The public regulation of global securities markets has become more effective in recent years as a result of improved cooperation among national regulators, (1) as well as increased harmonization of disparate legal rules. (2) The private enforcement of securities law, by contrast, remains an area of dissensus. This is due in part to the practice in the United States of applying U.S. antifraud rules liberally to cases involving significant foreign elements. Such extraterritorial application of law often creates conflict with other regimes whose substantive and procedural rules differ from ours.
Historically, courts determined the reach of U.S. antifraud law--that is, its applicability to securities fraud claims with foreign elements--by applying the "conduct" and "effects" tests. (3) On that analysis, U.S. law governed claims arising out of fraudulent conduct that either occurred within the United States or caused significant effects within the United States. These tests were not invented in the securities area: they are simply instantiations of the broader international jurisdictional principle that a country has the authority to apply its law to particular acts only if those acts have a recognized jurisdictional nexus with the country (for instance, in the form of conduct, effects, or the actor's nationality). (4) As such, the tests called for case-by-case examination of whether the appropriate jurisdictional nexus was present in any given dispute. As applied in securities litigation, they have yielded some fairly unpredictable, and also somewhat expansive, results. The conduct test, in particular, was used to support the application of U.S. law to claims that seemed quite far removed from any U.S. regulatory interest--including claims brought by foreign investors who had purchased securities of a foreign issuer on a foreign exchange. (5)
In 2010, the Supreme Court for the first time addressed the extraterritorial reach of Exchange Act section 10(b). (6) In Morrison v. National Australia Bank Ltd., (7) the Court rejected the long-standing conduct and effects tests in favor of a single transactional-nexus approach. Concluding that "the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States," (8) it held that section 10(b) applies to fraud only in connection with "transactions in securities listed on domestic exchanges, and domestic transactions in other securities." (9) The test therefore has two prongs: the first covers transactions that take place on U.S. securities exchanges, and the second covers non-exchange-based transactions made within U.S. borders. (10) The investment transactions at issue in Morrison had taken place on a foreign securities exchange, and the Court therefore concluded that section 10(b) did not govern the plaintiffs' claims. (11)
The Morrison lawsuit raised particularly thorny issues that counseled against application of U.S. law. First, it was a "foreign-cubed" case: the claims were brought by foreign investors against a foreign issuer, and arose out of foreign investment transactions. In such cases, the application of U.S. law would serve not the core regulatory interest of protecting U.S. markets and investors, but only the substantially weaker interest of preventing the United States from becoming a "launching pad" for fraud directed elsewhere. (12) The foreign regulatory interest, by contrast, was particularly strong. (13) Second, it was a class action, and the claims therefore invoked group litigation processes under U.S. procedural law that are themselves the subject of significant criticism in many other countries. (14) Finally, the plaintiffs in Morrison used the fraud-on-the-market theory to establish presumptive reliance; (15) in most countries, however, investors are required to prove actual reliance on misleading information in order to sustain a fraud claim. (16) The rule adopted in Morrison was nevertheless not limited to foreign-cubed class actions. It applies across the board, including in cases in which the U.S. regulatory interest is significantly stronger (such as those involving the foreign transactions of U.S. rather than foreign investors), (17) or the conflict with other regimes significantly milder (such as those involving individual rather than class claims).
The benefits that the Supreme Court believed would follow from this new transaction-based test were twofold: first, consistency in the application of U.S. law, (18) and second, the avoidance of interference with other countries' regulatory systems. (19) The Morrison test has already been applied in quite a number of securities fraud cases, and so it is possible to engage in an initial assessment of whether the transaction-based test is achieving these goals. The first part of this article engages in such a review. It examines the cases and analyzes the approaches that courts have used in applying the Morrison test, both under its first prong (exchange trading) and its second prong (non-exchange-based transactions). This review reveals certain fault lines in the Morrison test. It demonstrates that the Court's dual objectives in adopting that test are in certain respects in tension with one another, and lack the sensitivity of the old conduct and effects tests.
The article then turns to the landscape post-Morrison. Because the result of that case is to preclude the vast majority of claims brought by foreign investors, the question remaining is whether defrauded foreign investors will find any remedy in the United States going forward. This is a particularly interesting question for investors from countries whose regulatory regimes do not, either by rule or in practice, provide ready remedies for those harmed by securities fraud. Part III of the article considers two potential paths for foreign investors: litigation brought in U.S. federal courts under foreign securities law, and participation in FAIR fund distributions ordered by the Securities and Exchange Commission.
POST-MORRISON CASE LAW
A. Application of Morrison's First Prong: Exchange-Based Trading
1. General Approach to Exchange-Based Transactions
The first prong of the Morrison rule is relatively straightforward in application. The decision states that section 10(b) applies to claims arising out of transactions in securities listed on U.S. exchanges, noting the strength of Congress's interest in regulating American markets. (20) Further, making the parallel point that foreign governments have a strong interest in regulating their markets, it states that claims arising out of transactions on foreign securities exchanges will not be covered by U.S. antifraud law. (21) And indeed, after Morrison, courts have dismissed all claims arising out of foreign exchange transactions. (22) This is true even if the buyer is American; that is, Morrison's holding has not been restricted to foreign-cubed cases, but applies regardless of the purchaser's nationality. (23) It is also true regardless of where the investment decision originates--thus, if a buyer purchases securities trading on a foreign exchange, it is irrelevant whether the buy order was initiated in the United States. (24) The latter approach resists the expansion of section 10(b)'s scope to cover foreign trading on the basis of subsidiary contacts with the United States.
2. Foreign Exchange Transactions in Securities also Listed in the United States
In some cases immediately following Morrison, investors argued that the application of U.S. law to their claims arising in connection with foreign exchange transactions should be permitted as long as the securities in question were also listed on U.S. exchanges. (25) In other words, the argument was that once an issuer had listed in the United States, then all transactions in those securities were subject to U.S. laws. This argument was based on the following language in the Court's opinion, which seemed to speak to the categorical question of whether the issuer's securities were listed in the United States: "Section 10(b) reaches 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." (26)
The Court's apparent intention, however, was to limit the reach of section 10(b) to claims of purchasers whose particular investment transactions had taken place within the United States. The Court emphasizes this intention elsewhere in its opinion: "Nothing suggests that [the United States'] national public interest pertains to transactions conducted upon foreign exchanges and markets." (27) The case law has followed that approach, foreclosing the application of U.S. law to any claims arising out of foreign exchange transactions. (28) As the Southern District of New York stated in one recent decision,
[t]he idea that a foreign company is subject to U.S. Securities laws everywhere it conducts foreign transactions merely because it has "listed" some securities in the United States is simply contrary to the spirit of Morrison.... [T]he Court makes clear its concern is on the true territorial location where the purchase or sale was executed and the particular securities exchange laws that governed the transaction.... Plaintiffs' interpretation would be utterly inconsistent with the notion of avoiding the regulation of foreign exchanges. (29)
Thus, the fact that a class of securities has been listed in the United States is not enough to trigger the application of section 10(b)--the plaintiff's own investment must have been made in the United States. (30) This approach forecloses most claims by foreign investors, as they will arise in connection with foreign exchange trading.
3. Exchange Transactions in American Depositary Receipts
The one category of exchange-based transactions that has created some confusion post-Morrison is trading in American Depositary Receipts (ADRs). An ADR represents an ownership interest in a certain number of the ordinary shares of a foreign issuer. (31) ADRs may be listed and traded on public securities exchanges in the United States, or traded in the over-the-counter market. (32) Where fraud claims arise in connection with ADRs purchased on a U.S. exchange, one would expect section 10(b) to apply, because such transactions fall within the scope of Morrison's first prong. While several post-Morrison decisions have indeed treated ADRs like other securities, (33) a handful of decisions cast doubt on this analysis.
Pre-Morrison, some decisions had characterized U.S. exchange transactions in ADRs as "more foreign" than transactions in other securities. In a 2008 decision involving the securities of a Swiss issuer, for instance, the court began with the classic formulation that "[w]hen... a court is confronted with transactions that on any view are predominantly foreign, it must seek to determine whether Congress would have wished the precious resources of United States courts ... to be devoted to them rather than leave the problem to foreign countries." (34) It then "[a]ssum[ed] that the purchase of [the issuer's ADRs] on the [New York Stock Exchange] and the purchase of [the issuer's] shares by U.S. residents on the SWX [Swiss Exchange] may be viewed as predominantly foreign securities transactions," (35) and proceeded to hold under the then-applicable jurisdictional tests that U.S. law did not reach such transactions. Another case, Cornwell v. Credit Suisse Group, (36) followed this analysis, suggesting that "purchases of [issuer's] shares through ADRs might still be considered 'predominantly foreign securities transactions.'" (37)
These cases were decided pre-Morrison, and were therefore not focused explicitly on the question of characterizing the location of a transaction in ADRs. In one post-Morrison case, however, the Southern District of New York imported this line of reasoning into the new transaction-based jurisdictional framework. In In re Societe Generale Securities Litigation, (38) the court considered the claims of U.S. investors who had purchased ADRs on the over-the-counter market in New York (having already dismissed the claims of investors who purchased ordinary shares of the issuer on a French exchange). (39) It decided to dismiss those claims, on the theory that because an ADR represents the right to receive a certain number of the issuer's foreign shares, a transaction in ADRs does not qualify as a U.S.-based transaction. (40) Societe Generale itself involved ADRs traded in the over-the-counter market; however, its characterization of the transactions as non-U.S.-based is grounded in an assumption about the securities themselves, and might in the future be extended to exchange-based transactions.
The holding in Societe Generale is difficult to square with the Morrison test--and surely the United States has a regulatory interest in transactions in ADRs, both on exchanges and over-the-counter. If a foreign issuer has chosen to establish an ADR program in the United States, and is then charged with perpetrating a fraud in order to inflate the value of the U.S.-traded securities, it would be reasonable to apply U.S. antifraud law to resulting claims. (41) It may be that the court's reasoning flowed from Morrison's policy focus on avoiding conflict with foreign …