Court Relies on Morrison to Dismiss "Foreign-Cubed" and "Foreign-Squared" Claims
In a decision announced last week, the U.S. District Court for the Southern District of New York dismissed claims brought by foreign institutional investors and a domestic institutional investor against UBS AG, a foreign issuer, arising out of purchases of UBS stock on foreign exchanges. This advisory explains how Judge Richard J. Sullivan relied on the U.S. Supreme Court’s decision in Morrison v. National Australia Bank to make his ruling.
In Morrison, the Supreme Court rejected the “conduct” and “effects” subject matter tests and “articulated a ‘transactional’ test for determining ‘whether § 10(b) [of the Securities Exchange Act of 1934]...provides a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges.’”
Notably, Morrison involved a “foreign-cubed” action in which a foreign plaintiff sued a foreign issuer in U.S. court alleging violations of U.S. securities laws for transactions that occurred in a foreign exchange. The court in UBS interpreted the transactional test to require dismissal of “foreign-squared” claims as well, which involve domestic investors’ purchases of foreign issuers’ stock on a foreign exchange.
The court rejected plaintiffs’ argument that the Supreme Court did not intend for the transactional test to require dismissal of claims based on securities purchased on foreign exchanges where the securities are cross-listed on a domestic exchange. Judge Sullivan rejected this “listing theory,” as the “[Supreme] Court makes clear that its concern was with respect to the location of the securities transaction and not the location of an exchange where the security may be dually listed.” In so holding, the court followed prior opinions issued by the Southern District of New York, which also found the “listing theory” inconsistent with the Supreme Court’s holding in Morrison.
Encompassing both “foreign-cubed” and “foreign-squared” actions, the UBS opinion clarifies that § 10(b) was not intended to reach to extraterritorial transactions and that neither the cross-listing of securities on a domestic exchange nor the location of the investor in the United States at the time of the transaction are sufficient to overcome the presumption against extraterritorial application of § 10(b). Private causes of action under § 10(b) arise only from the purchase of stock on domestic exchanges within the jurisdiction of domestic securities laws and courts.