International Reach of US Securities Law

The US Supreme Court decision Morrison v. National Australia Bank is worth reading for the differing views of the role of the courts expressed by Justice Scalia in the majority opinion and Justice Stevens in his concurrence. Justice Scalia forcefully ruled that §10(b) of the Securities Exchange Act of 1934 (and associated Rule 10b-5) have no international reach and found a presumption against extraterritoriality. Justice Stevens called the presumption against extraterritoriality a nice catchphrase that overstates the point saying: "The presumption against extraterritoriality can be useful as a theory of congressional purpose, a tool for managing international conflict, a background norm, a tiebreaker. It does not relieve courts of their duty to give statutes the most faithful reading possible."

The case involved a private civil suit alleging securities fraud in a transaction that took place mostly in Australia with some minor US conduct. Eight Justices affirmed the Southern District of New York dismissal of the claim which the Second Circuit subsequently affirmed. But Justice Scalia’s opinion went on to criticize a general approach that has been the law in the Second Circuit, and most of the rest of the country, for nearly four decades. Justices Breyer, Stephens and Ginsberg joined in concurring opinions. Justice Sotomayor did not participate.

Justice Scalia's 24 page opinion on the extraterritorial reach of the §10b noted that it is a "longstanding principle of American law 'that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.'" It also said "When a statute gives no clear indication of an extraterritorial application, it has none." The ruling strongly criticized the New York-based Second Circuit for relying on a 1968 opinion Schoenbaum v. Firstbrook, 405 F. 2d 200 to use a conduct-and-effects test which asked “(1) whether the wrongful conduct occurred in the Unites States, and (2) whether the wrongful conduct had a substantial effect in the United States or upon United States citizens.” The conduct-and-effects test sought to ascertain what Congress would have done if it had addressed the eventual internationalization of the securities markets. Instead, Justice Scalia formulated a “transactional test” under §10(b), saying that it forbids not all deceptive conduct, but only deceptive conduct “in connection with the purchase or sale of any security registered on a national securities exchange or on any security not so registered.” Finding the statutory focus to be the “purchase and sale transactions,” he concluded that §10(b) applied to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.”

Today’s securities market is international in scope with few cases that are either wholly foreign or wholly domestic. The “transactional test” may leave unprotected US citizens who purchase or sell securities outside the United States as well as foreign citizens trading abroad who are victims of domestic conduct perpetrated by Americans over whom foreign courts may lack personal jurisdiction. Interestingly, the issue of the extraterritorial reach of US securities law is part of the Wall Street Reform and Consumer Protection Act of 2009, the financial reform bill pending in Congress. §7216 of H.R. 4173 provides courts with extraterritorial jurisdiction for "1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the violation is committed by a foreign adviser and involves only foreign investors; or 2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States."

For more on the Morrison case, see the post at the Securities Law Prof Blog