Usually when I write about the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank, it’s to tell you about yet another successful defense effort to dismiss claims involving the overseas application of U.S. laws, whether in trade secrets litigation, bankruptcy clawback actions or lots of other arenas that have nothing to do with Morrison‘s securities-law roots. In April, the Securities and Exchange Commission needed a full 106 pages to analyze Morrison‘s background and impact (before declining to answer the question of whether Congress should reform securities laws to restore a cause of action for U.S. investors against foreign-listed defendants). Across a wide plain of civil litigation, foreign defendants have wielded Morrison as a case-crushing bludgeon, with federal judges bowing to its power.
But in some recent rulings the judiciary is beginning to define limits to Morrison‘s sweep, suggesting that the ruling demands a more nuanced, fact-based inquiry than earlier decisions suggested. I’ve previously talked about U.S. District Judge Lewis Kaplan‘s survey last month of Morrison‘s impact on racketeering cases and his conclusion that as long as there’s “a domestic pattern of racketeering activity aimed at or causing injury to a domestic plaintiff,” RICO claims can survive against foreign defendants. Last week Kaplan once again homed in on Morrison and domestic conduct, this time in the securities context. The judge refused to dismiss any of the SEC’s claims against the New York investment adviser ICP, which allegedly defrauded investors in the Triaxx mortgage-backed collateralized debt obligations.
ICP and the individual defendants, represented by Williams & Connolly and Miller & Wrubel, had argued that the SEC cannot show the Triaxx CDOs were traded domestically. Morrison holds that there’s only a cause of action in the United States for “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” The Triaxx CDOs were not listed, and ICP’s lawyers said the investment vehicles in the case were all foreign, so, according to ICP, Morrison bars the SEC’s claims.
Kaplan, however, pointed to a March 2012 opinion from the 2nd Circuit. In Absolute Activist v. Ficeto, Judge Robert Katzmann (writing for a panel that also included judges Ralph Winter and Jon Newman) stretched the operative post-Morrison definition of a domestic transaction. “In order to adequately allege the existence of a domestic transaction, it is sufficient for a plaintiff to allege facts leading to the plausible inference that the parties incurred irrevocable liability within the United States,” the opinion said. “That is, that the purchaser incurred irrevocable liability within the United States to take and pay for a security, or that the seller incurred irrevocable liability within the United States to deliver a security.” If a plaintiff can show that one party to a transaction was in the United States at the moment the deal was struck, in other words, claims have a shot at surviving a Morrison-based motion to dismiss.
The SEC also cited Absolute Activist earlier this month, when it asked U.S. District Judge Barbara Jones to reinstate claims against Goldman Sachs CDO scapegoat Fabrice Tourre. Jones gutted the SEC’s case against the former Goldman VP last June, finding that the agency cannot pursue claims based on Tourre’s alleged lies to IKB and ABN Amro because they’re foreign companies that dealt with overseas-based Goldman entities. The SEC is now arguing that under the 2nd Circuit’s Absolute Activist test, the IKB claims should be reinstated because title to the notes Goldman sold to IKB was transferred at a closing in New York. That’s a domestic transaction, the SEC argued. (In Tourre’s response, Pamela Chepiga of Allen & Overy said Absolute Activist didn’t change the controlling law of the Supreme Court, which is Morrison.)