The Supreme Court, per Scalia, opined yesterday in Morrison v. National Australia Bank that foreign plaintiffs who transacted in foreign shares on a foreign exchange (hence, “f cubed”) could not bring a 10b-5 action. Margaret Sachs has a good analysis on the Glom. I want to emphasize one important and generally overlooked aspect of the case: its effect on jurisdictional competition.
As Professor Sachs observes, the Court threw out the Second Circuit’s longstanding conduct/effects analysis as unsupported by the statute and difficult to apply, and substituted an arguably clearer and more predictable transactional test.
Justice Scalia noted a basic problem with the prior test: “The probability of incompatibility with the applicable laws of other countries.” He noted:
Like the United States, foreign countries regulate their domestic securities exchanges and securities transactions occurring within their territorial jurisdiction. And the regulation of other countries often differs from ours as to what constitutes fraud, what disclosures must be made, what damages are recoverable, what discovery is available in litigation, what individual actions may be joined in a single suit, what attorney’s fees are recoverable, and many other matters. * * * [Foreign amici] all complain of the interference with foreign securities regulation that application of §10(b) abroad would produce, and urge the adoption of a clear test that will avoid that consequence. The transactional test we have adopted—whether the purchase or sale is made in the United States, or involves a security listed on a domestic exchange—meets that requirement.
Justice Stevens, concurred in the result because, he said, “this case has Australia written all over it.” However, he objected to the reasoning:
The Court . . . elects to upend a significant area of securities law based on a plausible, but hardly decisive, construction of the statutory text. In so doing, it pays short shrift to the United States’ interest in remedying frauds that transpire on American soil or harm American citizens, as well as to the accumulated wisdom and experience of the lower courts.
Professor Sachs worries that the opinion ignores
the loss of investor protection that will result from the switch to the transaction test. For example, it leaves unprotected US citizens who purchase or sell securities outside the United States. Likewise unprotected are foreign citizens trading abroad who are victims of domestic conduct perpetrated by Americans over whom the foreign forum lacks personal jurisdiction.
But she notes that Justice Scalia’s approach recognizing differences in countries’ securities regulation “may help to promote globalized securities markets.” I would add that the particular way that it promotes globalized securities markets is by adopting a test that enables investors to choose the applicable regulation by deciding where to trade.
The point that Justice Stevens and Judge Friendly, who developed the Second Circuit’s test, miss is that investors may not want the “protection” of U.S. law because it may actually be better for plaintiffs’ securities lawyers. The Second Circuit test makes U.S. law like the ex-lover in the old Dan Hicks song: How can I miss you if you won’t go away? (Sorry, I’ve always wanted to use that in a blog post.)