Will the United States Become a Global Securities Policeman?

In June, the U.S. Supreme Court dismissed a class action alleging federal securities fraud by foreign investors regarding shares issued by a foreign company and traded on a foreign exchange: Morrison vs. National Australia Bank. Such class actions are often called “cubed” because the plaintiffs, the company and the trading market are all located outside of the United States.

The Supreme Court held that securities fraud claims under U.S. law do not apply extraterritorially. In particular, the Supreme Court rejected arguments that it was sufficient to bring suit in federal court if a cubed claim involved some conduct or effect in the United States.

In July, a federal district court in New York extended this Supreme Court decision to “squared” class actions – where American investors brought claims under U.S. securities laws for transactions in foreign shares traded on a foreign exchange: Cornwell vs Credit Suisse. In the district court’s view, the rationale of the U.S. Supreme Court precluded the federal courts from adjudicating claims under Section 10(b) of the Securities Exchanges Act with respect to “foreign securities trades executed on foreign exchanges even if purchased or sold by American investors, and even if some aspects of the transaction occurred in the United States”.

Both these court decisions seem to be superseded by Section 929P of the new financial reform legislation, at least for securities fraud claims under U.S. law brought by the Securities and Exchange Commission or the Justice Department. The legislation gives the U.S. courts jurisdiction to hear such claims involving foreign securities traded on foreign exchanges if there is sufficient conduct or effect in the United States. The legislation also requires the SEC to study the extension of the conduct and effect tests to private suits to enforce the U.S. securities laws with regard to foreign securities traded on foreign exchanges.

However, the impact of the legislation is unclear for technical reasons. In its June decision, the Supreme Court stressed that the territorial scope of the federal securities laws did not present a question of jurisdiction – whether federal courts have the power to hear the case. Rather, the Supreme Court viewed the case as presenting a question on the merits – whether the activities at issue should be prohibited by the federal securities laws. While the financial reform legislation clearly gives federal courts the power to hear extraterritorial claims under the federal securities laws, it does not expressly address whether these laws should cover activities by foreign parties regarding foreign securities traded on foreign exchanges.

This is much more than a technical debate about the proper interpretation of a new statutory section. The outcome of this debate will determine whether the SEC and the Justice Department can bring suits in U.S. courts to enforce American concepts of securities fraud in cases involving foreign securities traded on foreign markets – even though such American concepts may be much broader than those applicable in these other countries. In response to the legislation, Le Monde reported that a number of foreign capitals fear seeing the U.S. courts become the “financial policeman” of securities transactions across the globe.