The 10b-5 Daily

At one point, it looked like the UBS securities class action would be a test case on the application of the Morrison decision (in which the U.S. Supreme Court rejected the extraterritorial application of Section 10(b) in private litigation). As it turned out, a number of district court decisions on the issue have been issued while the UBS court considered its ruling. This week, however, the court finally weighed in with a sweeping victory for the defendants. See In re UBS Sec. Litig., 1:07-cv-11225-RJS (S.D.N.Y. Sept. 13, 2011).

The court dismissed two sets of claims that Morrison arguably precluded. First, the court held that claims asserted by foreign plaintiffs who purchased UBS stock on a foreign exchange (“foreign-cubed claims”) were barred even though UBS common stock is cross-listed on the New York Stock Exchange. The court found that Morrison “makes clear that its concern was with respect to the location of the securities transaction and not the location of an exchange where the security may be dually listed.” Second, the court held that claims asserted by U.S. investors who purchased UBS stock on a foreign exchange (“foreign-squared claims”) were barred even though the orders were placed from the United States. The court found that neither the location of the buy order nor the place of injury converted the purchase into a “domestic” securities transaction.
Holding: Foreign-cubed and foreign-squared claims dismissed.

As noted by The 10b-5 Daily in its writeup of the Janus decision, a key open question was whether the Supreme Court’s “ultimate authority” requirement for primary liability also applied to corporate insiders. Just a few months later, there is already a district court split on the issue.

In In re Merck & Co., Inc. Sec., Derivative & “ERISA” Litigation, 2011 WL 3444199 (D.N.J. Aug. 8, 2011) the company’s executive vice president for science and technology argued that he did not have “ultimate authority” over the statements attributed to him in Merck’s public filings. (It is the same Merck case that led to the Supreme Court’s recent decision concerning the statute of limitations for securities fraud claims.) The court found that the holding in Janus was limited to cases involving a “separate and independent entity” and could not “be read to restrict liability for Rule 10b-5 claims against corporate officers to instances in which a plaintiff can plead, and ultimately prove, that those officers – as opposed to the corporation itself – had ‘ultimate authority’ over the statement.” Accordingly, the court declined to dismiss the claims against the Merck officer on that basis.

The ink was barely dry on the Merck decision, however, before another district court disagreed with its analysis. In Hawaii Ironworkers Annuity Trust Fund v. Cole, No. 3:10CV371 (N.D. Ohio Sept. 1, 2011), the court found that “nothing in the Court’s decision in Janus limits the key holding – the definition of the phrase ‘to make . . . a statement’ under Rule 10b-5 – to legally separate entities.” Indeed, the dissent in Janus clearly believed that the majority’s holding also applied to corporate insiders. In the instant case, the plaintiffs’ own complaint made it clear that the defendants, who were officers in one of the company’s business units, did not have ultimate authority over the alleged false statements in the company’s filings. The court also noted that the alleged false statements, unlike in the Merck case, were not specifically attributed to the defendants (a fact that might otherwise be sufficient to establish “ultimate authority”). The court therefore dismissed the Rule 10b-5(b) claims against the defendants for making false statements, but declined to dismiss the related Rule 10b-5(a) and (c) claims based on deceptive conduct.

What will the next court to address the issue hold? Stay tuned.

In the wake of the Morrison decision, U.S. courts have proven reluctant to endorse any securities fraud claims by foreign purchasers. And no bonus points for cleverness. In In re Toyota Motor Corp. Securities Litig., 2011 WL 2675395 (C.D. Cal. July 7, 2011), plaintiffs argued that they should be able to bring (a) U.S. securities fraud claims on behalf of ADS purchasers and domestic purchasers of Toyota common stock, and (b) Japanese securities fraud claims on behalf of all purchasers (foreign and domestic) of Toyota common stock. The plaintiffs posited two possible bases for jurisdiction over the Japanese law claims: original jurisdiction under the Class Action Fairness Act (CAFA) and supplemental jurisdiction.

The court disagreed with both. As to CAFA, the court found that Toyota’s common shares are “listed” on the NYSE and, as a result, are “covered securities.” Claims related to “covered securities” are expressly excluded from CAFA. The court also declined to exercise supplemental jurisdiction over the Japanese securities fraud claims for two reasons. First, the Japanese law claims would “substantially predominate over the American law claims” due to the much larger proposed class. Second, the “exceptional circumstance of comity to the Japanese courts.” The National Law Journal and Thomson Reuters have articles on the decision.

Holding: Motion to dismiss granted as to Japanese law claims and certain other claims.

Quote of note: The “respect for foreign law would be completely subverted if foreign claims were allowed to be piggybacked into virtually every American securities fraud case, imposing American procedures, requirements, and interpretations likely never contemplated by the drafters of the foreign law. While there may be instances where it is appropriate to exercise supplemental jurisdiction over foreign securities fraud claims, any reasonable reading of Morrison suggests that those instances will be rare.”