For the past several years, purchasers of securities on foreign exchanges have sought relief in U.S. courts under the antifraud provisions of the Securities Exchange Act. These so-called f-cubed litigations - claims by a foreign plaintiff, arising out of the purchase or sale of shares of a foreign corporation, executed on a foreign exchange - have been the subject of extensive commentary and jurisprudence, much of it focused on the circumstances under which f-cubed plaintiffs have the right to assert claims under the Exchange Act. The Supreme Court entered the fray in June of this year when it issued its highly anticipated opinion in Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010).
The issue in Morrison was whether Section 10(b) of the Exchange Act provides a cause of action to f-cubed plaintiffs. Prior to Morrison, the 2nd Circuit - often considered a leader in securities law issues - applied two tests in answering that question: the "effects test" looked at "whether the wrongful conduct had a substantial effect in the United States or upon United States citizens," and the "conduct test" looked at "whether the wrongful conduct occurred in the United States." Justice Scalia, writing for the majority, labeled this "judicial-speculation-made-law," observed that these tests were both unpredictable and administratively unworkable, and accused the 2nd Circuit of "excis[ing] the presumption against extraterritoriality." The Court also rejected a test proposed by the SEC that focused on (i) whether the fraud involves significant conduct in the United States, and (ii) whether that conduct is material to the fraud's success. The Court found that the SEC's test lacked textual support and warned of its adverse consequences, including bolstering the view that the United States "has become the Shangri-La of class-action litigation for lawyers representing those allegedly cheated in foreign securities markets."
In holding that Section 10(b) did not extend to f-cubed plaintiffs, the Court formulated a test that (in the majority's view) was more closely tied to the plain language of Section 10(b) - namely, a "transactional test" in which Section 10(b) reached only deceptive conduct 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. The opinion gave clarity and predictability on an issue that for years resulted in vague variations of the "conduct" and "effects" test, policy-driven decisions, and a noticeable absence of concrete, guiding principles.
Or so it seemed.
Weeks after the Court issued the Morrison opinion, Congress passed and President Obama signed the Dodd-Frank Act, which addressed, in the context of SEC enforcement actions, the extraterritorial application of the antifraud provisions of the securities laws. Section 929P(b) of the Act - titled "Extraterritorial Jurisdiction of the Antifraud Provisions of the Federal Securities Acts" - amended the Securities Act of 1933, the Exchange Act and the Investment Advisers Act to extend the reach of their antifraud provisions to those violations involving "conduct within the United States that constitutes significant steps in furtherance of the violation," or "conduct occurring outside of the United States [that] has a foreseeable substantial effect within the United States." In other words, Congress adopted a variation of the "conduct" and "effects" test that had been the governing law just weeks earlier.
Fortunately, 929P(b) applies only to actions commenced by the SEC. Congress left open the question of whether private rights of action under the antifraud provisions of the securities laws should be extended to private litigants, opting instead to have the SEC "solicit public comment and thereafter conduct a study to determine the extent to which private rights of action under the anti fraud provisions of the Securities and Exchange Act of 1934 . . . should be extended to cover" f-cubed litigations. Congress directed the SEC to address, among other topics, "the scope of such a private right of action, including whether it should extend to all private actors or whether it should be more limited to extend just to institutional investors."
The SEC's report to Congress is due by January 2012, 18 months from the enactment of the Dodd-Frank Act. At least until then, Morrison is the law for private, f-cubed litigants. Whether it stays that way remains to be seen. In the interim, counsel should use the opportunity provided by the notice and comment period to weigh in - in particular, by focusing on the costs of allowing private, foreign litigants to seek relief in U.S. courts, the potential of extraterritorial jurisdiction to create significant conflicts with the laws of foreign countries and the unpredictability and administrative challenges that will result from Congress's modified "conduct" and "effects" test. We have a clear sense of where the SEC stands on this issue. A concerted effort to present the risks of the SEC's approach may be the only way to ensure that the Morrison holding is more than just a temporary reprieve.