Financial Regulatory Forum

By Alison Frankel

The views expressed are her own.

It’s too bad for Fabrice Tourre, the former Goldman Sachs securities trader, that the portfolio manager on Goldman’s notorious ABACUS investment vehicle, isn’t a foreign company. If it were, Tourre might have entirely escaped Securities and Exchange Commission charges that he engaged in securities fraud in structuring and marketing the ABACUS synthetic collateralized debt obligation.

Under a June 10 ruling by Manhattan federal district court judge Barbara Jones, Tourre is off the hook for allegedly defrauding ABACUS investors IKB and ABN Amro because they’re foreign companies that dealt with overseas-based Goldman entities. So at least for those companies, Tourre’s actions fall outside the purview of U.S. courts under the U.S. Supreme Court’s 2010 Morrison v. National Australia Bank opinion. Here’s Judge Jones’s 41-page opinion—the first in which a federal district court judge has applied Morrison in an SEC enforcement case–and here’s the Reuters story on the ruling.

Tourre still has lots to worry about. In an odd, split-the-baby conclusion, Judge Jones drew a distinction between Goldman’s “offers” and “sales” of ABACUS securities, and ruled that, despite Morrison, the SEC can proceed with certain claims involving IKB and ABN Amro under the Exchange Act. Tourre’s lawyers at Allen & Overy will undoubtedly challenge Judge Jones’s novel interpretation on that point. More predictably, Judge Jones ruled that Morrison doesn’t apply to the SEC’s allegations that Tourre deceived the U.S.-based ACA Management, which served as the ABACUS portfolio selection agent, and ACA Capital, an investor, for failing to disclose that the hedge fund Paulson & Co., had been involved in picking the securities underlying ABACUS and was betting on the CDO to tank. Tourre’s lawyers have said they’re confident they’ll be able to defend those allegations.

The big question for other SEC defendants, though, is whether Tourre’s successful invocation of Morrison to knock out at least some of the SEC’s charges is a one-off event. That’s shaping up as a fascinating battle that’s going to pit Congressional intent against some supposedly bungled legislative drafting.

In July 2010, as Tourre’s lawyers were working on a motion to dismiss the SEC’s April complaint against their client based on the Supreme Court’s June 2010 Morrison ruling, Congress passed the Dodd-Frank Act, which contains provisions explicitly intended to undo Morrison’s restrictions on enforcement actions involving foreign securities transactions—exactly Tourre’s defense. Dodd-Frank adds a phrase to the 1933 and 1934 securities laws stating that “the district courts of the United States…shall have jurisdiction of an action or proceeding brought by or instituted by the [SEC] or the United States alleging a violation of the antifraud provisions.”

At the time, a sheaf of law firm client alerts (see here, here, here, and here, for example) reported that Dodd-Frank, in a response to Morrison, had restored power to the SEC and DOJ to bring actions involving overseas securities. That was clearly Congress’s intent, based on the June 30, 2010 Congressional Record. Under that reading of Dodd-Frank, Tourre fell into a narrow crack when he challenged the SEC charges under Morrison because Dodd-Frank hadn’t been passed when his case began, so he could assert it as a defense. Securities defendants in the post Dodd-Frank era could forget about any Morrison defense.

Or can they? A subsequent crop of Dodd-Frank interpreters have taken a close look at the language of the Morrison-rollback provision and concluded that Congress didn’t accomplish what it intended. George Conway III of Wachtell, Lipton, Rosen & Katz—who won the Morrison case at the Supreme Court—got the Dodd-Frank revisionism started with an August 2010 post at the Harvard Corporate Governance blog. “The provision unambiguously addresses only the ‘jurisdiction’ of the ‘district courts of the United States’ to hear cases involving extraterritorial elements; its language clearly does not expand the geographic scope of any substantive regulatory provision,” Conway wrote. “That is a crucial, and likely fatal, omission. In [Morrison], the Supreme Court reiterated the longstanding principle that the territorial scope of a federal law does not present a question of ‘jurisdiction,’ of a ‘tribunal’s power to hear a case,’ but rather a question of substance—of ‘what conduct’ does the law ‘prohibit’? The new law does not address that issue, and accordingly does not expand the territorial scope of the government’s enforcement powers at all.”

Law professors, including Richard Painter of the University of Minnesota, Genevieve Beyea of Texas Tech, and Adam Pritchard of the University of Michigan, reached similar conclusions. “The language that Congress used—at the behest of the SEC—quite clearly creates jurisdiction,” Pritchard said. “Unfortunately, this was never a question about jurisdiction.” According to Pritchard, the Supreme Court’s Morrison ruling never curtailed the jurisdiction of U.S. courts to hear securities fraud cases involving foreign transactions, but curbed their power to apply U.S. securities fraud laws to such transactions. Congress’s language in the Dodd-Frank Act, he told OTC, doesn’t extend the fraud laws. “There’s a gap between Congress’s intent and the language in the law,” Pritchard said. “It’s a really poor job of drafting.”

Will future courts look to Congressional intent or the language of the law to decide whether the SEC or DOJ can bring fraud cases involving foreign securities? Justice Antonin Scalia, in the Morrison ruling, made clear that, as far as he’s concerned, statutory language trumps intent. But we’ll have to see if lower courts follow his lead.

Alison Frankel’s column “On the Case” appears daily in Thomson Reuters News & Insight.

Photo: Fabrice Tourre, Executive Director, Structured Products Group Trading for Goldman Sachs, is sworn in before the Senate Homeland Security and Governmental Affairs Investigations Subcommittee hearing on “Wall Street and the Financial Crisis: The Role of Investment Banks” on Capitol Hill in Washington, April 27, 2010. REUTERS/Jim Young