The Second Circuit Court of Appeals ruled that plaintiffs cannot assert securities laws claims for foreign-issued shares purchased on a foreign exchange, even if the shares are cross-listed on a U.S. exchange or the “buy order” was placed within the U.S.
In Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), the Supreme Court held that the anti-fraud provisions of Exchange Act Section 10(b) (“Manipulative and Deceptive Devices”) and Exchange Act Rule 10b-5 (“Employment of Manipulative and Deceptive Devices”) cannot reach purchases of foreign-issued securities by foreign investors on foreign exchanges – so-called “foreign cubed” transactions – and held that the antifraud provisions apply only to 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.”[1]
In the wake of Morrison, securities plaintiffs argued that the Supreme Court left open the question of whether or not Section 10(b) claims can be brought relating to “foreign squared” transactions where a purchaser located in the U.S. transacts in a foreign-issued security on a foreign exchange. On May 6, 2014, the Second Circuit decided as a matter of first impression that Morrison‘s constraints on the extraterritorial reach of the Exchange Act precluded such claims.
In City of Pontiac v. UBS AG,[2] in connection with their purchase of UBS shares, investors brought a putative class action against UBS that alleged violations of Exchange Act Sections 10(b) and 20(a) (“Liability of Controlling Persons and Persons Who Aid and Abet Violations”). These shares were not only listed on foreign exchanges, but also cross-listed on the New York Stock Exchange (“NYSE”). One of the plaintiffs was a U.S. investor who had purchased shares by placing a “buy order” in the United States that was later executed on a Swiss exchange. The Court of Appeals held that the fact that a purchaser is a U.S. entity “does not affect whether the transaction was foreign or domestic,” and affirmed the judgment of the district court that Morrison prohibits claims based on purchases of foreign shares on foreign exchanges.[3]
The Second Circuit closed another window, arguably left open after Morrison, by rejecting the plaintiffs’ so-called “listing theory,” holding that the mere fact that UBS’s shares were cross-listed on the NYSE did not categorically bring them within the ambit of Section 10(b). The plaintiffs argued that, by its express terms, the first prong of the holding in Morrison permitted claims related to “transactions in securities listed on domestic exchanges.”[4] The Court of Appeals rejected this reading as “irreconcilable with Morrison read as a whole,” and found that “Morrison does not support the application of Section 10(b) of the Exchange Act to claims by a foreign purchaser of foreign-issued shares on a foreign exchange simply because those shares are also listed on a domestic exchange.”[5]
[1] Morrison v. National Australia Bank Ltd., 561 U.S. at 247, 273 (2010).
[2] City of Pontiac v. UBS AG, No. 12‐4355‐cv (2nd Cir. May 6, 2014) (Slip Op.)
[3] Id., Slip Op. at pp. 15-16.
[4] Morrison, 561 U.S. at 273.
[5] City of Pontiac, Slip Op. at 14.
