18.02  The Court’s opinion, which was issued on 24 June, 2010, authored by Justice Scalia for the Court, took a totally different tack in its ruling, however. Although the opinion purported to be an exercise in statutory construction, the tone of the opinion emphasized many of the issues surrounding the collective redress aspect of the case. Arguably, it was the class action nature of the proceeding—the form of the procedural remedy—rather than issues of private international law that drove the decision.

18.03  This chapter recounts for a transnational audience the strategies, issues, and arguments presented before the United States Supreme Court in Morrison. It, thus, shows how the American judicial system dealt with an important case addressing alleged transnational securities fraud utilizing one form of collective redress mechanism—the American ‘opt-out’ class action³—and its ultimate resolution of these questions.

18.04  Morrison overruled 40 years of established though not perfectly harmonious jurisprudence that had established an intellectual framework based on the so-called ‘conduct’ and ‘effects’ tests to decide transnational issues.⁴ Those tests permitted Americans damaged in the United States (where the ‘effects’ of the fraud were felt) to sue under United States law pursuant to age-old principles of territorial jurisdiction. It also permitted such laws to be applied where the fraudulent ‘conduct’ occurred in the United States, even if some of the effects were felt elsewhere, opening a theoretical door to foreigners suing in the United States. We will first review the facts of the case from the opinion of the Court, then move to the briefing by the parties before returning to the opinion itself.

18.06  This sentence, read closely, contains within it the kernels of the Morrison opinion: first, the ‘foreign plaintiffs’ versus ‘foreign defendants’ juxtaposition focuses and emphasizes only the parties rather than the underlying facts of the case. Secondly, the use of the ‘in connection with’ language from section 10(b) foreshadows the statutory analysis adopted by the majority as well as in Justice Breyer’s concurrence. And thirdly, more importantly, the ‘traded on foreign exchanges’ foreshadows the analysis and ‘remedy’ chosen by the Court. Section 10(b) of the Securities and Exchange Act of 1934 (the Exchange Act) generally, as will be seen, prohibits fraud in the trading of already issued securities.⁶

18.07  The Court’s factual recitation notes that National Australia Bank (National) had its shares listed on the Australian Stock Exchange, but also notes that National had American Depositary Receipts (ADRs)⁷ that were listed on the New York Stock Exchange. Significantly, this is the only reference to ADRs in the opinion. But ADRs, as will be seen, ultimately, turn out to be of consequence given the ‘remedy’ chosen by the Court.

(p. 338) The writedowns of HomeSide’s assets by National on 5 July, 2001 and subsequently on 3 September, 2001, and in particular, the MSR asset is next addressed by the Court.⁹

18.09  The Court also states that, ‘[a]ccording to the Complaint, … [respondents] had manipulated HomeSide’s financial models to make the rates of early repayment unrealistically low in order to cause the mortgage servicing rights to appear more valuable than they really were’.¹⁰ The lower court ruling is summarized as follows: ‘[t]he acts performed in the United States did not “compris[e] the heart of the alleged fraud” [citation omitted],¹¹ and, thus, dismissal was proper, laying the ground for proceedings before the Supreme Court.’

18.10  The Court chose not to relate certain facts in the record favourable to the petitioners. First, it did not recite¹² that the purchase price paid by National for HomeSide was $1 billion,¹³ thus indicating a large investment in the United States. Secondly, the Court did not note that, at the time of that purchase, HomeSide was the sixth largest mortgage service provider in the United States¹⁴ ‘with a [mortgage] portfolio exceeding $180 billion in 2001’,¹⁵ which encompassed over two million loans on US homes. These facts reflected the petitioners’ view that the HomeSide acquisition represented a major investment in the United States economy. The petitioners wanted to show, as in many private international law cases, that the jurisdiction had a legitimate interest in adjudicating the case.

18.11  The petitioners’ theme was that National had indeed ‘thrown in its lot’ with the United States. Although the case was transnational, it was far from the classic case of extraterritorial jurisdiction that was sometimes presented as in EEOC v Aramco American Oil Co,¹⁶ where the spectre of United States law regulating actual conduct in Saudi Arabia was central. This was a gambit designed to neutralize the ‘foreignness’ of this F-cubed action—an action by non-US foreigner suing on shares of a foreign company bought on a foreign exchange.

18.12  Although it was in the record, the Court also did not indicate that National’s Australian management put HomeSide up for sale¹⁷ immediately after the massive stock declines—which were the largest in value in Australian financial (p. 339) history¹⁸—after having ‘fired’ all of the American senior management in Florida. Similarly, it did not refer to the long-festering problems in hedging¹⁹ the MSR portfolio of HomeSide which took place in New York—another important United States ­contact—and involved a division (not a subsidiary) of National. The hedging operation incurred substantial losses (before the stock drops) in the United States of $1.4 billion in 2000 alone.²⁰

18.13  Moreover, what was also missing was any indication that the Australian management of National had in essence ‘blamed’ the debacle and huge writedowns on American HomeSide’s management and on events solely focused on Florida, shifting the blame from the National headquarters in Sidney.²¹²²

18.14  The petitioners emphasized that the MSR figure, which eventually was written down dramatically, had not been incorporated into any other financial information from HomeSide, and was presented as a separate line item in its consolidated financials as only attributable to the HomeSide business unit. The importance of this discreteness was that, as a practical matter, no exercise of any management or accounting judgment in Australia was likely. That is, the less involvement of Australian management in calculating or reviewing the MSR figure, the less the balance arguably tips towards the application of an Australian law under a private international law approach. Justice Ginsburg’s comment at oral argument that the ‘case has Australia written all over [it] thus becomes less meaningful’.²³

18.16  Secondly, the petitioners argued that a ‘new and improved’, or more subtle and nuanced, ‘conduct’ test should apply.²⁶ The petitioners knew that the presumption against extraterritoriality was the principal analytical argument of the respondents. The petitioners’ strategy was to turn that argument on its head and emphasize the reverse side of that presumption, namely the presumption of territoriality and the indisputable notion that the United States could regulate conduct within its borders,²⁷ particularly where it believed it had alleged truly fraudulent conduct.

18.17  As to the connection between the first and second facets of its argument, the petitioners bet that the broad text of section 10(b) itself and the presumption of territoriality would be sufficient to reach the ‘comity’ issue. The petitioners urged upon the Court the analysis of the Restatement (First) of Conflicts of Laws from 1934 (that presumably Congress was aware of in passing the relevant statute in 1939),²⁸ namely that, contrary to the common law rule that held a cause of action accrued (and jurisdiction could only be rightfully exercised by) in the jurisdiction where the ‘effect’ or ‘injury’ caused by the tort had occurred, a sovereign could exercise jurisdiction grounded on legislation (or less) that created a right with respect to conduct that was antecedent to the ultimate ‘effect’ or ‘injury’. Thus, this other jurisdiction could have an interest in the action in addition to the jurisdiction of the place of the injury.²⁹³⁰³¹

(p. 341) 18.18  The petitioners also combined the forum non conveniens analysis of Sinochem authored by Justice Ginsberg and the decision by Justice Jackson in Gulf Oil,³² where one of the factors identified as relevant to the forum non analysis was whether the judgment in the United States would be recognized in a subsequent foreign proceeding (thus, barring attempted relitigation by a losing plaintiff). Together it was believed this would be a persuasive screening mechanism for the Court.³³

18.19  As to the issue of comity, and foreign objections to F-cubed cases in general, the petitioners argued that yet another procedural device could act as a screening mechanism. That is, any sovereign who believed a securities class action against a company under its jurisdiction (presumably incorporated or headquartered there) would interfere in some manner with its domestic regulatory or other judicial regime could advise the court of their position. The petitioners urged that this could be done via the historically developed mechanism of the Tate or Bernstein letters, a tool whereby the United States State Department could communicate with a United States court as to the foreign relations position of the United States government based, presumably, on diplomatic communications with a foreign sovereign. The petitioners also referenced the arguably overlapping body of jurisprudence under the Foreign Sovereign Immunities Act.³⁴

18.20  Finally, although they had jettisoned the classic ‘conduct’ test, the petitioners argued that the general ‘material and significant conduct’ test advocated by the Securities and Exchange Commission (SEC) also applied to them as private litigants. That judgment was intended to make common cause with the Solicitor General representing the US government. Generally, litigants before the United States Supreme Court do this, relying on the generally positive reception from the Court to the government. By contrast, the respondents could have relied on the Restatement (2d) of Foreign Relations Law’s narrower ‘conduct’ test for securities cases alone. That test limits ‘conduct’ to ‘pertinent conduct in the United States’.³⁵

18.21  Consistent with their position in the lower courts, the respondents focused on the ‘presumption against extra-territoriality’. Most generally, that presumption is a canon of statutory construction that construes United States statutes not to have extraterritorial effect, ie regulating non-United States conduct, absent congressional direction.³⁶

18.22  The respondents also emphasized the Supreme Court’s relatively recent decisions in Empagran and Microsoft,³⁷ although both dealt with the interpretation of specific statutes. Empagran, in particular, was an anti-trust case where all the parties acknowledged that both the ‘conduct’ and the ‘effects’ were outside the United States. The issue was whether an anti-trust statute dealing with transnational cases would permit litigation in the United States courts under those circumstances, and the answer was not surprisingly in the negative.

18.23  Thus, the reliance on the Aramco presumption coupled with the use of Empagran and Microsoft as current exemplars of the application of the doctrine, even though they might be viewed as narrow statutory interpretation cases (as indeed the petitioners tried to limit them), was the offence that the respondents constructed.³⁸

18.24  Importantly, the petitioners cast everything factually in the case as Australian in nature, virtually assuming away the Florida conduct, by casting the case as purely extraterritorial with the resulting question being could section 10(b) regulate such non-United States ‘conduct’. They also noted that, ‘Australia has its own comprehensive scheme of securities regulation that provides ample mechanisms, including opt-out class actions, for redressing securities fraud in Australia’.³⁹

18.26  Moreover, as a matter of comity, the respondents took the position that in general the Australian accounting rules ‘differed in material respects from American (p. 343) accounting principles’⁴² and emphasized that the MSR’s capitalized value had been presented in the context of consolidated financial statements of National.

18.27  The respondents’ brief argued that the ‘disclosures were prepared and issued in Australia’ and that the ‘misstatements and omissions that caused the Australian Petitioners harm were all made in Australia’, downplaying, if not ignoring, the role of HomeSide.⁴³

18.28  The respondents, as their fall-back, relied on the independent canon of construction that ‘an act of Congress ought never to be construed to violate the law of nations if any other possible construction remains’, relying on the Charming Betsy actor liable case.⁴⁴ The argument went that, in 1934, under the ‘Law of Nations’, it was clear that it was the ‘last event necessary to make an actor liable for an alleged tort’ under lex loci delicti would be where the ‘loss is sustained’,⁴⁵ here Australia.

18.30  In its brief before the Supreme Court, the United States started with the proposition that, ‘[t]he text of the Exchange Act is silent as to its transnational reach’.⁴⁷⁴⁸ The government argued, however, that even without this clear textual guidance, the courts have nonetheless used ‘intrinsic sources’, particularly the consideration of the ‘statute’s purposes …’.

18.35  The brief then touts the effectiveness of the Australia Securities and Investment Commission (ASIC) and its enforcement activity given its ability to institute civil proceedings on behalf of victims of securities fraud. Importantly, it notes that, ‘ASIC is … a signatory of the IOSCO 2002 Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information’,⁵⁶ which relates to effective agency-to-agency cooperation, and it touts its strong relationship with the SEC. ASIC conceded it ‘did not take action vis à vis the NAB write-downs’, and indicated that the ‘ASIC was satisfied with how NAB was handling the situation’ post-disclosure writedowns.⁵⁷⁵⁸ At no point did it indicate that it had looked at HomeSide’s role in the National debacle nor indicate specifically what action was taken.

18.36  The Australia Brief next argues that sufficient remedies were available to the shareholder class in Morrison under Australian law, including class actions. It states, ‘Class actions have been provided for by statute in Australia for almost 20 years (p. 346) and a robust securities class action practice has evolved’.⁵⁹ It notes, however, that Australia has the ‘loser pays’ costs rule, but that ‘external funding’ can ameliorate that.⁶⁰

18.37  It reinforces the impression of forum shopping by the Morrison class given the existence of the Australian remedies regime by stating specifically that a class action could have been brought in Australia under the Corporations Act in relation to the ‘type of conduct’ alleged in this case. It states that the petitioners, ‘ … were not obliged to initiate an action in the United States to seek compensation for damage they claim to have suffered. That course of action was open to them in Australia’.⁶¹

18.38  However, the Australian brief concedes that Morrison was not a case of forum shopping when it states, ‘In 2006, the High Court of Australia affirmed that external funding is legally permissible in Australia’.⁶² Thus, contrary to the overall impression created by the brief, namely that this class action could have been brought in Australia, the simple economic reality was that funding mechanisms were not yet available in 2001 when the case was instituted.

18.39  The Australian government proposed a rule that states, ‘The Australian Government believes that the complexity of the analysis may be reduced if attention is focused on where the alleged wrongful disclosure (or non-disclosure) occurred…’.⁶³

18.40  Thus, the Australian brief did not cite any particular regulatory conflict, nor indeed did it cite a true conflict in collective redress or other remedies.

18.41  The United Kingdom brief also failed to set forth any true conflict between substantive UK law (ie the Financial Services and Markets Act 2000, in effect in England and Scotland) and substantive United States law⁶⁵ but instead articulated generalized concerns regarding American class action remedies.⁶⁶ The United Kingdom indicated that it had, ‘become a significant equity holder in various domestic financial institutions’, including the Royal Bank of Scotland, which was a defendant in a class action in the Southern District of New York.

18.43  The United Kingdom did not identify any specific, direct conflict with the United Kingdom’s disclosure or accounting regimes that occurred in this or other types of litigation. Instead, it reinforced the point that the procedural differences in collective redress regimes, in particular the American class action regime, are ‘substantive differences reflecting legitimate policy choices’.⁶⁹ Perhaps most important, the United Kingdom government says that, ‘The panoply of procedural rules and remedies that accompany litigation in federal courts under U.S. securities laws creates a very different environment for the commencement, prosecution and settlement of lawsuits than exists in other jurisdictions’.⁷⁰

18.44  The United Kingdom argued in a conclusory fashion that, ‘The statutory formulation of disclosure obligations varies with the type of corporate statement (prospectuses and other fund-raising documents, periodic corporate reports and ad hoc corporate announcements)’.⁷¹ It also emphasized the absence of a ‘fraud on the market’ evidentiary presumption within the laws of the United Kingdom. The United Kingdom brief did not even suggest that the disclosures in Morrison would be at odds with compulsory disclosures in the United Kingdom.

18.45  Given the American procedure of submitting extensive written materials to the Court, the role of oral argument before the Supreme Court is different from those countries where judges have not been provided with the facts or legal arguments before any appearance by counsel in court. In the Supreme Court, Morrison was allocated one hour of argument in total. The petitioners had one half hour of which it could and did reserve three minutes for rebuttal argument. The respondents had one half hour which it had to share with the government. The government appeared as amicus via the Solicitor General’s Office which is part of the Department of Justice, which, as noted, represents government agencies such as the SEC before (p. 348) the Supreme Court. The argument before the Supreme Court comes in the form of a dialogue with the Justices consisting of questions and answers.⁷²⁷³

JUSTICE GINSBURG: 

Mr Dubbs, you said something that I thought quite revealing in this—in your brief. I mean, this case is Australian plaintiff, Australian defendant, shares purchase in Australia. It has ‘Australia’ written all over it. And in your reply brief you said: ‘If the Plaintiff is a foreign securities purchaser as this one is, Sinochem makes it clear that forum non conveniens may dictate dismissal of an action brought in the U.S.’

And taking that, why not—of the applicable laws to this transaction, to this alleged fraud, isn’t the most appropriate choice the law of Australia rather than the law of the Unites States?⁷⁴⁷⁵

JUSTICE GINSBURG: 

Not just a question of proper forum, but the proper law?

MR. DUBBS: 

No, Your Honor. We think that, given the scope of Section 10(b), American law can and should be applied here. And we respectfully disagree with the observation that this case has ‘Australia’ written all over it. Indeed, from our point of view it has ‘Florida’ written all over it because Florida is where the numbers were doctored, Florida is where the fraudulent conduct in putting the phony assumptions into the valuation portfolio were done. Everything happened –

JUSTICE GINSBURG: 

And the communication was done in Australia by the Australian bank.

MR. DUBBS: 

The communication was done between Florida and—and Australia, and the senior management of HomeSide in Florida [which] created those numbers with the expectation and the knowledge that those would go into the financial statement …

(p. 349)

JUSTICE ALITO: 

Let’s assume that on the facts of this case they could not prevail under Australian law in the Australian court system. Then what United States interest is there …

MR. DUBBS: 

There is a strong United States interest. It’s on two levels. The first strong United States—United States interest deals with the conduct at issue here, namely the conduct in Florida by HomeSide. This was the sixth largest mortgage service provider in the United States.

JUSTICE GINSBURG: 

Now, I concede your argument that a big component of this fraud was what went on in Florida, but it needed to be disclosed to the public. It needed to be put out there. And that wasn’t done in Florida by the Florida defendants.

MR. DUBBS: 

It was done in Australia and we can prove that […]. To use Professor Beale’s example, you have poison candy in one jurisdiction, that poison candy is sent to another jurisdiction, and in the first jurisdiction there is a law that says ‘thou shalt not make poison candy;’ through the exercise of legislative jurisdiction that statute in the first jurisdiction is appropriate, and both jurisdictions have an interest in that … Now, if we are in the poison candy jurisdiction and we are bringing a case about poison candy, if the statute in addition says, ‘you have to show some harm from the poison candy,’ indeed you might as a matter of proof have to show effects from that other forum. But that’s different than regulating conduct in the second forum or anything else in the second forum. That is simply looking at the statute or the legal prescription against making poison candy. And we say Section 10(b) is like the poison candy statute.

JUSTICE SCALIA: 

… the issue for the Australians is: We want to determine whether there has been a misrepresentation or not.

MR. DUBBS: 

… .what’s in the portfolio … [is] what’s being misrepresented. And when they doctor the numbers and send them to Australia, it’s a misrepresentation of that.

MR. DUBBS: 

Now, my final point … if they advocate a rule, which it [a transaction] should be limited to exchanges, that goes back to my threshold point of the scope of the statute. And it takes an eraser to the statute and it says: It’s only exchanges; it’s not in connection with foreign or interstate commerce or through the mails; it’s limited, contrary to the express words of the statute … Now, there are other legitimate ways of cabining the private cause of action. But that—if you are faithful to the statute, we submit that is not one of them.

18.46  For the respondents, their counsel responded:

MR. CONWAY: 

… Petitioners have identified nothing in the text of Section 10(b) that overcomes the presumption against extraterritoriality or the Charming Betsy Rule. The statutes should thus be construed not to apply to transactions and shares of foreign issuers on foreign exchanges … Given the threat that the Section 10(b) implied right presents to the sovereign authority of other nations, as reflected in the amicus briefs of Australia, the United Kingdom, France, and the diplomatic note from the Swiss government, the Court should construe the implied right not to extend to claims of purchasers and sellers of securities of foreign issuers on foreign markets.

(p. 350)

JUSTICE STEVENS: 

… Supposing the class of plaintiffs included a group of Americans who were shareholders of the Australian bank and who—but who purchased their stock over the Australian exchange.

MR. CONWAY: 

… we would submit that that rule should be the same … in terms of the threat to international comity …

JUSTICE SCALIA: 

… Now, is it your point that in order to avoid an international extension of it, it should apply only to securities? …

JUSTICE SCALIA: 

Securities purchased and sold in the United States? Is that it?

MR. CONWAY: 

That—that’s correct, Your Honor. I think that’s a fair reading of the statute …

JUSTICE BREYER: 

How does it hurt the other countries if what we would say on their reading of this is, Congress has said, ‘Look, if some terribly bad conduct happens in the United States; they lie through their teeth; and you, whoever you are in the world, who buys some shares and as a result you are hurt, we will give you a remedy. Come to us’—now, how does that hurt Australia?

MR. CONWAY: 

Well, it hurts Australia –

18.47  The United States argued as amicus curie:

CHIEF JUSTICE ROBERTS: 

Well, what if—what if significant elements of the fraud occur in four different countries?

MR. ROBERTS: 

If—if—the critical question is whether there’s significant conduct here that’s material to the fraud success … if Section 10(b) didn’t cover that kind of conduct, then that would risk allowing the United States to become a base for orchestrating securities frauds for export. It would allow like masterminds in the United States engineering international boiler room schemes in which they direct agents in foreign countries to make fraudulent representations that victimize investors.

JUSTICE KENNEDY: 

Well, then you give no weight to the fact that it was on the Australian exchange?

MR. ROBERTS: 

The—the fact that the transaction happens on the Australian exchange is not dispositive … because if –

CHIEF JUSTICE ROBERTS: 

Do you have any indication that our friends around the world are comfortable with your test?

MR. ROBERTS: 

Well, the briefs that have been filed by Australia and United Kingdom and France are limited to the private right of action. … what they want to do is to limit the private rights.

18.48  We will now analyse the text of the Court’s opinion, both to understand its rulings as to transnational issues regarding extraterritoriality, but also to see how issues of collective redress intertwine to determine the result. We start with the Court’s (p. 351) interpretation and application of the presumption against territoriality and how the petitioners argued their case as essentially one of domestic United States conduct with ancillary foreign effects in Australia.

18.49  Justice Scalia began the written opinion with a quote from Aramco, ‘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”’.⁷⁶ Thus, he laid out the strong version of the presumption against extraterritoriality, although he quoted from that part of Aramco which relies, in turn, on Foley Brothers, where the Court stated in a somewhat more bland way, ‘Congress is primarily concerned with domestic conditions’.⁷⁷

18.50  Although on its face, the holding in Foley Brothers might leave room for an analysis of whether legislative jurisdiction had been exercised as to domestic conduct by domestic legislation or court decision, which could lead to an analysis of how those issues interrelated with the presumption, that approach was not taken by Justice Scalia.

18.52  Justice Scalia went on to say that petitioners’ argument is ‘a quite valid assertion’, because the presumption against extraterritoriality ‘is not self-evidently dispositive’.⁷⁹

18.54  This anthropomorphic metaphor does not, however, respond fully to the petitioners’ argument, that the case was one of domestic conduct in most important respects. Nor does it deal with the issue of the situation where there is domestic activity and transnational effects. Justice Scalia thus ducked the issue whether the broad anti-fraud language of section 10(b) created a United States interest in combating United States territorial fraud even though the ‘effect’ was extraterritorial.

18.55  Justice Scalia reaches for metaphor again, calling the Aramco version of the presumption against extraterritoriality the one true ‘North Star’ that guides all travellers with respect to questions of transnational litigation. To support this, Justice Scalia recites the facts of Aramco to focus on the fact that the plaintiff there, ‘had been hired in Houston and was an American citizen [cite omitted]’. He notes that, ‘the Court [in Aramco] concluded that the “focus” of Congressional concern … was neither that territorial event nor that relationship, but domestic employment’ [cite omitted].⁸² One certainly can agree that in Aramco the hiring of the plaintiff in Houston would be merely ‘some domestic activity’, as Justice Scalia uses the phrase. However, this narrative is incomplete given that the gravamen of the Aramco complaint was that the allegedly wrongful discharge occurred in Saudi Arabia several years after the hiring in Houston.

18.56  Justice Scalia also addresses the issue of comity, saying, ‘We reject the notion that the Exchange Act reaches conduct in this country affecting exchanges or transactions abroad …’.⁸³ Justice Scalia implies that the factual record before the Court reflects that Morrison affected the regulation of the Australian exchanges and transactions abroad. However, as shown by the brief of the Australian government, Australia made no such claim.

18.59  Given that, in 1964, the SEC urged successfully that Congress adopt amendments to the securities laws that made virtually all dealer markets ‘exchanges’ for the purposes of the regulatory framework, what this means today is that there may be no remedy with respect to transactions other than those effected on a registered (p. 354) securities exchange, except for isolated private off-exchange sales within the territorial United States.⁸⁹

18.60  By the manner in which Justice Scalia framed the contours of the section 10(b) private cause of action in the transnational context, Justice Scalia essentially limited the remedies available under the statute for transnational securities fraud domestically. Section 10(b) now requires an exchange transaction except for isolated transactions. This effectively eliminates the ‘effects’ test which was not before the Court.

18.61  Morrison was a ‘conduct’ test case. The prior ‘effects’ test, which was grounded on the common law proposition that the cause of action arose and the controlling law was that of the jurisdiction where the injury or ‘effect’ occurred, was effectively eliminated in those instances where an injury was suffered in the United States related to a security purchased on a non-United States exchange.⁹⁰ Thus, the interpretation of section 10(b) as requiring a ‘transaction’ test of US investors as well, and in reality, limits the remedies that dramatically changed existing law.

18.62  The final section of the Court’s opinion deals with a refutation of the competing test proposed by the Solicitor General, ‘A transnational securities fraud violates § 10(b) when the fraud involves significant conduct in the United States that is material to the fraud’s success.’⁹¹ Justice Scalia asserted that, ‘[n]either the Solicitor General nor petitioners provide any textual support for this test’.⁹²

18.63  Justice Scalia then addresses somewhat cursorily the various policy reasons that the Solicitor General advances in support of the ‘significant and material’ test. The Solicitor General argued that the ‘conduct’ test was, in part, justified because of the fear that fraudsters could use the United States as a base for operations for exporting securities fraud, using the phrase from a Third Circuit case, SEC v (p. 355) Kasser,⁹³ of a ‘Barbary Coast’. Rejecting this observation of the Solicitor General on behalf of the SEC, Justice Scalia returned to his central concern.

18.65  This obviously inflammatory exposition has several parts to it: first, the Barbary Coast comment is yet another rejection of the argument urged by the Solicitor General discussed earlier. Although Justice Scalia may be right that there is ‘no reason to believe’ that that conduct has happened to any great extent, it is also true that fraudsters have preyed upon both Americans and foreigners, as the example of Bernard Madoff illustrates.⁹⁵

18.66  Not surprisingly, Justice Scalia also asserted as fact that ‘one should also be repulsed by’ the asserted fact of ‘class-action litigation for lawyers, representing those allegedly cheated in foreign securities markets’.⁹⁶ He thus is simply adopting completely the argument of certain amici and business interests that collective redress via class actions is, almost by definition, frivolous and merely benefits lawyers, notwithstanding Congress’ reforms requiring higher and more demanding pleading standards as part of a rigorous regime to screen out meritless cases at an early stage.⁹⁷⁹⁸

(p. 356) 18.67  At this point in the opinion, Justice Scalia has finally identified the true ‘focus’ (as that term was adopted by him from Aramco): if one takes as a given that securities class actions involving foreign plaintiffs are, by definition, an ‘adverse consequence’ which is ‘repulsive’, then one should indeed search for a sweeping remedy to stop such adverse consequences. Whether the remedy is overly broad and has consequences that were not brought to the Court’s attention becomes of secondary importance.⁹⁹¹⁰⁰

18.68  Justice Breyer wrote a short concurrence. He interprets the phrase, ‘fraud in connection with the purchase or sale of any security registered on a national securities exchange, or any security not so registered’ as subject to the presumption against extraterritoriality, and thus, the fraud prohibition becomes neutered. Thus, Justice Breyer basically adopts the statutory interpretation of the majority.

18.69  Justice Breyer goes on to state that, ‘state law or other federal fraud statutes’, ‘may apply to the fraudulent activity alleged here to have occurred in the United States’.¹⁰¹ Of course, this does not deal with the issue that a class action or any other form of collective redress mechanism would be difficult or impossible under federal or state law. He also believes criminal remedies are not affected.

18.70  The concurrence authored by Justice Stevens and joined by Justice Ginsburg put the proper focus on the real goals of United States securities regulation—although petitioners would disagree with where the concurrence came out on the facts of the Morrison case. The concurrence argues that the prior ‘conduct’ and ‘effects’ tests approach was sound. Justice Stevens starts by stating the obvious: that what the Court has done was to create a ‘new transactional test’ for section 10(b), noting that, ‘the Court’s textual analysis is not nearly so compelling, in my view, as to warrant the abandonment’¹⁰² of the doctrine developed by the lower federal courts for many years.

18.71  Tellingly, Justice Stevens notes in a footnote, ‘The problem, when it comes to transnational securities frauds, is that the text of the statute does not provide a great deal of control. As with any broadly phrased, longstanding statute, courts have (p. 357) had to fill in the gaps’.¹⁰³ He also adds that, ‘Congress has enacted a regulatory statute and then accepted, over a long period of time, broad judicial authority to define substantive standards of conduct and liability, and much else besides’.¹⁰⁴ The ‘conduct’ and ‘effects’ tests were developed, he notes, ‘with the tacit approval of Congress and the Commission and with the general assent of the Second Circuit’s sister Circuits’.¹⁰⁵

18.72  Turning to the Court’s analysis and application of the presumption against ­extraterritoriality, Justice Stevens argued that, ‘the Court seeks to transform the presumption from a flexible rule of thumb into something more like a clear statement rule’.¹⁰⁶ He characterizes Aramco as ‘surely the most extreme application of the presumption against extraterritoriality in my time on the Court … ’.¹⁰⁷

18.73  Justice Stevens then noted that the arguments concerning the presumption against extraterritoriality, even if correct, ‘would have only marginal relevance to this case’.¹⁰⁸ He underscored the limitations of it, quoting Empagran and Foley Brothers and stated that the presumption merely ‘provides a sound basis for concluding that Section 10(b) does not apply when a securities fraud with no effect in the United States is hatched and executed entirely outside the country’.¹⁰⁹ He characterized that conclusion, ‘[as] not very illuminating because no party to the litigation disputes it’.¹¹⁰ Justice Stevens then goes on to say that the ‘real question in this case is how much, and what kinds of, domestic contacts are sufficient to trigger application of §10(b)’.¹¹¹ He continued by adding that the, ‘question … does not admit of an easy answer’.¹¹²

18.74  Significantly, Justice Stevens noted that, ‘The Government expresses no view on that test’s “effects” prong, as the decision below considered only respondents’ (p. 358) conduct [citations omitted]’.¹¹³ Justice Stevens also noted in a footnote that, ‘I expect that virtually all “foreign cubed” actions … would fail the Second Circuit’s test. As they generally should’.¹¹⁴

18.75  Justice Stevens proceeded to argue that the ‘real motor of the Court’s opinion, it seems, is not the presumption against extraterritoriality but rather the Court’s belief that transactions on the domestic exchanges are “the focus of the Exchange Act” and “the objects of its solicitude”’.¹¹⁵ He retorts that the ‘public interest’ and ‘the interests of investors’ are the objects of the statute’s solicitude.

18.77  His point is that these hypotheticals would ‘surprise and alarm generations of American investors’ as well as the ‘Congress that passed the Exchange Act’.¹¹⁷ Justice Stevens, at the end of this section, switches gears by noting that the Court’s rule is wrong because it, ‘withdraw[s] the statute’s application from cases in which there is both substantial wrongful conduct that occurred in the United States and a substantial injurious effect on United States markets and citizens’.¹¹⁸

18.78  Justice Stevens’ concurrence is noteworthy not only because it meets head-on Justice Scalia’s analysis of the presumption against extraterritoriality, but becuase it also questions the ‘real motor’ of the plurality, which is that the regulation of transactions on domestic exchanges as the supposed ‘focus’ of the Exchange Act. Moreover, it acknowledges that the question before the Court was section 10(b)’s applicability to F-cubed cases. Importantly, he notes that the ‘effects test’ was not before the Court, and, thus, the rule that permitted recovery by injured American investors based upon foreign frauds whose ‘effect’ was within the United States was thus not before the Court. However, he did not perceive, apparently, that the Court’s ‘transaction’ rule, which conflated a statutory analysis with a remedy for section 10(b) claims, in reality eviscerated the ‘effects’ test.

18.79  Although the Court acknowledged that National had ADRs trading, and may have known in general terms what ADRs were, it did not have before it, nor did it analyse, nor did the opinion of the Court reflect any understanding of how the ‘transaction’ test remedy might affect American investors. In its zeal to rid the system of the apparently self-evident ‘adverse consequences’ that ‘one should … be repulsed by’ of class action litigation with respect to transactions in foreign securities markets, it simply cut too deeply.

18.80  It did not appreciate that most large institutional purchases in the United States who diversify their portfolios with international securities buy those on the ‘home’ exchange, not via US-traded ADRs because of the added cost and small float of virtually all ADRs.¹¹⁹ Under the ‘transaction test’ these purchases presumably may not be protected by the United States’ securities laws notwithstanding their American purchasers.

18.81  In fashioning a remedy to eliminate F-cubed cases, which clearly was the Court’s goal, it potentially deprived millions of American investors of any remedy for fraud by the possible elimination of the ‘effects’ test as to foreign fraud. It did this perhaps out of ignorance, but it reached out to address a question not before it. The Court thus adopted a remedy that was disproportionate to the F-cubed threat it wanted to remedy, and ignored the prudential notion that issues not presented that have not been subject to the adversary system should not be decided because the consequences of any such ruling are simply not known. That is, however, what happened in Morrison.

18.83  Prior to the decision in Morrison, in December 2009, at the urging of Congressman Kanjorski, a bill was offered in the House of Representatives that was intended to codify the Second Circuit’s test for ‘conduct’ and ‘effects’ as to section 10(b).¹²¹ Subsequent to the decision in Morrison, that bill, which had been withdrawn, was revived and redrafted to limit its applications to actions brought only by the SEC. It was adopted by Congress, being introduced at the eleventh hour at the Conference Committee for the Dodd-Frank Act less than a month after Morrison.¹²²

18.84  As to private plaintiffs, the Dodd-Frank Act also directed the SEC to conduct a study to determine whether the changes provided for in the new legislation as applied only to the SEC should extend to private rights of action.^123124125

18.85  In April 2012 the SEC authorized the release of the study.¹²⁶ The study did not contain any recommendations by the SEC, but rather listed several options for congressional action (or inaction) identified by the SEC’s staff. Nearly all of those options called for legislative changes that would broaden the availability of transnational claims in private cases. Some, however, would be inconsistent with actions for collective redress, so the continuing availability of US collective redress actions for transnational securities fraud has been thrown back to Congress. The options ranged from doing nothing, to retaining the ‘transactional’ test, possibly with modifications. These ranged from clarifying that the test permits claims related (p. 361) to all securities listed on United States exchanges, regardless of where the shares at issue were purchased, to clarifying that the test permits claims whenever the securities transaction was induced in the United States, regardless of where it occurred, to reinstating the ‘conduct’ and ‘effect’ tests, possibly with modifications. SEC Commissioner Luis Aguilar, in an exhaustive dissent, called for a recommendation by the SEC that the ‘conduct’ and ‘effects’ tests be reinstated in the form now applied to SEC actions.

18.86  In Morrison, the United States Supreme Court drastically limited, if not precluded, collective redress for transnational securities fraud in United States courts, given that a non-federal, State cause of action cannot be maintained as a practical matter via a collective redress paradigm. Although Morrison’s principal target was the so-called F-cubed action that brought non-Americans to the United States Courts for non-United States exchange transactions, it also severely limited, if not eliminated as a practical matter, the rights of large American institutional purchasers who, for a variety of reasons, buy the stock of large, multinational companies on their ‘home’, ie non-United States, exchange, given the small ‘float’ of thinly traded ADRs in the United States

18.87  Morrison shows that the controversy surrounding procedures for collective redress in the transnational arena requires patient, deliberate, narrow decision-making so that legitimate interests are properly balanced. This has been made more difficult in the United States context, even without Morrison, given the statutory limitations presented by the Securities Litigation Uniform Standards Act and Class Actions Fairness Act (which were designed for other reasons) that are not present elsewhere. Some would say multinational negotiations or a treaty are the best answers for these transnational securities cases where collective redress measures are potentially implicated. But defrauded investors have less patience, so the best redress may be in the province of the courts, perhaps outside the United States.¹²⁷(p. 362)