It’s a good read for securities litigation junkies, but we weren’t exactly bowled over by the congressionally-mandated report that the Securities & Exchange Commission released late Wednesday in response to the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank. Congress demanded the study under the Dodd-Frank Act, essentially asking the SEC whether Morrison went too far in reigning in the extraterritorial application of U.S. securities laws.
The SEC’s 106-page answer provides an excellent summary of Morrison’s continuing rampage through the courts, along with a careful review of approaches that Congress might take to temper the court’s precedent. But when it comes to recommendations, the agency offers only a fairly tepid reiteration of the same position it advocated two years ago as an amicus in Morrison: That the courts might impose a narrowed conduct test that would allow a private right of action only in cases involving U.S. conduct that directly contributes to investor losses; and an effects test that would extend the reach of securities fraud claims to oversees conduct that “has a foreseeable substantial effect” within the U.S.
That’s a significantly looser standard than the Supreme Court’s holding in Morrison that U.S. securities laws don’t extend to foreign transactions at all. And that’s good news for investors, according to Salvatore Graziano and Bruce Bernstein of Bernstein Litowitz Berger & Grossmann. “If Congress adopted the position that SEC endorsed [in Morrison], I think would be a good thing for investors and we would be delighted,” Graziano told us. Delighted may be an understatement: Among the firm’s other cases, Bernstein Litowitz headed up shareholder litigation against Toyota over sudden acceleration problems that ran smack into Morrison.
Still, the SEC’s report struck at least one commissioner as woefully inadequate. Commissioner Luis Aguilar blasted the study in a lengthy dissenting statement, asserting that it “falls far short of providing Congress with an informed recommendation and falls far short in fulfilling the Commission’s mission to protect investors.” The report, Aguilar complained, failed to emphasize Morrison’s chilling effect on investors and suggested that Congress could simply do nothing to repair the damage.
Instead, Aguilar argued, the Commission should have recommended giving private litigants the full rights that Dodd-Frank carved out for the SEC’s own lawyers. Under Dodd-Frank, the SEC and Justice Department can claim securities fraud for U.S. conduct “that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors,” and can sue over “conduct occurring outside the United States that has a foreseeable substantial effect within the United States.”
The courts have roundly rejected attempts to interpret Morrison along those lines, leaving few U.S. litigation options for shareholders in foreign corporations unless they purchased American Depository Receipts. And that’s how it should be, according to George Conway III of Wachtell, Lipton, Rosen & Katz, who successfully argued Morrison at the Supreme Court. In his own submission to the SEC, which Wednesday’s report cites extensively, Conway advocated allowing a private right of action against foreign companies only in cases involving alleged fraudulent inducement on U.S. soil. (Read the other comments the SEC received on Morrison here.)
“I do think the statute could be amended in ways that would promote the interests of investors without interfering in the sovereign authority of other nations,” Conway said. Otherwise, he added, “I’m okay with leaving things as they are.”
Note: This story has been updated to clarify a reference to the SEC’s position as an amicus in Morrison, and to clarify that Berstein Litowitz lawyer Graziano was referring to the Morrison litigation in a quote in the third paragraph.
