John Filar Atwood
The Supreme Court’s decision in Morrison v. National Australia Bank Ltd. has been a bitter pill for investors, according to Daniel Sommers, a partner at Cohen, Milstein Sellers & Toll, many of whose clients are institutional investors. Investors no longer have a federal securities law remedy for purchases of securities outside the U.S., he said. Sommers and others examined the impact of the Morrison decision at a recent DC Bar panel discussion on global securities enforcement.
In its 2010 decision in Morrison, the U.S. Supreme Court ruled that 1934 Act Section 10(b) does not provide a cause of action for securities fraud unless the purchase or sale of securities on which the claim is based took place on a U.S. exchange, or occurred within the U.S. This transactional test superseded a “conduct and effects” test that had been the industry standard for decades prior to Morrison.
Investor reaction to the decision was disappointment, Sommers said, because the conduct and effects test was well-established and workable. Now U.S. investors have no meaningful U.S.-based federal law remedy for offshore securities purchases, he said.
Sommers said that investors have repeatedly challenged Morrison, trying to find a way around the bright line transactional test, but have been unsuccessful. The district courts have all rejected investors’ arguments, he said.
Jenner & Block’s Michael Lowman asked if institutional investors have changed their investment strategies given the lack of protection for offshore purchases. Sommers said that institutional investors are acutely aware that there is no remedy, but they still need to balance that with what investment advisers are telling them. Investing offshore now involves a legal decision in addition to an investment decision, he said.
Congress tried to provide some relief in the Dodd-Frank Act by granting federal courts extraterritorial jurisdiction under the conduct and effects test for proceedings brought by the SEC. Lowman asked panelist Elizabeth Jacobs, deputy director of the SEC’s Office of International Affairs, whether Dodd-Frank has helped the SEC investigate and enforce transactional securities fraud. Jacobs replied that the Commission has been able to move confidently forward on international matters, and that it has a very active docket of international cases.
Lowman asked the panelists whether the legislative fix in the Dodd-Frank Act was too narrow. He cited the recent decision in SEC v. Benger in which the district court held that certain stock sales, which originated out of a boiler scheme operating out of Chicago, were not domestic transactions under Morrison because the actual stock sales took place overseas. Jacobs said that while she was not at liberty to comment on the Benger case, she acknowledged that the case will need to be evaluated to “see if adjustments are necessary.”
In addition to the Morrison decision, the panel discussed international enforcement efforts, particularly with respect to China. Jacobs said that while there are many legitimate business operations in China, some are not. The SEC has benefited from international cooperation in trying to bring cases, but has had some difficulty trying to obtain work papers from China.
Gibson Dunn’s John Chesley said that the culture of secrecy in China has hampered seemingly simple tasks such as the production of work papers. His firm and others have opened offices in China to try to make it easier to pursue matters there. Having an office in China allows the firm to have Chinese nationals working on the case, he said. Sommers noted that people can go to jail in China for turning over documents, so it is nearly impossible for a law firm to do a private investigation there.
Jacobs said that overall she would describe the state of international regulatory cooperation as a glass that is more than half full. She noted that there are now 94 signatories to IOSCO’s memorandum of understanding on international cooperation.