City of Pontiac: Second Circuit Further Limits When US Securities Laws May Reach Non-US Securities and Issuers

In City of Pontiac Policemen’s and Firemen’s Retirement System v. UBS AG (“City of Pontiac”), the US Court of Appeals for the Second Circuit clarified an earlier ruling and further limited when US securities laws may reach non-US securities and issuers. Addressing two issues of first impression, the Court held that for purposes of a claim under Section 10(b) of the Securities Exchange Act of 1934, purchasing securities on a foreign exchange is not a “domestic” US securities transaction just because (i) the foreign security is cross-listed on a US exchange or (ii) the purchase order was placed with a US broker. This ruling provides welcome clarity for non-US companies issuing securities on non-US exchanges, but also highlights the significant questions to be considered in this rapidly evolving area of the law.

Morrison, Absolute Activist, and “Domestic” Transactions Under Section 10(b) -

In its groundbreaking decision Morrison v. National Australia Bank Ltd., the US Supreme Court held that Section 10(b) does not apply extraterritorially and established new standards for when securities fraud claims can reach abroad. Under Morrison’s “transactional test,” Section 10(b) applies only to “domestic” transactions, which are defined as either “transactions in securities listed on domestic exchanges” or “domestic transactions in other securities.”

In Absolute Activist Value Master Fund Ltd. v. Ficeto, the Second Circuit then considered what constitutes a “domestic transaction in other securities” under Morrison. Absolute Activist held that a “domestic” transaction subject to Section 1 (b) is one where (i) a party incurs “irrevocable liability” within the United States to purchase or deliver a security or (ii) title to a security is transferred within the United States. Since Morrison and Absolute Activist, securities plaintiffs have advanced various arguments in an effort to make their transactions sufficiently “domestic” to comply with Morrison—especially in cases involving non-US issuers and non-US securities. City of Pontiac considered and rejected two such arguments.

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