US Supreme Court Rules Against 'Foreign-Cubed' Securities Cases

by Glen Shapiro, LawAndTax-News.com, New York

02 July 2010

The Unites States Supreme Court has ruled that so-called “foreign-cubed” securities cases – where foreign plaintiffs sue foreign and American defendants for misconduct in connection with securities traded on foreign exchanges – cannot be heard in US courts.

Before the case in question, Morrison v. National Australia Bank, and as the Securities Exchange Act was silent on the question, US courts had applied Section 10(b) of the Act under a principle of “extraterritorial application”. They had assumed that a foreign purchaser of foreign securities had the right of action in the US if his or her losses were a direct result of actions taken within the US.

As explained by the Supreme Court, US courts had previously believed that: “The Exchange Act’s silence about Section 10(b)’s extraterritorial application permitted the court to ‘discern’ whether Congress would have wanted the statute to apply. This disregard of the presumption against extraterritoriality has occurred over many decades in many courts of appeals and has produced a collection of tests for divining congressional intent that are complex in formulation and unpredictable in application.”

“The results demonstrate the wisdom of the presumption against extraterritoriality,” the Supreme Court continues. “Rather than guess anew in each case, this Court applies the presumption in all cases, preserving a stable background against which Congress can legislate with predictable effects.”

The Supreme Court now holds that it “is a longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States. When a statute gives no clear indication of an extraterritorial application, it has none.” It reiterates that Section 10(b) “contains nothing to suggest that it applies abroad.”

In addition, although there was domestic activity in Morrison v. National Australia Bank (the alleged deceptive conduct and misleading public statements occurred in Florida), the Supreme Court restates that “the Exchange Act’s focus is not on the place where the deception originated, but on purchases and sales of securities in the United States.

Its clear opinion is that Section 10(b) “applies only to transactions in securities listed on domestic exchanges and domestic transactions in other securities. The primacy of the domestic exchange is (further) suggested by the Exchange Act’s prologue, and by the fact that the Act’s registration requirements apply only to securities listed on national securities exchanges.”

In addition, it adds, the probability of incompatibility with other countries’ laws is such that if Congress intended such foreign application “it would have addressed the subject of conflicts with foreign laws and procedures.”

The Supreme’s Court’s decision has, understandably, brought out a variety of reactions in the US. Some have said that it will bring more certainty to the law and may put a brake on “jurisdiction shopping” where plaintiffs, and their lawyers, search for the best forum to continue their action. On the other hand, others have suggested that it will overly restrict the ability of the Securities and Exchange Commission to remedy frauds originally arising in the US.

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