In the last “international litigation” case of the Term, the U.S. Supreme Court’s decision in Morrison v. National Australia Bank (No. 08-1191) held that Section 10(b) of the Securities Exchange Act of 1934 did not provide a private cause of action in “foreign-cubed” cases—cases where foreign plaintiffs sue foreign defendants for misconduct in connection with securities traded on foreign exchanges (hence “foreign cubed”). The Court rejected over 40 years of lower-court jurisprudence – which focused on where “conduct” and “effects” occurred or would be felt to determine the reach of Rule 10b-5. Instead the Supreme Court held that Section 10(b) reaches frauds only where “the purchase or sale is made in the United States, or involves a security listed on a domestic exchange” (slip op. at 21).
AmLaw Litigation Daily (7/6/10) announced that the Supreme Court’s ruling “would make tsunami-sized waves in securities litigation”. We aren’t so sure. First, how many pure F^3 cases are pending (by “pure” I mean cases that do not also include a claim or allegation that could be made that “the purchase or sale” was made in the U.S. or that the claim involves a “security listed on a domestic exchange”)? Second, future cases will not be deterred where there is any prospect that a material part of the transaction itself occurred in the U.S. (such as use of a U.S.-based underwriter or broker, or to the extent the non-U.S. issuer has American Depositary Receipt shares traded over a U.S. exchange). Third, the location of the purchase or sale is itself now going to become a point of contention, and litigation (unless Congress overturns Morrison quickly).
In terms of whether securities litigation is, net, going to increase or decrease as a result of the decision, let’s also not forget about the greater number of non-U.S. cases that can and possibly will now be brought given the momentary vacuum created by the decision by the U.S.’s Highest Court. Were that to happen, one might ask where a U.S. company or any of its U.S. directors and officers would rather be hailed into court – in the U.S., or in a “foreign” jurisdiction whose laws and procedures are neither as developed nor as predictable as those in the U.S.
– Louis M. Solomon