Commercial Litigation and Arbitration

Morrison’s Ban on Extraterritorial Application of Securities Laws Precludes Claims Arising out of Foreign-Issued Securities Cross-Listed on a U.S. Exchange

City of Pontiac Policemen’s & Firemen’s Retirement Sys. V. UBS AG, 752 F.3d 173 (2d Cir. 2014):

In this appeal we consider, as a matter of first impression, whether the bar on extraterritorial application of the United States securities laws, as set forth in Morrison v. National Australia Bank Ltd., 561 U.S. 247, 130 S. Ct. 2869, 177 L. Ed. 2d 535 (2010), precludes claims arising out of foreign-issued securities purchased on foreign exchanges, but cross-listed on a domestic exchange (the so-called "listing theory"). We also consider whether the alleged misstatements at issue here are actionable under the securities laws.

We conclude that: (1) the Supreme Court's decision in Morrison precludes claims brought pursuant to the Securities Exchange Act of 1934 ("Exchange Act") by purchasers of shares of a foreign issuer on a foreign exchange, even if those shares were cross-listed on a United States exchange; (2) claims brought under the Securities Act of 1933 ("Securities Act") based on disclosures made in connection with a UBS June 13, 2008 registered rights offering were properly  [*4] dismissed because they are immaterial and/or inactionable "puffery," as that term is defined in our case law; and (3) Exchange Act claims arising out of defendants' statements regarding positions in, and valuation of, mortgage-related assets were properly dismissed for failure to adequately plead a material misrepresentation or scienter.

Accordingly, we affirm the September 13, 2011 and September 28, 2012 judgments of the United States District Court for the Southern District of New York (Richard J. Sullivan, Judge) dismissing all claims with prejudice.


Plaintiffs, a group of foreign and domestic institutional investors,1 bring this putative class action against UBS AG ("UBS") and a number of UBS officers and directors (together with UBS, "UBS Defendants"),2 alleging violations of §§ 10(b) and 20(a) of the Exchange Act3 in connection with the purchase of UBS "ordinary shares" between August 13, 2003 and February 23, 2009 (the "Class Period"). These shares were listed on foreign exchanges and the New York Stock Exchange ("NYSE"). Plaintiffs allege that the UBS Defendants violated the Exchange Act by making, in conjunction with issuance of the ordinary shares, fraudulent statements  [*5] regarding: (1) UBS's mortgage-related assets portfolio (the "CDO/RMBS Fraud"); and (2) UBS's purported compliance with United States tax and securities laws by UBS's Swiss-based global cross-border private banking business (the "Tax Fraud").4

1   Foreign plaintiffs are Arbejdsmarkedets Tillaegspension ("ATP"), Union Asset Management Holding AG ("Union") and International Fund Management, S.A. ("IFM"). Other named plaintiffs are City of Pontiac Policemen's and Firemen's Retirement System ("Pontiac"), Council of the Borough of South Tyneside ("Tyneside"), William L. Wesner, Teamsters Union Local 500 Severance Fund ("Teamsters"), Oregon Public Employees Board ("OPEB"), and Alaska Laborers-Employers Retirement Fund ("Alaska Laborers").

2   The "UBS Defendants" are UBS AG; former UBS officers and executives, including Peter A. Wuffli, Clive Standish, David S. Martin, Marcel Ospel, Marcel Rohner, Marco Suter, Walter Stuerzinger, Ramesh Singh, Huw Jenkins, James Stehli, John Costas, and Michael Hutchins; and current and former members of the UBS board of directors, including Ernesto Bertarelli, Stephan Haeringer, Gabrielle Kaufman-Kohler, Sergio Marchionne, Rolf A. Meyer, Peter Voser, Lawrence A.  [*6] Weinbach, Joerg Wolle, Helmut Panke, and Peter Spuhler.

3   15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5.

4   Plaintiffs also alleged fraud arising out of statements by UBS regarding its Auction Rate Securities portfolio, but do not press this claim on appeal.

Plaintiff Alaska Laborers--Employers Retirement Fund ("Alaska Laborers") also brings this action on behalf of a class that purchased ordinary shares of UBS in connection with the Company's June 13, 2008 Rights Offering (the "Offering"), alleging that the UBS Defendants and a group of Underwriters5 violated §§ 11, 12(a)(2), and 15 of the Securities Act6 by making misleading statements regarding the alleged Tax Fraud in connection with the Offering.

5   The Underwriters are Deutsche Bank AG, BNP Paribas, Credit Suisse, J.P. Morgan Securities Ltd., Morgan Stanley & Co. International Plc, Goldman Sachs International, Deutsche Bank AG, London Branch, and UBS Securities LLC.

6   15 U.S.C. §§ 77k, 77l(a)(2), 77o.


A. Viability Under Morrison v. National Australia Bank of Claims Based on Foreign Shares Purchased on a Foreign Exchange

Three foreign institutional investors--plaintiffs Union, IFM, and ATP--and one domestic investor--plaintiff OPEB--purchased their UBS (foreign-issued) ordinary shares on a foreign exchange. The District Court, relying on the Supreme Court's decision in Morrison v. National Australia Bank, dismissed these claims. We address the claims of the foreign and domestic plaintiffs separately.

1. "Foreign Cubed" Claims17

17   A so-called "foreign-cubed" action involves claims in which "(1) foreign plaintiffs [are] suing (2) a foreign issuer in an American court for violations of American securities laws based on securities transactions in (3) foreign countries." Morrison, 561 U.S. at 283 n.11 (Stevens, J., concurring) (emphasis omitted).

Morrison  [*13] answered in the negative the question "whether [§ 10(b)] provides a cause of action to foreign plaintiffs suing foreign [ ] defendants for misconduct in connection with securities traded on foreign exchanges."18 It held instead that § 10(b) only provided a private cause of action arising out of "[1] transactions in securities listed on domestic exchanges, and [2] domestic transactions in other securities."19

18   Id. at 250-51.

19   Id. at 267.

Plaintiffs argue that, by its express terms, the Morrison bar is limited to claims arising out of securities "[not] listed on a domestic exchange."20 Under plaintiffs' so-called "listing theory,"21 the fact that the relevant shares were cross-listed on the NYSE brings them within the purview of Section 10(b), under the first prong of Morrison--"transactions in securities listed on domestic exchanges." We conclude that, while this language, which appears in Morrison and its progeny, taken in isolation, supports plaintiffs' view, the "listing theory" is irreconcilable with Morrison read as a whole.

20   Id. at 273 (emphasis supplied).

21   To our knowledge, no Circuit has yet addressed the viability of the so-called "listing theory"--whether listing on a domestic exchange,  [*14] absent a transaction on that exchange, provides a private cause of action under §10(b).

Morrison emphasized that "the focus of the Exchange Act is . . . upon purchases and sales of securities in the United States."22 As the District Court recognized, this evinces a concern with "the location of the securities transaction and not the location of an exchange where the security may be dually listed."23 Morrison's emphasis on "transactions in securities listed on domestic exchanges,"24 makes clear that the focus of both prongs was domestic transactions of any kind, with the domestic listing acting as a proxy for a domestic transaction. Indeed, the Supreme Court explicitly rejected the notion that the "national public interest pertains to transactions conducted upon foreign exchanges and markets."25 Furthermore, in Morrison, although the Ordinary Shares at issue were not traded on any domestic exchange, the Court noted that "[t]here are listed on the [NYSE], however, [defendant]'s American Depositary Receipts (ADRs), which represent the right to receive a specified number of [its] Ordinary Shares."26 This  [*15] did not affect the Court's analysis of the shares that were purchased on foreign exchanges.

22   561 U.S. at 266 (emphasis supplied).

23   2011 Op. at *5 (emphasis in original). Cf. Absolute Activist, 677 F.3d at 68-69 ("The second prong of [the Morrison] test refers to 'domestic transactions in other securities,' not 'transactions in domestic securities' or 'transactions in securities that are registered with the SEC.'" (citation omitted)).

24   561 U.S. at 267 (emphasis supplied).

25   Id. at 263 (emphasis in original); see also id. at 267("[N]o one [ ] thought that the [Exchange] Act was intended to regulate foreign securities exchanges--or indeed [ ] even believed that . . . Congress had the power to do so." (emphasis in original, internal quotation marks and alterations omitted)). Moreover, insofar as the government has an interest in regulating shares listed on domestic exchanges, a plaintiff who did not purchase the shares on a domestic exchange would not obviously have standing to pursue this interest. Cf. id. at 285-86 (Stevens, J., concurring) ("[I]f petitioners' allegations of fraudulent misconduct that took place in Florida are true, then respondents may have violated § 10(b), and could  [*16] potentially be held accountable in an enforcement proceeding brought by the [SEC]. But it does not follow that shareholders who have failed to allege that the bulk or the heart of the fraud occurred in the United States, or that the fraud had an adverse impact on American investors or markets, may maintain a private action to recover damages they suffered abroad.").

26   Id. at 250.

Perhaps most tellingly, in rejecting this Circuit's "conduct and effects" test in favor of a bright-line rule, Morrison rejected our prior holding that "'the Exchange Act [applies] to transactions regarding stocks traded in the United States which are effected outside the United States . . . .'"27

27 256 (quoting Schoenbaum v. Firstbrook, 405 F.2d 200, 206 (2d Cir. 1968)); id. at 257 (noting that "with Schoenbaum . . . on the books, the Second Circuit had excised the presumption against extraterritoriality from the jurisprudence of § 10(b)"). Schoenbaum involved a similar, albeit distinguishable, fact pattern to the one at issue here--"the sale in Canada of the treasury shares of a Canadian corporation whose publicly traded shares (but not, of course, its treasury shares) were listed on both the American  [*17] Stock Exchange and the Toronto Stock Exchange." Id. at 256.

In sum, Morrison does not support the application of § 10(b) of the Exchange Act to claims by a foreign purchaser of foreign-issued shares on a foreign exchange simply because those shares are also listed on a domestic exchange. Accordingly, we affirm the judgment of the District Court insofar as it dismissed the claims of Union, IFM, and ATP.

2. "Foreign Squared" Claims

Plaintiff OPEB is a U.S. entity that purchased some of its UBS shares on a foreign exchange by placing a so-called "buy order" in the United States, which was later executed on a Swiss exchange. In addition to advocating the "listing theory," OPEB argues that its purchase satisfies the second prong of Morrison because it constitutes a "purchase . . . of [a] security in the United States."28

28   Id. at 273.

In our decision in Absolute Activist Value Master Fund Ltd. v. Ficeto ("Absolute Activist") we explained that "'[a] securities transaction is domestic [for purposes of Morrison's second prong] when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed within the United States.'"29  [*18] We must now decide--as an issue of first impression--whether the mere placement of a buy order in the United States for the purchase of foreign securities on a foreign exchange is sufficient to allege that a purchaser incurred irrevocable liability in the United States, such that the U.S. securities laws govern the purchase of those securities. We conclude that it is not.

29   United States v. Vilar, 729 F.3d 62, 76 (2d Cir. 2013) (quoting Absolute Activist, 677 F.3d at 69). The parties did not have the benefit of our holding in Absolute Activist when arguing before the District Court. However, OPEB relies on Absolute Activist in its briefs on appeal, and does not raise different or additional facts that would have established that the transactions in question were domestic. Accordingly, we can resolve the issue on appeal without granting leave to amend or remanding. See Discussion Part D post.

Plaintiffs argue that "[w]hen a purchaser is a U.S. entity, 'irrevocable liability' is not incurred when the security is purchased on a foreign exchange[; rather it is incurred] in the U.S. where the buy order is placed."30 As an initial matter, we have made clear that "a purchaser's citizenship or  [*19] residency does not affect where a transaction occurs."31 Accordingly, the fact that OPEB was a U.S. entity, does not affect whether the transaction was foreign or domestic.32 Nor does the allegation that OPEB placed a buy order in the United States that was then executed on a foreign exchange, standing alone, establish that OPEB incurred irrevocable liability in the United States.33

30   Appellant's Br. 88.

31   Absolute Activist, 677 F.3d at 69 (internal quotation marks and alteration omitted).

32   See id. ("a foreign resident can make a purchase within the United States, and a United States resident can make a purchase outside the United States") (internal quotation marks omitted).

33   Although we have held, in the context of "transactions [not] on a foreign exchange," that "facts concerning the formation of the contracts, the placement of purchase orders, the passing of title, or the exchange of money" may be relevant to determining whether irrevocable liability was incurred in the United States, id. at 69-70 (emphasis added), we have never held that the placement of a purchase order, without more, is sufficient to incur irrevocable liability, particularly in the context of transactions in foreign  [*20] securities on a foreign exchange. Cf. id. at 62, 71 (holding that allegations that securities purchases were "brokered through a U.S. broker-dealer," standing alone, are insufficient to establish that irrevocable liability was incurred in the United States).

Accordingly, we affirm the judgment of the District Court dismissing the claims of OPEB, a domestic purchaser, insofar as its claims were based on purchases of foreign shares on foreign exchanges.34

34   We note that this conclusion is consistent with Morrison, in which the Supreme Court emphasized that, "the [Exchange] Act was [not] intended to regulate foreign securities exchanges." 561 U.S. at 267 (internal quotation marks and alterations omitted). As to this point, the concurrences in Morrison are arguably useful for discerning what the majority opinion did not hold. Justice Breyer concurred in the opinion only insofar as "the purchased securities are listed only on a few foreign exchanges, none of which has registered with the [SEC]. . . [and] the relevant purchases of these unregistered securities took place entirely in Australia and involved only Australian investors." Id. at 273 (Breyer, J., concurring) (emphasis supplied).  [*21] And Justice Stevens contrasted "the Court's belief that transactions on domestic exchanges are 'the focus of the Exchange Act,'" with his view that "[i]n reality . . . it is the 'public interest' and 'the interests of investors' that are the objects of the statute's solicitude." Id. at 284 (Stevens, J., concurring). The majority adopted no such caveats, nor recognized any such interests.



To summarize, we hold that:

(1) Morrison precludes  [*41] foreign plaintiffs' claims under § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") arising out of the purchase of foreign-issued securities on a foreign exchange, even where the securities are cross-listed on a domestic U.S. exchange.

(2) The fact that a U.S. entity places a buy order in the United States for the purchase of foreign securities on a foreign exchange is insufficient to incur irrevocable liability, as set forth in Absolute Activist, in the United States.

(3) Plaintiffs' claims under §§ 11 and 12(a) of the Securities Act of 1933 were properly dismissed for failure to plead an actionable misstatement.

(4) Plaintiffs' claims under § 10(b) of the Exchange Act based on the alleged Tax Fraud were properly dismissed for failure to plead an actionable misstatement.

(5) Plaintiffs' § 10(b) claims based on the alleged CDO/RMBS Fraud were properly dismissed for failure to plead materiality or a strong inference of scienter.

(6) The District Court did not err in denying plaintiffs leave to amend a second time.

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