Investors and issuers alike should take note of the Supreme Court's opinion in Morrison v. National Australian Bank as it could have major implications for their ability to sue or be sued for securities fraud in the future.
In a ground breaking decision decided yesterday the High Court in Morrison rejected years of federal jurisprudence on the extraterritorial application of US securities fraud legislation. In a scathing opinion by Justice Scalia, the Court criticized the Second Circuit's vaunted "conduct" and "effects" test for establishing subject matter jurisdiction over foreign investors trading foreign securities on foreign exchanges (the so called "foreign cubed" case). The Court found that the authority to hear a securities fraud case involving foreign investors and securities is a question of "merit" and not a question of subject matter jurisdiction. In other words, rather than diving into the particulars of the defendant's conduct or the nationality of the parties, the Court found that the question is whether Section 10(b) gives rise to a private cause of action for securities that are traded outside of the territory of the United States.
In opposition to the Second Circuit's test involving foreign securities traded on foreign exchanges, the Court promulgated the "transactional test" for determining the extraterritorial reach of US securities fraud laws. The Court held that "[T]hose purchase-and-sale transactions are the objects of the statue's solicitude...And it is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which Section 10(b) applies."