By Math­ews R. de Car­val­ho1         

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.

* * * * *

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.

* * * * *

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.

* * * * *

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.


1. 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.