The US Supreme Court's recent decision in Morrison v. National Australia Bank (130 S. Ct. 2869 (2010) substantially narrowed the scope of foreign issuer liability under US law by holding that Section 10(b) of the Securities Exchange Act of 1934 does not apply outside the US.

Unwilling to wait for the results of an SEC study of whether, in light of Morrison, Congress should rewrite Section 10(b) to grant investors an extraterritorial right of action under the statute (see Legal update, Congress acts quickly to curtail the impact of the Supreme Court's recent decision barring the extra-territorial application of US securities laws), restless plaintiffs' attorneys are shopping for new theories that may serve to circumvent Morrison. Creating even a minor loophole in Morrison could significantly increase foreign issuers' exposure to claims under US law.

The Supreme Court in Morrison attempted to create a strict, bright-line rule that would end decades of confusion as to which securities could be the subject of a claim under Section 10(b). Finding that Congress had never intended for Section 10(b) to apply extra-territorially in the first place, the Supreme Court rejected the "conduct and effects" test, which turned on where the alleged misconduct occurred or whether the effects of that alleged fraud were felt. In its stead, the Supreme Court ruled that Section 10(b) applies only to:

Seizing on a hyper-technical reading of the first prong of the Morrison test, some plaintiffs have argued that a foreign issuer's common stock may properly be the subject of a claim under Section 10(b) whenever that issuer sponsors the sale of American Depository Receipts (ADRs) in the United States. These plaintiffs argue that because foreign issuers that sponsor ADRs "list" their common stock on US exchanges for the purpose of facilitating the registration and trading of their ADRs, purchasers of those regular shares can assert claims in US courts under US law, even though those securities are only available for trading on non-US exchanges. The first court to rule on this issue rejected the plaintiff's theory outright in In re Alstom SA Securities Litigation, (Sept. 14, 2010 S.D.N.Y.) (In re Alstom). That court explained that "[t]hough isolated clauses of the [Morrison] opinion may be read as requiring only that a security be 'listed' on a domestic exchange . . . those excerpts read in context compel the opposite result." (In re Alstom at *3.) Rather, the Supreme Court "was concerned with the territorial location where the purchase or sale was executed and the securities exchange laws that governed the transaction", not where the security at issue was technically "listed" in In re Alstom.

Other plaintiffs have attempted to cast doubt on the clarity of the second prong of the Morrison test, which states that Section 10(b) also applies to transactions in any other securities in the United States, by arguing that it includes any transaction in a foreign security listed on a foreign exchange when that transaction involves a US party or some portion of that transaction took place in the United States. For example, some plaintiffs claim that Section 10(b) applies to the purchase of a foreign company's common stock on a non-US exchange when that purchase was initiated by placing an order from the United States, (see, for example, Cornwell v. Credit Suisse Group, (July 27, 2010 S.D.N.Y.); In re Société Générale Securities Litigation, (Sept. 29, 2010 S.D.N.Y.); Plumbers' Union Local No. 12 Pension Fund v. Swiss Reinsurance Company, (Oct. 4, 2010 S.D.N.Y.). Somewhat similarly, other plaintiffs have also argued that Section 10(b) should apply to the purchase of a foreign corporation's common stock when the deal was closed in the United States. See Quail Cruises Ship Management Ltd. v. Agencia de Viagens CVC Tur Limitada, (Aug. 6, 2010 S.D. Fla.).

All of the courts that have ruled on these arguments thus far have rejected them, holding that plaintiffs' efforts to establish a nexus between some step in the transactional process (or the parties) and the United States is nothing more than an attempt to reinstate the "conduct and effects" test rejected by Morrison. According to these courts, the second prong of the Morrison test should apply only where the issuer explicitly solicited purchasers in the United States. (see, for example, Swiss Reinsurance Company, at *8).

To date, US courts have applied its strict, bright-line test in a clear and consistent manner that limits foreign issuer liability under US law. Clearly frustrated by these failed attempts to rewrite Morrison, plaintiffs' attorneys are already employing strategies to circumvent the decision altogether. Some plaintiffs have brought claims based on foreign securities transactions under state law in state courts. Others are asserting claims under foreign law in federal courts. Although US courts have not yet ruled in these cases, there can be little question that the next front in the battle over the application of US law to foreign securities transactions has been opened.