Morrison Applied By The Lower Courts

At first glance, the transactional test seems to be a clear bar to suit for any securities traded on non-U.S. exchanges. However, despite the Court's stab at clarity, the transactional test did create a good bit of controversy among some experts in the field. Many plaintiff lawyers argued, for example, that the "listed on a domestic exchange" language meant that any securities listed on U.S. exchanges would make them eligible to sue regardless of where the alleged transaction actually occurred. However, this argument has been rejected by a number of lower courts in the Second Circuit. See Sgalambo v. McKenzie (Morrison warrants dismissal where plaintiff purchased Canadian issued shares on Toronto Stock Exchange, despite registration of the non-U.S. issuer on the NYSE and with the SEC); In Re Alstrom SA (Morrison warrants dismissal where plaintiffs purchase non-U.S. issued shares on the Euronext exchange, but where those shares were also available for purchase as ADRs on a U.S. exchange).

Similarly, even arguments to allow suit for f-squared plaintiffs (i.e. those who were domiciled in the U.S. but who purchased non-U.S. securities on non-U.S. exchanges) were rejected by courts in the Second Circuit even if the transactions were executed from locations within the U.S. See Plumber's Union v. Swiss Re (The purchase of securities on a Swiss stock exchange from a location in the U.S. is insufficient to subject the purchase to coverage under Section 10(b); In Re Societe General (US purchasers of non-U.S. issued securities on the Euronext Paris stock exchange have no cause of action under Section 10(b) even though they purchased them while in the US.); Porsche Automobile Holding SE (Applying Morrison, dismissed hedge fund claims of fraud in connection with purchase of security swap agreements. The case was dismissed even though the swaps did not trade on any exchanges and all of the steps necessary to transact the swap agreements were allegedly carried out in the U.S.).

One year after Morrison there does seem to be at least some certainty within the Second Circuit on the interpretation and application of the Morrison transactional test. Transactions in securities on non-U.S. exchanges will likely not give rise to an implied right of action under the federal securities laws in these courts. In at least one case Morrison has also been extended to cover both '33 and '34 Act claims. See In Re Royal Bank of Scotland Group PLC (Applying Morrison to dismiss both '33 and '34 Act claims by plaintiffs who purchased RBS shares on a non-U.S. exchange). On the other hand, there do seem to be more questions than there are answers regarding the scope of Morrison in more novel cases. For example, it is unclear how courts will address over-the-counter transactions involving derivatives as well as ADR's. As discussed by the Securities Litigation Watch here, OTC derivatives are poised to fall within the actionable reach of Section 10(b) later this summer. Furthermore, ADR's have been held actionable under Morrison's transactional test with the notable exception of ADR's purchased over-the-counter (which were excluded by Judge Berman in In Re Societe General). Such Morrison issues are likely to see continued litigation.

Adding to the uncertainty about Morrison, there are a variety of alternatives to Exchange Act claims that have not yet been fully explored including supplemental jurisdiction (i.e. applying the laws of the issuers country) and application of common law claims (discussed more fully by Securities Litigation Watch here). While none of these arguments have been successful to date, there is evidence that they would be legitimately entertained by courts in the Southern District of New York. Probably more telling of the uncertainty, however, is that no appellate opinion has been published either affirming or overruling the lower court rulings that have applied Morrison. This is not surprising considering that we are still only one year from the date Morrison was decided. Nevertheless, the court rulings that have come down to date in the Southern District of New York are not controlling precedent. Similarly, courts in the Ninth Circuit, another prominent circuit in securities class actions, have remained relatively silent on the matter. For example, in one of the few cases addressing Morrison in the Ninth Circuit, the U.S. District Court for the Central District of California ruled in Stack House v. Toyota Motor only that purchasers of Toyota stock on the Tokyo stock exchange could not be considered as lead plaintiff candidates.

Securities Class Action Trends and Predictions

When the Morrison decision was handed down in June 2010 many commentators, including Securities Litigation Watch, expected that the decision would, at a minimum, cause multi-exchange-based class action filings to all but dry up. Similarly, it was predicted by some that the decision would reduce the number of suits againt non-U.S. companies and possibly even boost class action litigation and litigation reform outside of the U.S. However, one year out from Morrison it appears that many of these predictions have not yet fully materialized.  

Due to the number of open questions still lingering about Morrison, it seems that many plaintiff law firms are still fully intent on fighting the good fight over the continued existence of multi-national securities class actions in the U.S. Thus, Morrison and its progeny have not necessarily discouraged plaintiffs and their law firms from pursuing multi-exchange litigation in many cases. For example, as Kevin LaCroix of the D&O Diary explains here, two recently filed credit-crisis related cases against Deutsche Bank (whose common shares trade on the NYSE and Frankfurt stock exchange) and Carlyle Capital Corp. (traded primarily on the Euronext Exchange) both include within their classes plaintiffs who engaged in security transactions on non-U.S. exchanges. Similarly, and surprisingly, securities class action suits against non-U.S. companies have not been reduced but have in fact increased in relationship to overall filings. For example, as Kevin LaCroix of the D&O Diary explains here, about roughly 30% of securities class action lawsuits filed so far during 2011 involve non-U.S. companies compared to 15.9 percent during all of 2010. It is important to note, however, a large part of the 2011 filings involve U.S.-listed Chinese companies, which, if removed, would drop the number of filing against such companies to well below historical averages (discussed more here).

Impact On International Securities Class Actions

Another interesting trend worthy of note is that non-U.S. securities class action filings have not seen much of a jump in the post-Morrison era. If anything there have been fewer such actions and those that have been lodged have been much lower profile. Interestingly, some of the more high profile international actions filed in the last couple of years appear to be spin-off litigation from parallel cases filed in the U.S. For example, commentators have noted that the Royal Dutch settlement in the Netherlands was pursued by Royal Dutch Shell as much as it was by the investors in an effort to get the U.S. courts to dismiss non-U.S. claimants on forum non conveniens grounds. It was, in other words, a clever way for the defendant to mitigate its exposure to higher settlement amounts in the U.S. by settling with non-U.S. claimants in a non-U.S. jurisdiction. Now that such claimants may, arguably, be barred from suit by law in the U.S. some non-U.S. defendants may be less likely to settle in outside of the U.S. where the class action laws may be more favorable to them.

International class action reform has not necessarily seen much of a boost after Morrison either. As discussed by Securities Litigation Watch here, a coalition of international pension funds recently lobbied the SEC to reverse Morrison pursuant to the SEC's request for comment on the "Extraterritorial Private Right of Action" provisions of the Dodd-Frank Act (discussed more here). While a strong reaction by international pension funds demonstrates notable investor interest in securities class actions, the form of that reaction is indicative of the futility of class action reform outside the U.S. As mentioned earlier in this post, many non-U.S. governments filed amicus briefs in favor of National Australia Bank in the Morrison case. Following that decision many such governments and respective ambassadors filed comments urging the SEC to support  Morrison's ban on extraterritorial application of U.S. securities laws. (See comments to the SEC on this issue here). Generally speaking, these non-U.S. governments do not support the extraterritorial assertion of U.S. jurisdiction because they deem it "inconsistent with established principles of international law and contrary to the principle of comity." They urge "respect for the sovereignty of other Nations." See Compliance Week for more details. This is code for the general disdain that many international governments have for the U.S. class action system.

One year after Morrison the world's largest international pension funds, including some U.S. based funds such as CalPERS, feel that it is more productive to lobby the U.S. government (even if it means overturning Supreme Court precedent) than to pursue reform abroad. Does this mean that reform abroad is not going to happen? No. But, the time horizon for such reform may be many years if Morrison stands-up to the test of time. While the Morrison decision is still hanging in the balance at the SEC or otherwise suffers from uncertainty or weakness, reform abroad will likely be stunted as well.

Impact On Filings and Settlements

The fallout from Morrison was also expected to impact settlement amounts, at least in cases involving an appreciable number of non-U.S. transactions. In some very large high-profile cases this seems to be the case. For example, in In Re Vivendi the court narrowed the plaintiff class by excluding those who purchased Vivendi common stock on non-U.S. exchanges. This resulted in an estimated 90% reduction in the expected plaintiff's damages. However, to date, the size of federal securities class action settlements does not seem to be significantly different than previous years. From June 24, 2010 when Morrison was filed to the present date the settlement average has hovered at just under $20 million, which is not out of step with historical averages. Similarly, post-Morrison federal securities class action filings, at roughly 290, are in step with previous years numbers.

Conclusion

One year after the Morrison decision U.S. claims administrators are starting to require exchange of trade data from claimants in order to address the application of Morrison by some courts. These lower court rulings are beginning to draw lines of delineation for application of U.S. securities fraud laws abroad. However, the clarity envisioned by Morrison along with its expected changes to the class action landscape have not yet fully materialized. There are still a number of open legal questions about the scope of the transactional test, especially regarding over-the-counter securities and ADRs. Furthermore, there currently is no controlling legal precedent, other than Morrison itself, to ensure consistency among the circuit courts. As a result of these uncertainties and the strong opposition to Morrison in many circles and other factors, securities class action filing and settlement trends have not yet changed. In some cases, such as suits against non-U.S. issuers, the exact opposite of what was expected has occurred. In any case, if Morrison does stick arund for the long-term some trends could start to change. The SEC could play a key role in that process. Under the Dodd-Frank Act the SEC is required to report the results of its study on the "Extraterritorial Private Right of Action" to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives no later than January 21, 2012. A rejection by the SEC of the transactional test could ultimately determine whether Morrison continues to develop and evolve or whether it becomes a relic of the past.