By Mathews R. de Carvalho*         

When does the use of the Exchange Act cross the line into forbidden extraterritoriality? In this contribution, Mathews R. de Carvalho (’19) examines recent federal court decisions which try to develop a body of law under which Section 10(b) might be applied to parties outside the United States without contravening the presumption against extraterritoriality. This Contribution argues that one approach taken by circuit courts – the irrevocable liability test – represents the most faithful application of the Supreme Court’s dictates in Morrison v. National Australia Bank Ltd.

When does the use of the Exchange Act cross the line into forbidden extraterritoriality? Statutes are presumed not to apply extraterritorially and the Supreme Court has explicitly held that is true for Section 10(b) the Securities and Exchange Act. Until recently, however, courts had divided on the test for when a securities transaction is domestic. This Contribution reviews the split present until July 2018 and argues that the approach taken by the Second and Ninth circuit courts is the most faithful application of the Supreme Court’s decision against extraterritorial application of Section 10(b) in Morrison v. National Australia Bank Ltd.

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In 2010, the Supreme Court decided Morrison v. Nat’l Australia Bank Ltd.2 In that case, the Court announced that Section 10(b) of the Securities Exchange Act of 19343 (“Section 10(b)”) did not apply extraterritorially.4 The Supreme Court held that Section 10(b) only applied to cases 1) involving the purchase or sale of a security listed on a domestic exchange or 2) involving the purchase or sale of a security within the United States.5 The boundaries the Court drew acknowledged the longstanding presumption against extraterritoriality. The presumption states that, generally speaking, Congress legislates domestically and that its laws do not carry extraterritorial power.6 Absent clear indication from Congress that it intended the Exchange Act to be applied outside the borders of the United States, the Supreme Court refused to announce a rule allowing the Act to be used beyond those two situations.7

Morrison involved a suit brought by foreign investors against a foreign bank for conduct that occurred abroad. Such a “foreign-cubed”8 transaction lacked connection to the United States. In dismissing the case, the Supreme Court stated that the exercise of the Exchange Act is not focused on “the place where the deception originated, but upon purchases and sales of securities in the United States.”9 The Court determined that “all aspects of the purchases” occurred outside the United States, and that most importantly, the transaction itself did not take place domestically.10 Because none of the transactions took place in the United States, the Court saw no reason to hold the defendant liable for a violation of American law in that case. The Court expressed a desire to avoid conflict with other nations, further justifying dismissing a case without connection to the United States.11

When a security is not traded on a national securities exchange, it is considered an over-the-counter (“OTC”) sale.12 At that point, the second Morrison scenario is implicated and a court must consider whether or not the transaction is domestic. Since 2010, lower courts have worked to develop a body of law to interpret what satisfies the “domesticity” requirement: that the purchase or sale of the security take place in the United States.

Most Circuits that have considered the issue have followed the “irrevocable liability” test announced by the Second Circuit in Absolute Activist.13 In determining the location of a purchase or sale of a security, the Second Circuit held that a “securities transaction occurs when the parties incur irrevocable liability.”14 Irrevocable liability is the point at which the parties become bound to “effectuate the transaction.”15 If irrevocable liability occurs in the United States, the transaction is domestic. If irrevocable liability is incurred abroad, the transaction is not domestic under this test. A domestic transaction can also be found if title to the shares is transferred in the United States.16 The Third, Ninth, and Eleventh Circuits adopted the irrevocable liability test.17

In the wake of the irrevocable liability test’s increased popularity with plaintiffs, courts have begun to question whether or not alleging a domestic transaction is sufficient to withstand a motion to dismiss, or if it is merely a necessary condition. Even the Second Circuit has begun to move away from the clear locational test it announced. In Parkcentral Global Hub. v. Porsche Automobile Holdings SE, the Second Circuit seemingly narrowed its previous holding in Absolute Activist, stating that even if there is a domestic transaction, a suit may be dismissed if the claim is “predominantly foreign.”18 This additional requirement cast doubt on whether or not Circuits would continue to apply Morrison as a transactional test.

Prior to July 2018, other courts seemed willing to experiment with extending Parkcentral’s logic. In Stoyas v. Toshiba Corp., for example, the Central District of California held that a domestic transaction was not sufficient to satisfy the requirements of Morrison.19 Instead, that court determined that plaintiffs had to allege an affirmative act by the defendant “related to the purchase and sale of securities in the United States.”20 Upon finding that the plaintiff had not asserted that “Toshiba listed its securities in United States or sponsored, solicited, or engaged in any other affirmative act in connection with securities sales in the United States,” the District Court dismissed the claim. 21

On appeal, the Ninth Circuit reversed the District Court’s decision and distinguished Parkcentral.22 The court delved into the differences between the securities at issue, where they were traded, and the defendants’ knowledge in the two cases. Rather than requiring some affirmative act on the part of the issuer of the securities, the Ninth Circuit applied the irrevocable liability test.23 Noting that no other Second Circuit case had cited Parkcentral and that Parkcentral itself had cautioned that its “predominantly foreign” analysis should not be “perfunctorily applied to other cases based on the perceived similarity of a few facts,”24 the Ninth Circuit held that to be in connection with a transaction, fraud “must ‘touch’ the sale—i.e., it must be done to induce the purchase at issue.”25 The court proceeded to explain how the plaintiffs in that case could establish the defendant’s connection to the transaction, and reversed and remanded with leave to amend the complaint.

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The Ninth Circuit’s decision in Toshiba, similar to the Second Circuit’s decision in Absolute Activist, outlines the best interpretation of the Supreme Court’s requirements in Morrison.

The irrevocable liability test provides the proper method of analyzing the domesticity requirement. When parties effectuate a transaction, or title changes hands, within the United States, that transaction took place domestically by definition. Morrison did not suggest that the only requirements set forth were merely necessary conditions. Instead, the clearest reading of the holding is that those requirements were sufficient. Had the Court meant to set merely a baseline, it could have done so. The Second Circuit decision in Parkcentral illustrates certain policy arguments for deviating from the rule announced in Morrison, but it is a deviation.

The Absolute Activist test, following precedent set in Morrison, gives parties and courts a bright-line rule to follow whenever they deal with securities transactions. Parkcentral’s approach dealt with facts separate from the question in Morrison. By looking at the relationship the defendant had with the United States, the court in that case created more uncertainty. Following that rule  increases the potential for conflicting judgments based on how much weight each court gives to each fact. Parties must be able to plan their affairs, particularly in securities litigation cases where the stakes can be particularly high. The Absolute Activity approach accomplishes this cleanly and furthers the goals announced in Morrison.

By adopting the Second Circuit’s irrevocable liability rule, the Ninth Circuit has brought the Circuits into a unified position on Morrison’s domesticity requirement.

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The irrevocable liability test seems to have become the test of choice among the Circuits in applying the second scenario described by Morrison. Absent future developments in the circuits, the question of how to interpret the domesticity requirement appears to have been settled. District courts that apply Parkcentral’s rationale rather than Absolute Activist’s or Toshiba’s will likely only do so in circumstances similar to Parkcentral. Most securities will be judged based on the irrevocable liability test. When irrevocable liability has been established within the United States, parties should expect that Section 10(b) will be applied.

* Mathews R. de Carvalho is a 3L at New York University School of Law. This piece is a commentary on the 2018 Problem at the Irving R. Kaufman Memorial Securities Law Moot Court Competition hosted at Fordham University School of Law in New York City. The problem dealt with alleged fraud stemming from omissions in a foreign company’s disclosure documents. The views expressed in this article do not necessarily represent the views of the author on this point of law. Rather, this article is a distillation of one side of an argument addressed at the Kaufman Competition. At time of publication, the issue at play during the Competition has been settled by the relevant Circuit Court of Appeals.

2. 561 U.S. 247 (2010).

3. 15 U.S.C. 78(a) et seq.

4Morrison, 561 U.S. at 273.


6. Foley Bros. v. Filardo, 336 U.S. 281, 285 (1949).

7Morrison, 561 U.S. at 265.

8Id. at 283 n.11.

9Id. at 266.

10. Id. at 273.

11. Id. at 275.

12. United States v. Georgiou, 777 F.3d 125, 135 (3d Cir. 2015).

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

14Id. at 67-8.

15. Id. at 68.

16. Id.

17. See Georgiou, 777 F.3d 125; see also SEC v. World Capital Mkt. Inc., 864 F.3d 996 (9th Cir. 2017); Quail Cruises Ship Mgmt. Ltd. v. Agencia de Viagens CVC Tur Limitada, 645 F.3d 1307, 1310 (11th Cir. 2011).

18. 763 F.3d 198, 216 (2d Cir. 2014).

19. 191 F. Supp. 3d 1080, 1095 (C.D. Cal. 2016).

20Id. at 1095.

21. Id.

22. Stoyas v. Toshiba Corp., 896 F.3d 933, 950 (9th Cir. 2018).

23Id. at 949 (explaining that the ADRs at issue in Parkcentral do not confer ownership rights and are not pegged to the value of the reference security).

24Id. at 950 n.21.

25. Id. at 951.