Paradise Lost: §10(b) after Morrison v National Australia Bank

Abstract § 10(b) of the Securities Exchange Act of 1934-the key anti-fraud provision of the US securities laws-has been in force for three-quarters of a century. However, its application to transnational, or cross-border, transactions had been unsettled for decades often leading different courts to conflicting results. The Supreme Court attempted to remedy this problem earlier this year when it decided the landmark case of Morrison v National Australia Bank, Ltd. In that case, the Court addressed the extraterritorial reach of § 10(b) for the first time and issued a bright-line transactional test that limited the application of § 10(b) to purchases or sales made in the US or involving securities listed on a domestic exchange. This Article analyzes the Supreme Court's bright-line test and proposes a different standard for the extraterritorial application of § 10(b). Under the standard proposed by this Article, a transnational securities fraud violates § 10(b) when the fraud involves significant conduct in the United States that is material to the fraud's success and that fraud directly caused the plaintiff's injury. As explained below, this standard strikes the proper balance between advancing § 10(b)'s remedial objectives and conserving the scarce resources of US courts and law enforcement authorities for regulation of securities fraud that has a substantial connection to the US. I. INTRODUCTION The Deepwater Horizon oil spill in the Gulf of Mexico has shed light on a problem that has riddled US securities lawyers and the courts for decades. BP PLC is a foreign company. Its shareholders - the majority of whom reside abroad - purchased most of BP's shares on the London Stock Exchange. At the time of the disaster, BP shares were trading at nearly $60, but they have lost nearly half their value since the catastrophic spill. BP's shareholders are outraged and are seeking redress against the company and its executives for the losses they have sustained. Citing BP's history of safety lapses, cost-cutting measures, and workplace disasters, BP's foreign shareholders have filed a securities class action lawsuit in the US based on claims that the company misled investors prior to the spill.1 However, there is a fundamental question surrounding BP's shareholders' suit: do the US securities laws even permit securities fraud claims that are brought against foreign issuers on behalf of foreign investors that purchased securities on foreign exchanges? "Foreign-cubed" litigation, the name of these types of securities fraud claims, is the latest legal nemesis of lawyers for companies ranging from BP to Toyota (especially after Toyota's massive safety recalls)." The increasing globalization of capital markets has caused these so-called "foreign-cubed," or "f-cubed," actions to gain even greater prominence as there is now even greater potential for transnational, or cross-border, securities fraud. Thus, over the past decade, foreign investors - like BP's shareholders - have increasingly initiated securities fraud class actions against foreign companies in US courts.3 Although § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act" or the "1934 Act") - the key anti-fraud provision of the US securities laws - has been in force for three-quarters of a century, whether, or to what extent, it applies to transnational, or cross-border, transactions has perplexed the lower courts for many decades. Of particular note, there has been a three-way circuit court split over the proper application of § 10(b) to foreign-cubed lawsuits.5 Even more significantly, the Supreme Court had never considered the extraterritorial reach of § 10(b) until June 2010 when it decided the landmark case of Morrison ? National Australia Bank, Ltd.6 The increased volatility experienced by investors in both the domestic and international securities markets finally forced the Court to address the confounding question of which law to apply in the increasingly internationalized setting of securities fraud claims. …