Applying Morrison Extra-Territorial Limits of U.S. Securities Laws, Second Circuit Rejects Claims Regarding Securities Dual Listed on U.S. and Foreign Exchanges

May 9, 2014

On May 6, 2014,  the U.S. Court of Appeals for the Second Circuit issued a ruling which continued the recent trend of further restricting the extra-territorial application of the U.S. securities laws in the aftermath of the Supreme Court’s landmark opinion in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010).  In City of Pontiac Policemen’s and Firemen’s Retirement System v. UBS AG, 12-4355-cv (May 6, 2014) ("Slip op."), the Second Circuit ruled that the ban on extraterritorial application of U.S. securities laws applies not just to situations where foreign securities are listed on foreign exchanges, but also when such securities are cross-listed on U.S. exchanges.  Previously, the Supreme Court had ruled in Morrison that Section 10(b) of the Exchange Act did not "provide[] a cause of action to foreign plaintiffs suing foreign [ ] defendants for misconduct in connection with securities traded on foreign exchanges."  Id. at 250-51.  With this recent decision by the Second Circuit, the courts have signaled the continued limitation on the use of the U.S. securities laws exclusively to securities that are traded on U.S. exchanges. 

The Supreme Court held in Morrison that Section 10(b) only provided a private cause of action arising out of "[1] transactions in securities listed on domestic exchanges, and [2] domestic transactions in other securities."  Morrison, 561 U.S. at 267.  In the Second Circuit’s City of  Pontiac case, where the securities at issue were cross-listed on a U.S. exchange, plaintiffs put forward a so-called "listing theory," arguing that the Morrison bar was limited to "claims arising out of securities ‘[not] listed on a domestic exchange.’"  Slip Op. at 11-12 (emphasis in original).  While noting that the language of Morrison "taken in isolation, supports plaintiffs’ view," the Court of Appeals found that the "listing theory" was "irreconcilable with Morrison read as a whole."  Slip Op. at 12. 

Based on this reasoning, the Second Circuit held that U.S. securities laws do not apply in so-called "foreign cubed" claims, where foreign plaintiffs are suing foreign defendants regarding foreign securities that were sold on foreign exchanges–even when those securities were cross-listed in the United States.  Id. at 14.   

In evaluating whether so-called "foreign squared" claims–where a domestic plaintiff is suing a foreign defendant regarding foreign issued shares where the order for those shares was placed in the United States–are governed by U.S. securities laws, the Second Circuit defined the key issue as whether the buy order placed by the plaintiffs in the United States incurred irrevocable liability to carry out the transaction domestically, even as, ultimately, foreign securities were being purchased from a foreign exchange.  Noting that they had "never held that the placement of a purchase order, without more, is sufficient to incur irrevocable liability, particularly in the context of transactions in foreign securities on a foreign exchange," the Court of Appeals found  that the buy order did not incur irrevocable liability as needed and thus that the so-called "foreign squared" claims also failed. Slip Op. at 14-16.

The Second Circuit’s ruling in City of Pontiac on an issue of first impression regarding the application of U.S. securities laws to foreign securities cross-listed on U.S. and foreign exchanges has the potential of bringing a significant amount of clarity to an area of law that is constantly evolving, having seen multiple federal court decisions since Morrison, and should help buyers and sellers of securities be more confident in their rights and obligations in future transactions involving foreign securities and exchanges.  It also signals a continued acceleration of the trend since Morrison for the courts to restrict the application of U.S. securities laws to those securities which are traded exclusively on U.S. exchanges.   

Gibson, Dunn & Crutcher LLP      

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following members of the Securities Litigation Practice Group Steering Committee:

Jonathan C. Dickey – Co-Chair, New York/Palo Alto (212-351-2399, 650-849-5370, [email protected])
Robert F. Serio – Co-Chair, New York (212-351-3917, [email protected])
Meryl L. Young – Co-Chair, Orange County (949-451-4229, [email protected])
Thad A. Davis – Co-Chair, San Francisco (415-393-8251, [email protected])
George H. Brown – Palo Alto (650-849-5339, [email protected])
Jennifer L. Conn – New York (212-351-4086, [email protected])
Ethan Dettmer – San Francisco (415-393-8292, [email protected])
Lee G. Dunst - New York (212-351-3824, [email protected])
Gareth T. Evans - Orange County (949-451-4330, [email protected])
Barry R. Goldsmith – New York (212-351-2440, [email protected])
Mark A. Kirsch – New York (212-351-2662, [email protected])
Monica K. Loseman
– Denver (303-298-5784, [email protected])
Brian M. Lutz – San Francisco (212-351-3881, [email protected])
Jason J. Mendro – Washington, D.C. (202-887-3726, [email protected])
Wayne Smith – Orange County (949-451-4108, [email protected])
Robert C. Walters – Dallas (214-698-3114, [email protected])
Aric H. Wu – New York (212-351-3820, [email protected]) 

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