Mercati finanziari e regole di sistema
Dicembre 2012

The new boundaries of U.S. extraterritorial securities regulation

Estremi per la citazione:

J. Crivellaro, The new boundaries of U.S. extraterritorial securities regulation, in Riv. dir. banc., dirittobancario.it, 28, 2012

ISSN: 2279–9737
Rivista di Diritto Bancario

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I mercati azionari statunitensi sono regolati a livello federale da due principali leggi introdotte a seguito del tracollo finanziario del 1929: il Securities Act del 1933 e il Securities Exchange Act del 1934. Essendo il sistema finanziario americano impostato sulla filosofia del disclosure e non su di un giudizio di merito delle compagnie che intendono quotarsi in borsa, le disposizioni che sanzionano il rilascio di informazioni false o fraudolente assumono un’importanza fondamentale. Esse infatti costituiscono il principale strumento per garantire un corretto funzionamento dei mercati, come evidenziano la sezione 10(b) del Securities EchangeAct del 1934 e la Rule 10b-5 che proibiscono la diffusione di informazioni false o fraudulonte da parte delle compagnie quotate in borsa.

Nonostante l’importanza di queste disposizioni, la normativa federale non specifica in modo chiaro quale sia l’ambito di applicazione territoriale della legge. Di conseguenza negli ultimi decenni sono state le corti federali a dover interpretare lo spirito del legislatore per determinare in quali casi dispute concernenti fatti accaduti all’estero potessero essere soggette all’applicazione del diritto federale finanziario.

La sentenza della Corte Suprema degli Stati Uniti, Morrison v National Australia Bank, offre la prima vera interpretazione della questione da parte del supremo organo giudiziario. Essa ha circoscritto l’applicazione della sezione 10(b) ad un ambito territoriale alquanto ristretto, introducendo un nuovo standard giurisdizionale definito come il ‘transactional test’. Tale standard prevede che sia possibile avvalersi della sezione 10(b) solamente nel caso di (1) operazioni in azioni quotate sui mercati azionari statunitensi o di (2) operazioni finanziarie effettuate all’interno degli Stati Uniti.

Il nuovo standard introduce una chiara demarcazione giuridica in una materia che era precedentemente affidata a considerazioni discrezionali. Ciononostante, all’indomani della sentenza Morrison, il Congresso americano ha introdotto la Sezione 929P(b) del Dodd Frank Act per poter estendere la competenza degli organi federali a situazioni che esulano dai criteri sopracitati (il transactional test).

Non essendo stata estesa la modifica della Sezione 929P(b) anche ai ricorrenti privati, la nuova interpretazione della Corte Suprema in Morrison rischia di compromettere gravemente il ricorso di molti investitori statunitensi e stranieri, vittime di frodi finanziarie al di fuori della ristretta protezione accordata dal transactional test.

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1. Introduction - Regulation of the securities markets

The securities industry in the US is heavily regulated by two pivotal pieces of legislation, the Securities Act of 1933 (“1933 Act”)1 and the Securities Exchange Act of 1934 (“1934 Act”).2 These were introduced following the Great Depression of 1929 and responding to a perception that unscrupulous dealings in securities had fomented the market crash.3 The post-1929 regulatory framework sought to protect investors through an extensive disclosure regime, imposing onerous requirements of public disclosure for publicly traded companies.4 The 1934 Act also gave the federal regulatory agency, the Securities and Exchange Commission (“SEC”), the disciplinary power to enforce sanctions for the prohibited fraudulent conduct.5 Possibly because of the importance of the disclosure philosophy (rather than a merit-based review), the anti-fraud provisions of the 1934 Act were worded expansively and scrupulously enforced.6

Section 10(b) of the 1934 Act prohibits any person to “use or employ, in connection with the purchase or sale of any security registered on a national securities exchange… any manipulative or deceptive device or contrivance.” 7 Pursuant to its authority under the Act, the SEC introduced Rule 10b-5 providing that:

“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) to employ any device, scheme, or artifice to defraud,

(b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”8

Thus, a plaintiff instituting a 10b-5 claim must prove a material manipulation or deception occurring in connection with the purchase or sale of securities by a defendant with a blameworthy state of mind (scienter). Additionally, a private plaintiff bringing such a claim must prove he purchased or sold the security relying on the allegedly fraudulent manipulation/deception, and such reliance caused an economic loss.9 Despite the doctrinal hurdles of a 10b-5 claim the “overwhelming majority” of class actions based on securities fraud claims (whether domestic or transnational) are brought under this provision of the securities laws.10

Notwithstanding the centrality of Section 10(b) and Rule 10b-5 in federal securities laws both the Act and the regulation are silent as to their extraterritorial effect.11 Historically, an expansive reading of the section was premised on the reference to “interstate commerce” since the definition of the term in the Act includes trade, commerce, transportation or communications “between any foreign country and any State.”12 Yet, this contextual reading of the 1934 Act was expressly discarded by the Supreme Court in Morrison v National Australia Bank.13

2. Foreign securities litigation prior to Morrison

The overarching inquiry in common law courts of discretionary jurisdiction faced with the prospect of transnational securities litigation is whether there are sufficient links with the forum nation to justify the expense of the court’s adjudication.14 Crudely put, federal courts question “whether Congress would have wished the precious resources of United States courts and law enforcement agencies to be devoted to them [foreign lawsuits] rather than [to] leave the problem to foreign countries.”15

In the course of four decades, case law ruled that federal courts would hear a case where the plaintiff could allege that (1) the misrepresentation resulted in a substantial effect to investors in the US (the “effects” test); or that (2) a substantial amount of the conduct resulting in the misrepresentation occurred in the US (the “conduct” test); or (3) an “admixture” of the two tests. Conceptually, federal courts approached this issue assuming that Congress had not considered the question of extraterritoriality and therefore sought to adjudicate in light of what Congress would have done had it addressed the question.16

Under the effects test, courts had jurisdiction to hear a securities fraud claim where “the wrongful conduct had a substantial effect in the US or upon US citizens”17 and where “the transactions involve stock registered and listed on a national securities exchange, and are detrimental to the interests of American investors.”18 Underlying the effects test is a protectionist ideology: “American investors should be protected even if the fraud affecting them occurred abroad.”19

Under the conduct test, courts had jurisdiction to hear a securities fraud claim where the “wrongful conduct occurred in the US”20. This factual inquiry focuses upon “the nature of conduct within the United States as it relate[d] to carrying out the alleged fraudulent scheme.”21 Thus, even if the securities are not purchased domestically, a foreign plaintiff can proceed if he can prove that a significant part of the fraudulent conduct occurred in the US. Somewhat artificially, courts have reasoned that when applying the conduct test to wrongful conduct which partly occurred in the US they are applying the anti-fraud provisions domestically rather than extraterritorially.22 As Judge Friendly explained, the test’s rationale is that Congress would not have wanted the US “to be used as a base for manufacturing fraudulent security devices for export, even when these are peddled only to foreigners.”23

In Itoba Ltd. v. LEP Group PLC the Second Circuit combined the effects and the conduct test as “an admixture or combination of the two often gives a better picture of whether there is sufficient United States involvement to justify the exercise of jurisdiction by an American court.”24

In a recent summary by the Second Circuit of the applicable bases of jurisdiction, the Court held that Section 10(b) applied to (a) domestic sales to American investors regardless of the occurrence of any act in the US (effects test), (b) foreign transactions to American investors if acts had occurred in the US (conduct test) and (c) foreign investors only if significant acts had occurred in the US (heightened conduct test).25

Given New York’s pre-eminence as the centre of the American securities industry,26 the standards set by the Second Circuit have been authoritative for most other circuits.27 Regrettably, the variety of different tests applied resulted in a jurisprudence which was “complex, vague, inconsistent and unpredictable.”28 In particular, the wide extraterritorial reach of the conduct test was represented as a form of “legal imperialism that set the United States on a collision course with the legitimate interests of other sovereign nations”29

Perhaps the complexity of the appellate jurisprudence resulted from the conflicting policy objectives which the courts sought to jointly pursue. On the one hand, federal courts sought to ensure that the US did not become a “Barbary Coast [for] international securities pirates.”30 This encouraged judges to construe the securities laws broadly and find jurisdiction insofar as some tenuous link with the US was found. On the other hand, a necessity to preserve the scarce judicial resources deterred judges from transforming federal courts into the “Shangri-La of class action litigation representing those allegedly cheated in foreign securities markets.”31

The difficulty of pursuing these conflicting aims has been exacerbated by the globalization of the international capital markets; a trend which has greatly facilitated the purchase and sale of securities in a transnational setting.32 Thus, to reconcile policy objectives which often presented themselves as irreconcilable, the Second Circuit focused upon malleable standards capable of tailoring the remedy, and the precedential value to the case at hand. The inevitable consequence of this fact-intensive jurisprudence was to generate haphazard case law and an unpredictable climate for foreign and domestic issuers.

3. The judgment

What the previous sections highlighted was the legal basis for the potential extraterritorial effect of US securities regulations. Yet this rich body of law was singlehandedly overruled by the Supreme Court of the United States in its judgment in Morrison v National Australia Bank.33 The judgment focused on three main lines of inquiry: an assessment of the geographic reach of Section 10(b) and Rule 10b-5, a consideration of the presumption against extraterritoriality of federal statutes, and the creation of a new standard for international securities litigation.

In addressing the geographic scope of the anti-fraud provisions of the securities laws, the Supreme Court unexpectedly shifted the threshold analysis from a question of jurisdiction to a consideration of the merits.34 The entire framework of federal appellate case law had been channelled to answer specifically whether federal courts were seized with the jurisdiction to hear a case with a significant foreign dimension. For the Supreme Court instead, the question became whether the statutory and regulatory provisions could extend to the dispute at hand.

The majority answered the question of extraterritorial application by focusing on ordinary principles of statutory interpretation. Justice Scalia resurrected the presumption against extraterritoriality of domestic statutes,35 and, convinced that the scant (if any) reference to international application in the 1934 Act reinforced his narrow interpretation of the statute’s reach, held that there was no evidence that Congress intended the section to apply extraterritorially.36 Thus, since there was “no affirmative indication in the Exchange Act that [Section] 10(b) applies extraterritorially, . . . it does not.”37

Ultimately, the Court categorically dismissed the former conduct and effects test as they failed to respect the presumption against extraterritoriality,38 were applied haphazardly and without adequate justification from the statute,39 and risked offending the sovereignty of other nations whose laws the 1934 Act would be grossly over-shadowing.40 To fill the lacuna legis created, the Supreme Court devised a new standard for suits brought pursuant to the anti-fraud provisions of the 1934 Act: the transactional test. Regrettably, while the new standard was repeatedly (but differently) articulated throughout the Opinion, it was poorly explained.41

In fact, the Court held that anti-fraud provisions only applied to:

“Transactions in securities listed on domestic exchanges, and domestic transactions in other Securities;”42

Cases where “the purchase or sale is made in the United States, or involves a security listed on a domestic exchange;”43 or

Cases where the plaintiff alleges “use of a manipulative or deceptive device or contrivance … 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.”44

Thus, the transactional test is composed of a “first prong” addressing transactions in securities listed on an American stock exchange, and a “second prong” addressing other (unidentified) domestic transactions in other securities. Rather than focusing upon “the place where the deception originated”, the new jurisdictional standard limits the reach of the anti-fraud provisions exclusively to “purchases and sales of securities in the United States.”45

In an attempt to restore clarity and predictability, the Supreme Court has introduced an element of legal formalism requiring courts to focus exclusively on the place of purchase or sale of the transaction rather than the essence or motive underlying the transaction. What is apparent is that a bright line test was intended by the Supreme Court, and such a test, capable of providing definitive answers has provided some of the desired clarity. For example, it is now certain that a foreign plaintiff - whether suing a domestic or foreign defendant - will have no cause of action if the transaction at issue was executed on a foreign exchange.46

4. The Dodd-Frank Act

The day after the Morrison judgment was handed down by the Supreme Court, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank Act”) was passed by Congress in response to the financial crisis to an “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”47While reforming the banking and financial services industries at large, the Dodd-Frank Act also addressed the extraterritorial effect of the anti-fraud provisions of the 1934 Act. While the Morrison Court had not distinguished between private rights of action and governmental enforcement actions, Congress chose to focus uniquely on the latter.

Section 929P(b) of the Dodd Frank Act grants federal courts subject matter jurisdiction to hear cases brought by the SEC or the Department of Justice (“DOJ”) if the factual disputes satisfy either the conduct or the effects test.48 While the provision was not extensively discussed on the Congressional floor, the legislative history reveals the intent to overrule the Morrison decision with regards to public enforcement powers.49

Unfortunately, the hasty Congressional response overlooked the exact implications of the Morrison judgment. By restoring the conduct and effects test for SEC and DOJ suits, Congress reinstated federal appellate case law concerning the issue of whether federal courts had subject matter jurisdiction to entertain securities suits with foreign elements.50 Yet, the Supreme Court in Morrison had shifted the threshold inquiry from subject matter jurisdiction to a question of merits, effectively rendering the first inquiry futile.51 Essentially, Congress in Section 929P has affirmed jurisdictional standing for federal courts when the Supreme Court had already conceded the issue, but then barred extraterritoriality on other grounds.

Therefore, on a textual reading of Section 929P(b) the provision would be wholly ineffective.52 On the other hand, Congressional intent is sufficiently clear (despite the drafting error) and the practical complications are sufficiently compelling to ensure that, as a practical matter, Morrison will not hinder the ability of the SEC and the DOJ to bring enforcement actions.53

In Section 929Y, Congress directed the SEC to solicit public comments and conduct a study to determine whether to extend the scope of the 929P private rights of action.54 The SEC study was released in April 2012 highlighting a number of potential alternatives but without issuing a firm recommendation.55 Thus, it seems that the consequence of the imprecise Congressional response has been merely to add an additional layer of complexity to an already tortuous jurisprudence.

5. Conclusion & critique of the judgment

While the Supreme Court’s ruling on the merits of the Australian plaintiffs’ claim was widely accepted, the reasoning displayed by the majority was heatedly criticised.56 In fact, Justice Scalia’s recourse to the principles of statutory interpretation and his quest for a ‘textualist’ understanding of the 1934 Act seems far-fetched when the entire field of law has been shaped beyond the wildest dreams of the enacting Congress.57 Similarly, resort to the presumption against extraterritoriality - while a commendable exercise in the early stages of interpretation of a federal statute – is somewhat less praiseworthy when an entire industry has grown up with the expectation that the law had extraterritorial effect. Moreover, as the concurrence highlighted, the presumption itself is a “flexible rule of thumb” rather than a mandatory principle of law and it should sway in light of more important policy objectives.58

The spirit of the Court’s Opinion rested strongly on the principle of comity. Despite the difficulty of encapsulating the principle in a clear definition, the former conduct and effects tests was prone to interfere with the legitimate regulation of securities markets by other nations.59 Especially insofar as the Second Circuit presumed to apply US securities laws to claims involving securities traded on foreign exchanges, this violated an inherent sense of territorial justice.60 Insofar as other countries pursued different policy objectives, such an extension of US jurisdiction constituted a grave infringement on their legitimate sovereignty.61

Yet, the convergence of securities laws and objectives in the desire to pursue securities fraud violations seems to restrict the potential for stark policy contrasts.62 Especially where the defendant issuer is listed on the American exchange, even if the alleged fraud occurs on a foreign exchange, the degree of intrusiveness in a foreign nation’s sovereignty would be relatively minimal. Paradoxically, a rigorous application of the Morrison ratio may actually offend the principles of comity more than the former conduct and effects test. If strictly applied, Morrison requires federal courts to decline jurisdiction for fraudulent conduct which occurred on a transaction executed on a foreign exchange even if the misconduct originated and was almost exclusively carried out in the US.

Ultimately, the Supreme Court’s choice to overrule an entire body of law as if it had not existed was perplexing.63In the course of forty years, the Second Circuit’s rulings had created a sophisticated jurisprudence which was regularly applied engendering confidence in market actors and an expectation for its continuation.In light of the settled nature of this jurisprudence, the Court should probably have inferred Congressional acknowledgment and acceptance of the judicial developments in the area.

1

48 Stat. 74, enacted 1933-05-27, codified at 15 U.S.C. § 77a et seq. The 1933 Act regulates the initial registration of securities on the US capital markets.


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2

Pub.L. 73-291, 48 Stat. 881, enacted 1934-06-06, codified at 15 U.S.C. § 78a et seq.


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3

James M. Landis, Legislative History of the Securities Act of 1933, 28 Geo. Wash. L. Rev. 29 (1959); Bierman Jr., The Great Myths of 1929 and the Lessons to Be Learned, 53 J. Econ. Hist. 195 (1993); John C. Coffee & Hillary A. Sale, Securities Regulation (8th ed. 2008) 1353ss.


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4

Louis Loss & Joel Seligman, Securities Regulation, 3rd edn (1998), 29 ‘Then, too, there is the recurrent theme throughout [federal securities law] of disclosure, again disclosure, and still more disclosure. Substantive regulation has its limits. But “The truth shall make you free. F. Easterbrook & D. Fischel, Mandatory Disclosure and the Protection of Investors, 70 Virginia L. Rev. 669, 670 ‘The dominating principle of securities regulation is that anyone willing to disclose the right things can sell or buy whatever he wants at whatever price the market will sustain.’


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5

SEC, ‘The Laws That Govern the Securities Industry’, http://www.sec.gov/about/laws.shtml#secexact1934.


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6

Alan Palmiter, Securities Regulation 528 (4th ed. 2008).


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7

15 U.S.C. § 78j(b) (2006).


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8

17 C.F.R. § 240.10b-5 (2010). The Supreme Court in U.S. v. Hagan, held that Rule 10b-5 “does not extend beyond conduct encompassed by Section 10(b).” Thus, the two provisions will be treated together for the purposes of this article. U.S. v. Hagan, 521 U.S. 642, 651 (1997).


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9

For an exhaustive definition of the elements of a 10b-5 cause of action, see, Keith A. Rowley, Cause of Action for Securities Fraud Under Section 10(b) of the 1934 Securities Exchange Act and/or Rule 10b-5, 2d 271 (2012); Arnold S. Jacobs, s. 7:1 Elements of a 10b-5 Cause of Action, Disclosure and Remedies Under the Securities Laws, in 5B Disclosure & Remedies Under the Sec. Laws (2012). For a summary assessment of recent Supreme Court case law addressing the 10b-5 elements, see Jacopo Crivellaro & Milosz Morgut, Highlights of Recent Supreme Court Securities Jurisprudence, 9 Macquarie Business Law Journal (2012).


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10

Amanda Rose, Reforming Securities Litigation Reform: Restructuring the Relationship Between Public and Private Enforcement of Rule 10b-5, 108 Colum. L. Rev. 1301, 1302 (2008).


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11

Hannah L. Buxbaum, Multinational Class Actions Under Federal Securities Law: Managing Jurisdictional Conflict, 46 Colum. J. Transnat'l L. 14, 18-19 (2007) (“[T]he antifraud provisions of the federal securities laws do not speak directly to the scope of their application in the international context.”) ; J. William Hicks, Enforcement: Remedies and Sanctions, Violations of Registration and Reporting Requirements and Prohibitions against Fraud: Subject Matter Jurisdiction: Judicial Approaches to Foreign Transactions, in International Dimensions of U.S. Securities Law Database, (2011).


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12

15 U.S.C. §78c(a)(17): “The term ‘interstate commerce’ means trade, commerce, transportation, or communication among the several States, or between any foreign country and any State, or between any State and any place or ship outside thereof. The term also includes intrastate use of (A) any facility of a national securities exchange or of a telephone or other interstate means of communication, or (B) any other interstate instrumentality.” Katherine J. Fick, Such Stuff as Laws Are Made on: Interpreting the Exchange Act to Reach Transnational Fraud, 2001 U. Chi. Legal F. 441, 445 (2001).


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13

“[A] general reference to foreign commerce in the definition of “interstate commerce,” see 15 U.S.C. § 78c(a)(17), does not defeat the presumption against extraterritoriality.” Morrison v. National Australia Bank, 130 S.Ct. 2869, 2874 (2010).


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14

Charles Alan Wright, Arthur R. Miller and Edward H. Cooper, Federal Practice and Procedure: Jurisdiction and Related Matters, vol14D (3rd edn) para 3828.4; Robert Braucher, The Inconvenient Federal Forum (1947) 60 Harv. L. Rev. 908, 909; Alexander Reus, Judicial Discretion: A Comparative View of the Doctrine of Forum Non Conveniens in the United States, The United Kingdom, and Germany (1994) 16 Loyola Int’l & Comp. L. Journal 455, 459.


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15

Bersch v. Drexel Firestone Incorporated & Ios J H, 519 F. 2d 974, 985.


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16

John R. Crook, Contemporary Practice of the United States Relating to International Law: U.S. Supreme Court Limits Extraterritorial Reach of Securities Laws, (2010) 104 American Journal of International Law 654.


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17

Schoenbaum v. Firstbrook, 268 F.Supp. 385, 392 (1967).In Schoenbaum, treasury shares of a Canadian corporation (Banff Corporation), were listed on the Canadian stock exchange and on an American stock exchange. Following a merger with another Canadian corporation, shareholders brought a derivative suit in the US. The Second Circuit held that the Canadian investors could sue in US courts under a Section 10(b) claim even if the alleged fraud occurred in Canada, because the fraudulent practices had a substantial effect on “domestic investors who have purchased foreign securities on American exchanges and to protect the domestic securities market from the effects of improper foreign transactions in American securities.” In a recent summary of the standard, the Second Circuit held that the non-domestic fraudulent conduct must have caused actual harm to US sellers, investors or markets. Eur. & Overseas Commodity Traders v. Banque Paribas London, 147 F.3d 118, 125 (2d Cir. 1998).


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18

Schoenbaum, 405 F.2d at 208.


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19

Hannah L. Buxbaum, Multinational Class Actions Under Federal Securities Law: Managing Jurisdictional Conflict, 22 .Consequently, “[t]he effects test cannot be satisfied by the f-cubed plaintiff… The ‘effects test’ is only meant to shield domestic investors and domestic markets from the effects of securities frauds perpetrated elsewhere.” In Re Rhodia S.A. Securities Litigation, 531 F.Supp.2d 527, 538 (2007); Eur. & Overseas Commodity Traders v. Banque Paribas London, 147 F.3d at 128.


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20

Leasco Data Processing Equip. Corp. v. Maxwell, 468 F.2d 1326 (1972). The conduct test was devised five years after the effects test in a case where the controlling shareholder of a British company (Leasco Corporation) while in the US had fraudulently induced an American company to buy British stock listed on the London Stock Exchange but not registered on an American exchange (so that the plaintiffs would have had no remedy under the effects test). Liability under the conduct test was then limited to cases where the wrongful conduct was more than merely preparatory: SEC v. Kasser, 548 F.2d 109, 114 (3d Cir. 1977); IIT v. Vencap, Ltd., 519 F.2d 1001, 1017 (2d Cir. 1975); and in situations where there is a direct causal nexus between the wrongful conduct and the harm SEC v. Berger, 322 F.3d 187, 192 (2d Cir. 2003); In re Vivendi Universal, S.A. Securities Litigation, 381 F. Supp. 2d 158, 169-70 (S.D.N.Y. 2003).


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21

Psimenos v. E.F.Hutton & Co., 722 F.2d 1041, 1045 (2d Cir. 1983).


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22

Leasco Data Processing Equip. Corp. v. Maxwell, 468 F.2d 1326, 1337 (2d Cir. 1972).


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23

IIT v. Vencap, Ltd., 519 F.2d 1001, 1017 (2d Cir. 1975). Thus, Justice Friendly’s comment highlights a shift in the guiding regulatory framework from a protectionist philosophy (effects test) to a more cooperative model of global regulation (conduct test). See also, SEC v. Kasser, 548 F.2d at 116 (“By finding jurisdiction here, we may encourage other nations to take appropriate steps against parties who seek to perpetrate fraud in the United States.”) Kun Young Chang, Multinational Enforcement of U.S. Securities Laws: The Need for the Clear and Restrained Scope of Extraterritorial Subject-Matter Jurisdiction, 9 Fordham J. of Corp. & Fin. Law 89, 99-100 (2003). While the conduct test could also apply for f-cubed plaintiffs, foreign plaintiffs alleging Section 10(b) claims faced tougher pleading requirements. Morrison, at 2879.


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24

Itoba Ltd. v. LEP Grp. PLC, 54 F.3d 118, 122 (2d. Cir. 1995).


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25

Morrison v. National Australia Bank, 519 F.2d 974 (2d Cir. 2010).


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26

Zoelsch v. Arthur Anderson & Co., 824 F.2d 27, 32 (D.C. Cir. 1987) (expressly recognizing New York’s pre-eminence).


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27

However, there were some differences present between the Circuits especially with regards to the conduct test. The Seventh Circuit in Kauthar SDN BHD v. Sternberg, 149 F.3d 659, 665 (7th Cir. 1998) required a securities violation for jurisdiction, while the Third Circuit SEC v. Kasser, 548 F.2d at 114 only required “some activity designed to further a fraudulent scheme.”While other circuits applied “the same fundamental methodology of balancing interests and arriving at what seemed the best policy … [in doing so they] produced a proliferation of vaguely related variations on the “conduct” and “effects” tests.” Morrison, at 2880.


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28

Cornwell v. Credit Suisse Group, 08-cv-3758, (S.D.N.Y., 08/04/2008), at p. 3.; John C. Coffee, Jr., Foreign Issuers Fear Global Class Actions, The National Law Journal 1 (June 14, 2007) ; Stephen J. Choi & Linda J. Silberman, Transnational Litigation and Global Securities Class-Action Lawsuits, 2009 Wis. L. Rev. 465, 467 (2009) (“[M]uch uncertainty surrounds the consideration of extraterritorial issues within securities class-action lawsuits. The individual doctrines applied within the courts--such as the conduct and effects tests--are often ambiguous and difficult to predict.”);


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29

Roger W. Kirby, Access To United States Courts By Purchasers Of Foreign Listed Securities In The Aftermath Of Morrison V. National Australia Bank Ltd, 7 Hastings Bus. L. J. 223, 235 (2011): “Judicial analyses developed in this area have confused, if not actually degraded, legal principles in order to arrive at desired, but not necessarily desirable, outcomes respecting access to United States courts and availability of § 10(b).”


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30

SEC v. Kasser, 548 F.2d at 116.


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31

Morrison, at 2886.]


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32

John C. Coffee, Jr., Racing Towards the Top?: The Impact of Cross-Listings and Stock Market Competition on International Corporate Governance, 102 Columb. L. Rev. 1757, 1771-72 (2002);Chris Brummer, Post American Securities Regulation, Securities Law Review § 2:2 (2011).


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33

Morrison v. National Australia Bank, 130 S.Ct. 2869 (2010).


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34

“[T]o ask what conduct 10(b) reaches is to ask what conduct 10(b) prohibits, which is a merits question... [subject-matter jurisdiction] presents an issue quite separate from the question whether the allegations the plaintiff makes entitle him to relief.” Morrison, at 2877.


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35

Foley Bros., Inc. v. Filardo, 336 U.S. 281, 285 (1949): “legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.”


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36

Morrison, at 2878, 2881. By comparing the language of Section 10(b) with the extraterritorial reference in Section 30 of the 1934 Act, the Court held that if Congress had intended 10(b) to apply extraterritorially it would have worded its intent more clearly. Id. at 2883.


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37

Id. at 2883.


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38

Id. at 2879. Concealed within the presumption against extraterritoriality the Court was actually advocating a narrow construction of the ‘effects test’. William S. Dodge, Morrison’s Effects Test, 40 Sw. L. Rev. 687 (2011).


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39

Morrison, at 2879-81. While the former conduct and effects test may have had little support in the language of the statute, the new transactional test has no stronger footing.


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40

This was worded as the ‘comity’ concern. Id. at 2884-86.


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41

“The Court mistakes brevity for clarity, failing to define certain key terms or otherwise specify the precise contours of the test.” Alex Reed, But I'm An American! A Text-Based Rationale For Dismissing F-Squared Securities Fraud Claims After Morrison V. National Australia Bank, 14 U. Pa. J. Bus. L. 515, 528 (2012); Richard Painter et al., When Courts and Congress Don't Say What They Mean: Initial Reactions to Morrison v. National Australia Bank and to the Extraterritorial Jurisdiction Provisions of the Dodd-Frank Act, 20 Minn. J. Int'l L. 1, 8-14 (2011).


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42

Morrison, at 2884


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43

Id. at 2886.


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44

Id. at 2888.


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45

In conceiving the new standard, Justice Scalia drew support from the wording of Section 10(b), which itself only targets “deceptive conduct ‘in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered” rather than addressing deceptive conduct globally or at its origin. Morrison, at 2884.


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46

Morrison, at 2883.


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47

Premise to the Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173(ENR).


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48

“The district courts of the United States ... shall have jurisdiction of an action or proceeding brought or instituted by the Commission or the United States alleging a violation of the antifraud provisions of [this title] involving-- (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.” Dodd-Frank Act § 929P(b) (2010).


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49

156 Cong. Rec. H 5233 (June 30, 2010) (statement of Rep. Paul Kanjorski). “This bill's provisions concerning extraterritoriality ... are intended to rebut [the] presumption [against extraterritoriality] by clearly indicating that Congress intends extraterritorial application in cases brought by the SEC or the Justice Department.”


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“[The Dodd Frank Act] codified the long-standing appellate court interpretation of the law . . . by . . . providing that the inquiry is one of subject matter jurisdiction,” Study on Extraterritorial Private Rights of Action, SEC Release No. 34-63174, 2010 WL 4196006 (Oct. 25, 2010).


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Morrison, at 2876.


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“[t]he provision unambiguously addresses only the ‘jurisdiction’ of the ‘district courts of the United States' to hear cases involving extraterritorial elements; its language does not expand the geographic scope of any substantive regulatory provision.” George T. Conway III, Extraterritoriality After Dodd-Frank, Harv. Law Sch. Forum On Corp. Governance & Fin. Reg. (Aug. 5, 2010); George T. Conway III, Extraterritoriality of the Federal Securities Laws After Dodd-Frank: Partly Because of a Drafting Error, the Status Quo Should Remain Unchanged, Wachtell, Lipton, Rosen & Katz Report (July 21, 2010); Stephen R. Smerek & Jason C. Hamilton, BNA World Sec. Law Report, The Extraterritorial Reach of U.S. Securities Law After the Morrison Decision and the Dodd-Frank Act (Oct. 12, 2010).


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Genevieve Beyea, Morrison v. National Australia Bankand the Future of Extraterritorial Application of the U.S. Securities Laws, 72 Ohio St. L.J. 537, 570-71 (2011). 571-72;Richard Painter, et al., When Courts and Congress Don't Say What They Mean: Initial Reactions to Morrison v.National Australia Bank and to the Extraterritorial Jurisdiction Provisions of the Dodd-Frank Act, 19: (“[T]he SEC still might not fare well before some lower court judges who do not care about the intent of Congress when Congress fails to clearly express that intent. If the Dodd-Frank Act ... only speaks to jurisdiction, some courts may not be willing to read into the provision what Congress clearly intended: to empower the SEC to bring cases where the conduct was that described in the statute.”). The SEC has interpreted the Dodd-Frank Act as overruling Morrison with regards to its own enforcement powers: “in [Dodd-Frank], Congress effectively overrules Morrison by codifying the Second Circuit's long-standing conduct and effects test[s] (which Morrison has repudiated) for civil enforcement actions brought by the SEC” SEC's Memorandum of Law in Opposition to Defendant Tourre's Motion to Dismiss the Amended Complaint at 10 n.1, Sec. and Exch. Comm'n v. Tourre, No. 10 Civ. 3229, 2011 WL 350286 (S.D.N.Y. Dec. 21, 2010).


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The SEC was ordered to “solicit public comment and thereafter conduct a study to determine the extent to which private rights of action under the antifraud provisions of the Securities and Exchange Act of 1934 should be extended to cover--(1) conduct within the United States that constitutes a significant step in the furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; and (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.” The Commission was asked to focus on “(1) the scope of such a private right of action, including whether it should extend to all private actors or whether it should be more limited to extend just to institutional investors or otherwise; (2) what implications such a private right of action would have on international comity; (3) the economic costs and benefits of extending a private right of action for transnational securities frauds; and(4) whether a narrower extraterritorial standard should be adopted” as well as other issues. Dodd-Frank Act § 929Y (2010).


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SEC, Study on the Cross-Border Scope of the Private Right of Action Under Section 10(b) of the Securities Exchange Act of 1934 as Required by Section 929Y of the Dodd-Frank Wall Street Reform and Consumer Protection Act, (April 2012).


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Most critics focus upon the Court’s errors in the interpretation of the legislation from a statutory perspective. Brett R. Marshall, Morrison v. National Australia Bank Ltd.: A Clear Statement Rule Or A Confusing Standard, 37 Journal Of Corporation Law 203 (2011); MenyElgadeh, Morrison v. National Australia Bank: Life After Dodd-Frank,16 Fordham J. Corp. & Fin. L. 573 (2011); Andre Rocks, Whoops! The Imminent Reconciliation Of U.S. Securities Laws With International Comity After Morrison v. National Australia Bank And The Drafting Error In The Dodd-Frank Act, 56 Vill. L. Rev. 163 (2011); Nidhi M. Geevarghese, A Shocking Loss Of Investor Protection: The Implications Of Morrison v. National Australia Bank, 6 Brook. J. Corp. Fin. & Com. L. 235 (2011).


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The concurrence termed it “Justice Scalia’s personal view of statutory interpretation” Morrison, at 2892.


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Morrison, at 2891; Marco Ventoruzzo, Like Moths To A Flame? International Securities Litigation After Morrison: Correcting The Supreme Court's “Transactional Test”, 52 Va. J. Int'l L. 405, 433:“the problem with this principle is that it is more a myth than a reality in American law. Even a cursory review of decisions suggests that its foundations are shaky… Moreover, a fairly large number of decisions that embraced the presumption against extraterritoriality agree that the presumption could be overcome by the presence of effects of relevant conduct in the United States.”


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Hannah L. Buxbaum, Multinational Class Actions Under Federal Securities Law: Managing Jurisdictional Conflict, 16-71 (2007); Kun Young Chang, Multinational Enforcement of U.S. Securities Laws: The Need for Clear and Restrained Scope of Extraterritorial Subject-Matter Jurisdiction, 9 Fordham J. Corp. & Fin. L. 89, 89-125 (2004); Roberta S. Karmel, The Second Circuit's Role in Expanding the SEC's Jurisdiction Abroad, 65 St. John's L. Rev. 743, 743-71 (1991).


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Many amicus briefs were filed in Morrison highlighting the displeasure at an expansive US securities regulation: Br. for Eur. Aeronautic Defence & Space Co. N.V. *9-12, WL 719336; Br. of Int'l Chamber of Commerce at *18-29, 2010 WL 719334; Br. of Org. for Int'l Inv. at *12-19; Br. of UK at *6-12.


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This was the case where ever the underlying regulatory policies were strikingly different; like the difference between the anti-trust (competition law) philosophies in the US – UK. See the Laker Airways saga. Laker Airways v. Department of Trade, [1977] 1 QB 643; Laker Airways Ltd v Sabena et. al, 731 F.2d 909 [1983]; British Airways Board v. Laker Airways Ltd. [1985] A.C. 58.


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Mark Gillen & Pittman Potter, The Convergence of Securities Laws and Implications for Developing Securities Markets, 24 N.C. J. Int'l L. & Com. Reg. 83, 85-86 (1998); Eric C. Chaffee, The Internationalization of Securities Regulation: The United States' Role in Regulating the Global Capital Markets, 5 J. Bus. & Tech. L. 187, 193-97 (2010); Christopher M. Bruner, States, Markets, and Gatekeepers: Public-Private Regulatory Regimes in an Era of Economic Globalization, 30 Mich. J. Int'l L. 125, 171 (2008) (“The push for cooperative regimes has been particularly strong in the economic arena.”) The SEC has been particularly active in fostering global cooperation in the regulation of securities. Press Release, SEC, SEC Announces IOSCO Unveiling of Multilateral Agreement on Enforcement Cooperation (Oct. 31, 2003), available at http://www.sec.gov/news/press/2003-145.htm; SEC, International Regulatory Policy, Jan. 20, 2010, http://sec.gov/about/offices/oia/oia_ regpolicy.shtml (last visited Sept. 17, 2010) (stating that regulatory priorities include “facilitating regulatory cooperation regarding the supervision of financial entities active in the cross-border capital markets”).


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the criticisms may have invited, perhaps necessitated, clarity or sharpening of standard, as the SEC had urged, but it certainly did not oblige a presumption against extraterritoriality.” Roger W. Kirby, Access to United States Courts by Purchasers of Foreign Listed Securities in the Aftermath of Morrison v National Australia Bank Ltd, 238.


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