VJIL Symposium: Hannah Buxbaum Comments on “Like Moths to a Flame? International Securities Litigation after Morrison: Correcting the Supreme Court’s ‘Transactional Test'”

[Hannah L. Buxbaum is Interim Dean and John E. Schiller Chair in Legal Ethics, Indiana University Maurer School of Law.]

This post is part of the Virginia Journal of International Law Symposium, Volume 52, Issues 1 and 2. Other posts in this series can be found in the related posts below.

Thank you to Opinio Juris for hosting this online discussion and to the Virginia Journal of International Law for putting this discussion together. I have the pleasure of commenting on Professor Marco Ventoruzzo’s recent Article, “Like Moths to a Flame? International Securities Litigation after Morrison: Correcting the Supreme Court’s ‘Transactional Test’.”

The transaction-based test that the Supreme Court adopted in the 2010 Morrison decision – which limits the application of U.S. antifraud law to transactions that occur on U.S. exchanges, or that otherwise take place within the United States – was intended to eliminate the uncertainty and unpredictability created by the previous conduct and effects tests. As Professor Ventoruzzo notes, and as post-Morrison litigation demonstrates, the “bright-line” test has not succeeded in eliminating much uncertainty, particularly when it comes to defining the location of non-exchange based transactions. Professor Ventoruzzo’s primary objection to the Morrison test, though, is that it is “too narrow, undermining the investor protection goals of the securities laws” (p. 408). He notes that the new transaction-based test bars not only claims of foreign investors based on foreign transactions (such as those involved in the Morrison case itself) but also certain claims of U.S. investors. For instance, U.S. investors who purchase securities in transactions that occur abroad lose the protection of U.S. antifraud law, even under circumstances in which the purchase was solicited by means of fraud within the United States. His solution to this problem – and to the other flaws of the Morrison test – is to advocate the adoption of an “effects only” test for the applicability of U.S. antifraud law. Under his proposed test, a plaintiff would have to establish that “illegal conduct … created direct, substantial, and reasonably foreseeable effects within the United States” in order to invoke the application of U.S. antifraud law (p. 441).

In Professor Ventoruzzo’s view, the “effects only” test is preferable to Morrison’s transaction-based test because it will protect the interests of U.S. investors defrauded within the United States – and it is preferable to the old “conduct and effects” approach because it will be consistent with jurisdictional approaches taken in other countries, and might therefore promote international agreement on private securities enforcement. However, his discussion leaves room for some uncertainty about whether an effects-only test would serve those ends. He states that a foreign-cubed action (foreign investor, foreign issuer, foreign investment transaction) could be brought under U.S. antifraud law as long as the illegal conduct also produced consequences in the United States. That would be the case, he suggests, if the securities affected by the fraud were also listed in the United States in the form of ADRs, or if there were other holders of the securities who were U.S. residents (p. 441). But this would permit precisely the kind of foreign-cubed litigation that had become so problematic pre-Morrison – litigation in which a large number of foreign investors in a foreign issuer’s securities attempted to piggyback on litigation in the United States brought by a small number of U.S. investors. He does note that U.S. courts would still have access to tools, such as the doctrine of forum non conveniens, that could be used to dismiss the claims of foreign investors. But as many pre-Morrison decisions reflect, courts do not always choose to use those tools, even in circumstances where the application of U.S. law would cause significant jurisdictional conflict. It is therefore an approach to legislative jurisdiction that remains viewed as overly expansive in many other countries.

Under Professor Ventoruzzo’s test, only fraud whose effects were felt exclusively abroad would fall outside the scope of U.S. law (p. 442). In this aspect, his argument highlights very nicely the difficulty that all categorical tests face. The more interconnected the world’s markets, the less likely that transactions – and their effects – can be cabined neatly within particular territories. If that is true, then it may turn out that what we really need, other than in the clearest cases of overreaching, is more, not less, of the messy flexibility that comity can provide.