Some of the consequences of the Supreme Court's reasoning in Morrison can be seen from a recent decision in the 11th Circuit.
In Quail Cruises Ship v. Agencia de Viagens CVC Tur Limitada, No. 10-14253, 11th Cir., July 8, 2011, the court addressed a securities fraud action brought by a foreign investor (Quail Cruises is a Bahamian corporation) against a foreign issuer (Templeton International, Inc. is also a Bahamian corporation). Moreover, according to a brief for one of the defendants, most of the investment activity (and presumably the fraud) occurred outside the US.
- The district court correctly determined that the Amended Complaint failed to state a claim under §10(b) of the 1934 Act because Quail alleged fraud in connection with a “transaction” that did not take place in the U.S. As pleaded in the Amended Complaint, the transaction that triggered Quail’s fraud claims consisted of: I) a proposal for the sale of stock made in late May, 2008 in Brazil; ii) an agreement for the purchase and sale of that stock in late May or early June, 2008, that was entered into outside of the U.S. by two entities, neither of which was organized or based in the U.S.; iii) a “formal stock purchase agreement” that was entered into outside the U.S. in June, 2008, between two entities, neither of which is even a party to this action; and iv) a so-called “closing” in Florida that, as described in the Amended Complaint, consisted of nothing more than the transmission of previously executed and effective transaction documents to the Florida offices of Quail’s counsel.
In other words, the case involved a foreign security, a foreign plaintiff, and fraud that presumably took place outside the US.
The district court dismissed the case relying on Morrison. See 732 F.Supp. 1345 (SD Fla. 2010). The court was concerned that jurisdiction in the US had been deliberately triggered by ensuring that the transaction took place in the US. As the court noted:
- The Defendants also contend that Morrison's central holding would be undermined if parties could elect United States securities law merely by designating the law offices of one of the parties' counsel, located in the United States, as the place of closing the transaction when the transaction otherwise has no relationship with the United States. The Court agrees with the Defendants' analysis. Just as Title VII concerns domestic employment, the Securities and Exchange Act concerns domestic securities transactions. The principle takeaway from Morrison is that Congressional intent, not the intent of the parties, is dispositive of the application of federal securities law to foreign securities transactions. Adopting a rule that permits the intent of parties located abroad and contracting from their home countries in a wholly off-shore transaction to apply United States securities law is inconsistent with Morrison.
The implication of the lower court's opinion was, apparently, that those allegedly defrauded could not arrange to arbitrarily seek application of the antifraud provisions while those committing the fraud could arbitrarily seek to avoid application of the antifraud provisions. See SEC v. Goldman Sachs, 2011 U.S. Dist. LEXIS 62487 (SD NY June 10, 2011) (“In response, at oral argument, the SEC argued that U.S. companies should not be allowed to skirt U.S. federal securities laws by using foreign affiliates to complete securities transactions. Justice Stevens voiced similar concerns in a concurring opinion in Morrison.”).
We will look at the 11th Circuit's approach in the next post.
The cited brief and the appellate opinion for this case can be found at the DU Corporate Governance web site.