Relaciones Interpersonales

Under Morrison, Section 10(b) applies to fraud in connection with the purchase or sale of any security registered on a national exchange regardingMorrison’s first prong and to domestic transactions involving any security not so registered for Morrison’s second prong.395 The focus of the Morrison bright line test is the location of the transaction itself, and not the conduct or any activity related to the conduct.396 In other words, in order to have a viable claim under Section 10(b), investors must show that their securities were registered on a U.S. exchange or that the purchase or sale of their securities was consummated within the United States.397

To date, lower courts applying Morrisonhave dealt with fact patterns involving securities listed on foreign exchanges; securities cross-listed on multiple exchanges; American Depository Shares; American Depository Receipts; Contracts for Difference; securities- based swap agreements; credit default swaps; collateralized debt obligations; collateralized liability obligations; foreign private funds; and domestic over-the-counter securities such as trading on Pink Sheets or OTCBB. Among the Courts of Appeal, only the Second and Eleventh Circuits have issued decisions under Morrison.

Courts have announced several principles in decisions issued after Morrison, including: A transaction is domestic when title to the disputed securities passed within the United States.398 The only question is, where did the transaction take place?399The location of conduct attendant to the transaction is irrelevant.400

A transaction is domestic when the purchaser or the seller becomes irrevocably committed to the transaction within the United States.401 Irrevocable liability attaches when the parties achieve a

395 Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247, 266 (2010). 396Id.at 269-71.

397Id.

398 Quail Cruises Mgmt v. Agencia De Viagens CVC Tur Limitada, 645 F.3d 1310 (11th Cir. 2011).,

399Absolute Activist, 677 F.3d at 66-67. 400Morrison,561U.S. at 269-71.

401 Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 68 (2d Cir. 2012).

meeting of the minds.402 Nonetheless, state contract law has no bearing on the question of where irrevocable liability attaches; rather, the focus should be on “where, physically, the purchaser or seller committed him or herself, not where, as a matter of law, a contract is said to have been executed.”403

In transactions involving ADRs,404swap agreements,405and CDSs,406the determination of where the transaction took place turns on the location where the underlying reference securities are traded.407

When a security is cross-listed on U.S. and foreign exchanges, the location of the transaction is the exchange on which the security has its primary listing.408Thus, if the stock is primarily traded on a foreign exchange, but is cross-listed on a U.S. exchange, the transaction is presumed to have occurred abroad; conversely, if the stock is primarily traded on a U.S. exchange but is also cross- listed on a foreign exchange, the transaction is presumed to have taken place within the United States.409The purchaser or seller need not be physically present at an exchange.410

Transactions in domestic OTC markets are treated the same as transactions executed through domestic exchanges.411

In applying Morrison to transactions occurring away from exchanges, courts have been quick to accept the Absolute Activist

irrevocable liability test, but they have looked to contract law in reaching their decisions.412Decisions issued to date point to the last 402Id.at 67-68 (citing Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 176, 891 (2d Cir. 1972)).

403 United States v. Vilar, 729 F.3d 62, 78 (2d Cir. 2013).

404In reSociete Generale Sec. Litig., 2010 WL 3910286, at *6 (S.D.N.Y., Sept. 29, 2010).

405 Elliot Assocs. v. Porsche Automobil Holding, 759 F. Supp. 2d 475-76 (S.D.N.Y. 2010).

406Freudenberg, 2008 WL 2876373 at *7.

407See e.g. Elliot Assocs., 759 F. Supp. 2d at 474-75.

408 UBS Sec. Litig., 2011 WL 4059356, at *5-6; See also Stackhouse,

2010 WL 3377409, at * 1. 409Id.at *5-6.

410Stackhouse, 2010 U.S. Dist. LEXIS 79837, at *1. 411Ficeto, 839 F. Supp. 2d at 1111.

412See, e.g.,Arco Cap. Corps., 949 F. Supp. 2d at 542-43; see also Amerindo Inv. Advisors Inc., 2013 WL 1385013, at *1.

act in the formation of the contract to determine where the transaction occurred.413 Courts have looked at the terms of subscription agreements to identify the acts that, under the agreements, constitute the last acts necessary to form a contract.414

Courts have also considered the physical location of the purchaser, the seller, the issuer, the broker, and the seller’s bank as factors in their analysis under Morrison’s second prong.415

In the authors’ views, several important questions have been raised by the decisions issued to date, including: In light of the Vilar

court’s rejection of contract law as a basis for determining when and where irrevocable liability attaches, if contract law does not supply the answer to the question, then what body of law does? What if the purchaser and seller commit to a transaction at different times? What if the purchaser and seller are located in different countries when each, or both, become committed to the trade? If courts and litigants should not look to contract law for guidance, then why did the

Absolute Activist court refer to the key moment as “the point at which, in the classic contract sense, there was a meeting of the minds of the parties?”

If an order to buy an exchange-listed security is placed through one trading venue but then routed to and executed through another venue located in another country, where is the transaction said to take place? Is it the location of the venue through which the order was placed? Or is it the location of the venue where the trade was executed?

What happens if the computer servers of a trading venue, through which a trade is executed, are located elsewhere from the offices of the trading venue?

Where is a trade said to occur if the order to buy and the order to sell are placed through two different trading venues located in two different countries?

413See supranote 330.

414Arco Cap. Corps., 949 F. Supp. 2d at 542-43; Cascade Fund, LLLP v. Absolute Capital Mgmt. Holdings, et al., 2011 U.S. Dist. LEXIS 34748 *21-22 (D. Colo. 2011).

415See Cascade, 2011 U.S. Dist. LEXIS 34748, at *22; See also Absolute Activist, 2013 WL 1286170, at *17 (S.D.N.Y. Mar. 28, 2013); Atlantica Holdings Inc., 2014 WL 917055, at *8.

In the case of transactions in foreign securities cross-listed on U.S. exchanges, should trades always be said to have occurred through the primary, foreign exchange even when the trades are executed through the U.S. exchange?

The language of Section 10(b) prescribes, and the Court in

Morrison held, that Section 10(b) reaches fraud in connection with transactions in securities registered on national exchanges. Does the breadth of that language indicate congressional intent to submit to the primary antifraud provision of the Exchange Act all trading in securities listed on national exchanges—that is, exchanges regulated under the Exchange Act—including transactions that occur away from the exchange? Do transactions in securities listed on U.S. exchanges impact the trading on those exchanges, even when executed away from the U.S. exchanges?