SEC Report on the Supreme Court’s Morrison Decision and Commissioner Aguilar’s Dissent Set the Stage for Congress to Consider Legislation to Expand the Reach of US Securities Laws

April 16, 2012


On April 11, the SEC published a 106-page report examining cross-border securities fraud litigation since the June 2010 Supreme Court case, Morrison v. National Australia Bank Ltd.[1], and legislative proposals to modify or reverse the Supreme Court’s decision.[2] The SEC report was requested by Congress when it passed the Dodd-Frank Wall Street Reform and Consumer Protection Act.[3]

Before Morrison, most federal courts allowed securities fraud class action claims to be brought under Section 10(b) of the Securities Exchange Act of 1934 if a sufficient level of conduct comprising the fraud occurred in the United States or if foreign conduct caused a foreseeable and substantial harm in the United States. After Morrison, only claims involving securities listed on US stock exchanges or involved in domestic transactions are viable under federal law.[4]

The Morrison decision generated substantial controversy and debate. By limiting the reach of US law, Morrison had a profound effect on international securities litigation. In what was probably the most dramatic outcome, the plaintiffs in Rosenbaum Partners, et al. v. Vivendi Universal, S.A., et al., who had won at trial and expected an estimated $9.3 billion in damages, had their claims all but dismissed after Morrison.[5]

Within a month of the ruling, Congress partially reversed Morrison in the Dodd-Frank Act by granting the SEC and Department of Justice authority to bring enforcement actions involving foreign securities using the pre-Morrison conduct and effects tests.[6] Congress refrained, however, from expressly authorizing the extra-territorial application of the Securities Exchange Act to private party claims involving securities traded outside the US. Instead, Congress requested the SEC’s study and views.[7]

Last week’s SEC report is an exhaustive analysis of Morrison and its aftermath. It summarizes pre- and post-Morrison law, as well as 72 public letters received in response to the Commission’s solicitation for public comment. The SEC also reiterated its view, originally expressed in its amicus brief in Morrison, that the conduct and effects test should be the governing standard so long as the plaintiff can show that its injury resulted directly from conduct within the US.[8] The SEC staff also identified a host of additional proposals for legislation, ranging from returning to the pre-Morrison conduct and effects test to simply modifying the transactional test adopted by the Supreme Court.

For SEC Commissioner Luis Aguilar, the SEC report did not go far enough and represented a missed opportunity to urge specific Congressional legislation. Commissioner Aguilar took the unusual step of writing a strongly worded dissent.[9] Commissioner Aguilar has been outspoken and influential on international securities litigation issues in the past. Last year, during a speech discussing Chinese companies listed on US stock exchanges, Commissioner Aguilar posited that, “[w]hile the vast majority of these Chinese companies may be legitimate businesses, a growing number of them are proving to have significant accounting deficiencies or being vessels of outright fraud.”[10]

In his dissent last week, Commissioner Aguilar expressed his “strong disappointment” with the study and urged Congressional action.[11] He specifically criticized his own Commission’s report for (1) failing to explain that private securities fraud litigation is a vital complement to SEC actions and essential to investor protection, (2) overstating the international comity concerns associated with restoring investors’ rights to assert private claims under Section 10(b), (3) inaccurately portraying investor harm resulting from Morrison and failing to convey a sense of urgency as to the harm being suffered, and (4) providing as an option that Congress take no action at all.[12] Commissioner Aguilar’s call to action is almost certain to spur some members of Congress to propose legislation to modify or reverse the Morrison holding. There are powerful interests advocating for legislative change, including numerous public pension funds.

When Congress takes up these issues, it should do so recognizing that since Morrison was decided, US courts have seen a surge in securities cases involving foreign companies listed on US stock exchanges, particularly companies based in China. Experience with these transnational cases has shown that many of the concerns about applying US securities laws in the global financial market are real and substantial, particularly when US discovery norms are imposed. Congress also should consider recent securities litigation developments in Canada, Australia, and European Union member states where varying approaches are being implemented. These developments show that traditional assumptions about the perceived absence of remedies outside the US are outdated. Moreover, policymakers need to consider the extraterritorial application of US securities law, and resulting class action litigation, mindful of the recent multinational response to securities fraud claims. 

Investors, directors and officers, and underwriters should watch developments on Capitol Hill closely during this election season as the debate over the Morrison decision and legislative responses to it is unlikely to go away. 

[1] 561 U.S. __, 130 S. Ct. 2869 (2010).
[2] Study on the Cross-Border Scope of the Private Right of Action Under Section 10(b) of the Securities Exchange Act of 1934 (Apr. 11, 2012) (“Study”), available at http://sec.gov/news/studies/2012/929y-study-cross-border-private-rights.pdf.
[3] Section 929Y of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
[4] The Second Circuit recently addressed the standard for pleading a “domestic transaction” sufficient to withstand a motion to dismiss based on Morrison. Absolute Activist Value Master Fund Ltd. v. Ficeto, __F.3d__, 2012 WL 1232700 (2d Cir. Apr. 13, 2012). The court held that “plaintiffs must allege facts suggesting that either irrevocable liability was incurred or title transferred within the United States.” Id. at *6-8., avilable at http://www.omm.com/second-circuit-defines-domestic-transaction-under-morrison-03-06-2012/.
[5] Compare Vivendi Found Liable on All 57 Counts in Investors’ Class Suit, (Bloomberg Jan. 30, 2010), available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a9Js0VPRJWzw, with Much of Vivendi U.S. shareholder lawsuit dismissed, (Reuters Feb. 1, 2012), available at http://www.reuters.com/article/2012/02/01/us-vivendi-shareholder-lawsuit-idUSTRE8101JN20120201.
[6] Section 929Y of the Dodd-Frank Act.
[7] Id. 
[8] Study at vi, 61. 
[9] Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, Statement by Commissioner: Defrauded Investors Deserve Their Day in Court (Apr. 11, 2012), available at http://sec.gov/news/speech/2012/spch041112laa.htm.
[10] Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, Speech by SEC Commissioner: Facilitating Real Capital Formation (Apr. 4, 2011), available at http://www.sec.gov/news/speech/2011/spch040411laa.htm.
[11] Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, Statement by Commissioner: Defrauded Investors Deserve Their Day in Court (Apr. 11, 2012), available at http://sec.gov/news/speech/2012/spch041112laa.htm
[12] Id