In Print: Volume 89: Number 2
Amputating the Long Arm of the Law: An Analysis of the U.S. Supreme Court’s Decision in Morrison and Why § 10(b) Still Reaches Issuers of ADRs
By Paul B. Maslo
89 Wash. U. L. Rev. 477 (2012)
The U.S. Supreme Court’s recent decision in Morrison v. National Australia Bank has substantially shortened the reach of the anti-fraud provisions of the securities laws. Before Morrison, the courts utilized the conduct and effects tests to determine whether § 10(b) of the Securities Exchange Act of 1934 applied. Under those tests, the statute reached fraudulent conduct that occurred in the U.S. and fraudulent conduct abroad that had a substantial effect in the U.S. In Morrison, however, the Supreme Court, in an opinion authored by Justice Antonin Scalia, held that regardless of where the fraudulent conduct occurs or whether the conduct has an effect in the U.S., the anti-fraud provisions of the Exchange Act apply only to transactions in securities that trade on a U.S. exchange or that are purchased in the U.S.
This Commentary reviews the conduct and effects tests and the Supreme Court’s decision in Morrison. It then addresses the new transactional rule’s impact on the application of the Exchange Act’s anti-fraud provisions in several situations where courts before Morrison routinely allowed § 10(b) claims to proceed: (1) foreign-cubed actions (i.e., claims involving a foreign citizen’s purchase of a foreign issuer’s ordinary shares on a foreign exchange) where the fraud impacts U.S. investors or is executed in the U.S.; (2) cases involving a U.S. citizen’s purchase of a foreign issuer’s ordinary shares outside the U.S.; and (3) actions concerning the purchase of a foreign issuer’s American Depository Receipts (“ADRs”). While courts are in agreement that the test articulated in Morrison prevents § 10(b) from reaching defendants in the first and second types of actions, they are in conflict as to whether ADR purchasers should be able to bring a claim. This Commentary argues that a recent district court decision wrongly decided the application of Morrison in the ADR context and that the new rule should not prevent most ADR purchasers from bringing a cause of action under § 10(b).