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January 25, 2012 5:01 PM

The Global Lawyer: The Global Securities Case of the Decade (So Far)

Posted by Michael D. Goldhaber

In September 2003, George Conway of Wachtell, Lipton, Rosen & Katz e-mailed colleagues with a head-scratcher about a client matter that just came in the door. An Australian bank had been hit with a U.S. securities action by Australian plaintiffs on the foundation of shares bought in Australia. "Can they do that???" asked Conway.


This question marked the birth of a case that was destined to sharply curtail the overseas reach of U.S. law: Morrison v. National Australia Bank. The textbook answer when Conway asked it was yes: Given sufficient U.S. effects or conduct, a U.S. court could hear a "foreign-cubed" suit, brought by foreign plaintiffs against a foreign defendant on the basis of foreign securities. But in the U.S. Supreme Court's Morrison ruling of June 2010, Conway persuaded Justice Antonin Scalia to scrap the conducts and effects tests. The new rule is that U.S. courts can't hear any claim based on a security sold on a foreign stock exchange, because a statute doesn't apply extraterritorially without saying so expressly, lest the United States become a plaintiffs' paradise. In the eighteen months since the Supreme Court finally answered Conway's question, Morrison's progeny have spread through the federal courts like rabbits in the outback.

Perhaps no precedent has ever cut down so many claims of such great value so rapidly. Wal-Mart v. Dukes or AT&T Mobility v. Concepcion may yet affect more class actions, depending on how broadly they are interpreted. But Morrison struck quicker because the ruling was jurisdictional, and it was construed sweepingly, perhaps because the anti-imperial rhetoric struck a chord. What's more, Morrison uniquely targeted high-stakes lawsuits--because large-cap companies dominate global business, and because the ruling followed history's largest drop in stock values as well as history's biggest Ponzi scheme.

A list of Morrison's victims, lovingly compiled by Conway, includes four credit crisis stock-drop claims with potential damages in the billions (against Swiss Re) or tens of billions (against UBS, RBS, and Credit Suisse). At least another half-dozen companies (Vivendi, Alstom, BP, Toyota, Porsche, and Goldman Sachs) won the dismissal, or substantial dismissal, of claims exceeding a billion dollars. In Vivendi‚Äôs case, the averted damages (over $7 billion) were already awarded by a jury. None of this is to mention a trio of Madoff feeder fund cases winnowed by Morrison. And extraterritoriality has yet to be briefed in the biggest feeder fund case of all, against Greenwich Sentry. Morrison would have barred 98 percent of history's largest recovery against a European company in a U.S. securities action--Royal Ahold's 2006 settlement for $1.1 billion. That record now looks pretty safe.

Invulnerable to its natural predators in the plaintiffs' bar, Morrison continues to spread both within the world of securities law and beyond. The revived presumption against extraterritoriality may be raised in virtually any statutory context. Alison Frankel of Reuters has identified Morrison ripple effects in the areas of RICO enforcement (both public and private), trade secrets, bankruptcy, antitrust, alien tort, and criminal defense. At the far edge of the frontier, a new ruling by the U.S. Department of Labor holds that the whistle-blower provisions of Sarbanex-Oxley have no extraterritorial reach.

Within securities law, Morrison has eliminated not only F-cubed claims but also "F-squared" claims (for instance against Credit Suisse and Swiss Re), where only two foreign elements were present. In principle, Morrison would seem to apply equally to an "f-to-the-first-power" situation, involving a U.S. buyer, a U.S. seller, and a foreign transaction. Indeed, this may have happened already, as many of the underlying swaps in the securities case that a group of hedge funds brought against Porsche involved two U.S. counterparties. It happens that the Porsche defendant (which was not a party to the transactions) was foreign, but the only fact that mattered to the judge is that the swaps were designed to track securities sold on a German exchange.

Will Morrison find a stopping point on appeal? Seven Morrison cases are now on appeal in the Second Circuit alone, according to a list maintained by Conway. The most interesting offer the opportunity to define extraterritoriality in arenas where the bright-line test of "where was the stock exchange" has no relevance.

The Second Circuit already affirmed that Morrison applies to RICO in Norex Petroleum v. Access Industries. The recently argued Cedeno v. Intech and the soon-to-be-argued EC v. RJ Reynolds may decide whether the test for extraterritoriality under RICO should be whether the racketeering enterprise was foreign, whether the racketeering pattern was foreign, or whether one or the other was foreign. Of course, how to determine whether an enterprise or a pattern is foreign is itself the subject of debate.

The impending Porsche appeal will help assign a nationality to derivative transactions that resist territorial classification. The court below accepted the defendant's argument that the swaps at issue were functionally equivalent to German securities because they referenced German securities. The plaintiffs argue that Morrison is focused simply on the place of transaction, which they regard as the U.S. In support of an affirmance, the business amici argue that a foreign company should not be vulnerable to a U.S. suit based on a side bet by third parties. The plaintiffs respond that Porsche is on the hook because it used the U.S. wires and mails or interstate commerce to advance its alleged fraud. In another exotic securities case, Basic Yield Alpha v. Goldman Sachs, the court adopted a test of wider potential application: that the parties must incur "irrevocable liability" to buy or sell the derivative in the U.S. But the fund suing Goldman chose to refile in state court rather than appeal to the Second Circuit. (The funds suing Porsche chose to do both).

As we have noted in connection with the Alien Tort Stature, when a plaintiff's path forward is blocked under federal law, the lawsuits will either flow down (to state law) or out (to non-U.S. courts)--unless they're blocked again. A broad swath of Morrison state claims may be preempted under the Securities Litigation Uniform Standards Act or the Class Action Fairness Act, based on a pair of California district court rulings in favor of Toyota, and a New York district court ruling in favor of the Kingate feeder fund. None of those three rulings are under appeal.

Even so, plaintiffs are pursuing in state court at least three major cases that were dismissed under Morrison: against Porsche, BP, and Goldman Sachs. Of the ten hedge funds that sued Porsche in federal court, five refiled in state court, claiming about half of the $2-plus billion originally sought, because only those five funds can allege a fraudulent miscommunication in New York, which may be essential to stating a claim under New York law. "In a case where Morrison would otherwise prohibit a securities action," said plaintiffs' lawyer J.B. Heaton of Bartlit Beck, "it's a special set of facts that give you a viable state common law fraud action." In addition to advancing choice of law arguments, defendants will routinely challenge state Morrison claims under the doctrine of forum non conveniens; and at least when the claims are grounded in a statute, defendants may push for new limits on the extraterritorial reach of state courts.

If state Morrison suits falter, that leaves Morrison suits abroad. Will another nation emerge as the Shangri-la of global class actions? The Global Lawyer will investigate in a future column.

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