More on Morrison

In addition to John’s shrewd post about Morrison below – I suspect the post is right that it might turn out to be a “zombie” precedent – take a look at University of Georgia securities law expert Professor Margaret Sachs’ observations from a global securities law perspective at Opinio Juris today.

(Update:  Also take a look at the discussion at OJ from Professor Austen Parrish specifically focused on extraterritoriality.  And also Bill Dodge on extraterritoriality at OJ.  OJ has the best roundup of academic commentary on the decision, from a variety of disciplinary perspectives.)

An excerpt from Professor Sachs – and particularly note that much hinges from a securities law perspective on the bill just being reported out of conference:

A few observations about this remarkable opinion:

The opinion makes no mention of the loss of investor protection that will result from the switch to the transaction test. For example, it leaves unprotected US citizens who purchase or sell securities outside the United States. Likewise unprotected are foreign citizens trading abroad who are victims of domestic conduct perpetrated by Americans over whom the foreign forum lacks personal jurisdiction.

Why not allow these investors to sue in United States courts? One reason is the abandonment of the idea that all countries are of one mind about fraud. As Justice Scalia noted, “the regulation of other countries often differs from ours as to what constitutes fraud, what disclosures must be made, what damages are recoverable, what discovery is available in litigation, what individual actions may be joined in a single suit, what attorney’s fees are recoverable, and many other matters.” In making these observations, he drew on amicus briefs by foreign countries that wish to exert exclusive control over the prosecution of securities trades occurring within their own borders. While Justice Scalia does not say so expressly, accommodating these countries in this regard may help to promote globalized securities markets.

Justice Scalia maintained that the new “transactional test” will give the foreign amici the certainty that they crave. Will it really do so? Sometimes. Most likely it is the second prong – “domestic transactions in other securities” – that will produce trouble. Suppose a foreign brokerage firm has a US affiliate. If the foreign brokerage firm receives an order to trade from a foreign investor and executes the trade in the US through the US affiliate, does the trade qualify as a domestic transaction? Moreover, suppose a US investor purchases a foreign security, not traded on a US exchange, from the comfort of his living room through the auspices of an interactive web site maintained outside the United States. Can that qualify as a domestic transaction?

There is a real question about where the opinion leaves actions brought by SEC and the DOJ. While Justice Stevens’s concurrence suggests that it leaves them untouched, this conclusion seems questionable. The Court’s reasoning focused on the presumption of extraterritoriality and the text of Section 10(b), both of which apply as much to the government as they do to private parties.

To be sure, the question regarding the impact on the SEC and the DOJ will evaporate in the event that Section 7216 of H.R. 4173 becomes law. That Section (which has passed the House and is currently in a House/Senate Conference Committee) articulates a broad exterritorial reach for fraud actions brought by the SEC and the DOJ. The Section also makes that reach expressly jurisdictional. As a result, it would override Morrison’s “threshold error,” at least so far as SEC and DOJ actions are concerned.

In its present iteration, Section 7216 is silent about extraterritoriality as it pertains to private fraud actions. The need to square that silence with Morrison may be just around the corner.