The Supreme Court Leaves Domestic Investors Unprotected from Securities Fraud

United States investors, who buy or sell securities outside the U.S., cannot sue in the U.S. or use U.S. law, to recover against foreign fraudsters! Nor can foreign investors trading abroad who are victims of fraud perpetrated in the U.S. by U.S. corporate fraudsters! This dilemma is the new result of the Supreme Court's opinion in Morrison v. National Australia Bank.

As a result, U.S. investors will now be sent overseas, to forums that are not as investor friendly, to seek recovery.

Over the past 40 years, Courts have followed the "conduct" and "effects" test to exercise jurisdiction over securities fraud if a major portion of the fraud occurred in the U.S. or if foreign conduct produced immediate and substantial effects in the U.S. Justice Scalia, writing for the court, held that there was no affirmative indication that the Exchange Act was intended to apply extraterritorially. Its focus is not on where the deception originated, but on purchases or sales of securities in the U.S.

Justice Breyer concurred in part only so far as the complaint failed to allege that the purchases were "in connection with" either the purchase or sale of a security listed on a national securities exchange" or "any security not so registered" that was purchased or sold in the U.S. While there is nothing in the Securities Exchange Act that limits the second category to purchases or sales within the U.S., Breyer would apply the presumption against extraterritoriality.

Justices Stevens, joined by Ginsburg, also concurred, but only in the judgment, saying that they would adhere to the conduct -and-effects test approach followed over the last 40 years, and rejected the presumption against territoriality. Rather, the real question should be "how much, and what kinds of, domestic contacts are sufficient to trigger application of Section 10b-5." Taking great issue with the majority, Stevens wrote:

Repudiating the Second Circuit’s approach in its entirety, the Court establishes a novel rule that will foreclose private parties from bringing §10(b) actions whenever the relevant securities were purchased or sold abroad and are not listed on a domestic exchange. The real motor of the Court’s opinion, it seems, is not the presumption against extraterritoriality but rather the Court’s belief that transactions on domestic exchanges are "the focus of the Exchange Act" and "the objects of [its] solicitude." ... In reality, however, it is the "public interest" and "the interests of investors" that are the objects of the statute’s solicitude.

Imagine, for example, an American investor who buys shares in a company listed only on an overseas exchange. That company has a major American subsidiary with executives based in New York City; and it was in New York City that the executives masterminded and implemented a massive deception which artificially inflated the stock price—and which will, upon its disclosure, cause the price to plummet. Or, imagine that those same executives go knocking on doors in Manhattan and convince an unsophisticated retiree, on the basis of material misrepresentations, to invest her life savings in the company’s doomed securities. Both of these investors would, under the Court’s new test, be barred from seeking relief under §10(b).

The oddity of that result should give pause. For in walling off such individuals from §10(b), the Court narrows the provision’s reach to a degree that would surprise and alarm generations of American investors—and, I am convinced, the Congress that passed the Exchange Act. Indeed, the Court’s rule turns §10(b) jurisprudence (and the presumption against extraterritoriality) on its head, by withdrawing the statute’s application from cases in which there is both substantial wrongful conduct that occurred in the United States and a substantial injurious effect on United States markets and citizens.

Nevertheless, Justice Stevens follows the Court of Appeals decision in concluding that this case, in particular, does not have extensive links to or ramifications in the U.S., but rather "has Australia written all over it."

Most important, however, is Justice Stevens concluding paragraph, which transcends this case and expresses his heartfelt opinion against the Court's campaign against our securities laws:

The Court instead elects to upend a significant area of securities law based on a plausible, but hardly decisive, construction of the statutory text. In so doing, it pays short shrift to the United States’ interest in remedying frauds that transpire on American soil or harm American citizens, as well as to the accumulated wisdom and experience of the lower courts. I happen to agree with the result the Court reaches in this case. But “I respectfully dissent,” once again, “from the Court’s continuing campaign to render the private cause of action under §10(b) toothless.” Stoneridge, 552 U. S., at 175 (STEVENS, J., dissenting).

We could not agree more.

So, now what? As a firm we must now look abroad to protect our clients. While we have done so in the past, it will now become a primary function. Unfortunately, those laws are not as developed as well as those in the U.S., and access to the Courts is much more difficult.