This is an update to our November 30, 2010 and April 26, 2011 blog posts relating to the SEC's Study on
Extraterritorial Private Rights of Action. The study was a result of the
Supreme Court's decision in Morrison
v. National Australia Bank, 130 S. Ct. 2869 (2010), which abandoned
nearly 50 years worth of legal precedents, limiting the ability of Americans to
invoke the protections of the U.S. securities laws against transnational
securities fraud. Specifically, the Supreme Court rejected the U.S.
Second Circuit Court of Appeal's "conducts and effects" test and established a
transaction based test focusing on the location of the purchase or sale of the
securities. The new bright line test limits Section 10(b) claims to the use of
a manipulative or deceptive device or contrivance only in connection with the
purchase or sale of a security listed on an American stock exchange, and the
purchase or sale of any other security in the United States.
Shortly after Morrison was decided, the Dodd-Frank
Act was enacted, which restored the ability of the SEC and DOJ to bring
enforcement actions for securities fraud if the matter involves: "(1) conduct
within the United States that constitutes significant steps in furtherance of
the violation, even if the securities transaction occurs outside the United
States and involves only foreign investors; or (2) conduct occurring outside
the United States that has a foreseeable substantial effect within the United
States." Although the Act did not provide the same protections for
private citizens, Section 929Y directed the SEC to conduct a study to determine
whether private rights of action should be extended to the same extent as that
provided to the SEC and DOJ.
On April 11, 2012, the SEC released its "Study on the
Cross-Border Scope of the Private Right of Action Under Section 10(b) of the
Securities Exchange Act of 1934." A copy of the 73 page report can be
found here. In response to the SEC's request for public
comments, the SEC received 72 comment letters (30 from institutional investors;
19 from law firms and accounting firms; 8 from foreign governments; 7 from
public companies and associations representing them; 7 from academics; and 1
from an individual investor). Of these, 44 supported enactment of the conduct
and effects tests or some modified version of the tests, while 23 supported
retention of the Morrison transactional test.
In the study, the SEC does not take any position on the
question of whether or not Congress should pass legislation to overturn Morrison.
Instead, the SEC presents several options for Congress to consider, including
(1) enactment of the "conduct and effects" tests; (2) narrowing the conduct
test's scope to require the plaintiff to demonstrate that his/her injury
resulted directly from conduct within the United States; (3) enacting the
conduct and effects tests only for U.S. resident investors; (4) clarifying the
transaction test by permitting investors to pursue a Section 10(b) claim for
the purchase or sale of any security that is of the same class of securities
registered in the United States, irrespective of the actual location of the
transaction; (5) authorizing Section 10(b) private actions against securities
intermediaries such as broker-dealers and investment advisers that engage in
securities fraud while purchasing or selling securities overseas for U.S.
investors or providing other services related to overseas securities
transactions to U.S. investors; (6) permitting investors to pursue a Section
10(b) private action if they can demonstrate that they were fraudulently
induced while in the United States to engage in the transaction, irrespective
of where the actual transaction takes place; and (7) clarifying that an
off-exchange transaction takes place in the United States if either party made
the offer to sell or purchase, or accepted the offer to sell or purchase, while
in the United States.
In connection with the release of the study, Commissioner
Luis A. Aguilar issued a harsh dissenting statement relating to the SEC's
report. As part of a press release entitled, "Defrauded
Investors Deserve Their Day in Court," Mr. Aguilar recommended that
Congress enact for private litigants a standard that is identical to the
standard set forth in Section 929P of the Dodd-Frank Act - the standard for SEC
and DOJ actions:
Today the Commission has authorized that a Study be sent
to Congress expressing the views of the Staff on the cross-border scope of the
private right of action under Section 10(b) of the Securities Exchange Act of
1934. However, my conscience compels me to write separately to record my views
on the Study. 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 has resulted, and will continue to result, due
to Morrison v. National Australia Bank, Ltd
If American investors are defrauded by a company that
they have invested in - and that company is listed on a foreign exchange -
investors may be unable to have their day in court and seek redress against
this company for its lies and misrepresentations. Thus, investors have been
stripped of a traditional American right.
The answer to the Congressional query about whether to
re-establish extraterritorial private rights of action under Section 10(b) of
the Exchange Act through the application of the pre-Morrison tests of
conduct and effect is an unequivocal yes.
The Study is incomplete in many ways, but I will just
highlight the following:
The Study should have recommended that Congress enact for
private litigants a standard that is identical to the standard set forth in
Section 929P of the Dodd-Frank Act - the standard for SEC and DOJ actions. The
harm that has resulted and continues to result to investors is significant, and
Congress should act to rectify this with haste.
Abbey Spanier Rodd
& Abrams, LLP, located in New York City, is a well-recognized national
class action and complex litigation law firm.
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