Supreme Court Rejects Extraterritorial Application of Section 10(b) and 'Conduct and Effects' Test in Morrison v. National Australia Bank Ltd

Supreme Court Rejects Extraterritorial Application of Section 10(b) and 'Conduct and Effects' Test in Morrison v. National Australia Bank Ltd

by Michele Rose, Christian Word, Jessica Phillips and Kamil Redmond

The United States Supreme Court recently rejected years of federal jurisprudence on the extraterritorial application of §10(b) of the Securities Exchange Act. In Morrison v. National Australia Bank, No. 08-1191, the Court held that a claim brought by foreign investors against a foreign company based on shares bought on a foreign exchange-a so-called "F-cubed" case-may not be litigated in United States courts under §10(b).

 Excerpt:

The United States Supreme Court recently rejected years of federal jurisprudence on the extraterritorial application of §10(b) of the Securities Exchange Act. In Morrison v. National Australia Bank, No. 08-1191, 2010 U.S. LEXIS 5257 (June 24, 2010), the Court held that a claim brought by foreign investors against a foreign company based on shares bought on a foreign exchange-a so-called "F-cubed" case-may not be litigated in United States courts under §10(b). The Court explained that §10(b) is silent on its scope beyond our borders and, as a result, prohibits fraud only in connection with the purchase or sale of stock either made in the United States or listed on a domestic exchange.

The Court's decision is expected to have a significant impact on current and future §10(b) actions as the "conduct and effects" test previously applied by most courts permitted many claims to proceed that are no longer viable under Morrison. Specifically, the principal impact will be to the benefit of foreign companies that do not engage in capital formation activities in the United States but simply engage in operations here, as that domestic conduct apparently can no longer give rise to a §10(b) claim. Foreign issuers who sell stock in this County (via American Depositary Receipts (ADR) or otherwise) will, however, remain subject to §10(b)'s proscriptions. In light of the recent increase in the number of F-cubed cases filed in U.S. courts, it remains to be seen whether these foreign plaintiffs will try to maneuver around Morrison or pursue their claims in their home country.

Overview of the Morrison Case

For decades before the Court's decision in Morrison, the lower courts-led by the Second Circuit-had required a case-by-case analysis to decide whether they had jurisdiction to over securities fraud claims over F-cubed cases. The courts applied their "best judgment as to what Congress would have wished if these problems had occurred to it," and concluded that Congress did not intend "to allow the United States to be used as a base for manufacturing fraudulent security devices for export, even when these are peddled only to foreigners." To that end, the Second Circuit traditionally used two tests in considering the extent to which §10(b) and Rule 10b-5 applied extraterritorially: (1) an "effects" test that analyzed whether the wrongful conduct had a substantial effect in the United States or upon its citizens, and (2) a "conduct" test, which inquired whether the wrongful conduct occurred in the United States. [footnote omitted]

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