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  • Writer's pictureKirk Hartley

F Cubed Suits – “The Myth of Morrison: Securities Fraud Litigation Against Foreign Issue

A detailed data driven study of securities lawsuits before and after Morrison is the subject of a new paper by Professor Davidoff Solomon and colleagues. A summary is online in a November 21, 2018 article at; the full paper is available for download at SSRN. Part of the summary is pasted below.

“In The Myth of Morrison: Securities Fraud Litigation Against Foreign Issuers, we examine the effect of the Supreme Court’s decision in Morrison v. National Australia Bank. Morrison has been described as a “steamroller,” substantially paring back the ability of private litigants to sue foreign companies for securities fraud. In Morrison, the Supreme Court held that Section 10(b), the general antifraud provision of the Securities Act of 1934, does not apply extraterritorially in a private cause of action brought under Rule 10b-5. Rather, the Court stated that “Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” Morrison is widely understood as reducing the litigation risk for foreign issuers, and the decision has been characterized as potentially “encourage[ing] non-U.S. issuers to continue to list their shares on U.S. exchanges and strengthen U.S. capital markets.”

We analyze pre- and post-Morrison litigation empirically and find that the dramatic claims about Morrison’s impact are largely a myth. Morrison did not substantially change the exposure of foreign issuers to federal securities fraud litigation or the types of issuers who face U.S. litigation. Even where the decision had its greatest impact—the composition of the plaintiff class—we find that U.S. exchange trading in defendant firms before Morrison was sufficiently robust that pre-Morrison cases could have pled an investor class that would have satisfied its transactional test. While Morrison may have put an end to the “global class action,” prior to Morrison, such cases were a rarity.

We conduct our analysis by examining a sample of 388 lawsuits alleging a violation of Rule 10b-5 that were filed between 2002 and 2017 against foreign issuers—issuers headquartered outside the United States. The first question we analyze is the impact of Morrison on overall litigation risk against what we call Foreign Listed Firms—foreign firms whose securities traded on at least one non-U.S. exchange. We focus on Foreign Listed Firms because the jurisdictional rule adopted by the MorrisonCourt is most likely to affect litigation against these firms as opposed to foreign-headquartered firms that are listed exclusively in the United States. One of the driving forces behind Morrison was the idea that foreign firms with limited connections to the U.S. were being targeted with burdensome U.S. litigation. For Morrison to address this concern, it should have reduced Foreign Listed Firms’ litigation exposure.

We confirm that class action suits against foreign issuers after Morrison were almost entirely confined to those issuers having a U.S. exchange listing at some point during the class period. Moreover, conditional on a firm having a U.S. exchange listing, Rule 10b-5 cases brought after Morrison consistently defined a class period that fully coincided with the period when the issuer maintained its U.S. listing. However, surprisingly, this focus of filed cases on firms with a U.S. listing did not represent a significant shift from the pre-Morrison era. Ninety percent of pre-Morrison cases were filed against foreign firm with a U.S. exchange listing, and nearly all of them alleged a class period that fully coincided with the period when the issuer maintained its U.S. listing. This result highlights the fact that F-cubed suits (suits brought by foreign investors, against foreign firms who bought on a foreign exchange) were not common prior to Morrison.”

The Myth of Morrison: Securities Fraud Litigation Against Foreign Issuers UC Berkeley Public Law Research Paper, U of Penn, Inst for Law & Econ Research Paper No. 18-34, 44 Pages Posted: 13 Nov 2018 Last revised: 16 Nov 2018

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