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So the U.S. Supreme Court held in Morrison that the investors who purchased their shares
of a non-U.S. company on a foreign exchange cannot pursue claims under the
Exchange Act, but securityholders who purchased American Depositary Receipts
(ADRs) in the U.S. can still seek damages under the Exchange Act, right? Not
according to a September 29, 2010 decision by Southern District of New
York Judge Richard Berman in the Société Générale subprime-related securities class action
The defendants did not even raise the argument, and it
may comes as somewhat of a surprise to some observers, but Judge Berman held,
applying the U.S. Supreme Court's decision in Morrison (about which
refer here), that not even domestic purchases of SocGen's ADRs
can assert claims under the Exchange Act. As a result, Judge Berman wound up
dismissing the entire case, and not just the claims of investors who purchased
their SocGen shares on foreign exchanges.
As discussed below, if the Exchange Act does not even
apply to domestic transactions in ADRs, the question that immediately arises as
to who is left that might be able to assert Exchange Act claims against
non-U.S. companies. The answer in many cases may be - well, nobody.
Background and Decisions
Investors had sued the French bank and certain of its
directors and officers in 2008 following the revelations of Jérôme
Kerviel 4.9 billion euro trading losses and the bank's disclosures of its
own losses from subprime mortgage related investments.
After the Supreme Court issued its opinion in Morrison,
the defendants in the SocGen case had moved to dismiss the claims of two the
three named plaintiffs. Both of the two were U.S. residents who had purchased
their securities outside the U.S. Judge Berman quickly disposed of these
claims, ruling (in reliance on, among other post-Morrison cases, the
Credit Suisse case and the Alstom decision, about which refer here and here respectively) that the Exchange Act does not reach
claims of such so-called "f-squared claimants."
Judge Berman didn't stop there, but went on to consider
the applicability of the Exchange Act to the claims of the third named
plaintiff, UFCW, which had purchased ADRs over the counter in the United
States. Even though the defendants had not even themselves raised the question,
Judge Berman decided sua sponte that Morrison precludes UFCW's
claims as well.
In reaching this conclusion, Judge Berman said:
...even though Defendants do not argue that UFCW's claims
should be dismissed under Morrison, the Court concludes that the Exchange Act
is inapplicable to UFCW's ADR transactions. That is, the Court finds that
because "[t]rade in ADRs is considered 'predominantly a foreign securities
transaction,' Section 10(b) is inapplicable. An ADR 'represents one or more
shares of a foreign stock or a fraction of a share." Accordingly, UFCW's
claims are also dismissed.
Judge Berman's decision seemingly does not depend on the
fact that UFCW purchased its ADRs over the counter, rather than on an exchange.
His logic instead depends on the fact that what UFCW purchased were ADRs, the
acquisition of which, he held, represents a fundamentally foreign transaction.
-- which appears to suggest that Judge Berman would apply the same analysis
even to ADRs purchased on an exchange.
It is fair to say that Judge Berman's ruling is unexpected
Not even the defendants in the case saw it coming. I think it also raises
First, Judge Berman's analysis seems to depend on his
rather brief review of what an ADR is and the nature of the transaction
involved in a domestic ADR purchase. This seems to me like an issue that would
have benefitted from full briefing by all parties. Certainly before any other
court chooses whether or not to follow Judge Berman, a comprehensive
examination of the relation of the purpose and uses of ADRs would seem to be
Second, and perhaps more importantly, Judge Berman's
analysis of whether or not the Exchange Act applies to UFCW's ADRs arguably
would have benefitted from more detailed consideration of whether the UFCW's
ADR purchases are "domestic transactions in other securities" to
which the Exchange Act applies under the second prong of the Morrison standard.
Third, Judge Berman's conclusion seemingly put domestic
ADR transactions in an odd category about which it may be asked - which jurisdiction's
laws apply to these transactions if not U.S. law?. Are ADR purchases
transactions without a country? (Or to put it in a less contentious frame, what
jurisdiction's securities laws make more sense than those of the U.S. to apply
to ADR transactions in the U.S.)?
To the extent it is (if ever) conclusively established
that the Exchange Act does not even reach domestic ADR transactions, that
holding would represent a significant blow to the U.S. securities class action
plaintiffs' bar, as it would eliminate in many instances all or virtually all
of the claims that had seemed to be left after Morrison.
If domestic purchasers of ADRs cannot assert claims under
the Exchange Act, there would be very few if any holders of securities of many
foreign domiciled companies who could assert Exchange Act claims. One wonders
whether Judge Berman's holding could spell the end (or virtual elimination) of
many of the current securities cases pending against foreign companies - not
only cases such as Vivendi, where plaintiffs won a jury verdict on the issue of
liability, but also in more recently filed cases such as those initiated
against BP and Toyota.
Not only would that seem to dramatically narrow, if not
eliminate, what claims seemed to remain against foreign domiciled companies in
the wake of Morrison, but it could drastically limit opportunities for security
holders of non-U.S. companies to file future lawsuits under the Exchange Act.
The Morrison decision itself was a surprise, now Judge
Berman seems to have compounded that surprise by taking Morrison in a
completely unexpected direction. Of course, where it will all lead remains to
be seen. I think more will be heard on the issues Judge Berman has raised.
I have in any event added the SocGen decision to my
running tally of subprime and credit crisis related lawsuit dismissal motion
rulings, which can be accessed here. Special thanks to a loyal reader for supplying
a copy of the SocGen decision.
Read other items of interest from the world of
directors & officers liability, with occasional commentary, at the D&O Diary, a blog by