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Norton Rose Fulbright: 2d Circuit Dismisses Listing Theory Under Morrison

By Johannes K. Gabel, Manuela A. Siragy and Richard Werner Fagerer

The Court of Appeals for the Second Circuit in its May 6 decision emphatically continued to interpret the Morrison v. National Australia Bank1 doctrine broadly by confirming the District Court’s dismissal of a putative securities class action against UBS AG2 as not actionable in US courts. The plaintiffs, the City of Pontiac Policemen’s and Firemen’s Retirement System, had argued that US securities laws should apply because (i) UBS AG’s shares, in addition to being listed on the Swiss stock exchange (SIX), are also listed on the New York Stock Exchange (so-called listing theory under the US Exchange Listed prong of Morrison), and (ii) the plaintiffs had issued a buy order in the United States and, thus, the transaction was a US transaction (under the Domestic Transaction prong of Morrison). The Second Circuit rejected both arguments, the listing theory as against the holding of the US Supreme Court in Morrison “as a whole”, and the domestic transaction based on issuing a purchase order theory as against the incurrence of irrevocable liability requirement of its two year old Absolute Activist3 decision.

City of Pontiac v. UBS AG [enhanced opinion available to subscribers] does not break new ground, but it is the first time that a Circuit Court, and, above all, the Circuit Court at the center of the US capital markets, rejected the listing theory and clarified that issuing a purchase order in the US without more does not create a domestic transaction. As such, the decision provides further support for the trend in District and now Appeals Courts to curtail the extra-territorial application of the US securities laws, steadily expanding the mandate set by the US Supreme Court in Morrison.


In 2010, the US Supreme Court in Morrison v. National Australia Bank limited cross border securities class actions by postulating that the antifraud provisions of the US securities laws applied in connection with the purchase or sale by non-US plaintiffs of securities of non-US issuers only if (1) related to securities “listed on an American stock exchange” (“US Exchange Listed prong”) or (2) made “in the United States” (“Domestic Transaction prong”) [enhanced opinion] [ subscribers may access Supreme Court briefs for this case].  Since in Morrison Australian plaintiffs had sued an Australian issuer based on securities purchased on the stock exchange in Australia, the Supreme Court had dismissed the case. The decision put to rest the “conduct” and “effect” tests the lower courts had previously applied. Not specifically dealt with in Morrison were two important situations which remained subject to discussion: (i) Transactions in securities that are listed on both a US and a foreign exchange (rather than shares listed on a foreign exchange, and ADRs listed in the US as in Morrison), and (ii) transactions by US plaintiffs (rather than non-US plaintiffs as in Morrison) on foreign exchanges. Since 2010, US courts have grappled with the interpretation of Morrison as applied in these two situations, but have generally taken an expansive, rather than a limiting view of the Morrison doctrine, with City of Pontiac v. UBS AG being the most recent example.

Expansive interpretation of Morrison

The Morrison doctrine has been embraced by many courts to limit the application of US laws to foreign transactions.

(1) Courts have strictly interpreted the US Exchange Listed prong of the Morrison doctrine. While the New York Stock Exchange (and the now defunct American Stock Exchange) had explicitly been recognized as being a “U.S. Exchange,”4 the mere fact that a security was listed on the New York Stock Exchange would not suffice.5 Rather, the courts stressed that the subject transaction of the case must have been executed through that US exchange. Up to now only lower courts had taken this position; now the Second Circuit has endorsed that reasoning.

(2) To be considered a “Domestic Transaction”, courts have held that the transaction had to be solicited and consummated in the United States. Consummation, the courts explained, required either that the title to the securities was transferred in the United States,6 or, at least, that the purchase order had become irrevocable and, thus, that a party was liable to carry out the transaction in the US.7 The courts made it clear that it did not suffice that purchase orders were electronically placed with a broker in the US8, that, more generally, US brokers were involved, that the securities were issued by a US company or registered with the SEC, or that the buyer or seller resided in, or held citizenship of, the United States9. The Second Circuit now held unequivocally that the purchase order alone would not make someone irrevocably liable (presumably, since the order could be revoked or cancelled or may not be filled).

Also not considered a “Domestic Transaction” were trades in American Depository Receipts listed on the pink sheets OTC Market10 or trades in derivative instruments, such as swaps, where the underlying reference asset was traded on a foreign exchange11, as they were considered economically and functionally equivalent to foreign transactions.

(3) Finally, it is noteworthy that a number of courts have applied Morrison’s canon of construction to an ever larger number of related factual situations. Courts declared Morrison to govern criminal actions under the securities laws, not just civil cases12, to the Alien Tort Statute13, to the Racketeer Influenced and Corrupt Organization Act (RICO)14, to §2(c) of the Robinson Patman Act 15, to the Dodd Frank antiretaliation provisions16, and to state securities laws17. Courts have, however, allowed common law fraud, negligence, misrepresentation, breach of contract, and similar causes of action, even if 10(b) claims are barred by Morrison.18

[1] 561 U.S. 247 (2010).

[2] City of Pontiac Policemen’s and Firemen’s Retirement System v. UBS AG, No. 12-4355-cv (2d Cir. May 6, 2014).

[3] Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012).

[4] In re Alstom S.A. Securities Litigation, 2010 U.S. Dist. LEXIS 98242 (S.D.N.Y. Sept. 13, 2010).

[5] In re Alstom SA Securities Litigation, fn. 4, Id.; In re Vivendi Universal S.A. Securities Litigation, 765 F.Supp. 2d 512 (S.D.N.Y. 2011).

[6] In re UBS Sec. litigation, 2011 WL 4059356 (S.D.N.Y. Sept. 13, 2011); In re Societe Generale Securities Litigation, 2010 U.S. Dist. LEXIS 107719 (S.D.N.Y. Spt. 29, 2010); Quail Cruises Ship Mgmt. Ltd. v. Agencia de Viagenes CUV Tur Limitada, 645 F.3d 1307, 1310-11 (11th Cir. 2011).

[7] Plumbers’ Union Local No. 12 Pension Fund v. Swiss Reinsurance Co., 2010 U.S. Dist. LEXIS 105720 (S.D.N.Y. Oct. 1, 2010) (dicta) citing Blau v. Ogsburg, 210 F.2d 426, 427 (2d Cir. 1954) (purchase occurs when purchaser incurs an irrevocable liability to take and pay for the stock); Absolute Activist Fund, fn. 3, at 67-68, citing Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972), SEC v. Goldman Sachs Co., 790 F. Supp.2d 147, 159 (S.D.N.Y. 2011).

[8] Plumbers’ Union Local No. 12, fn. 7, Id.

[9] City of Pontiac, fn. 1, at 15; Absolute Activist Fund, fn. 7, at 69.

[10] In re Societe Generale Securities Litigation, fn. 3, at 19; but see In re Vivendi, fn. 5 (ADR listed on NYSE, underlying shares listed on Paris stock exchange).

[11] Elliot Associates v. Porsche Automobil Holding SE, 759 F.Supp. 2d 469 (S.D.N.Y. 2010).

[12] United States v. Vilar, 729 F.3d 62 (2d Cir. 2013), but see United States v. Siddiqui, 699 F.3d 690, 700 (2d Cir. 2012), United States v. Al Kassar, 660 F.3d 108, 119 (2d Cir. 2011); courts have distinguished mail and wire fraud cases, because of the “broad language” of the statutes, see e.g. U.S.A. v. Coffman, 771 F.Supp.2d 735 (E.D.Ky. 2011).

[13] Kobel v. Royal Dutch Petroleum, 133 S.Ct. 1659 (2013).

[14] See, e.g. Norex Petroleum Ltd. v. Access Indus., 631 F.3d 29 (2d Cir. 2010) and USA v. Philip Morris USA Inc., 783 F.Supp.2d 23 (D.D.C. 2011) (the RICO statute does not apply extraterritorially); but see European Community v. RJR Nabisco, Inc., 11-2475, at 4-5 (2nd Cir. April 29, 2014) (RICO applies extraterritorially if, and only if, liability or guilt could attach to extraterritorial conduct under the relevant RICO predicate).

[15] See, e.g. Newmarket Corp. v. Innospec Inc. Civ. Action No. 3:10CV503-HEH (E.D. Va. 2011) (Section 2(c) of the Robinson Patman Act does not have extraterritorial effect).

[16] Liu v. Siemens AG, No. 13 Civ. 317 (WHP), Slip Op. (S.D.N.Y. Oct. 21, 2013) (the anti-retaliation protection found in section 922 of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 does not apply extraterritorially).

[17] In Re National Century Financial Enterprises Inc., 755 F.Supp.2d 857 (S.D. Ohio 2010) (applying the Ohio Securities Act to sales of securities that occur wholly outside of Ohio would violate the extraterritoriality principle, as articulated in Morrison, of the Commerce Clause and, thus, be unconstitutional).

[18] Anwar v. Fairfield Greenwich Ltd., 728 F.Supp.2d 372 (S.D.N.Y. 2010), Terra Securities ASA Konkursbo v. Citigroup, Inc., 740 F.Supp.2d 441 (S.D.N.Y. 2010), and recently In re BP p.l.c. Secs. Litig., MDL No. 10-md-2185, Civ. Act. No. 4:12-cv-1837 (S.D. Tex. Sept. 30, 2013).

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