Concern that Dodd-Frank Act may give rise to a private right of action in the US for transnational securities fraud
In June 2010 the US Supreme Court (the Supreme Court) decided that section 10(b) of the US Securities Exchange Act 1934 (the Act), and Rule 10b-5 made under the Act, did not give rise to a private right of action in the US for a foreign purchaser of a security issued by a foreign issuer that is traded on the a foreign exchange (a “foreign-cubed” case). That decision of the Court was welcomed by non-US, publicly-traded companies as it means that they are less exposed to securities litigation in the US. The Court’s judgment was given in the case of Morrison v National Australia Bank Ltd (Morrison).
However, the rules to be made under the US Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 are now being considered, and there is a possibility that the interpretation of section 10(b) of the Act may be extended to include a private right of action for transnational securities fraud. That extension may have the effect of reversing the Supreme Court’s judgment in Morrison.
City of London Law Society and Law Society submission to the SEC
The US Securities and Exchange Commission (the SEC) has invited comments on this possible extension of section 10b. The City of London Law Society and the Law Society (the Societies) have submitted this paper to the SEC, arguing strongly for the position decided by the Supreme Court in Morrison. The Societies state in their paper that they support the postions advanced in the amicus curiae brief submitted in the Morrison case on behalf of the UK Government. That amicus curiae brief (which is attached to the Societies’ paper) suggested that the SEC should adopt the following rule:
“Foreign purchasers of securities on a foreign exchange who are injured by misleading statements or omissions made outside of the United States by a foreign issuer have no private right of action under section 10(b) or Rule 10b-5.”
The amicus curiae brief also suggested a further clarification as to fraudulent conduct that occurs in the US; that such conduct would only create liability under section 10(b) or Rule 10b-5 in a foreign-cubed case if it constituted a deceptive act in connection with the sale of securities – a narrow test.
Public policy
The Societies’ submission to the SEC argues strongly in favour of the adoption of these two rules, on the grounds that:
- The UK has adequate remedies of its own for investors who suffer securities fraud.
- In all US legislation, there is a presumption against its extraterritorial application unless there exists an explicit intent by Congress to the contrary.
- There is no valid policy justification to support the extraterritorial extension of section 10(b) in lieu of the national laws of other jurisdictions.
- There are more appropriate mechanisms to deter securities fraud than private litigation, including joint action by states and cooperation by regulatory authorities.
- The reasonable expectations of investors and public companies should be protected and respected.
On this last point, the Societies’s submission argues that: “UK investors who acquire shares in a UK company on a UK securities exchange do not reasonably expect to obtain the benefits of the antifraud provisions of US securities laws, and legislation that would provide for US jurisdiction because certain actions may have occurred in the US or certain effects result in the US would not be consistent with those expectations. Were Congress to authorize the extraterritorial application of the US securities laws in private actions, we fear that the result would be to impose considerable burdens on non-US companies, at substantial cost to their shareholders…”.
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