Extraterritorial Application of U.S. Securities Laws: Recent Case Law

It is common knowledge that business now is global. Because the United States is the world’s largest economy, a large portion of global business touches the U.S. And that also means that, in principle, American law can potentially apply to transactions involving non-U.S. businesses.

In 2010, the United States Supreme Court decided in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), that U.S. securities laws did not apply to overseas transactions even if there was some articulable connection to the United States. In Morrison, the connection to the U.S. was tenu­ous. The plaintiffs were Australians who owned stock in an Australian bank whose shares were not traded in the U.S. They asserted a securities fraud claim under the American securities laws (§ 10(b) of the Securities and Exchange Act of 1934 and SEC Rule 10b-5) because their shares in the bank de­clined in value as a result of what they said were fraudulent acts and statements at the bank’s U.S. subsidiary. In Morrison, the Supreme Court held that this connection to the U.S. was too remote for American securities law to apply. The Supreme Court held that § 10(b) applied “only [to] trans­ac­tions in securities listed on domestic exchanges, and domestic transactions in other securities.” Although Morrison is proving to be influential even outside the U.S., as was pointed out here last month by Byron Shaw in his Practice Point dated August 1, 2018, the precise contours of Morrison are still being defined and refined.

Little is uncertain about what are “transactions in securities listed on domestic exchanges.” But what are “domestic transactions in other securities?” What distinguishes a “do­mestic” securities transaction from a non-domestic or transnational one?

In 2012, the Second Circuit defined a “domestic transaction” as one in which “irrevocable liability was incurred or . . . title was transferred within the United States.” Absolute Activist Value Master Fund, Inc. v. Ficeto, 677 F.3d 60, 62 (2d Cir. 2012).

That actually still leaves quite a bit to be litigated. Both of these tests—irrevocable liability and passage of title—are issues mainly of state law. And as a matter of state law, the point at which liability becomes ir­re­voca­ble is not always clear in every transaction (and that is also true of the point at which title passes).

A case in point is the Second Circuit’s decision this past June in Giunta v. Dingman, 893 F.3d 73 (2d Cir. 2018). In that case, the trial court had dismissed the case for failure to state a claim, hold­ing that U.S. securities laws did not apply to the transaction. The plaintiff, Gordon, had alleged that he had been gulled into investing in Dingman’s businesses in the Bahamas through a series of fraud­u­lent misrepresentations. Among other things, Gordon and Dingman met a few times in Manhattan and spoke on the telephone in calls placed from Manhattan. In those conversations, ac­cording to the complaint, Gordon and Dingman agreed that Gordon would purchase half the equity in Dingman’s holding company, Out West Hospitality Ltd. (OWH). Gordon wired $100,000 to Dingman, which Dingman acknowledged as payment for 10 percent of OWH’s equity. He followed it with another $150,000 wire. Dingman never sent financial information to Gordon despite Gordon’s requests, and then, after a few months, Dingman informed Gordon out of the blue that the busi­nesses had closed and that there were other stockholders as well. Gordon sued.

The district court dismissed the case because it believed Gordon hadn’t alleged a domestic trans­action. Bahamian law required governmental approval for the transfer of shares. So in the district court’s view, that meant the parties were not “irrevocably liable.”

The Second Circuit reversed. It explained that “irrevocable liability” is incurred when the parties are not free to walk away from their deal. Yes, there was a condition to completing the trans­action—approval by the Bahamian authorities—but that was not up to the buyer and seller. Ac­cord­ing to the complaint, the buyer and seller had already committed to each other and neither was free to refuse to proceed with the deal. That means there was irrevocable liability. A condition sub­sequent doesn’t affect the parties’ commitment to the deal, only the parties’ ability to complete it.

Bottom line: Under current case law, even after Morrison, American securities law might well apply to transactions in securities of non-U.S. companies. This is important to keep in mind when planning a cross-border deal.