Supreme Court Adopts Transaction Test for Section 10(b) Extraterritorial Reach
In Morrison v. National Australia Bank, the Court held that Section 10(b) and Rule 10b-5 apply only to securities listed on a U.S. exchange or transactions occurring in the United States, displacing the Second Circuit's effects and conduct.
In a unanimous judgment authored by Justice Scalia, the U.S. Supreme Court adopted a strict territorial reading of Section 10(b) of the Exchange Act, holding the anti-fraud provision reaches only (i) securities listed on a U.S. stock exchange or (ii) purchases or sales of securities effected in the United States. The decision overruled the Second Circuit's long-standing effects and conduct tests and recharacterized the extraterritoriality question as merits-based rather than jurisdictional. Justices Stevens and Breyer concurred, urging retention of the more flexible judicially developed approach. For BigLaw practitioners advising multinational issuers, underwriters and investors, the ruling narrows the universe of foreign-cubed securities fraud claims that can survive dismissal and reshapes pleading strategy in transnational deals, ADR programs, and cross-border investigations. Counsel should expect immediate motions to dismiss pending putative class actions involving non-U.S. listed securities, and re-examination of disclosure and forum-selection practices for offerings with global distribution.