The New York Law Journal has a column (Aug. 17 edition – subscrip. req’d) on the application of the Morrison decision. In Morrison, the Supreme Court held that Section 10(b) liability for securities fraud is limited to “transactions in securities listed on our domestic exchanges, and domestic transactions in other securities.” What constitutes a “domestic transaction,” however, was not clarified.
As a result, the authors note, lower courts have adopted at least three different approaches for determining whether a non-exchange transaction is “domestic.” Some courts have looked at whether the “critical steps of the transaction,” including the offer and acceptance, occurred in the United States. Other courts limit potential liability to transactions in which the parties agreed to be bound to each other in the United States. The strictest approach is to insist that the actual transfer of the securities must have taken place in the United States. The authors argue that all of these approaches are broader than what the Supreme Court intended.
Quote of note: “When any of these approaches is applied to Morrison, it becomes clear that the lower courts’ applications of Morrison are inconsistent with the Supreme Court’s ruling and do not end extraterritorial application of the 34 Act. If [the Morrison corporate defendant] had hypothetically transferred its stocks to the investors in New York, for example, the 34 Act arguably would have applied under all three approaches. Ironically, under the prior conduct and effects tests, the same hypothetical would likely not have triggered the application of the 34 Act.”