HOW AMERICAN ARE AMERICAN DEPOSITARY RECEIPTS? ADRs, RULE 10b-5 SUITS, AND MORRISON V. NATIONAL AUSTRALIA BANK

IntroductionInvestors who believe that they have been the victims of securities fraud can sue the issuer of the security under Securities and Exchange Commission Rule lOb-5.1 For decades, when the alleged fraud involved foreign elements, the federal courts of appeals used two tests, the "conduct test" and the "effects test," to determine whether a fraud was "American enough" to be subject to suit under Rule 10b-5.2 The U.S. Supreme Court, in its 2010 decision in Morrison v. National Australia Bank Ltd,., harshly criticized the vagueness of the conduct and effects tests and held that section 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act"), from which Rule 10b-5 derives, had no extraterritorial application.3 Therefore, Rule 10b-5 applies only to domestic transactions, which the Court identified as those that are "in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States."4 The terms of this bright-line "transactional test," however, were not further defined, and applying the transactional test to complex, modern financial products may prove nearly as difficult as applying the previous tests that the Court rejected.5In particular, the status of American Depositary Receipts ("ADRs") in this new framework is uncertain.6 There are several types of ADRs, but all are hybrids of American and foreign securities.7 ADRs are vehicles for Americans to invest in foreign corporations through an intermediary bank, which holds the actual foreign security, and through which the investor receives an ADR representing his ownership interest.8 This Note examines how the new test from Morrison affects ADRs.9 It concludes that under Morrison, the fate of two classes of ADRs can be predicted with a fair degree of confidence.10 Those sponsored ADR programs that are listed on American exchanges should be subject to Rule 1 Ob-5, and unsponsored ADR programs-those whose issuances do not involve the foreign corporations-should not create potential Rule 10b-5 liability for companies abroad.11 ADR programs that do not trade on American exchanges, on the other hand, are in a much more ambiguous situation.12 Nevertheless, they too should be covered under section 10(b) of the 1934 Act because their issuer's purposeful and relatively extensive entry into the U.S. securities market ultimately makes them domestic transactions.13Part I of this Note establishes the relevant statutory background, including section 10(b) of the 1934 Act and Rule 10b-5.14 It then summarizes Morrison and explains the new transactional test it established,15 Part II examines the federal district court cases interpreting Morrison and identifies themes emerging from those decisions.16 Part III introduces and discusses the different types of ADRs.17 Next, it considers how district courts have previously ruled on section 10(b) liability for ADRs, proposes several guiding factors for analysis, and suggests how courts should rule in the future.18I. The Securities Regulation Framework and the Supreme CourtThe 1934 Act and the U.S. Supreme Court's 2010 decision in Morrison guide the inquiry concerning where ADRs fit within the regulatory framework governing securities fraud suits.19 Section A discusses the two key statutes, the Securities Act of 1933 ("the 1993 Act") and the 1934 Act, and particularly notes the purposes of the 1934 Act, which are integral to the Note's analysis of where ADRs fit into the new regulatory framework.20 It also explains the 1934 Act's relationship to Rule 10b-5.21 This Part then describes the regulatory framework surrounding Rule 10b-5.22 Section B then goes on to describe Morrison, placing particular emphasis on the Court's rationale and its view of the problems with the extraterritorial application of section 10(b) of the 1934 Act.23A. The 1933 Act, 1934 Act, and Rule 1 Ob-5In the wake of the stock market crash of 1929 and in the midst of the Great Depression, Congress passed the 1933 Act. …