Alison Frankel

On Friday, U.S. District Judge Deborah Batts dismissed a securities class action against Deutsche Bank and its underwriters on a $5.6 billion offering of preferred securities. The judge ruled on a defense motion for reconsideration that under the 2nd Circuit Court of Appeals’ 2011 ruling in Fait v. Regions Financial, the defendants’ valuation of Deutsche Bank’s exposure to subprime mortgages was an opinion, and the plaintiffs couldn’t show that the defendants didn’t believe that opinion when offering materials were published. Batts’s ruling was a big win for Deutsche Bank’s lawyers at Cahill Gordon & Reindel and the underwriting syndicate’s counsel at Skadden, Arps, Slate, Meagher & Flom.

It’s also the latest indication that as Fait approaches its one-year anniversary on Aug. 23, it’s shaping up to be one of the most powerful tool for securities defendants since Morrison v. National Australia Bank. In Fait, 2nd Circuit judges Rosemary Pooler, Barrington Parker and Raymond Lohier held that statements in offering materials about an issuer’s goodwill and loan loss reserves are not matters of objective fact, but opinions. And as opinions, they can’t be the basis of liability under the Securities Act unless investors can show that defendants didn’t actually believe what they were saying when they said it. “When a plaintiff asserts a claim under Section 11 or 12 [of the Securities Act] based upon a belief or opinion alleged to have been communicated by a defendant,” Parker wrote for the panel, “liability lies only to the extent that the statement was both objectively false and disbelieved by the defendant at the time it was expressed.”

That language raised the bar for investors, and some cases haven’t been able to clear it. You want examples? In July, U.S. District judges Denise Cote and William Pauley both cited Fait in opinions dismissing investor claims, Pauley in a partial dismissal of a case claiming Bank of America misrepresented its liability for breaches of representations on mortgage-backed securities and Cote in refusing to permit investors to file a new complaint against General Electric in connection with $12 billion in stock offerings. In February, U.S. Magistrate Judge Henry Pitman of Manhattan cited Fait in recommending the dismissal of another class action against BofA, this one involving alleged misrepresentations in three 2008 stock offerings. According to a Westlaw search, Fait has been cited in more than 50 trial and appellate court briefs in securities cases since last August, so we should be seeing more decisions based on Fait in coming months.

The ruling isn’t a free pass for defendants facing claims under the Securities Act of 1933. In the Federal Housing Finance Agency’s case against UBS, for instance, Cote refused in May to dismiss allegations that the bank misled mortgage-backed securities investors about the quality of underlying loans, rejecting Fait arguments by UBS’s lawyers at Skadden. “There is dictum in Fait that superficially supports defendants’ claims,” she wrote, noting “confusion” about the 2nd Circuit’s holding. ” upon closer examination of that decision and its reasoning,” Cote continued, “the court is convinced that [the FHFA] has the better of the argument.” Similarly, in June U.S. District Judge Shira Scheindlin denied the credit rating agencies’ Fait-based motion to reconsider her refusal to dismiss a special purpose vehicle investor’s negligent misrepresentation claims.

But the 2nd Circuit believes so strongly in the decision that in May, in a per curiam ruling, the appellate court extended its reasoning in Fait from claims under the Securities Act to fraud claims under the Exchange Act of 1934. “Even if the [plaintiffs'] second amended complaint did plausibly plead that defendants were aware of facts that should have led them to [revise accounting], such pleading alone would not suffice to state a securities fraud claim after Fait,” the 2nd Circuit said in City of Omaha v. CBS. “Plaintiffs’ second amended complaint is devoid even of conclusory allegations that defendants did not believe in their statements of opinion regarding CBS’s goodwill at the time they made them.”

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.

It’s been relatively easy for district courts to figure out how to apply the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank in securities cases – unless the defendant is a U.S.-listed company, shareholders are pretty much out of luck in U.S. courts. Post-Morrison racketeering litigation has no such conveniently bright lines. The Racketeer Influenced and Corrupt Organizations Act doesn’t explicitly mention that it applies to overseas conduct, so under Morrison judges must presume it does not. But they’ve struggled to define exactly what constitutes overseas racketeering as opposed to domestic racketeering with an international component.

After all, as U.S. District Judge Lewis Kaplan of federal court in Manhattan noted in a ruling last week, RICO was originally intended to combat international organized crime rings. Kaplan is presiding over Chevron’s RICO case against the U.S. lawyers and experts who helped Ecuadoreans obtain an $18 billion judgment against the oil company. His ruling cites the Southern District’s famous Pizza Connection prosecution, which involved Mafia drug trafficking between Sicily and New York, as a RICO paradigm. “To say that Congress did not intend RICO to apply unless the enterprise in question was purely domestic would be unsupportable,” Kaplan wrote.

But on the other hand, he said, courts have concluded since Morrison that RICO cases involving mainly foreign plaintiffs, foreign defendants and foreign conduct are not viable in U.S. courts. The 2nd Circuit Court of Appeals ruled first, in a case called Norex Petroleum v. Access Industries. U.S. Senior District Judge Jed Rakoff subsequently reached the same result in Cedeno v. Intech (affirmed by the 2nd Circuit in a summary order). Kaplan also cited several other rulings in which courts have focused on “the domestic or foreign character of the alleged RICO enterprise” – mostly, whether defendants are “foreign” – to decide whether cases are barred by Morrison.

A month ago, when I wrote about the dismissal of a securities class action against UBS, George Conway III of Wachtell, Lipton, Rosen & Katz told me that the UBS case had been the last, best chance for plaintiffs lawyers to find a way around the U.S. Supreme Court’s June 2010 ruling in Morrison v. National Australia Bank. Morrison, as you know, barred U.S. courts from hearing securities fraud cases against companies whose shares aren’t listed on U.S. exchanges. In the 16 months since the Supreme Court issued its Morrison ruling, federal courts have made it indelibly clear that securities suits against foreign companies — whether they involve the 1933 Act, the Exchange Act, common stock, CDOs, or swaps — are a non-starter under Morrison’s strictures. (Here’s Sullivan & Cromwell’s Sept. 29 overview of Morrison’s impact on securities litigation.) “Now it’s all over,” Conway told me. “They don’t even bother to bring these cases anymore.”

But it turns out that securities litigation was only the beginning of the story of the Morrison v. NAB ruling. Morrison citations are now turning up in the darnedest places: not just racketeering cases, where Morrison has been invoked since it first came down, but in trade secrets litigation, bankruptcy clawback cases, antitrust and alien tort suits, even criminal defense. If you represent a foreign defendant — or even a U.S. defendant accused of overseas wrongdoing — and you’re not at least considering Morrison’s implications, you’re not thinking hard enough.

The ruling’s key sentence is this one: “When a statute gives no clear indication of an extraterritorial application, it has none.” In other words, unless Congress specifies in any law that the statute applies to conduct that took place overseas or to non-U.S. defendants, then the law simply doesn’t cover that conduct or those defendants. Foreign racketeering defendants were the first to capitalize on the broad language of Morrison, arguing that the federal Racketeering Influenced and Corrupt Organizations Act doesn’t apply outside of the U.S. In the biggest Morrison ruling in a RICO case, Washington, D.C., federal court judge Gladys Kessler found in March that under Morrison, the U.S. government has no racketeering case against British American Tobacco even though she’d already entered a final judgment against BAT.