On May 6, 2014, the U.S. Court of Appeals for the Second Circuit issued its opinion in City of Pontiac Policemen’s and Firemen’s Retirement System v. UBS AG, No 12-4355, slip op. (2d Cir. May 6, 2014) (“City of Pontiac”), a case with implications for the extraterritorial reach of U.S. securities laws. Three foreign institutional investor plaintiffs and one domestic investor plaintiff had purchased foreign-issued shares on a foreign exchange and brought claims arising out of those transactions under U.S. securities laws. At issue in City of Pontiac was “whether the bar on extraterritorial application of the United States securities laws, as set forth in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), precludes claims arising out of foreign-issued securities purchased on foreign exchanges, but cross-listed on a domestic exchange (the so-called ‘listing theory’).” City of Pontiac, slip op. at 4. The Second Circuit determined that the Morrison bar precludes such claims. Id.
The foreign institutional investor plaintiffs argued unsuccessfully that the Morrison bar did not apply to their claims because the securities at issue were cross-listed on the New York Stock Exchange. In support of their position, plaintiffs relied on language in the Morrison opinion that section 10(b) of the Securities Exchange Act of 1934 provided a cause of action arising out of “transactions in securities listed on domestic exchanges.” City of Pontiac, slip op. at 11 (quoting Morrison, 561 U.S. at 267). The Second Circuit rejected this theory, slip op. at 12, holding it irreconcilable with Morrison’s reasoning that “the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States.” Morrison, 561 U.S. at 266.
The domestic investor plaintiff unsuccessfully argued that the transaction at issue was, in fact, a purchase of a security within the United States (and not extraterritorial in nature) because it had placed a “buy order” for the shares in the United States (even though the shares were foreign-issued and purchased on a foreign exchange). Thus, the domestic investor plaintiff argued that the Morrison bar did not apply. The Second Circuit rejected this argument and concluded that the “mere placement of a buy order in the United States for the purchase of foreign securities on a foreign exchange” was not sufficient to make the plaintiff’s transaction a domestic securities transaction within the United States. City of Pontiac, slip op. at 15. The Second Circuit further reasoned that an investor’s residency in the United States does not affect where a transaction occurs. Id.
This outcome is a victory for non-U.S. issuers concerned about the extraterritorial limits of U.S. securities laws. Foreign issuers will be able to dually list their securities on a U.S. exchange without fear of exposing themselves to liability under U.S. securities laws, and will not be subject to liability for buy orders placed in the U.S. for non-U.S. securities transactions.