Extra-Territoriality of U.S. Securities Laws

Given the robust nature of the class action mechanism in the U.S., it is hardly surprising that plaintiffs rush to initiate legal actions before the U.S. courts even in relation to foreign companies that have issued securities listed on non-U.S. stock exchanges. U.S. courts have been left to combat with what are known as “foreign-cubed” or “f-cubed” class action law suits, defined broadly as law suits that “involve fraud claims brought by foreign investors against foreign issuers, based on harm arising out of investment transactions on foreign securities exchanges”. Historically, U.S. courts have been sympathetic to such claims. However, in a far-reaching judgment in Morrisson v. National Australia Bank Ltd., the U.S. Supreme Court yesterday put an end to this practice by defining the territorial application of U.S. securities laws narrowly.

The Court held that Section 10(b) of the U.S. Securities Exchange Act of 1934 “does not provide a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges”. Following this, the Court held that if Section 10(b) is not extra-territorial, then the concomitant anti-fraud provision in Rule 10b-5 would also not be extra-territorial. Hence, the focus is “not on the place where the deception originated but on purchases and sales of securities in the United States”.

As far as Indian companies are concerned, it circumscribes the situations in which Indian listed companies may be sued in the U.S. for securities laws violations. However, it does not affect Indian companies who have ADRs listed on the U.S. stock exchanges, as they continue to be subject to U.S. securities laws and to actions by ADR holders who have acquired them on U.S. stock exchange. To that extent, the decision does not have any impact on the lawsuits relating to Satyam that are pending before the U.S. courts.

Enron/Skilling Case: In another decision rendered yesterday in Skilling v. United States, the U.S. Supreme Court decided against Jeff Skilling (the former CEO on Enron) on his objection to the venue of trial in Houston on grounds of pretrial publicity, but ruled in his favour on the argument that he did not violate a statute on “theft of honest services”, which it interpreted narrowly to mainly include bribery and kickback schemes. The court found that the “Government charged Skilling with conspiring to defraud Enron’s shareholders by misrepresenting the company’s fiscal health to his own profit, but the Government never alleged that he solicited or accepted side payments from a third party in exchange for making these representations.”

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • Does this mean an Indian company listing shares in India under Regulation S of the US Securities Act does not need a 10(b)5 opinion any longer?

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