Milberg Partner Michael Spencer Discusses Supreme Court Decision in Morrison v. National Australia Bank

By on August 3, 2010
Michael C. Spencer
Michael C. Spencer

Milberg Partner Michael C. Spencer

A recent U.S. Supreme Court decision in Morrison v. National Australia Bank states that foreign plaintiffs who bought foreign stock on a foreign exchange do not have the right to bring claims in the United States. The decision essentially ends all so-called f-cubed cases pending in U.S. courts. But, a few legal observers have noted that some judges are now applying the ruling against domestic plaintiffs who bought their shares of foreign companies on foreign exchanges as well and dismissing their claims in court.   In addition, judges are also interpreting the ruling’s bar on foreign plaintiffs to include investors who have purchased foreign companies’ American Depositary Receipts, which are  listed on U.S. stock exchanges.

Recently, lawyers for Vivendi, the French company found liable by a jury for misleading investors 57 times from 2000 to 2002, took the same sweeping position in court to persuade a judge to overturn the January 2010 jury verdict against the company and dismiss the shareholder class action case.  In a post with the D&O Diary, Milberg LLP partner Michael Spencer, co-lead counsel for plaintiffs in the Vivendi case, disputes the convenient misinterpretation of the Supreme Court ruling by the defense bar:

The emerging conventional wisdom in legal circles and the media is that the Supreme Court’s decision in Morrison v. National Australia Bank sounded the death knell for use of Section 10(b) of the Securities Exchange Act on behalf of “foreign” purchasers of securities who were allegedly defrauded. Some are even suggesting that defrauded Americans who bought shares traded on a foreign exchange have no remedy.

Any fair and careful lawyer should find that conventional wisdom galling. The first part of the test articulated by the Morrison Court is being missed — or deliberately ignored. In assessing the so-called extraterritorial scope of Section 10(b), the Court applied the plain language of the statute and found coverage for “transactions in securities listed on domestic exchanges and domestic transactions in other securities.” That holding is repeated several times in the Court’s decision, including in the final paragraph. But the first part of the test has been passed over in lower court decisions, legal commentary, and media reports in the month since Morrison was issued. It’s as though the words repeatedly used by Justice Scalia — “securities listed on domestic exchanges” — disappeared the moment he wrote them.

It is indubitable that many “foreign” companies’ ordinary (common) shares are registered under the Exchange Act and listed on the NYSE, even if the shares are not traded on the exchange and quoted in the Wall Street Journal. (Justice Scalia used “registered” and “listed” interchangeably; he said “The Act’s registration requirements apply only to securities listed on national securities exchanges.”) That is not surprising, since many provisions of the Exchange Act, including Section 10(b), come into play when securities are registered under the Act.  Any competent corporate lawyer practicing in this area will confirm that foreign companies sponsoring upper-level ADR programs in the U.S. must, and do, register and list. Some observers are confusing registration and listing with “trading,” but the Court repeatedly used “registered” and “listed,” the terms from the statute and regulations. And those who think only the particular custodial shares “underlying” an ADR program get registered should please refer to 17 C.F.R. § 240.12d1-1 (“Registration effective as to class or series”). It takes 20 seconds to google a foreign company’s Form 20-F cover page to ascertain the status of its shares.

Justice Scalia usually means what he says. Under the plain language of the Supreme Court’s holding, Section 10(b) covers transactions in shares “listed on a domestic exchange.” Period. No matter whether the purchaser is foreign or domestic, no matter where the transaction occurred.

That result apparently gets defense lawyers in a dither. Wachtell partner George Conway, who represented the winner in Morrison, was quoted as calling the argument “N-U-T-S.” As a plaintiffs’ lawyer, I’m happy to read that reaction — if Conway can respond only with a quip rather than a substantive answer, we are probably on to something. The argument wasn’t made by plaintiffs’ counsel in recent motion practice over whether claims even by domestic purchasers of Credit Suisse ordinary shares traded abroad survive after Morrison; SDNY Judge Marrero dismissed the claims, presumably without knowing that the company is registered and listed on the NYSE. SDNY Judge Holwell has the question squarely before him in post-verdict motions in Vivendi for both foreign and domestic ordinary share purchasers, and will probably rule within the next month or so. Today’s conventional wisdom should by right become tomorrow’s embarrassment.

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