The Reach of U.S. Securities Laws Continues to Narrow

Written By Michael Eizenga and Keir Wilmut

In Morrison v. National Australia Bank Ltd., decided in June, the U.S. Supreme Court ended F-Cubed litigation (read U.S. Supreme Court Rejects F-Cubed Litigation). Sweeping aside decades of case law, the Supreme Court held that Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 did not allow foreign investors to sue foreign issuers in the U.S. to recover alleged damages suffered from purchases on foreign securities exchanges. Continuing this trend, the U.S. District Court for the Southern District of New York has confirmed that the Supreme Court's decision also bars F-Squared litigation: even American investors are unable to sue foreign issuers in the U.S. to recover alleged damages suffered from purchases on foreign securities exchanges.

In Cornwell v. Credit Suisse Group, a group of American investors sued Credit Suisse Global (CSG) for alleged misrepresentations regarding CSG's risk management practices. These American investors had purchased shares in CSG listed on either the New York Stock Exchange or the Swiss stock exchange (SWX).

Following the decision in Morrison, CSG brought a motion to dismiss the claims of the plaintiffs who had purchased their shares on the SWX. The plaintiffs argued that Morrison applied only to foreign plaintiffs and American investors could still sue when there was an American aspect to the purchase of shares.

In a strongly worded decision, the District Court rejected the plaintiffs' argument as an attempt “to exhume and revive the body” of the “conduct and effect” test rejected by the Supreme Court. The District Court held that the Supreme Court had replaced this test with a “new bright-line transactional rule” that “does not leave open any of the back doors, loopholes or wiggle room to accommodate the distinctions Plaintiffs urge.”

The test is clear and categorical: Section 10(b) and Rule 10b-5 apply only to (i) the purchase or sale of a security listed in an American exchange, or (ii) the purchase or sale of any other security in the United States. Claims based on transactions on foreign securities exchanges cannot be brought in the U.S.:

...§10(b) would not extend 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.

The Effect of This Change

Denying Americans the right to bring lawsuits in American courts (albeit against foreign entities regarding securities purchased on foreign exchanges) may be controversial in some quarters. However, assuming it is not overturned, we expect the District Court's rejection of F-Squared litigation to further the effects we previously identified (read U.S. Supreme Court Rejects F-Cubed Litigation) from the Supreme Court's rejection of F-Cubed litigation:

1. Canadian issuers face a greatly reduced risk of being sued in American courts (even by Americans).
2. Filling this gap, the number of securities class actions brought in Canada may increase. American investors who purchase shares listed in Canada will be forced to sue in Canada.
3. Canadian and American plaintiff firms may begin to cooperate more, bringing similar but separate cases at the same time on both sides of the Canada-United States border.
4. Over time, non-American jurisdictions may begin to offer more robust protection for investors buying shares listed on their national exchanges. If they do not, investors may decline to purchase shares in their jurisdiction for fear of not having a remedy.
5. It is an open question whether Canadian courts will become equally hesitant to allow cross-border involvement in lawsuits. If they do, it may be more difficult for American investors to become part of Canadian class actions.