Can't See the Forest for the Trees: Where Does a Purchase or Sale of Securities Occur?
Calfee, Christopher, American University Business Law Review
Whether Justice Scalia chopped down the "judicial oak which ha[d] grown from little more than a legislative acorn"1 or cleared an entire forest of "botanically distinct tree[s]"2 when he created the transactional test in Morrison v. National Australia Bank, Ltd., he undoubtedly changed the legal landscape for both international and antifraud securities laws. The transactional test-which the Supreme Court designed to act as a bright-line rule to supplant the older "conduct" and "effects" tests developed by the Second Circuit- gauges whether a U.S. court can hear an antifraud securities case containing extraterritorial elements.3 In clearing away decades of federal extraterritorial jurisprudence, Morrison dictates that an American court may no longer hear an antifraud securities case under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act")4 and Rule 10b-55 unless the purchase or sale of securities occurred within the United States.6
Since its creation, the transactional test has gained both positive and negative attention from the international legal community.7 But after the hundreds of securities class action cases adjudicated since the day of the decision,8 the question remains: Does the transactional test clarify when an international securities antifraud claim falls within U.S. jurisdiction?
This Article will show that while Justice Scalia may have cut down the occasionally thorny "conduct" and "effects" tests, the seeds he planted with the transactional test may be just as difficult to care for and administer. Courts must now grapple with defining the "purchase" and "sale" of a securities transaction, and then determine whether such actions occurred within the United States. Within a complex global marketplace experiencing frequent cross-border activity, such terms are not easily defined and lead to contrary holdings on similar fact patterns.
Part I of this Article looks at how courts were able to avoid the terms "purchase" and "sale" prior to Morrison. Part II examines how Morrison used those terms in its decision. Part III analyzes how courts have thus far interpreted the Morrison transactional test and breaks down the various methods used in reaching their decisions. Finally, Part IV suggests a method for unifying the disparate methods of identifying whether a securities transaction is domestic or not.
I. EXTRATERRITORIAL APPLICATION OF "PURCHASE" OR "SALE" LANGUAGE PRIOR TO MORRISON V. NATIONAL AUSTRALIA BANK, LTD.
Although courts prior to the Morrison decision agreed that there should be an extraterritorial reach for antifraud provisions, there was little consensus as to how it should be applied.9 Most private parties rely on Section 10(b) of the Exchange Act and Rule 10b-5 to bring a transnational securities fraud case within the United States.10 The broad language of both Section 10(b) and Rule 10b-5 was written to "close a loophole in the protections against fraud."11 Thus, courts determined that Congress meant for Section 10(b) to protect investors regardless of whether they purchased or sold securities on U.S. markets.12 To determine if there was a sufficient jurisdictional nexus between the conduct abroad and the investors Congress intended to protect, courts applied the "conduct" and "effects" tests.13
The "effects" test states that the United States has jurisdiction over claims arising out of fraudulent extraterritorial conduct that caused losses within the United States or harmed U.S. markets.14 Schoenbaum v. Firstbrook first articulated this test in 1968.15 The case involved the sale of treasury shares of a Canadian corporation, BanffOil, Ltd., at a market price Banffand its directors knew would undervalue the shares.16 The plaintiffwas an American citizen and Banffcommon stock was traded on both the American Stock Exchange and the Toronto Stock Exchange.17 Although the fraudulent transaction occurred in Canada, the court found that since Banffwas listed on a U. …