While the Morrison decision limits Section 10(b) liability to securities transactions that take place in the United States, the complexity of the global securities market can lead to transactions that are difficult to define geographically. As a result, lower courts have struggled to consistently apply Morrison to different fact patterns.
In Phelps v. Stomber, 2012 WL 3276969 (D.D.C. Aug. 13, 2012), the court addressed whether there could be Section 10(b) liability for “Class B Shares” and “Restricted Depositary Shares (RDS)” issued by a closed-end investment fund. The Class B Shares were sold only outside the U.S. to foreign investors. The RDSs were sold to investors in the U.S.
As to the Class B Shares, the court held it was of no significance that Euronext, the exchange upon which the shares were traded, is owned by a Delaware company. Euronext was still a “foreign exchange” for purposes of the Morrison analysis and there could be no Section 10(b) liability. In contrast, the RDSs were clearly bought and sold in the U.S., but the defendants argued that the purchase of a RDS also should be considered a foreign transaction because it represented the shareholder’s ownership of a Class B Share traded on Euronext. Among other precedent, the defendants cited the Societe Generale decision, which held that American Depository Receipts were the “functional equivalent” of trading a company’s shares on a foreign exchange. The court rejected this view, finding that while the contention that “an investor could not purchase an RDS in the United States without a corresponding overseas transaction may be true, it does not change the fact that a purchase in the United States still took place.” Accordingly, Morrison did not bar the RDS claims.
Holding: Motion to dismiss granted (on other grounds as to the RDS claims).
Quote of note: “[P]laintiffs’ efforts to label everything “Made in America” to get around Morrison requires the Court to ignore allegations in the complaint and information contained in the Offering documents referenced in the complaint.”