the District Court's decision applying Morrison v. National Australia Bank Ltd., 130 S.Ct. 2869 (2010), which held that Section 10(b) of the Securities Exchange Act of 1934 did not provide a private cause of action in "foreign-cubed" cases-cases where foreign plaintiffs sue foreign defendants for misconduct in connection with securities traded on foreign exchanges (hence "foreign cubed").  Rejecting prior jurisprudence focusing on where "conduct" and "effects" occurred or would be felt to determine the reach of Rule 10b-5, Morrison the Supreme Court held that Section 10(b) reaches frauds only where "the purchase or sale is made in the United States, or involves a security listed on a domestic exchange".

In Tourre, the District Court rejected most of the SEC's claims under MorrisonTourre notes that one of the factors that "weighed heavily" in the Supreme Court's decision was the "probability of incompatibility with the applicable laws of other countries".  But as we have pointed out (here), that is an issue that cuts in multiple directions - incompatibility may come from underenforcement as well as overenforcement.  In any event, in the year since Morrison was decided, we have not seen much discussion or any evidence of incompatibility.

The District Court in Tourre also provides an extensive analysis of what it believes Morrison meant by a purchase or sale of a security occurring in the U.S.  Said the Court, following the Southern District decision in Plumbers' Union Local No. 12 Pension Fund v. Swiss Reinsurance Co., 753 F. Supp. 2d 166 (S.D.N.Y. 2010), the District Court holds that the purchase (or sale) does not occur until the buyer has "incurred an irrevocable liability to take and pay for the stock".  The Court rejected the importance of evidence of significant activity and conduct in the U.S. short of the irrevocable liability, stating:  "The shortcoming of all of this U.S.-based conduct is precisely that - it is just conduct".

The District Court also applies Morrison's standard to claims under the Securities Act of 1933, specifically Section 17(a).  See also In re Royal Bank of Scotland Grp. PLC Securities Litig., No. 09 Civ. 300 (S.D.N.Y. Jan. 2011)(discussed here).

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